Trump And The Friends Of Fannie Mae And Freddie Mac
Nov. 16, 2016 9:08 AM ET
Summary
Fannie Mae and Freddie Mac currently pay virtually all of their profits to the Treasury leaving nothing for shareholders.
Several big investors have purchased shares of the GSEs and some are challenging the government's position in court.
Several of these investors now have an inside track within the incoming Trump administration.
Following the election of Donald Trump the markets have been volatile with some investments taking off and others under pressure. Among the biggest gainers since election day have been shares of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) which are no strangers to large price swings themselves.
Insider influence
As followers of American government are well aware, connections to those on the inside of an administration are highly valuable. So it should come as no surprise that Fannie and Freddie shares saw a major boost in the wake of the Trump election.
Some of the most prominent connections include:
John Paulson who donated to the Trump campaign and is now an advisor on the Trump transition team. He is a major investor in Fannie and Freddie .
Bruce Berkowitz, although not part of the transition team, donated $125,000 to the Trump campaign. Berkowitz's Fairholme Fund has been one of the leading investors in the GSEs and is backing legal challenges to the government's position.
Steve Mnunchin is a strong candidate to become Treasury Secretary. He serves on the Sears (NASDAQ:SHLD) board alongside Berkowitz and could be helpful in communicating Berkowitz's views.
Ken Blackwell is part of the transition team and has been critical of the government's position regarding Fannie and Freddie.
Carl Icahn has supported Trump and is an investor in Fannie and Freddie.
With this cast of characters around him it would be reasonable to expect that Trump will be hearing some strong messages relating to the administration's policy on Fannie and Freddie. Trump's inexperience as a politician may also help to boost the level of influence these individuals can have as it may make him more easily influenced with regard to public policy.
While those with administration connections have largely kept publicly silent about Fannie and Freddie, Bill Ackman has been more public with his opinion. At a New York conference he said he woke up "extremely bullish" following the election of Trump. Additionally he added that he believes the situation can be resolved within the first twelve months of the Trump administration.
Administration Change
The current situation of Fannie and Freddie is clearly a product of both Democrats and Republicans and until the Trump election I expected any solution to come from the courts against the wishes of the executive and legislative branches. But, although I have no shortage of differences with the President-Elect, he may just be the wild-card that could resolve the situation with cooperation from the executive branch.
Challenges and Solutions
Standing in the way of an immediate solution is a law that prevents the sale of the Fannie and Freddie investments prior to 2018 possibly delaying the final resolution. However, Trump would be able to influence the FHFA for amendments to the Preferred Stock Purchase Agreement as well as future actions regarding the GSEs.
Since Trump knows or has connections to the leaders of the GSEs lawsuits there is a possibility that he will bring them all together to try to work out some form of "grand settlement" to resolve multiple lawsuits with one settlement. Through his business career Trump has been no stranger to settling lawsuits and this may bode well for Fannie and Freddie plaintiffs looking for a quicker solution.
One of the key risks to such a settlement is that it would not be politically popular and could lead to Congressional action to prevent its implementation. President Trump would almost certainly veto such legislation but if the settlement is unpopular enough Congress could override. Additionally this carries the risk of spurring Congress to action to wind down the GSEs although the policy differences of the major parties still appear too far apart to resolve in the current political environment.
There still also remains the outside possibility that Senator Bob Corker, who has supported winding down the GSEs, could become Secretary of State. Although this wouldn't give Corker direct control over Fannie and Freddie it would add a voice of opposition to a pro-shareholder settlement. At the same time this would remove a major GSE reform voice from the Senate which could reduce the chances of Congressional action to block a settlement.
Takeaway
The election of Donald Trump has brought a man new to political office to the most powerful position in the United States and he brings with him a group of individuals supporting GSE shareholders. In my view this increases the chance of a settlement that could realize value for Fannie and Freddie shareholders which would serve to reduce risk from court decisions.
Risks still exist from Trump not taking GSE action or a Congressional override but overall the inside connections to the administration have the potential to be a highly positive development for GSE shareholders and could make the first year of the administration highly interesting from an investment standpoint.
Disclosure: I am/we are long FNMA, FNMAM.
"The world is a dangerous place to live�not because of the people who are evil, but because of the people who don't do anything about it." �Albert Einstein
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