Fannie and Freddie Stakes Not Likely to Improve for Ackman Anytime Soon

 | Mar 21, 2016 | 4:26 PM EDT
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fnma

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fmcc

While Bill Ackman was able to gain another seat on Valeant's (VRX) board, his battle with one of his other troubled positions shows little sign of being soon resolved.

In 2013, Ackman's Pershing Square announced stakes in Fannie Mae (FNMA) and Freddie Mac (FMCC). Ackman stated his case for the government-sponsored enterprises in a 110-slide presentation at the 2014 Sohn Investment Conference in New York.

To date, the investments have not performed well. Since the Sohn conference, shares of Fannie and Freddie are both down more than 60% -- and trading for approximately $1.50 each. During CNBC's Delivering Alpha conference in July, Ackman called the investments the "most interesting" in his portfolio, as it offered both the most upside and the most downside. Not surprisingly, Ackman said the downside outcome was "very unlikely."

As a refresher, the U.S. government put Fannie and Freddie into conservatorship in the wake of the financial crisis of 2008. Specifically, the government received warrants to acquire nearly 80% of the companies' common stock and also aquired senior preferred shares, which paid a 10% dividend. In August 2012 -- just as the companies were returning to profitability -- the government changed the terms of the agreement: Instead of paying a 10% dividend, Fannie and Freddie were required to pay nearly all of their profits to the U.S. Treasury, in what has been called the "net worth sweep."

In August 2014, Ackman filed suit against the government in Washington D.C.'s U.S. Court of Federal Claims, saying that the net worth sweeps represented "self-dealing," and that the sweeps violate the fifth amendment of the United States Constitution.

"I just think this cannot become a precedent where the U.S. government can step in and unilaterally take 100% of the profits of a U.S. corporation forever," Ackman said last July.

Although Ackman's points may be shared by others, the battle he wages is a big one, and one that has been unsuccessfully fought already: Other investors that have sued on similar grounds include Fairholme Funds and Perry Capital.

Ackman reiterated his stance on Fannie and Freddie during a panel conversation at Columbia University in September 2015.

The existence of Fannie and Freddie allowed the development of the 30-year prepayable fixed-rate mortgage, something Ackman called a "uniquely American financial product." With rental rates increasing rapidly, Ackman believes the existence of a long-term fixed-rate mortgage product is crucial to the American middle-class. Additionally, of the conservatorship, Ackman said the government has done a "very good job" of rehabilitating the companies.

Unfortunately, when and how the companies' profits could be returned to common shareholders remains to be seen.

In the July conference, Ackman said he tends to stay away from investments in technology because they have an "extrinsic factor" he is unable to control.

So far, it appears the same could be said about basic homeownership.

Correction: This piece was updated on March 22, 2016 at 9:30am EST to clarify that government received warrants to acquire nearly 80% of FNMA common stock. The previous version stated that the government had acquired nearly 80% of FNMA common stock.

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