This was probably already posted last week, but it is still a good read.
Popular Hedge Fund Bet on Fannie and Freddie Is Paying Off Big This
7:00 AM ET 1/26/19 | Dow Jones
By Juliet Chung and Andrew Ackerman
Some of Wall Street's biggest investors are sitting on a paper windfall this year as the government ratchets up a debate over the future of mortgage-finance giants Fannie Mae and Freddie Mac.
The increased rhetoric has so far led to a surge in the companies' shares and paper profits for their investors, including mutual-fund giant Capital Group Cos. and hedge funds Discovery Capital Management LLC, Blackstone Group's GSO Capital Partners LP, Paulson & Co., Perry Capital and Pershing Square Capital Management LP, said people familiar with the matter.
For more than a decade, lawmakers have tried and failed to overhaul Fannie and Freddie, which were placed in conservatorship during the 2008 financial crisis. But recent statements by administration officials indicating the government plans to move soon on taking the firms out of conservatorship have sent shares surging. The common shares of Fannie and Freddie are up more than 170% this year, while the most commonly traded class of the preferred shares, a form of senior equity that used to pay a dividend, are up more than 37%.
Several of the funds own different classes of preferred shares. Pershing Square largely owns common shares.
Hedge funds have been betting on Fannie and Freddie's privatization for years. They have pressed their case for much of that time with lawmakers, but have been buffeted by political and legal developments that have swung the companies' shares wildly. The trade has run for such a long time -- a decade for some -- that some early investors in it are closing down or have dramatically different businesses now.
Perry told clients in 2016 it was closing but continues to hold Fannie and Freddie in vehicles it is winding down, while Claren Road Asset Management LLC has changed its name and shrunk to managing $300 million but is still investing in the companies, said people familiar with the firms.
There is no guarantee a deal to end conservatorship will come to fruition. Repeated efforts to overhaul the firms have failed since the financial crisis as the issue is politically fraught; a change to the status of the firms could hurt the price and availability of mortgages for millions of Americans.
But should a plan go forward, it would conclude the biggest unresolved legacy from the financial crisis -- what to do with the failed mortgage-finance companies -- and partly determine whether hedge funds wind up profiting from their wagers.
"It's night and day," said David Barrosse of Washington, D.C., policy analysis firm Capstone LLC, of the change in political will to privatize Fannie and Freddie. "We think that the signs are there for anyone to see, in public statements: This is happening now."
Fannie and Freddie are central players in the mortgage market, buying mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them in 2008 in a bid to stabilize the housing market as mortgage defaults mounted.
In return for injecting about $190 billion into the firms, the government created a new class of stock -- senior preferred shares -- that paid an annual 10% dividend, along with warrants to acquire nearly 80% of the firms' common stock. The Treasury revamped its bailout agreement in 2012 to require nearly all the firms' profits be swept away as dividend payments on those preferred shares. Investors filed suit over the change.
Hedge funds, which largely own preferred shares, have been betting they will recoup on their preferreds something close to par, or 100 cents on the dollar. Some funds scooped up preferreds for cents on the dollar when the firms collapsed.
Hedge funds have been pushing for the government to raise fresh capital for the companies and sell its stake on the market. That way, investors hope, they might be paid out. Hedge funds argue the firms' restructuring would bolster a slowing housing market and move liability from taxpayers to private shareholders.
Fannie and Freddie have sent roughly $292 billion to the federal government since their bailouts in 2008. Investors point out that return relative to the amount of government aid the firms received far outstrips the $16 billion return on TARP, the federal bailout fund for banks during the crisis.
Hedge funds could also benefit if lawsuits investors have filed related to the government's rewrite of the bailout terms are decided in their favor.
To help their bet, fund managers and analysts have made regular visits to Treasury and Congress, kept investment staffers in Washington and hired specialist public relations firms.
Several investors have close ties to senior Trump administration officials. John Paulson, for example, invested inOneWest Bank, the lender rehabilitated by executives that included Treasury Secretary Steven Mnuchin and Joseph Otting, acting chief of Fannie and Freddie's federal regulator. Mr. Mnuchin also invested in Mr. Paulson's hedge fund before he became Treasury secretary.
A growing cadre of investors who aren't suing the government, including Paulson and GSO, are behind a proposal by investment bank Moelis & Co. that calls for allowing Fannie and Freddie to recapitalize by ending the profit sweep and issuing new common and preferred stock. Moelis, which is advising some holders of Fannie and Freddie's preferred shares, estimates the government could make up to $125 billion through the sale of its warrants for the companies' common stock.
Investors peg the total face value of preferred shares at more than $30 billion.
A Trump administration plan to release the companies from government control is technically feasible, but analysts said it may be difficult to pull off partly because Congress would be unhappy that the administration was sidestepping it.
Discovery, GSO and Perry are up on the trade overall, said people familiar with the firms.
