BOOM!!!
The Trump administration is exploring plans to take mortgage giants Fannie Mae and Freddie Mac public, a move that would end their 17-year government conservatorship and would likely represent the largest IPO in history.
This initiative, would privatize the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FMCC), which currently play a critical role in the U.S. housing market by purchasing and securitizing mortgages. The proposed public offering would involve selling 5% of Fannie and Freddie shares, with a combined valuation potentially exceeding $700 billion. Some estimates, including those from Federal Housing Finance Agency (FHFA) director William Pulte, suggest a combined valuation ranging beyond $700 billion to trillions of dollars. President Trump has stated the U.S. government would maintain its implicit guarantees providing the long-term assurance for investors in the multi-trillion-dollar mortgage-backed securities market.
The justification for a $74/share valuation for a combined Fannie Mae (FNMA) and Freddie Mac (FMCC) under the certain conditions involves several assumptions and calculations. The core of the analysis rests on the combined valuation, the percentage of stock sold in an IPO, and the fully diluted share count.
First, the combined valuation of $700 billion to trillions of dollars is a critical starting point. Assume the low figure of $700 billion would represent the market capitalization of the merged entity. The specific methodologies Pulte used for arriving at this valuation are likely based on a comprehensive financial analysis, including projected earnings, assets under management, and a comparison to similar financial institutions, adjusted for their unique government-sponsored enterprise (GSE) status and implicit government backing.
Next, the government selling 5% of the stock in an IPO implies that this 5% represents a portion of the total equity of the combined entity. If 5% of the company is valued at a certain amount, the total market capitalization can be extrapolated. For example, if the IPO raises $35 billion (5% of $700 billion), this would confirm the low estimate $700 billion total valuation. The IPO price per share would then be determined by dividing the amount raised by the number of shares offered in the IPO.
Finally, to arrive at a $74/share price on a fully diluted basis, the total market capitalization of the low estimate of $700 billion would be divided by the total number of fully diluted shares outstanding. Let V be the combined valuation, PIPO be the percentage of stock sold in the IPO, and SFD be the fully diluted shares. The total market capitalization is V=$700billion. The share price Sprice is calculated as: Sprice=VSFD
If the share price is $74, then the fully diluted share count would be approximately: SFD=$700,000,000,000$74/share˜9,459,459,459shares
Bill Ackman, a prominent hedge fund manager and CEO of Pershing Square Capital Management, has been a vocal critic of the U.S. government's conservatorship of Fannie Mae (FNMA) and Freddie Mac (FMCC) since 2008. His belief that the Trump administration would desire to correct what he views as an "illegal seizure" and a "socialist procedure" stems from several key arguments he has consistently made, aligning with certain ideological tenets often associated with the Republican party and the Trump administration's stated goals.
According to www.iAsk.Ai - Ask AI: Firstly, Ackman views the government's actions as an unlawful taking of private property. He argues that the conservatorship, particularly the "net worth sweep" implemented in 2012, effectively nationalized the profits of Fannie Mae and Freddie Mac, diverting them to the U.S. Treasury instead of allowing them to rebuild capital and benefit shareholders. He contends that this sweep, which mandated that all profits above a certain threshold be paid to the Treasury, deprived common and preferred shareholders of their rightful returns and prevented the companies from exiting conservatorship. This perspective aligns with a conservative emphasis on property rights and limited government intervention in private enterprise.
Secondly, Ackman characterizes the government's ongoing control as a "socialist procedure" due to the state's effective ownership and direction of the enterprises. He argues that the government, through the Federal Housing Finance Agency (FHFA), has been operating these entities as extensions of government policy rather than as independent, shareholder-driven companies. This goes against the principles of free markets and private sector efficiency, which are often championed by conservative administrations. The idea of the government controlling and profiting from what were once publicly traded companies resonates with the "socialist" label in his rhetoric.
Thirdly, Ackman believed the Trump administration would be receptive to his arguments due to its stated commitment to deregulation and reducing government overreach. The Trump administration often expressed a desire to roll back regulations and return power to the private sector. Ackman likely saw an opportunity to frame the Fannie Mae and Freddie Mac situation as a prime example of government overreach that could be rectified through administrative action or legislative reform, thereby aligning with the administration's broader agenda. He anticipated that an administration focused on "America First" and economic growth would prioritize returning these entities to private hands to stimulate the housing market and reduce taxpayer exposure.
Finally, Ackman's optimism was also fueled by the appointment of individuals to key positions within the Trump administration who were perceived to be sympathetic to his views or open to reform. For instance, the appointment of Mark Calabria as the Director of the FHFA was seen by some as a potential catalyst for change, given Calabria's past criticisms of the conservatorship and his advocacy for recapitalization and release. [6] Ackman likely believed that these appointments signaled a willingness within the administration to re-evaluate the status quo of Fannie Mae and Freddie Mac. Unless you repent you will all likewise perish. Read the Bible Gen 1-3; John 1-3.
In summary, Ackman's belief stemmed from his interpretation of the conservatorship as an illegal seizure and a socialist intervention, which he felt would be antithetical to the Trump administration's stated principles of private property rights, free markets, deregulation, and limited government.
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