This memo outlines a high-conviction, asymmetric investment opportunity in the common stock of Fannie Mae (FNMA) and Freddie Mac (FMCC), two Government-Sponsored Enterprises (GSEs) that form the bedrock of the U.S. housing finance system. The investment thesis is not based on conventional operational improvements but on a singular, transformative event: the anticipated exit of both entities from their 17-year government conservatorship. Since 2008, the U.S. Treasury has controlled the GSEs and executed a "Net Worth Sweep," expropriating all profits, which has prevented any value from accruing to common shareholders.
The core of our thesis rests on a confluence of political and regulatory catalysts, most notably the stated intentions of a potential second Trump administration to resolve the GSEs' status. Prominent investors, such as Bill Ackman of Pershing Square, have publicly articulated a clear roadmap to re-privatization, which involves ending the profit sweep, allowing the GSEs to rebuild capital, and ultimately re-listing them on major exchanges. This path would unlock immense, trapped value for existing shareholders.
While the market correctly prices in the significant political risk and the binary nature of the outcome, we believe it underappreciates the mounting pressure to end a conservatorship that has already seen the government repaid nearly twice the initial bailout amount. The variant perception is that the status quo is no longer tenable and that the political will to resolve this final piece of post-2008 crisis policy is stronger than ever. This is a high-risk, event-driven trade where the potential upside of a successful exit from conservatorship dwarfs the risk of capital loss should the current state persist.
2. The Scoreboard
(Note: Financials are distorted by the Net Worth Sweep. The figures below reflect underlying earnings power before the sweep to the Treasury.)
Metric
Value (Est.)
YoY Growth
Trend
Revenue (Net Interest Income)
$25 Billion
+3%
↗️
Pre-Sweep Net Income
$15 Billion
+5%
↗️
Retained Earnings
$0 (due to sweep)
N/A
→
Effective P/E Ratio (Pre-Sweep)
~1x
N/A
Extremely Low
Guarantee Book of Business
~$8 Trillion
+2%
↗️
3. Business Overview
Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are the two pillars of the U.S. secondary mortgage market. They do not originate loans directly to homebuyers. Instead, their primary function is to purchase mortgages from lenders (banks, credit unions), package them into mortgage-backed securities (MBS), and sell these securities to investors with a guarantee against default. The loans they are permitted to purchase must meet specific size and quality criteria, known as "conforming loans." The size limit is set annually by their regulator, the Federal Housing Finance Agency (FHFA).
This process serves two critical public policy goals:
Liquidity: It provides a constant flow of capital to mortgage lenders, allowing them to originate more loans. Without the GSEs, lenders would have to hold mortgages on their books, severely constraining the supply of housing credit. Fannie Mae traditionally works with larger, national banks, while Freddie Mac focuses on smaller banks and thrift institutions, ensuring broad liquidity across the entire market.
Stability & Standardization: By guaranteeing the timely payment of principal and interest on the MBS they issue, the GSEs make these securities highly attractive to global investors. This guarantee function effectively standardizes the credit risk, creating a deep and liquid market for U.S. housing debt and keeping mortgage rates, particularly the 30-year fixed-rate mortgage, lower than they otherwise would be. This standardization creates a uniform national mortgage market, preventing vast disparities in credit access between different states.
They make money primarily through guarantee fees (g-fees). This is the fee they charge for absorbing the credit risk on the mortgages they securitize. Their revenue is a function of the size of their guarantee book and the g-fee percentage charged. Despite being in conservatorship, their fundamental business model remains intact and is immensely profitable. In the post-crisis era, the GSEs have also become pioneers in credit risk transfer (CRT) transactions, where they sell off a portion of the credit risk on their new books of business to the private market. This demonstrates a clear evolution towards a more utility-like model that distributes risk away from the taxpayer, a key component of the future privatized state.
The moat surrounding Fannie and Freddie is unique and, in a normal environment, would be considered one of the widest in any industry. It is a government-chartered duopoly. No other private entity has the explicit government backing (even if implicit post-conservatorship) or the scale to replicate their function. Their cost of funding is inherently lower than any private competitor could achieve, allowing them to price their guarantee profitably while still maintaining mortgage affordability. The infrastructure, relationships, and standardization they have built over decades are impossible for a competitor to challenge. This duopoly has created a network effect where all mortgage market participants—lenders, servicers, and investors—are deeply integrated into the GSE system. This creates enormous switching costs and reinforces their dominant position. The conservatorship has clouded this reality, but the underlying moat remains, ready to be monetized by shareholders upon their release.
4. The Investment Thesis
The investment case for FNMA and FMCC is a pure-play bet on a specific political and regulatory outcome: the end of the conservatorship and the recapitalization of the companies as private-sector entities.
Point 1: The End of the "Net Worth Sweep" is the First Domino
The single greatest impediment to shareholder value has been the "Net Worth Sweep" agreement, implemented in 2012. This amendment to the initial bailout terms requires Fannie and Freddie to send virtually all of their profits to the U.S. Treasury. This has prevented them from rebuilding their capital buffers, a necessary prerequisite for exiting conservatorship. However, the original sin of the 2008 crisis has been more than absolved. The GSEs received a $187 billion lifeline and have since paid back nearly $300 billion to the Treasury. The argument for continuing this punitive profit sweep is increasingly weak.
Under the first Trump administration, Treasury Secretary Steven Mnuchin took the first critical step by ending the net sweep, allowing the GSEs to begin retaining earnings. A second administration is widely expected to accelerate this process, viewing the re-privatization of the GSEs as unfinished business. Allowing the companies to retain their substantial annual earnings (upwards of $15-20 billion combined) would enable them to build capital organically and rapidly, setting the stage for a public offering.
Point 2: A Clear Political Catalyst and a Public Roadmap
The thesis gained significant credibility with Bill Ackman's public advocacy, which laid out a plausible plan for their release. This is not a fringe idea; it was official policy under the previous administration. A second Trump presidency is the most direct catalyst, as key figures have already expressed their desire to resolve the situation.
The proposed plan involves several steps:
End the Sweep: Formally terminate the net worth sweep and allow all profits to be retained.
Set Capital Requirements: The Federal Housing Finance Agency (FHFA) would set a final capital rule. Ackman and other proponents argue for a 2.5% requirement, which they believe is achievable.
Credit Past Payments: The Treasury would credit the ~$300 billion in payments against its senior preferred stock position, effectively retiring it.
Raise Capital: The GSEs would raise an additional ~$30 billion in the public markets through IPOs to meet the new capital requirements.
Re-list: Shares would be re-listed on the NYSE, with the government's 80% warrants being exercised, providing a final multi-billion dollar windfall for the taxpayer.
This sequence of events would transform the companies from wards of the state with no value for common equity into profitable, publicly-traded financial utilities with a wide moat.
Variant Perception (The "Edge")
Consensus View:
"FNMA and FMCC are zombie stocks. The government will never let them go, and even if they do, existing shareholders will be wiped out in a restructuring. The political will to enrich hedge funds is zero. This is a perennial value trap that never plays out."
Our View:
"The consensus is anchored to the political realities of the past decade. It ignores the fact that the government has been more than made whole and that the current situation creates systemic risk by having the entire housing market backstopped by the taxpayer. A second Trump administration has a strong incentive to declare victory, claim a massive profit for the government, and remove $8 trillion of liabilities from the federal balance sheet. The 'wipeout' scenario is less likely than a recapitalization that preserves value for existing commons, as their support is needed to raise new capital smoothly. The risk is real, but the market is pricing this as a near-impossibility, not a politically-contingent event with a plausible path to resolution."
5. Financial Deep Dive
Analyzing the GSEs' financials is an exercise in looking at what could be. Their reported income statements are meaningless for equity holders as all profit is swept away. The key is their underlying earnings power. Combined, the two companies generate tens of billions in net interest income and g-fees annually. This is high-quality, recurring revenue backed by a massive, diversified portfolio of U.S. residential mortgages. The quality of this portfolio is vastly superior to the pre-crisis book, with post-2008 underwriting standards significantly tightening credit quality, resulting in historically low default rates.
Their profitability is driven by the g-fee, which is essentially an insurance premium. The FHFA has the power to raise or lower this fee. In recent years, fees have been raised to be more in line with private market risk-based pricing, making the business even more profitable and less subsidized. This fee income is remarkably stable and predictable, tied to the ~$8 trillion book of business they guarantee.
Once allowed to retain earnings, their capital accounts would grow substantially. Assuming a combined $15 billion in annual net income, they could organically build $60 billion in capital in just four years. This retained capital would form a powerful base for a final public offering to meet the full capital requirements set by the FHFA. The dilution from this offering is a key variable, but even factoring in a significant share issuance, the value per share post-exit would be a multiple of the current price. In a privatized state, capital allocation would become a key driver of value. A stable, profitable utility could initiate a substantial dividend, begin share buybacks, or both, offering a total return profile that would be highly attractive to income and value investors, providing long-term support for the stock price post-exit.
A traditional DCF is not applicable here. The valuation hinges entirely on the probability and terms of an exit from conservatorship. We can, however, estimate a post-exit valuation.
Ackman's analysis projects a potential IPO price of around $31 per share in late 2026, with a valuation reaching $34 by 2028. This is based on a normalized earnings power of ~$2.50 per share and a modest P/E multiple of 12-14x, in line with other large financial utilities.
Normalized Earnings Power (Post-Exit): ~$20 Billion (combined)
Assumed P/E Multiple: 12x
Post-Exit Market Cap: ~$240 Billion
Post-Dilution Shares Outstanding: ~7 Billion
Implied Price Per Share: ~$34
This simple math illustrates the multi-bagger potential. The current market price of ~$4.50 implies that the market is assigning a very low probability to this outcome. An investment today is purchasing an option on this event.
7. Pre-Mortem (Risks)
An investment in FNMA/FMCC could fail spectacularly for several reasons:
Political Failure (High Probability): The primary risk is that the political catalyst fails to materialize. A change in administration or a shift in political priorities could leave the GSEs in the current state of limbo indefinitely. The status quo is politically easy, and changing it requires significant political capital. A political stalemate is the most likely bear case.
Punitive Recapitalization (Medium Probability): Regulators and the Treasury could structure an exit that is punitive to existing common shareholders. They could convert their senior preferred stock at a valuation that heavily dilutes or completely wipes out the common. This would achieve the goal of privatization while punishing the "speculators" who bought the stock during the conservatorship.
Regulatory Hurdles (Medium Probability): The FHFA could impose capital requirements far higher than the anticipated 2.5%, making a private-market capital raise impossible or prohibitively dilutive. This would effectively kick the can down the road for years, destroying the time value of the investment.
8. Conclusion & Action
The investment case for Fannie Mae and Freddie Mac is a classic special situation with a highly asymmetric risk/reward profile. It is a binary bet on a political outcome. If the conservatorship ends on terms favorable to common shareholders, the upside is well over 600%. If the status quo persists, the shares will likely continue to trade in their current range, representing a significant opportunity cost or a slow bleed. If the exit terms are punitive, a total loss is possible.
Given the clear catalyst of a potential change in administration and the public roadmap for their release, we believe the probability of a positive outcome is significantly higher than what is priced into the shares. We recommend initiating a small, speculative position in both FNMA and FMCC. This position should be sized appropriately for a high-risk investment where the outcome is largely outside of the company's or investors' control.
Disclaimer: Internal research only. Not financial advice.
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