Wall Street Firms Circle Fannie and Freddie Ahead of Privatization

by 06 May 2013

If it was up to the most powerful hedge fund managers in the world, Fannie Mae and Freddie Mac will one day become 100 percent private entities under the control of Wall Street investment banking firms. According to a recent article in Bloomberg BusinessWeek, hedge funds controlled by billionaire investors such as John Paulson are actively lobbying the U.S. Congress to consider transitioning the troubled mortgage guarantors into private companies instead of liquidating them.

Fannie and Freddie are designed to function as publicly-traded companies that enjoy status as government-sponsored entities (GSEs). In the wake of the collapse of the American housing market and the meltdown of the mortgage and credit investment markets in 2008, Fannie and Freddie went from being government-sponsored to government-owned as the Treasury stepped in with a taxpayer-funded bailout of both GSEs. 

The Destiny of Fannie and Freddie Put On Hold

Housing finance reform has been a contentious issue on Capitol Hill and Wall Street since the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in 2010. By that time, Fannie and Freddie had been very busy issuing mortgage guarantees for just about every home loan originated in the U.S.; this eventually caused the GSEs to carry an extremely risky investment portfolio.

The prevailing wisdom of investors and public officials with regard to Fannie and Freddie on the issue of housing finance reform was to put both GSEs out of their misery and move to privatize the mortgage guarantee process. That was until Fannie and Freddie began posting impressive earning reports that showed them becoming profitable in the near future. Liquidation suddenly became a second-rate option for the GSEs since their profits are destined to repay American taxpayers at a time when the U.S. is going through a period of budget sequestration.

What Hedge Fund Managers Want

Paulson & Co., the Carlyle Group and Perry Capital LLC are some of the hedge funds that have actively lobbied Members of Congress and the U.S. Senate Banking committee. These hedge funds are widely believed to hold significant amount of shares in Fannie and Freddie since before they were placed under conservatorship by the U.S. government. 

Before their downfall, both GSEs and their shares were Wall Street darlings; holding stock in these companies was coveted by day traders and institutional investors alike. These days, however, their shares are unceremoniously listed on the OTC Bulletin Board as penny stocks. Now that Fannie and Freddie are seemingly enjoying a phoenix flight, hedge fund managers who had taken large positions in the GSEs prior to their collapse are eager to see their investments recuperate. 

There is another potential reason behind the lobbying by hedge funds: Should Fannie and Freddie go private, hedge funds managers may seek to gain influence and control over the secondary mortgage markets as majority shareholders.


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