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Ackman: How to Save Fannie, Freddie

Wednesday, 16 Jul 2008 02:13 PM

Hedge fund manager William Ackman says he has a plan to bail out mortgage companies Fannie Mae and Freddie Mac by increasing their capitalization.

The two mortgage companies need more capital and cannot wait for the housing market to be stabilized, says Ackman, who runs Pershing Square Capital Management.

He has a short position in both the junior debt and the equity of Fannie Mae and Freddie Mac.

"It doesn't matter what the rating agencies say about their capitalization," Ackman said, in an interview on CNBC. "Implicit guarantees don't work in the market that we're in now. What matters is capital."

"These institutions need to have a fortress balance sheet. (JPMorgan CEO) Jamie Dimon talks about a fortress balance sheet. We need a Fannie and Freddie with a fortress balance sheet."

Ackman does not believe the housing market will stabilize.

Fannie Mae is far from being well-capitalized and the mortgage company needs a capital infusion in order to restore confidence in the market, he said.

“They need to be able to withstand the perfect storm,” Ackman said. “It’s now the perfect storm.”

Ackman’s plan calls for the current common equity to be extinguished and leverage at the mortgage companies to be lowered.

Then a restructuring of Fannie and Freddie would take place, where the common and preferred equity would be extinguished, and the subordinated debt exchanged for equity warrants.

"This is not the senior debt of Fannie Mae — there is a relatively small amount of it outstanding. ... We believe the subordinated debt holders should get warrants," he said.

Ackman suggests that his plan is similar to a prepackaged bankruptcy restructuring, which will be positive for investors and, he says, minimize taxpayer risk.

"This is a conservatorship, which is a good thing, because you can accomplish it more efficiently," he said.

Ackman says that the companies have too much debt and not enough equity, and his plan will readjust the balance sheet.

He suggests that for every $1 of senior, unsecured debt held, a holder would receive $0.90 in new senior, unsecured debt and $0.10 of new common equity. This would result in reducing Fannie's debt to $675 billion from $750 billion.

"That raises equity by $75 billion," he said. "By eliminating subordinated debt of $11 billion, you're creating another $11 billion worth of equity."

The senior, unsecured holders would get ownership of the company and become its majority equity holders, he said.

Another part of his plan calls for the government to make a stand-by purchase commitment for new Fannie Mae common equity at initial value for three years. The government would issue subordinated debt or preferred stock in the future if capital is needed.

The plan would allow for equity to be created and would reconfigure the balance sheet, he said.

“We’re changing the portion of debt and equity,” Ackman said.

The companies should remain as private entities and should be less levered, he said.

“People are losing confidence,” he said. “That’s the beauty of this plan. It’s a way for these institutions to be recapitalized without the government having to write a check.”

Both Fannie Mae's and Freddie Mac’s stocks will continue to tumble and their second quarter earnings will be a “disaster,” Ackman predicted.

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Hedge fund manager William Ackman says he has a plan to bail out mortgage companies Fannie Mae and Freddie Mac by increasing their capitalization.The two mortgage companies need more capital and cannot wait for the housing market to be stabilized, says Ackman, who runs...
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Wednesday, 16 Jul 2008 02:13 PM
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