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The next day, President Trump
The good news of sorts is that the GSEs will indeed exit conservatorship because the Trump Administration needs the cash value to support the President's ambitious tax cutting agenda. The bad news is that as and when the GSEs are released in a couple of years, the US will own more than 98% of the equity on a fully diluted basis.
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Releasing the GSEs from conservatorship implies crushing dilution of the private investors and also the Treasury's own preferred position by the accumulating liquidity preference caused by the accumulation of capital by the GSEs. Prior to release, the Treasury should end the accumulation of private capital by the GSEs.
Retaining private capital does nothing to support the credit standing of the GSEs, but it does make release more expensive. Will President Trump force Treasury Secretary Scott Bessent to take a loss of several hundred billion dollars by waiving the mounting liquidity preference? Not likely. The United States will essentially own all of the voting shares of the GSEs upon release. What then?
The challenge for Secretary Bessent is how to turn this asset into cash that can be used to offset the cost of tax cuts. In order to generate several hundred billion in cash quickly, the Trump Administration will be forced to restructure the GSEs to unlock value in the shortest period of time. Otherwise the Treasury risks taking a loss on the sale of common equity shares.
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The best path for restructuring the GSEs is for the Treasury to convert its option into common shares, then further issue new common shares to repay the liquidation preference as required by the same federal law that applied to the Treasury stake in GM, AIG and Citigroup. But unlike these private companies, the GSEs will never be truly free of control by the Treasury, thus a new strategy is needed for monetizing these assets.
When President Lyndon Johnson sold common shares of Fannie Mae to the public in 1968, this was an act of fraud. Doing it again in say 2027 will also be a fraud. Why? Because the US retains "dominion" over the GSEs, to paraphrase U.S. Supreme Court Justice Louis Brandeis a century ago. Pretending to sell an asset while retaining control over the property, wrote Brandeis, "imputes fraud conclusively."
The Trump Administration needs to monetize the GSEs quickly, but the United States must remain in control to avoid destabilizing the housing sector. Fortunately the Trump Administration can avoid this conflict while also doing right by the private shareholders and without new legislation.
The answer is for the US to remain the majority voting shareholder of Fannie Mae and Freddie Mac, while financing the repayment to Treasury (and the capital needs of the GSEs) privately via a new class of non-voting senior preferred securities.
How does embracing an explicit public/private model help President Trump and Treasury Secretary Bessent make GSE release a reality?
First, by having a frank discussion about the credit needs of the GSEs and the housing market, we can make the process credible and eliminate the unseemly spectacle of hedge funds manipulating GSE common shares with impunity. The goal here is to make the release so credible that the Congress will find it difficult to meddle with the GSEs after release.
Second and more important, restructuring the capital of the GSEs will make the release process more credible with the markets, particularly with financial institutions and global investors, and raise a lot of money for the Treasury without the risk of a loss. Trying to sell $500 billion in common shares to the public makes no sense in a market where investors want safe yield.
Prior to release, the GSEs should start to repurchase and extinguish common shares from the Treasury and finance this process with cash profits and issuance of new nonvoting senior preferred shares to private investors. The GSEs should also repurchase common and preferred shares in the open market, offering private investors the opportunity to sell for cash or in exchange for new senior nonvoting preferred on an attractive basis.
Eventually, most of the GSEs capital structure will be senior preferred and debt held privately, while the Treasury could hold less than $100 billion in common voting shares, essentially a "golden share." And with continued control by the US, the capital needs of the GSEs will be reduced accordingly, increasing resources to better support housing. Remember, private capital does not matter to the GSEs.
Having the United States as the sole common voting shareholder is credible because ultimately the Treasury retains dominion over Fannie Mae and Freddie Mac. By keeping the US as the sole shareholder of the GSEs, we preserve the 30-year mortgage, interest rate locks for consumers and to-be-announced (TBA) eligibility for conventional loans. Most importantly, keeping the US as sole owner of the GSEs avoids any need by Moody's and other rating agencies to change the credit ratings of the GSEs.
By restructuring the GSEs into public utilities, we can end decades of free-riding by private investors on the public credit. Retiring all publicly held GSE common shares and selling new senior preferred shares to the public provides a practical way to raise hundreds of billions of dollars for the Treasury in a short period of time.
Ending private ownership of GSE common shares also allows the Trump Administration to make clear that the days of private investors profiting at public expense are over. And by restructuring the balance sheets of the GSEs, we can give President Trump and Congress the cash needed to preserve the tax cuts – without Treasury risking a large financial loss.
Ed Pinto of American Enterprise Institute and Alex Pollock of the Mises Institute wrote in "
"The conventional narrative is that an exit from conservatorship would be a 'privatization' and Fannie and Freddie would again become "private" companies. It is not the case. To be a GSE means that you have private shareholders, but you also have a free government guarantee of your obligations. As long as Fannie and Freddie have that free government guarantee, they will not be private companies, even if private shareholders own them."
