Billionaire investor Bill Ackman believes 2 stocks could drop about 900% under a future Trump administration

President-elect Donald Trump has given many traders bullish on a market that has been on a glorious two-year rally. Many believe that deregulation and corporate tax cuts may well create highly effective tailwinds that would unleash confident investors that would likely do well to propel stocks higher.

It is no longer surprising that billionaire investor Bill Ackman, a vocal supporter of Trump, is all about this preparation. Ackman and his fund Pershing Square Holdings the bailout has yielded tremendous gains over the past five years. Ackman now believes that two of Pershing’s longtime holdings are in position to unload about 900% due to the incoming Trump administration. Let’s see.

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Could the 17-year conservatorship come to housing?

In 2013, Ackman and Pershing purchased approximately 10 percent of the common stock of government-sponsored entities (GSEs). Federal State Mortgage Association (OTC: FNMA) and Federal Home Mortgage Mortgage (OTC: FMCC)identified as Fannie Mae and Freddie Mac. Only recently on X did Ackman present his thesis on how the 2 mortgage giants might well exit government control and be recapitalized, resulting in the most famous shareholder gains.

The U.S. Treasury Department placed Fannie and Freddie into receivership in 2008 after the companies were caught holding too many subprime mortgages to reveal some immediate background. Fannie and Freddie provide well-known liquidity in the mortgage market by purchasing mortgage loans from financial institutions and lenders and packaging them into securities that may then be sold to dealers. Fannie facilitates mortgage loans from larger banks, while Freddie offers them to smaller banks.

While under trusteeship, Fannie and Freddie turned over all of their earnings to the Treasury under what is defined as a post-classification settlement. The Treasury Department also owns more than $193 billion in Fannie and Freddie’s senior most preferred stock, which is equivalent to a vesting of 80% of Fannie and Freddie’s traditional stock and expires in September 2028. The Treasury Department has invested $187 billion in equity in Fannie. and Freddie when they put them under conservatorship and has since seen about $300 billion in relief payments from the sweepstakes settlement.

Shareholders, overwhelmed after Fannie and Freddie went into receivership, argued it was time for the Treasury Department to free the 2 GSEs from oversight, while various hedge fund managers praised Ackman’s bailout, which bet , that this will eventually fall. Problems began to unfold in this direction under Trump’s first administration. Treasury Secretary Steven Mnuchin ended the classification settlement and allowed Fannie and Freddie to keep earnings for the plan’s capital. Meanwhile, the Federal Housing Finance Administration (FHFA) has set unique capital requirements that Fannie and Freddie must meet to exit conservatorship.

It is urgent how Fannie and Freddie can realistically raise tens of billions in capital when the Treasury has a whole bunch of billions in the highest preferred stocks and warrants because there is the possibility of the most famous dilution.

Ackman believes the second Trump administration will make an impression on the job. It envisions a path whereby the GSEs credit his or her backdated distributions to the Treasury Department under a classification settlement that would then possibly retire the older most preferred shares. The GSE’s total capital requirements would be 2.5% of outstanding mortgage guarantees, a level that Ackman believes would form a fortress stability plan capable of salvaging the roughly seven cases of losses that Fannie and Freddie suffered at some point in the astronomical recession. . The Treasury would then likely cash in on its warrants and depreciate the common stock over five years, generating $300 billion in revenue.

How Ackman Gets Up

Ackman assumes that Fannie and Freddie will raise capital in the fourth quarter of 2026, giving them two more years for capital planning. GSEs save solid earnings energy so that they will quickly acquire capital. At that level, they would like another $30 billion to meet their 2.5 percent capital requirement.

Ackman estimates that Fannie and Freddie are each priced at around $34 a half, an 888% premium for Fannie and a 909% premium for Freddie from their current ranges (as of Jan. 2).

While stocks soared after Ackman’s offer, traders might be taking the best-known threat to that funding and the many variables at play quite calmly. Ackman anticipates that the Treasury Department will attribute prior distributions to higher preferred stocks and that the capital requirement will likely be 2.5%. Nevertheless, the Congressional Funds Workplace (CBO) conducted some scenarios about the GSEs exiting control in 2020, and the minimum responsive capital requirement was changed to 3%. It is also now no longer clear that the Treasury would issue backdated distributions to the senior most preferred shares.

That said, if the board actually wants to get the GSE out of control, it might want to impress concessions on the higher most preferred shares or warrants, and it’s no doubt feasible that they impose a 2.5% reduction in the capital requirement.

I accept as truth with Ackman that the potential for the GSEs to spiral out of control has greatly increased. Still, there would likely be a lot of unknown variables at play, so traders would probably feel free to act quickly.

Another idea is to buy the junior most preferred shares that exchange at the most well-known discounted rate. There would likely be less upside than common stock, but the junior most preferred stock has a higher priority to redeem than the common stock in the capital pool. It’s a situational mode that might be fairly leveled at the threat spectrum. A minor speculative situation may be most productive right here.

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Bram Berkowitz holds positions with the Federal Nationwide Mortgage Association. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed in this document are those of the creator and are no longer necessarily central to these Nasdaq, Inc.