Fannie Mae: a 10x opportunity?

TLDR

Fannie and Freddie are back in focus, and we’re long. The thesis is that Fannie Mae will eventually exit conservatorship via IPO, driven by capital accumulation and increasing political pressure. Timing remains uncertain given legislative and regulatory risk, but that uncertainty is offset by Fannie’s position as part of a government-backed duopoly that guarantees ~25% of the U.S. mortgage market. The business generates $14–17B of annual net income, and as capital continues to build, pressure to resolve conservatorship will increase. While near-term catalysts are uncertain, we believe an IPO is likely over time; in the meantime, we are comfortable owning a high-quality business as the situation develops.

Intro

We are not attempting to reinvent the wheel. Fannie Mae has been extensively analyzed across research reports, litigation, legislation, and market commentary.

The complexity of this opportunity does not lie in building a traditional valuation model. Rather, it lies in synthesizing a wide range of non-traditional drivers - political incentives, legal outcomes, and regulatory decisions - that ultimately determine the path forward.

The goal of this piece is to distill that complexity into a coherent framework, summarizing the existing landscape and presenting a clear, actionable view of the risks and potential upside.

The big names, Ackman & Burry, are weighing in on Fannie Mae. This isn’t going to be for the faint of heart. Investing is hard. Politics is unpredictable. This opportunity sits at the intersection of both. Warren Buffet quips that investing is a game of baseball but no one is calling strikes so you should wait for your pitch. This is an easy one to sit out. For everyone else that wants to take a swing: let’s ride.

https://x.com/michaeljburry/status/2038453607121506362

Before we get excited, this is potentially a very long play. It’s hard to put enough emphasis on long. Ackman first entered this trade in 2013. He was talking about Fannie Mae back on Charlie Rose in 2008. He was on Charlie Rose again in 2015 pitching why Fannie should be public. His patience is legendary and needs to be studied.

I wouldn’t take Ackman’s word at face value though. Never forget his famous covid trade where he warned ‘hell is coming’ because of covid: he then pocketed $2B in bets against markets**.**The world is full of beauty. The art world has the Mona Lisa, math has the Fibonacci Sequence, computer science has the illusion of multitasking, and in finance we have Bill Ackman’s covid trade. Beauty aside, let’s dig in.

Fannie giveth and she taketh. If you were invested pre 2008, good riddance. If you effectively bet on the election in ‘24, then congratulations, that bet paid off nicely (yes, that would have been a bet, not investing).