The announcement by the Trump Administration to potentially take Fannie Mae and Freddie Mac public has reignited a complex and often misunderstood debate about the future of the nation's housing finance giants. While the idea of an IPO sounds like a clear path to privatization, a closer look at the unique history and current legal status of these entities reveals a more complicated story. The language used by the Trump administration: "taking these companies public," rather than "a secondary offering," is not just a matter of semantics. It hints at a potential move that could render the existing, publicly traded stock worthless, a critical point for investors to understand.
To grasp the full weight of this situation, one must recall how we arrived here. During the 2008 financial crisis, the U.S. government placed Fannie Mae (FNMA) and Freddie Mac (FMCC) into conservatorship, effectively seizing control. However, it was not a complete takeover. The government acquired an 80 percent stake, leaving the remaining 20 percent in the hands of existing shareholders. This was a strategic decision; a full nationalization would have forced the government to absorb trillions of dollars in mortgage-backed securities (MBS) onto its own balance sheet, a move that would have dramatically increased the national debt. Instead, the government’s support was structured as a contingent liability, a form of off-balance-sheet financing that preserved the illusion of a private company while the government reaped all the profits.
This unusual arrangement has left the current common stock in a legal and financial limbo. The shares that trade daily on the OTC Bulletin Board Exchange are not like typical stocks. The government is entitled to all of Fannie and Freddie's profits, and the pre-conservatorship shareholders have no claim to these earnings, nor do they have voting rights.
The Obama Administration's stance was clear: these companies were insolvent when the government intervened, and in a normal bankruptcy, shareholders would have been completely wiped out. The fact that the stock even exists today is an accounting convenience, not a guarantee of a future return. This historical precedent suggests that the Trump administration's use of the term "IPO" could signal the creation of an entirely new class of stock, one that is separate from and superior to the old shares.
If a new "IPO" occurs (as Trump claimed last week), the most likely outcome for the old stock is that it will not be fungible with the new offering. It will probably not have voting rights, a claim on future profits, or the right to receive dividends. The government could, in effect, declare the old stock worthless, transforming it into nothing more than a speculative litigation lottery ticket for activist investors who choose to sue the government to force a settlement.
For anyone excited about the prospect of Fannie and Freddie going public, it is crucial to recognize that the currently trading FNMA and FMCC stock might not participate in the liberated, profitable entity. While a different administration might offer a different outcome, the underlying logic of a bailout and the legal precedent of conservatorship suggest a grim reality for existing shareholders, regardless of who is in the White House.
While the administration's stated goal is to maintain implicit government guarantees and sell a portion of the companies to the public, the mechanism for doing so remains opaque. An IPO for Fannie and Freddie would be a monumental event, potentially raising tens of billions of dollars and reshaping the housing finance system. However, for investors holding the existing stock, the promise of an IPO is fraught with risk, as the historical context and legal structure of the conservatorship suggest that a new era for Fannie and Freddie may leave the original shareholders behind entirely. Fortunately, we should have much greater clarity in the coming weeks.