President-elect Donald J. Trump’s decision to pick Steven Mnuchin, a former Goldman Sachs partner, as the next Treasury Secretary is driving hopes on Wall Street that government sponsored mortgage giants Fannie Mae and Freddie Mac will be privatized in the new administration. “We’ve got to get them out of government control,” Mnuchin told Fox Business News on Wednesday morning as he was picked by Trump to be his Treasury Secretary.
Fannie Mae and Freddie Mac were bailed out to the tune of $188 billion during the financial crisis and put into government conservator-ship as their portfolios of home loans soured during the credit crunch. Since the crisis, both firms have sat in a legal limbo.
Fannie and Freddie repaid bailout funds in 2013 and 2014 and have been making billions of dollars quarterly profits. Hedge funds including Pershing Square and Paulson Co. bought large stakes in both firms as they repaid bailout funds. However, the U.S. government still controls both companies and for years has swept Fannie and Freddie’s billions in quarterly profits to its coffers.
Billionaire Bill Ackman of Pershing Square and Bruce Berkowitz, of Fairholme Funds, have both sued the government to force Fannie and Freddie to exit conservator-ship. Both stocks have swung wildly in recent years on court rulings regarding Ackman and Berkowitz’s suits.
But now it seems Wall Street may get its way. Mnuchin said on Wednesday getting Fannie and Freddie out of government control is among the “top ten things” he will get done as Treasury Secretary. “We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control,” Mnuchin said. Other imperatives include rolling back the 2010 Dodd Frank Act to free banks to lend and trade.
Financial stocks continued their over 15% post-election rally, with Goldman Sachs rising over 4% to multi-year highs above $220 a share and Bank of America and JPMorgan rising 3% and 1%, respectively. But no stocks moved more than Fannie and Freddie on the Mnuchin pick.
Shares of Fannie surged over 31% in early trading, while Freddie rose over 29%. Both firms have more than doubled since Election Day, minting hundreds of millions of dollars in paper profits for investors like Ackman, Paulson and Fairholme’s Berkowitz.
Some investors took Trump’s election as a sign their trades would soon pay off. “I think Fannie and Freddie are going to get resolved in the first 12 months of this new administration, and I’m looking forward to having my second meeting with Donald Trump and negotiating a deal,” Ackman said on Nov. 10, at a Dealbook conference.
Collectively, Fannie and Freddie hold over $5 trillion in mortgage assets and they are the de-facto holder of prime mortgages in the United States. Last quarter, Fannie generated net income of $3.2 billion, while Freddie posted a profit of $2.3 billion.