Pershing Square’s Bill Ackman provided a 103-page slide show on Thursday to illustrate his proposal for the U.S. government to end its conservatorship of Fannie Mae and Freddie Mac. At first glance, investors were underwhelmed: Fannie share’s fell 13 percent to $5.40 and Freddie dropped 15 percent to $4.83 on Thursday. At midday on Friday they each recouped about 40 cents to $5.83 and $5.24.

Mr. Ackman, whose company purchased big stakes in the companies after the government took control of them during the Great Financial Crisis, had teased his plan on X on December 30, when shares of both were trading below $2.50. That was followed by a January 2 announcement from the Treasury and the Federal Housing Finance Agency — the latter is the regulator for Fannie and Freddie —  of steps to prepare for an “orderly” exit  from conservatorship.

The agencies said those measures included seeking input from the public on how the release should be structured. Fannie and Freddie shares rallied in the ensuing sessions, cresting at $7.04 and $6.43, respectively, on Tuesday. At their current levels the shares are a far cry from the $31.81 Pershing projects for Fannie in a new public offering at the end of 2026 and $33.77 a year later for Freddie.

Pershing did not respond to telephone and email requests for comment. Analysts led by Bose George at Keefe, Bruyette & Woods offered more modest valuations for Pershing’s proposal – named “The Art of the Deal,” in a nod to a 1987 book by incoming President Trump – calculating the shares would end up being priced in the “high teens to low-$20 range.”

One reason for the difference is Pershing’s view that the government will not convert its preferred shares in Fannie and Freddie into common stock, a belief the Keefe Bruyette team does not share. The two companies, known as government-sponsored enterprises, issue guarantees for home mortgages that are then packaged into bonds and sold to investors.

They began as federal agencies designed to provide affordable home financing but eventually sold shares to the public, which gave them an incentive to expand their operations to generate profit beyond what they made from generally conservative home-mortgage insurance. 

Before the financial crisis, the GSEs had added sideline businesses of borrowing money with implied guarantees of repayment by the U.S. Treasury, and using the proceeds to purchase riskier mortgages than the 30-year home loans for creditworthy borrowers in which they specialize. They also lowered their standards for borrowers to qualify for mortgage insurance. These strategies punished the GSEs’ balance sheets as housing values plummeted and mortgage defaults climbed during the crisis.

The companies were unprofitable beginning in 2007 and until 2011 for Fannie and 2012 for Freddie, according to the Pershing document, but have since recovered and abandoned the arbitrage business. Pershing calculates that the government ended up investing $191 billion in the pair and has generated a net profit of $110 billion, or 57 percent.

Until Trump’s first term, all of the profits the two companies made were delivered to the Treasury, effectively disenfranchising public shareholders. They were then allowed to keep their profits to rebuild their capital. President Biden did not take “meaningful action” to end the conservatorship, according to the Pershing document, which lays out a four-point plan to achieve that goal:

• Set appropriate capital requirements

• Limit government-granted benefits to the GSEs

• Develop market-based compensation and governance policies

• Clarify the nature of the Treasury guarantees for investors who buy GSE mortgage-backed securities

The GSEs are now required to hold equity capital equal to 4 percent of their guarantee business, a level Pershing says can safely be reduced to 2.5 percent. That is well below regulatory requirements for private-sector banks and mortgage insurers, but the presentation contends the current GSE business is less risky. The Keefe, Bruyette analysts agreed, adding that the reduced level was still far higher than the 0.45 percent in force before the financial crisis.

Pershing wants an end to exemptions from regulatory requirements that private-sector companies must follow and also to a $2.25 billion line of credit with the Treasury. Mr. Ackman’s proposal wants salaries raised to market rates to limit turnover and bonuses paid in restricted stock with long-term vesting periods. Compensation targets should emphasize risk control in addition to “standard financial targets.”

Rather than an explicit guarantee, Pershing suggests that the preferred stock purchase agreements that were the mechanism for Treasury aid to the GSEs could be used to create something similar. Should the companies run into trouble again, the Treasury could buy more of the preferred shares, throwing the GSEs a lifeline instead of offering a direct guarantee of their debts.