After Senator Bob Corker’s surprise call for Americans to short Fannie Mae (FNMA) and Freddie Mac (FMCC) during an interview with CNBC’s Rick Santelli on Wednesday, in a new twist, Bill Ackman revealed that Political Alpha has circulated a new research note on the GSEs that could signal a shift in the Obama administration’s handling of the GSEs.

“Multiple sources have confirmed that the White House has reached out to the housing finance community to understand better its options on what to do with the GSEs after conservatorship,” according to Andrew Taylor, director of research at the investment intelligence agency. There’s already been rumours by various hedge funds that Obama’s team wants to privatise the GSEs; is this the beginning of the end?

Perhaps Obama’s team is coming around to the Republican senator from Tennessee’s camp, who was quoted on CNBC saying “people should just short it, because it’s major BS.”

“The Administration is in the very early stages of looking at various options to end the GSEs conservatorship. This is a major shift in thinking as it would entail ending the GSE profit sweep allowing Fannie and Freddie to begin to retain capital. We have been told the Administration is not close to deciding how to proceed,” said the Political Alpha note.

This follows on the heels of the latest litigation that arose from the Treasury Department’s 2012 profit-seeking takeover of Fannie Mae and Freddie Mac. On Sept 30, Judge Margaret Sweeney of the Court of Federal Claims agreed to the the plaintiffs’ demands in Fairholme Funds vs. United States to file all materials classified as “protected information” in relations to Fannie Mae and Freddie Mac. This essentially forces the administration to disclose the internal dealings behind the takeover they’ve been trying to suppress.

Corker on Fannie Mae

In Corker’s controversial CNBC interview, he changed tack and said the Republican-led Congress is “inept” and cannot be trusted to take up GSE reform, and in fact, many are no longer interested in reform as they were in 2008. But many on the hill and on the street are beginning to think he has a personal business interest in winding down the GSEs. Congress cannot act because without the GSEs, the housing market could crash and there’s just no substitute for the GSEs.

What do we know so far? The GSEs need to “pay back” what’s been invested by the government so far, which is $132 billion. They “may” need to pay interest on this at a rate that the government incurs to borrow from the public market. But then would the government have to pay them for their services in stabilizing the financial markets and creating liquidity in the market? There’s just too many unanswered questions left: was the SPSPA agreement needed and lawful when cheaper credit was already available from the fed? Did the conservatorship violate the fiduciary duties to shareholders? Are 80% equity warrants still valid?

Perhaps what we’ve seen this week is the two camps hunkering down for a big fight, with Corker dumping the stock while Ackman pumps them up. The ongoing legal battles could shed a light on what’s to come this season.

Fannie Mae Bethany McLean
Fannie Mae