Donald Trump Considers the Sale of Fannie Mae and Freddie Mac
Elon Musk, recognized as the world’s wealthiest individual with a net worth of $381 billion according to the Bloomberg Billionaires Index, pales in comparison to Fannie Mae and Freddie Mac. These two entities, which have been intertwined for decades, could potentially hold a combined market value in the trillions if the government opts for privatization. This prospect has caught the attention of former President Donald Trump ever since he assumed office.
As reported by Bankrate, a financial services firm, approximately 70% of all mortgages in the United States are either backed or owned by the two organizations, often referred to as government-sponsored enterprises (GSEs). They purchase home loans from banks and bundle them into mortgage-backed securities with government guarantees, thereby providing banks with additional capital to extend more affordable home loans.
Following the 2008 financial crisis, which was partly exacerbated by poor mortgage lending practices, the government intervened and took control of Fannie Mae and Freddie Mac, providing a $189 billion bailout. The government’s backing makes their bonds appealing to investors.
As the housing market stabilized and recovered, Fannie and Freddie returned to profitability, reimbursing the Treasury for the bailout and amassing $161 billion in capital. During his first term, Trump attempted to privatize these institutions—known as releasing them from conservatorship—but was hindered by various regulations that have since been rescinded.
The Potential Trillions of ‘These Amazing Companies’
The public sale of Fannie Mae and Freddie Mac is projected to generate trillions. The annual profits of around $30 billion could benefit current shareholders, including billionaire hedge fund managers Bill Ackman and John Paulson, who acquired shares at significantly reduced prices. Both have contributed substantial amounts to Trump’s political campaign.
Ackman believes that the share price for privatized GSEs could reach $31, representing a staggering 1,200% increase from his average purchase price of $2.40. Trump has appointed William Pulte, chairman of a major homebuilding company, as the overseer of both agencies, further emphasizing the potential value of Fannie and Freddie.
Trump describes Fannie and Freddie as “THESE AMAZING COMPANIES” in his Truth Social posts, stirring interest among investors, as their share prices surged following his remarks.
However, Trump is well aware that if these companies are privatized, there may be a temptation to incur excessive debt, with the assumption that government bailouts would be available if necessary. He stated he would “stay strong in my position on overseeing them as president,” suggesting a strategic influence over builders and lenders reliant on his administration.
Concerns from Treasury Secretary
The discussion surrounding privatization brings to light Treasury Secretary Scott Bessent, who supports the transfer of Fannie Mae and Freddie Mac to the private sector, albeit with caution. He is concerned that profit-driven entities, especially under the guidance of a pro-industry appointee like Pulte, could favor lenders seeking to raise interest rates.
This situation could lead to higher borrowing costs for mortgages and escalate rates on long-term government bonds, presenting challenges for the Treasury as it faces rising fiscal deficits expected to reach 7% of GDP if Trump’s major legislative proposal is approved—significantly above the secretary’s long-term target of 3%.
Bessent is also wary that increased interest rates could hinder new home construction and stifle economic growth necessary for generating tax revenue. However, opposing the president’s initiatives does not guarantee job security, as seen in Bessent’s careful phrasing about the privatization timeline in interviews.
Legislative motions concerning tax reforms and trade agreements are anticipated to unfold, with immediate priorities overshadowing the privatization of Fannie Mae and Freddie Mac. The administration’s assertions of “deals” may not hold significant ground, especially when compared to the extensive terms typically found in major trade negotiations.
While the future of these institutions remains uncertain, Trump’s Treasury secretary is one of the few advisors whose counsel carries weight in the administration. However, the notion that the next president could receive accolades for realizing the financial potential of Fannie Mae and Freddie Mac might prove unrealistic.
Irwin Stelzer is a business advisor
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