By Joe Light

Michael Burry bet against the subprime mortgage market two decades ago. The former hedge fund manager, made famous by the book The Big Short , recently said he was buying shares of mortgage giants Fannie Mae and Freddie Mac.

Hedge funds and retail investors for years have been lured -- and often burned -- by one of the biggest all-or-nothing bets in stocks. Now, prominent investors are betting that President Donald Trump will give them what no other president has since the government took over the companies in 2008: a payoff on their shares.

Although publicly traded, Fannie and Freddie have been under U.S. "conservatorship" since the 2008-09 financial crisis and haven't sent profits to shareholders. Until recently, shareholders hoped that Trump would release them from government control and turn the profit spigot back on. Now, some shareholders are pushing government officials to move down a less ambitious path that would leave Trump in control, while still helping shareholders collectively realize billions of dollars on their stock.

"We're thinking about taking it public, taking a little chunk out of it, " Trump said on May 1 at an unrelated event. "I don't know what the hell we're going to do."

The second Trump administration has given Fannie and Freddie holders a wild ride. Shares of the two companies skyrocketed last summer after the president said he was considering taking them public. But since September, both stocks have dropped about 50%. Persistent inflation and the Iran war have fueled doubts that Trump will push for releasing the companies.

Some administration officials have argued that the proceeds from the government's stock sales could cut the deficit, or that Congress could use the money for other priorities, such as supporting affordable housing.

Fannie and Freddie don't make mortgages but buy them from lenders, wrap them into mortgage-backed securities, and guarantee to make bond investors whole if borrowers default. That system makes 30-year fixed-rate mortgages cheap and plentiful, although it rests on the belief that the government would bail out the companies if they ran into trouble.

After the government took over Fannie and Freddie in 2008, it eventually injected them with more than $190 billion in bailout money. In return, the Treasury received warrants to acquire nearly 80% of the companies' common stock, as well as a new class of "senior" preferred shares. Since then, the government's claim has grown to more than $370 billion.

The government left outstanding the companies' common stock and legacy "junior" preferred shares. In the years after the crisis, institutional investors including Fairholme Funds, Paulson & Co., and Pershing Square Capital Management bought common or junior preferred shares on the bet that the companies would one day send profits to private investors again. Burry disclosed a major stake in Fannie and Freddie in December, and said last month in a Substack post that he had bought more.

Behind the scenes, shareholders are pushing Trump to make a move. Hedge fund PointState Capital earlier this year hired a firm to lobby the administration, according to federal filings.

Pershing Square founder Bill Ackman also held several meetings with administration officials earlier this year to pitch his most recent plan to restructure the companies. The crux of Ackman's plan is for the Trump administration to retire the government's $374 billion senior preferred claim on Fannie and Freddie.

"Fannie and Freddie are stupidly cheap," Ackman said in an X post in March. "Asymmetry at its best. They could be a 10x and it could happen soon."

Analysts for years avoided evaluating the shares because of their political risks, but have recently begun to initiate coverage. On Monday, Mizuho Securities gave Fannie and Freddie Outperform ratings with $10 and $9 price targets, respectively. "The current administration has the political motivation to complete what it began in its first term," wrote Mizuho managing director Dan Dolev.

Fannie's and Freddie's shares look extremely cheap by any standard valuation metric, but calculating one is mostly a waste of time. That's because there is no way for shareholders to know what Trump will do with the government's common and senior preferred shares, or when he'll take action.

In the most negative scenario for common-stock holders such as Ackman, Trump could not only exercise the warrants to acquire almost 80% of the companies but also seek to convert the senior preferred shares to common, which would leave the government with near total ownership.

That is why many hedge funds have considered Fannie's and Freddie's junior preferred shares to be the safer bet. On Monday, Fannie's and Freddie's junior preferred shares traded at a little less than half of their par value. The funds bet that a restructuring could pay near par or leave them with an equivalent amount of common stock.

That, too, is a gamble. During the first Trump administration, Treasury and Federal Housing Finance Agency officials considered restructuring plans that would dilute the junior preferred shareholders and the common holders, probably leading to more court battles.

"There's no fundamentals to this trade. It's completely politically based," said Stephen Myrow, managing partner of Beacon Policy Advisors.

Lately, Trump and other government officials have floated the idea of selling a tiny slice of Fannie and Freddie rather than trying to sell all of the government's stock at once.

In his remarks on May 1, Trump alluded to a plan from FHFA Director Bill Pulte to sell about 5% of the government's shares in the companies, which would raise a relatively small amount.

"It's peanuts," Trump said. "You take it public, it buys 15 missiles."

The White House and Treasury Department didn't return Barron's requests for comment.

It is unclear how mortgage-bond investors would react to such a step, which is another challenge. Bond investors have warned that changing the government's relationship with Fannie and Freddie could raise mortgage rates if the market no longer trusts that the government would bail them out in a crisis.

Analysts say there are other steps that the Trump administration would probably have to take if it decides to move forward with selling shares.

"This is not something that Trump can just post on TruthSocial and then it will exist," said Ben Elliott, an analyst at Bloomberg Intelligence. "It's an incredible amount of on-ramp to lay the groundwork."

Fannie and Freddie shares will surge anytime Trump hints that a share offering is coming. Until Trump takes concrete steps, they are a speculative bet.

Write to Joe Light at joe.light@barrons.com

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May 07, 2026 01:00 ET (05:00 GMT)

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