Late last night the Wall Street Journal reported something that Americans have gotten used to hearing — bipartisan government talks on the passage of a critical housing bill have broken down, and now the future of that bill is unclear.
That means it’s a good morning for hedge fund billionaire Bill Ackman, who is betting that Washington can’t overhaul the system that broke down during the financial crisis.
He wants Fannie Mae and Freddie Mac, the main actors in that system to remain as they are (with some significant tweaks).
The bill in question, sponsored by Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), would have drastically changed the function of Fannie and Freddie and put more mortgages in the hands of Wall Street banks. Talks within the Senate Banking Committee broke down because six Democratic Senators, including Elizabeth Warren, believe the bill doesn’t provide enough incentive for banks to lend to low-income Americans.
Elizabeth Warren and Bill Ackman on the same side. How do you like them apples?
Earlier this week Ackman presented his argument for why Fannie and Freddie, now very profitable entities indeed, should stay alive to a room full of investors at the Sohn Investment Conference. Both stocks are worth about $US4 right now, and he thinks they could be worth ten times that.
For him and other shareholders to profit, however, Fannie and Freddie have to get rid of a little thing called the ‘net worth sweep.’ The short version is that back in 2012 the government amended its agreement with Fannie and Freddie so it was the only shareholder that got any of their profits. That also happened to be the year Fannie and Freddie became profitable.
The Johnson/Crapo bill would remove Fannie and Freddie as lenders entirely. Their sole purpose would be to buy the housing loans from private lenders and issue them as securities, giving bondholders a guarantee that they will be made whole if something goes wrong.
Supporters like HUD Secretary Shuan Donnovan argue that the bill provides $US5 billion in affordable housing for low-income Americans. For the Senators standing with Warren however, the repeal of mandatory housing goals meant to bring conservatives on board means that private lenders will have way less of an incentive to make riskier loans.
Sean Oblack, an aid of Senator Johnson’s said in a statement:
“We have made significant progress bridging the divide among those previously undecided, and the committee vote is just a first step. Those involved in the negotiations have indicated they are interested in continuing to work together to try and find common ground, so the Banking Committee will keep working after favourably reporting out the bill next week.”
Analysts like Isaac Boltansky, a policy analyst at Compass Point Research and Trading LLC in Washington think that the bill could clear the Banking Committee, but without the support of Warren’s camp, it would have trouble passing on the floor of the Senate.
If it doesn’t, the entire effort, which Senators were hoping to get done before the 2014 elections in November, could fall by the wayside.
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