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Ackman, Berkowitz Slammed After Fannie Mae Plunges 60% On Court Ruling

It is not a good morning for Bill Ackman's Pershing Square or Bruce Berkowitz's Fairholme Capital, or the US government for that matter, of course, which happen to be the three largest investors in Fannie Mae:


The reason: FNM stock, which at last check, was crashing by nearly 60%.


So why is FNM plunging? Perhaps a better question is why they soared as much as they did in the first place. 

For the answer we go to Bill Ackman and his jolly copycat groupies. As Bloomberg reminds us, Ackman, speaking at the 19th annual Sohn Investment Conference in New York, said Fannie Mae could be worth $23 to $47 a share over time, where he referred to a 110-slide presentation on the mortgage companies. 


Pershing Square has about 11 percent economic exposure to Fannie Mae and Freddie Mac shares based on common stock outstanding, a stake first disclosed last year. While lawmakers are weighing methods to wind down the companies, Ackman said mortgage rates would jump without the government-sponsored enterprises.


There is no viable alternative,” to Fannie Mae and Freddie Mac, Ackman said today in a Bloomberg Television interview with Stephanie Ruhle after the Sohn presentation. “Preserving the 30-year prepayable fixed-rate mortgage -- it’s like the bedrock of the housing system -- is critical.

We think the only way to do it is by preserving Fannie and Freddie.”

$23 to $47... or zero. Because while there may be no viable alternative, Ackman forgot one key thing: his adversary is the US government, a place where making trillionaires out of billionaires is not exactly in fashion right now. And that is precisely what would have happened if the Ackmanites had gotten their way in litigation that would assure that private stakeholders would get all the benefits of the GSE bailout with none of the downside risk (because after all these were, are and always will be guaranteed by the US government). \

Then this happened.

As AP reports, late yesterday a federal judge on Tuesday ruled against investors who are trying to collect billions of dollars in profits of government-chartered mortgage companies Fannie Mae and Freddie Mac. The decision by U.S. District Judge Royce Lamberth to dismiss the investors' lawsuits was a victory for the government. It was also a huge hit to the litigants case, and is the reason why as of right now, Pershing Square is worth a few hundred million less (and it will be worth far less if and when the SEC cracks down on Ackman's illegal purchase of Allergan calls).

More from AP:

"There can be no doubt" that the investors understood the risks involved in investments in closely regulated companies such as Fannie Mae and Freddie Mac, Lamberth wrote, and therefore have no reasonable expectation of profiting.


During the recent mortgage crisis, the government pumped $187 billion into the troubled companies, which have since recovered and now have quarterly profits running into the billions.


Recovering money for itself, the government is collecting a dividend amounting to nearly every dollar of the companies' net worth. That leaves nothing for private investors who had put money into the companies when they faced collapse.


Investors had hoped lawmakers or the courts would force the government to give up rights to the earnings. Among those suing the government are hedge fund firm Perry Capital LLC and mutual fund company Fairholme Capital Management LLC.

And while we don't feel bad for billionaires Ackman, Perry, Fairholme et al, we do commisserate with all those piggybackers who thought that Ackman's 110 slides on the matter were enough. Clearly, they weren't.