Economist Peter Schiff slammed billionaire hedge fund manager Bill Ackman’s restructuring proposal that would release mortgage giants Federal National Mortgage Association (OTC:FNMA) or Fannie Mae and the Federal Home Loan Mortgage Corp. (OTC:FMCC), popularly known as Freddie Mac.
This Is ‘Fake Privatization’
On Thursday, in a post on X, Schiff argued that the plan was not aimed at modernizing the mortgage finance system, as Ackman had framed it, but was instead “a carefully engineered boondoggle” designed to enrich hedge funds while saddling taxpayers with the downside.
Schiff said the government cannot take the mortgage giants public without clarifying whether their debt is guaranteed. He argued that Ackman's plan skirts this issue entirely by keeping the agencies in conservatorship so the government “never has to admit the truth.”
According to Schiff, “Nothing real is reformed. The guarantee remains. The public is kept in the dark. And private investors are given a path to cash out.”
He called the proposal “fake privatization,” warning that it restores the same structure that existed prior to the 2008 crash, but with “the most extreme form of moral hazard,” that is, “private profits paired with fully socialized losses.”
Schiff also criticized Ackman's call to cut the government sponsored enterpises’ capital requirement from 4.5% to 2.5%, calling it “one of the most dangerous parts of the entire proposal.” He warned that in such a scenario, even a modest decline in home prices could wipe out their entire capital cushion.
The structure, he said, shifts retained earnings and future dividends away from taxpayers and toward private investors. In later stages, he warned, “private shareholders, who own only 20% of the company, will effectively receive 100% of the real cash profits.”
Schiff concluded the plan “creates the most dangerous and irresponsible structure imaginable” and “leaves American taxpayers holding the bag.”
He concluded by saying that he will be hosting a space on Feb. 24 to “expose the full truth behind this so-called recap and release.”
Fannie-Freddie Merger A ‘Moral Hazard’
Schiff has been a vocal critic of the Trump administration’s plans for Fannie Mae and Freddie Mac, which have been under government conservatorship since the Great Financial Crisis in 2008.
He has pushed back against President Donald Trump’s plans for a merger of the two GSEs, saying that it would allow the combined entity to “leverage an explicit” government guarantee, which would turn risky mortgages into the equivalent of government treasuries, in-terms of creditworthiness.
The outcome of this, he said, would be a “moral hazard” far greater than what existed before 2008, due to the implicit government guarantee.
Ackman, on the other hand, has said that such a merger stands to create significant cost synergies, which can help bring down mortgage rates substantially.
“A merger would also reduce the cost and risks of government oversight as there would be only one institution that would require FHFA oversight,” he said, while backing Trump’s plan regarding the same.
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