Hedge funds and other investors piled into Fannie and Freddie stock before Trump’s election, betting on “recap and release.” The assumption was that a pro-business administration would end conservatorship and “privatize” the GSEs, creating the appearance of less government involvement while effectively rewarding major shareholders who had backed the campaign.
But the core problem was ignored: the GSEs can’t be released without deciding whether their debt carries a U.S. government guarantee.
Admit the guarantee and taxpayers inherit a multi‑trillion‑dollar liability; deny it and the mortgage market would collapse.
There’s no return to an “implicit” guarantee—if the government acknowledges it, the guarantee becomes explicit by definition. Politically and economically, “recap and release” was never feasible.
A recent “solution” from a prominent investor is effectively a bailout dressed up as reform: forgive Treasury’s senior preferred, restore dividends to common and preferred shareholders, and keep the GSEs in perpetual conservatorship so taxpayers still absorb losses.
That structure hands private upside to shareholders while increasing moral hazard and leaving taxpayers with greater downside.
It would also worsen the housing affordability crisis created by the current system.
Fannie and Freddie suppress mortgage rates and inflate home prices; true affordability requires winding down the GSEs, letting mortgage rates reflect real risk, restoring meaningful down payments, and allowing home prices to fall to sustainable levels.
That honest approach entails short‑term pain for current homeowners, lenders, and taxpayers who would absorb losses on underwater mortgages—politicians avoid that and cling to the broken status quo.
Between the present system and the bailout-style proposal, the status quo is the lesser evil, but neither solves the underlying problem.
A discussion and Q&A on this topic is scheduled for today at 9 AM Eastern