Almost a year after leaving office, former President Donald Trump fired off a letter bemoaning a job not done. It was about Fannie Mae and Freddie Mac, “two great American companies” that backstop the US housing system. Since 2008, the pair have operated under the conservatorship of the US government – a sort of purgatory between state and public ownership – where they remain an unresolved legacy of the global financial crisis. During his time as President, Trump occasionally hinted at reform but nothing happened and, by early 2021, he was back in Mar-a-Lago.

His letter reveals what might have been:

“I would have ordered FHFA [the regulator] to release these companies from conservatorship. My Administration would have also sold the government’s common stock in these companies at a huge profit and fully privatized the companies.” 

Trump blames “the incompetent Mel Watt”, President Obama’s appointee as director of FHFA, for his failure to achieve these things. A rule – later deemed unconstitutional by the Supreme Court – prevented him from firing Watt and by the time he was replaced, his successor was less than a year at his desk before priorities switched to Covid. 

In addition, although Trump doesn’t address it in his letter, the capital position of the two companies also hindered their path to independence. At the end of 2020, they held just $42 billion of capital between them, on a balance sheet over 150 times as large. One of his last acts as President was to tweak the rules by which Fannie and Freddie disburse profits, allowing them to preserve more capital and creating momentum for their eventual release. 

Three years on, the pair have $132 billion of capital and generate around $28 billion of profit per annum; an incoming President is allowed to choose whoever he likes to run FHFA; and Trump thinks their conservatorship “has to come to an end.”

Consequently, as a barometer of his chances for re-election, Fannie and Freddie securities enjoy a special status. Their common stocks – representing highly subordinated claims on assets that sit beneath a government warrant over 79.9% of equity and a pile of government-owned preferred stock – are up 50% year-to-date and 13% since last week’s debate. Slightly higher up the capital structure, non-interest paying preferred stock trades at 20 cents on the dollar, up from 10 cents last November.

So what do these companies do? How have they changed since they were last independent? And how will politics determine their future? Let’s take a look...