◼ FINANCE March 9, 202025PHOTOGRAPH BY LEXEY SWALL FOR BLOOMBERG BUSINESSWEEK
THE BOTTOM LINE Hedge funds made a big bet on the mortgage
giants going private again. But bond investors and housing
advocates are worried about the mortgage market’s stability.Even so, Calabria’s skeptics worry that the les-
sons of the crash will be forgotten in a rush to
reprivatize. “I’ve still got a lot of concerns,” says
Senator Mark Warner, a Democrat from Virginia
who’s been part of several failed efforts to get
Congress to pass a housing reform bill. “At the
talking stage, I’ve found he’s got a lot more open-
ness to some of our ideas. But I want to make sure
that whatever reform takes place doesn’t end up
with the same duopoly with no constraints that got
us into this crisis in the first place.”
Calabria has several big tasks ahead. One is writ-
ing a rule dictating how much capital Fannie and
Freddie will need to avoid ever needing another
bailout. As recently as 2017, there was still a risk
the U.S. Department of the Treasury would have
to shoulder the companies’ quarterly losses. If
Fannie and Freddie have to retain more capital,
they might have to buy fewer loans or back away
from riskier ones, which could raise mortgage
rates or make some types of loans less available.
Last year, Calabria said the capital rule would be
announced in the first quarter of 2020. In Vegas, he
says, “It could slip a little bit, but it will be soon.”
Also on Calabria’s to-do list is ending Treasury’s
sweep of Fannie’s and Freddie’s profits, which
is required under the 2008 bailout agreement.
In September, Calabria and Treasury Secretary
Steven Mnuchin took a key step by raising the
amount of profits the companies can keep before
sending the rest to the Treasury. Calabria says
within the next year he hopes to negotiate more
substantial changes to the bailout terms.
It’s these potential changes that get to the heart
of what hedge fund titans such as Pershing Square
Capital Management’s Bill Ackman and Paulson &
Co.’s John Paulson have for years been waiting for.
Shareholders in Fannie and Freddie have gone a
decade without a dividend. The end of conserva-
torship could increase the value of the shares and,
depending on the deal that’s hashed out, result in a
substantial payday for some hedge funds. Calabria
says the treatment of shareholders will ultimately
be decided by the Treasury Department. “I hav-
en’t seen a term sheet yet from Treasury; we’re
still negotiating,” he says. Calabria has consistently
said that shareholders should have been wiped out
when the companies were bailed out in 2008.
Still, money managers with Fannie and
Freddie stakes have friends in all the right places
in Washington. Paulson is a big fundraiser for
President Trump. Mnuchin invested in Paulson’s
hedge fund before joining the Trump administra-
tion. Mnuchin also served on the board of Sears
Holdings Corp. with Bruce Berkowitz, whose firmFairholme Capital Management is also a share-
holder in Fannie and Freddie. A spokesman for
Paulson declined to comment, and a spokesman
for Fairholme didn’t return calls for comment. A
Treasury official said the agency’s preference is to
work with Congress and it hasn’t considered any
specific proposals for recapitalizing the companies.
Also lobbying hard are bond investors, banks,
and asset managers. Groups such as the Securities
Industry & Financial Markets Association are try-
ing to convince Calabria and the Trump adminis-
tration that releasing Fannie and Freddie without
an explicit guarantee of their bonds could make
investors wary about buying them, which in turn
would increase funding costs and mortgage rates.
An explicit guarantee is something only Congress
can provide, though Mnuchin has said that even
if Congress doesn’t act, Treasury will continue to
provide some supports. Calabria insists he’d have
to sign off on that as well and says that while he’s
willing to proceed without it, no decisions have
yet been made.
There are lots of things that could throw
Calabria’s plan off track—for starters, Trump not
getting reelected. Democrats have generally been
leery of taking the duo out of conservatorship, wor-
rying that as private companies they wouldn’t be
able to ensure housing affordability. A turn in the
U.S. housing market is also a risk, and a long slide
in the U.S. stock market could also complicate any
plans for the companies to attract equity inves-
tors. Calabria is “clearly learning the realities of the
job and how hard this is,” says Mortgage Bankers
Association lobbyist Bill Killmer. “There’s a reason
why it has taken so long to fix Fannie and Freddie.”
�Elizabeth Dexheimer◀ Calabria