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To put things in a simple and topical political context, would John McCain eagerly dole out political advice to Barack Obama or vice versa on how to win the presidential race? Of course not. So, why is Bill Ackman of Pershing Square Capital Management LP trying to play hero and devise what he believes is a rescue plan for his short-selling targets Fannie Mae and Freddie Mac, as he stands to gain from their demise?
Ackman has spoken with Treasury and Federal Reserve officials about his plan, which would help the institutions raise about $86 billion in capital in lieu of a federal government injection. For every dollar of senior unsecured debt, the plan outlines, a holder would receive 90 cents in new senior unsecured debt and 10 cents in value of new common equity, calling it new Fannie Mae or new Freddie Mac. The government would also offer a three-year stand-by commitment. Ackman told the Deal that while Pershing is indeed a short-seller of Freddie and Fannie, "we are short a small part of the capital structure--the common stock and the junior debt." He added that Fannie and Freddie implosions could have dire impacts on consumer sentiment which could damage his long positions such as Target Corp. and Sears Holdings Corp. "Its very important for them [Fannie and Freddie] to survive and thrive." What about his short-selling positions in bond insurers MBIA Inc. and Ambac Financial Group Inc.? It seems that if Fannie and Freddie were to completely implode, these monolines, which have been battered by structured finance related losses, could take even more of a beating. Regarding the proposed federal government equity injection in Fannie and Freddie, Ackman noted, "I would be concerned if the federal government invested equity under the current capital structure, because I believe the [Fannie and Freddie] equity is far out of the money." He added that a government equity injection within a heavily debt-weighted capital structure would place tax payer dollars at significant risk. Is Ackman trying to rescue Fannie and Freddie in the same way that he did with the pair of monolines earlier this year? In early February, he released his version of a split-book plan to protect the solvency of the monolines' more stable municipal businesses. The plan would make the muni unit a subsidiary of structured finance and as the parent, structured finance would collect dividends and sell some or all of its stake in the muni business to raise capital. MBIA's chairman and CEO Jay Brown did not seem to be convinced that Ackman was his company's savior, arguing that the plan would choke off the holding company by cutting dividend flow. The Street does not seem to be convinced that Ackman's plan is the answer for Fannie and Freddie as their shares declined 13.57% to $8.41 and 13.08% to $6.18, respectively, in early-afternoon trading. Ackman, keep rescuing and let the short-selling bucks keep rolling in. - Michael Rudnick Dealscape: Ackman's rescue plan for Fannie, FreddieWatch the CNBC video
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