We Bought Fannie & Freddie: Here’s Why the Timing Matters

From bailout to buyout

Let’s rewind to 2008.

It’s the peak of the Great Financial Crisis, the financial sector’s overexposure to subprime mortgages is causing a banking crisis, and the U.S. Treasury elects to place Fannie Mae and Freddie Mac, two of the leading providers of mortgage financing, under conservatorship to stabilize investor sentiment and prevent contagion.

For all intents and purposes, the government action was a bailout. The intervention provided a $187 billion lifeline with stringent conditions that all future profits from these two companies will be passed back to the Treasury under a “net sweep agreement.”

Fast forward to today and the financial crisis has been stabilized, financing activity has normalized, and Fannie Mae and Freddie Mac have fully repaid the $187 billion to the Treasury, plus an additional $110 billion of dividends. 

Simply put, these businesses have not only stabilized but thrived. Yet they remain under government conservatorship.

So what’s the investment opportunity today?

It was never the intention for the government to hold these assets forever. 

The first Trump administration took steps to strengthen both Fannie Mae and Freddie Mac to exit these positions entirely in order to absolve itself of the nearly $8 trillion in government liabilities attached to them. But ultimately, due to Covid and other priorities, the administration ran out of time and privatization didn’t materialize. 

Now, with the reelection of Donald Trump and the hiring of vocal executives in favor of exiting conservatorship, there’s newfound momentum towards privatization.

If Fannie Mae and Freddie Mac can effectively exit conservatorship and direct their earnings streams back toward shareholders (instead of the government), we believe the companies could warrant valuations that rival traditional banks which trade at 12-14x forward P/E.

Assuming the companies can generate similar earnings as they did in 2023, applying a 10x forward P/E multiple would translate to potentially 4x upside in their share prices from here.

The crux of our thesis lies in the ability for both companies to become fully recapitalized and exit conservatorship, a catalyst we’re increasingly confident will happen in the near future. 

The mandate for Titan Opportunities is to invest in what we believe to be asymmetric bets resulting from market dislocations or key catalyst events. Fannie Mae and Fredie Mac sit squarely in this category, presenting a “heads I win, tails I don’t lose as much” opportunity that is rare to find for companies of this size.

Trimming and exiting strong performers

Confluent (CFLT) has rallied a tremendous ~54% since the start of Q4 2024. Compare that to the Russell 2000’s +4% performance, and it has been one of the biggest winners inside of our Opportunities strategy. That said, the higher share price has reduced our expected annualized return on a go-forward basis because our revenue and earnings estimates have not moved meaningfully higher of late, which means the implied valuation has gotten more expensive. We elected to trim the position in advance of the company’s earnings report after hours today.

ACV Auctions (ACVA) rallied ~50% over the last 12 months, and we think the company’s valuation is now priced for perfection. Given the stock’s tremendous move higher, we elected to exit the position entirely to allocate funds to companies with more compelling upside potential and more reasonable valuations.

Important to note: the results of these trades have increased our strategic cash position to ~3%. The cash will allow us to stay active and opportunistic with respect to volatility that arises in the future.

As always, let us know if you have any questions about the recent trades; we’re happy to assist.

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Disclosures: 

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Please refer to Titan's Program Brochure for important additional information. Titan’s affiliate, Titan Global Technologies LLC (“TGT”), is a registered broker-dealer and member of FINRA/SIPC. Contact Titan at support@titan.com.

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