Fed Taking Measures 'the Smart Way': Ackman

The Federal Reserve's steps to help out the banking system have begun to take hold and will help resuscitate the economy, said William Ackman, managing principal at Pershing Square Capital Management.

At the same time, Ackman said his company believes the stock market is becoming a more attractive investment.

"What I like is I think stocks are cheap and I think the Federal Reserve has taken some very important steps that will improve liquidity—the banking system—and that in turn will help the economy," Ackman said on CNBC. "I think the most significant thing the Fed has done is committed to putting $250 billion in the banking system. I think they're doing it the smart way."

He was referring to the government's bank capital infusion program, referred to as the TARP, to get financial institutions to lend more aggressively again. The amount allocated so far will go a long way towards recapitalizing the banking system, he said.

"I think some banks will need more capital but I think it may be enough" overall, he said. "That will be a wonderful thing."

(Watch the accompanying video for the full interview with Ackman...)

But he suggested an alteration to the way the government plans to use the remaining $450 billion of the bank rescue program.

Rather than using that money to buy distressed assets, the government instead should put the money up as financing for private groups to purchase the toxic mortgage holdings.

"The beauty of what's been proposed is it's incredibly flexible so ultimately what makes sense is what's going to happen," he said. "What I would do instead of the government being a buyer of complicated mortgage assets ... the best way to do it would have the government be a lender."

The government then would provide financing that would accessible to entities that bid on the distressed assets and set a price on them in the open marketplace, instead of having the government determine their value.

Speaking on the broad causes and effects of troubles in the stock market and the economy, Ackman said there will be more failures among various funds but they ultimately have not been the principal source of market's troubles.

"I think there will be mutual funds blowups, there will be private equity blowups, there will be hedge fund blowups," he said. "If you look at the problems we've had over the last 18 months, very few of them have been hedge-fund related.

"There are hedge funds that are going to be out of business. It's just like there are mutual funds that shut down. If the performance isn't good people ultimately take their money. It's a great discipline. The beauty of it is you don't need taxpayers to come in and save the day."

On a separate topic, Ackman delineated Pershing's proposal Wednesday to revamp Target's business structure.

Target currently owns 85 percent of the land on which its buildings sit, and Ackman proposes that the company would contribute the land to a spinoff, which in turn would create a real estate investment trust. The land REIT would be spun off to shareholders who would be paid a dividend that would be funded from rent Target would pay for the land.

The Target dividend would be reduced to a nominal penny per share.

The deal would be a tax advantage for the company while also rewarding shareholders in both Target and the REIT, Ackman said.

"I think it's a great example of shareholders and companies working together to get the best outcome for all shareholders," he said.

© 2009 CNBC.com