Two powerful investment groups with ties to the White House are pitching a new plan that would free the mortgage giants Fannie Mae and Freddie Mac from US government control — and restore value to their investment in the companies.
Blackstone, the world's biggest private equity group, and the hedge fund Paulson & Co have hired the investment bank Moelis to develop proposals to overhaul the two agencies.
Together, Fannie and Freddie guarantee the bulk of US home loans and underpin the country's unique system of 30-year fixed rate mortgages.
Moelis published what it described as a detailed blueprint for reform on Thursday, pitching itself into the heated debate over the future of the agencies. A leading banking lobby immediately attacked the proposals as "self-serving", and it remained far from clear that the plans would gain traction in Washington, despite the political connections of its proponents.
Paulson, whose manager John Paulson was an economic policy adviser to Donald Trump's election campaign, and Blackstone, whose chairman and chief executive Stephen Schwarzman heads the president's strategic and policy forum, own preference shares in the two agencies.
Fannie and Freddie have been in a limbo state of "conservatorship" — meaning they are neither fully public nor private — since the government rescued them at the height of the 2008 financial crisis.
Under the present financial structure, they pay all of their profits to the Treasury in the form a dividend, to compensate taxpayers for the risk they bear in providing a financial backstop.
Investors who own the shares claim the post-crisis set-up is unfair and untenable. Several have taken legal action against the Treasury.
Moelis claimed its recapitalisation plan would allow the government to realise between $75bn and $100bn in cash by exercising warrants, a structure it likened to the post-crisis resolution of the bailed-out insurer AIG.
Private investors would plough additional funds into the two groups as part of the proposed recapitalisation. With up to $180bn of new capital, there "should not be a realistic scenario" in which the government would be on the hook for losses even in a future financial crisis, Moelis claims. The government would nonetheless be paid a fee for providing a backstop against losses beyond that figure.
Details of the plan appear to be at odds with comments that Steven Mnuchin, Treasury secretary, has made about Fannie and Freddie. Last month he said he expected the pair to continue paying dividends to the government.
The document Moelis published on Thursday said the plan was "a clear and pragmatic path to achieve important public policy goals in a manner that will both protect taxpayers for years to come and respects the property rights of shareholders".
However, David Stevens, president and chief executive of the Mortgage Bankers Association, said it was "designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds".
He added: "The self-interests of stock speculators and profit seekers are not in the best interests of either the taxpayer or the housing system."
Shares in Fannie Mae rallied 172 per cent after the US election, from $1.65 to a peak of $4.49 on November 30, on the hope that the Trump administration would be more amendable to recapitalising and privatising the company. Since then the stock has sunk back to $2.57.
Freddie Mac similarly rose sharply after the election before tumbling back down. Both stocks dropped in February after a court ruled against hedge funds that challenged the government's hold on the agencies' profits.
Paulson declined to comment. Blackstone did not respond to a request for comment.