NEW YORK ( TheStreet) -- Fannie Mac ( FNMA) and Freddie Mac ( FMCC) shares rallied late Monday after hedge fund investor Bill Ackman detailed his thinking in owning common shares of the mortgage giant at the Ira Sohn Conference and in an interview with CNBC.
President Obama last year stated his desire to wind down Fannie and Freddie in an effort to reduce the government's role in the mortgage market. Currently more than about 90% of new mortgages rely on government backing.
However, the legislation favored by the President to reduce the government's footprint appears to be going nowhere, and Ackman told CNBC Monday private market solutions to housing are "not feasible." He argues the government sponsored entities, which ran into trouble during the crisis and were placed under government conservatorship in 2008, are low risk as long as they stay away from subprime mortgages and stay out of what he called the "fixed income arbitrage business." Ackman was presumably referring to the GSEs' use of derivatives to bet on the direction of interest rates, which in the decade preceding the 2008 crisis became a risky side business to their main function of guaranteeing mortgages and issuing mortgage backed securities.
"I am prepared to sit down and make a deal with the government regarding Fannie and Freddie," Ackman said at the conference, according to The Wall Street Journal's Marketwatch.
While the U.S. Treasury currently receives all the profits from Fannie and Freddie, Ackman reasons the government won't want to continue to be responsible for the GSEs because it would eventually require taking their $5 trillion in liabililties onto the government's balance sheet, thus increasing the national debt by that amount.