Morning Brief: Fannie, Freddie Can Keep $3 Billion in Capital, Treasury Says

Hedge fund managers John Paulson and Bill Ackman got some good news about their long-suffering Fannie Mae and Freddie Mac bets when the Treasury Department and Federal Housing Finance Agency announced the mortgage giants will be allowed to build capital cushions.

“Under the modifications announced today, Fannie Mae and Freddie Mac will be allowed to maintain a capital buffer of $3 billion each,” the Treasury Department said in a December 21 statement.

Since 2012, Fannie and Freddie have been turning over all their profits to the Treasury, prompting the hedge fund managers to sue the government. In September, Congressional Democrats asked Treasury Secretary Steve Mnuchin and Federal Housing Finance Agency director Mel Watt to allow Fannie and Freddie, which back more than $5 trillion in mortgage debt, to keep their income due to concern they’d end up with zero capital reserves in January.

FHFA place the two mortgage agencies in conservatorship in 2008 due to the housing market’s collapse, with the U.S. Treasury committing financial support. Watt said in the Treasury Department’s December 21 statement that the tax reform legislation introduced this year by the GOP may require Fannie and Freddie to take more money from the government because the value of deferred tax assets on their balance sheets would have to be written down.

Paulson & Co. owns Fannie and Freddie preferred shares, while Ackman’s Pershing Square Capital Management owns more than 10 percent of the common. The common stock of Fannie Mae rose about 3.5 percent on December 21 to close at $2.83 a share, while Freddie Mac rose about 1.5 percent to $2.67.

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More hedge funds were started than liquidated during the third quarter for the first time in over two years as assets rose to a record $3.16 trillion, according to Hedge Fund Research. New fund launches totaled 176 in the third quarter, compared with 170 during the same period a year earlier. The number of liquidations in the three months through September fell about 46 percent to 137, from 252 in the third quarter last year. The first nine months of this year saw a total 618 hedge-fund liquidations and 545 launches. That compares with 1,057 funds liquidated and 729 launched during the same period of 2016.

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Elliott Management senior portfolio manager Dave Miller is joining the board of Arconic, according to a regulatory filing. Miller is the Elliott executive who led the firm’s investment in Arconic, which settled a bitter proxy battle with the hedge fund on May 22. He replaces Patrice Merrin — one of three Elliott nominees that joined the board in May — who is stepping down. Elliott has a 12 percent stake in Arconic, whose shares have fallen 5 percent since the proxy battle was settled. Still, the company’s shares are up about 45 percent since the end of last year, closing at $26.80 on December 21.

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Hedge funds are attracting more assets this year, but not everyone is benefiting, according to an eVestment report released December 21. More than $40 billion in new capital has flowed into hedge funds in 2017, indicating the industry “has returned to health,” the data provider said. However, “the health is not widespread” as the industry consolidates, with only 40 percent of funds seeing net inflows this year, eVestment said. Long-short equity funds are the most in demand, while macro funds have seen net outflows for the past three months. The firm pegs the industry assets at $3.26 trillion.