Why Did Carl Icahn Buy Into Fannie Mae and Freddie Mac?

Carl Icahn has joined several other big-time investors as a Fannie Mae and Freddie Mac stockholder. So, what's his goal here?

Jun 4, 2014 at 5:07PM

Joining the ranks of hedge fund managers Bruce Berkowitz and Bill Ackman, activist investor Carl Icahn has bought a $50 million stake in Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) .

While it's definitely exciting to see what companies the "whales" are jumping into, it's always important to take a closer look to see if it makes sense for you before considering it for your own portfolio. Why did Icahn jump in and what's his goal here? And what can you learn from it?

Fannie Mae

Source: www.futureatlas.com

Berkowitz hedges, Icahn gambles
In mid-May, it was announced that Berkowitz's Fairholme Capital had cut its stake in Fannie and Freddie, and we just recently discovered that Icahn was the buyer.  Fairholme sold 6.8 million shares of Fannie (exactly how many Icahn bought) and 2.2 million shares of Freddie in the first quarter, bringing its total stake down to 19.2 million shares of Fannie and 17.2 million of Freddie.

Berkowitz's reasons for doing this are not too tough to figure out. First, by selling the shares, he's locking in gains. The share price of both companies has more than doubled since Berkowitz bought in, and even though he seems reasonably confident in the future profitability of both investments, there's nothing wrong with taking some profits on the table.

Icahn, on the other hand, is more than likely looking at this as a speculative investment and nothing more. A $50 million stake is small potatoes for Icahn, whose investments typically are in the billions, like his stakes in Apple and Herbalife. So, Icahn is probably looking at Fannie and Freddie as a potential home run, and is probably willing to throw his weight around a little to help the cause, but is not willing to risk too much of his money.

Could be a ten-bagger, but could be nothing...
There is a lot that could potentially go wrong with this investment. Under the current arrangement, all profits earned by Fannie and Freddie go directly to the U.S. Treasury. There is currently a shareholder lawsuit led by Ackman and Berkowitz, alleging that investors were "duped" by the government who allowed shares to continue to trade even though they had no intention of letting investors share in the profits. Now that Icahn, one of the most "visible" investors is in the picture, you can bet he'll have something to add.

Additionally, there are continuing efforts in the U.S. Senate Banking Committee to dismantle both companies, which would effectively leave shareholders with nothing. As written, the current bill would wind down Fannie and Freddie and give all proceeds from the asset sales to the Treasury. Not surprisingly, shareholders aren't too happy about this one either.

So, there really is no grey area when investing in Fannie and Freddie. The stocks could indeed rise dramatically if a new profit-sharing arrangement is agreed upon, either as a result of the lawsuit or otherwise. Ackman has said that shares of Fannie Mae could be worth $47 each if the profits were shared equitably, and that figure takes into account the dilution caused by the bailouts.

On the other hand, if the lawsuit or congressional action doesn't work out in favor of the shareholders, the stocks could become worthless. So, with some good fortune, Icahn's stake could be worth half a billion dollars, but it could be worth next to nothing just as easily. You can be sure Icahn is well aware of this fact, and looks at this as a calculated risk.

Care to speculate?
While I think a new investment in Fannie or Freddie is much too risky considering all that is going on, if you decide to jump in, approach the situation much like Carl Icahn is. If you normally invest $10,000 in a new position, maybe $500 worth of Fannie or Freddie wouldn't be a bad speculative play, as long as you understand that big payday you're going after is hardly a certainty. Additionally, the stock isn't as liquid as others so be careful.

Still, if you take a lesson from Icahn here about good portfolio allocation and the right way to speculate, there's nothing wrong with taking a small, calculated chance on a potential home-run. Just be prepared and willing to accept the consequences if things don't work out in your favor.

Take advantage of this little-known government tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers