Todd T. Westhus is poised to join George Soros and John Paulson with an unlikely wager.
Soros broke the Bank of England in 1992 by betting on the devaluation of the British pound, netting $1 billion. Paulson took home $15 billion, anticipating the collapse of subprime debt that contributed to the financial crisis. Now, Westhus is trying to transform the $9.4 trillion U.S. mortgage market. The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae and Freddie Mac preferred shares at 2 cents on the dollar. Back then, the mortgage giants were just about given up for dead. Today, the companies are profitable and their shares have soared 24-fold.
Taxpayers rescued Fannie Mae and Freddie Mac in 2008 with a bailout that swelled to $187.5 billion, an amount the companies will finish sending back to the government this month. The issue for investors is that the Treasury Department decided in 2012 to keep all the companies’ profits. Perry sued the U.S. in July, saying the money sweep flouts the rule of law. Senator Bob Corker, a member of the Senate Banking Committee, said the government, the firms’ staunchest supporter, should be rewarded.
The companies would “be generating not one dime of revenue if it weren’t for the federal government,” Corker, a Tennessee Republican, said in an interview.
Almost six years after bad home loans crippled the economy, Perry and other investment firms are battling a government that can’t agree on a fresh path forward. At stake is the future of housing, which contributed more than 15 percent of America’s economic activity last year, and the survival of Fannie Mae and Freddie Mac, which together guaranteed about 60 percent of new home loans in 2013.
Biggest Paydays
For the investors, it’s also one of the biggest potential paydays in history.
On the line is at least $33 billion in preferred shares, securities meant to be compensated before owners of common stock in the event of a bankruptcy. That’s an amount greater than the annual funding for the National Institutes of Health. The money could be fully repaid or wiped out, depending on the outcome of lawsuits and political jockeying.
There are greater rewards in the companies’ common shares. Fannie Mae’s stock has risen more than 1,800 percent since February 2013. The shares rose 4.7 percent to $5.58 at 12:05 p.m. today in New York, the highest since 2008. Bill Ackman of Pershing Square Capital Management LP said last month it could go up another 10-fold.
‘Distressed Trade’