Fannie Mae and Freddie Mac's Conservatorship Is The Largest Shareholder Rights Violation In US History And Must Be Ended
Edge One Capitalhas built a significant stake in both Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). The stake was initiated in December 2023 at $0.75 for Fannie Mae and $0.67 for Freddie Mac, based on a deep conviction that the time to end the seventeen-year government conservatorship is now.
Varun Gupta of Edge One Capital articulated the firm's investment thesis in Fannie Mae and Freddie Mac, emphasizing the value to all stakeholders as well as the potential for significant shareholder returns once the companies exit conservatorship and transition to private ownership.
The prolonged control of these two vital institutions violates fundamental shareholder rights, distorts governance, and leaves taxpayers with trillions in contingent liabilities. It was never meant to be permanent. The purpose of the 2008 conservatorship was to stabilize the companies, recapitalize them, and return them to the private market as strong, well-governed institutions. That mission was accomplished years ago, except for the return of the companies to private markets. Since then, the delay has served only the interests of politics and bureaucracy, not the homeowners, investors, or taxpayers.
A Constitutional and Governance Failure
The continued conservatorship is, in effect, a prolonged taking of private property without just compensation – a violation of the Fifth Amendment's protection of property rights. Shareholders have been denied the use and value of their investment while the government has exercised complete control over operations and profits. The government has already recouped, with a substantial profit, the original capital it provided during the crisis. It has received over $300 billion in dividends on approximately $187 billion of capital support.
Under the current structure, governance is fundamentally compromised. The Federal Housing Finance Agency (FHFA) serves as both the regulator and conservator, blurring accountability and leaving the companies subject to political interference. These are not conditions under which any other major financial institution in the United States is expected to operate. Privatization would restore the independence necessary for long-term strategic planning, effective risk management, and proper board oversight.
During the 2008 financial crisis, the U.S. government employed a combination of bailouts and conservatorships to stabilize the financial system. Most private-sector institutions-such as JPMorgan, Bank of America, Citigroup, Goldman Sachs, and even AIG-received capital infusions, loan guarantees, or asset purchase commitments through programs like TARP, but they retained their own boards and management teams. In contrast, Fannie Mae and Freddie Mac were placed into full government conservatorship under the FHFA, where they remain to this day.
The official rationale was that their systemic importance to the mortgage market and the scale of their liabilities required direct operational control to restore market confidence. However, the argument against this is that the large commercial banks, which were equally, if not more, systemically critical, met the same criteria-yet they were not placed under government control. The persistence of Fannie Mae and Freddie Mac's conservatorship may reflect a politically self-serving motive.
The Scale of the Stakes
Fannie Mae and Freddie Mac collectively back over $7 trillion in mortgages – more than half of the entire U.S. mortgage market. They provide liquidity, stability, and access to credit for millions of American households. The current arrangement places this critical function under perpetual political risk while leaving taxpayers as the ultimate backstop.
Capital, Risk, and Affordability
A sustainable exit from conservatorship must include robust capital standards, but these standards must be calibrated to strike a balance between safety and affordability. A leverage-style capital baseline around 2.5%, with appropriate buffers and risk-based overlays, is sufficient to protect taxpayers while keeping mortgage costs competitive.
These standards should be paired with the Enterprises' proven risk-reduction tools, including credit risk transfer (CRT), which shifts exposure to private investors. Comparisons to private mortgage insurers or large banks are misleading:
— PMIs typically require 4-6% or more capital because they insure the highest-risk portions of the loan.
— Banks must maintain higher reserves to mitigate deposit and liquidity risk.
— Fannie Mae and Freddie Mac guarantee conforming loans with strong underwriting standards, and they do not hold deposits.
Critics claim privatization would increase mortgage rates. This outcome is not inevitable. The Enterprises have multiple levers to preserve affordability:
— FHFA can fine-tune capital requirements over time as risk transfer changes, allowing more loans to be made without compromising safety.
— The Enterprises can absorb modest cost increases through existing high margins, avoiding the need to pass them on to borrowers.
— Structured arrangements – such as an implicit or explicit liquidity backstop by the government – could lower funding costs and sustain market confidence.
— As private companies, their systemic importance and the government's residual stake would be understood by markets as a source of stability in a crisis.
— Modernization of data collection and extensive AI analytics will ensure liabilities are limited and assets are protected.
— Freed from the constraints of conservatorship, the enterprises could streamline operations, cut excess costs, and channel those efficiencies directly into lower mortgage rates.
When combined, these measures make it entirely possible to maintain and improve access to affordable mortgage credit under private ownership.
Stakeholder Benefits of Privatization
— For Homeowners: Innovation in mortgage products, stable access to credit across market cycles, and competitive pricing driven by market discipline.
— For Taxpayers: Reduced contingent liabilities as private capital absorbs first losses before any government support.
— For Shareholders: Restoration of property rights, corporate governance, and transparent capital allocation.
— For Employees: Freedom to attract and retain top talent, align incentives with long-term stability, and invest in operational efficiency without political constraints.
Combining Fannie Mae and Freddie Mac
Combining Fannie Mae and Freddie Mac into a single, well-capitalized enterprise is another option that would deliver immediate and lasting benefits. By eliminating duplicative infrastructure, consolidating technology platforms, and unifying risk management, the combined entity could operate with greater efficiency and lower overhead. From a capital-raising perspective, a larger, simplified institution with a stronger balance sheet would likely attract broader investor interest and command a lower cost of capital.
The two institutions are already extensively intertwined with each other; a combined institution would bring clarity and transparency, leading to more effective oversight and regulation. A single management team could more effectively set strategy, allocate resources, and respond to market shifts-ultimately strengthening the housing finance system while creating the capacity to deliver more competitive mortgage rates to borrowers.
The combined entity could also be an integral part of the proposed U.S. Sovereign National Fund.
Conservatorship was a temporary emergency measure. Seventeen years later, it has become an indefensible exception. We have the policy tools, capital framework, and market conditions to return Fannie Mae and Freddie Mac to private ownership while protecting taxpayers and preserving affordability.
We must restore market discipline, repair governance, and uphold the fundamental rights of all stakeholders.
About Edge One Capital:
Edge One Capital is an investment firm based in Raleigh, North Carolina, with an emphasis on deep long-term value for all of its investments. For more information, please contact info@edgeonecapital.comor visitwww.edgeonecapital.com
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SOURCE Edge One Capital
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