Keefe agrees with Ackman on Fannie, Freddie minimum capital level

Keefe Bruyette says Bill Ackman, CEO of Pershing Square, this morning a presentation on detailing his investment thesis for Fannie Mae (FNMA) and Freddie Mac (FMCC) common shares. Keefe agrees with Ackman’s view that reducing the government-sponsored enterprise minimum capital level to around 2.5% is key to consummating the privatization without raising mortgage rates, the analyst tells investors in a research note. The firm sees 2.5% as a “very strong” level of capital. It also believes that privatization is possible without disrupting the agency mortgage-backed security market, as long as the transition is handled well and Treasury is effective at messaging that the implicit guaranty will remain in place on agency MBS. Keefe has assumed that Treasury would convert its senior preferred to common which has made it cautious on the common shares given the dilution risk. However, it “would potentially agree with the argument in the presentation that a conversion of senior preferred to common should be avoided because it’s likely to result in a new slew of litigation, which could derail any privatization effort.”