Michael Burry Switches Fannie Mae and Freddie Mac Positions to Preferred Shares
Investor Michael Burry exited his common stock holdings in the Federal National Mortgage Association (OTC:FNMA) and Freddie Mac (OTC:FMCC), moving instead into junior preferred shares of both mortgage entities.
The shift follows growing concerns over shareholder equity dilution. If the U.S. Treasury converts its $388 billion senior preferred stock claim into common shares, existing common holdings face potential dilution of at least 90 percent. Preferred stock is expected to hold up better than common equity in a government conversion scenario. Furthermore, common share prices for both companies had given up nearly all price gains made following Donald Trump's election victory while forming a bearish technical chart pattern.
By closing his common stock positions, Burry also realized full tax losses on the holdings. Market participants will be monitoring whether the Treasury ultimately executes a conversion of its senior preferred stake, alongside price performance in both common and preferred stock classes. Federal National Mortgage Association common stock traded at $4.04, up 0.09%, while Freddie Mac common shares traded at $3.68, down 0.27%.
Key points
- Michael Burry sold out of common stock in Fannie Mae and Freddie Mac to purchase junior preferred shares.
- The move aims to protect against dilution of 90% or more if the U.S. Treasury converts $388 billion in senior preferred stock into common shares.
- Burry noted preferred shares are better positioned than common stock in the event of a government equity conversion.
- Selling the common stock allowed Burry to realize full tax losses after shares surrendered post-election gains.
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Why did Michael Burry sell Fannie Mae and Freddie Mac common stock?
Burry sold his common stock to protect against potential equity dilution of 90% or more if the U.S. Treasury converts $388 billion in senior preferred stock into common shares. He also cited bearish technical chart setups and used the sale to realize tax losses.
Why did Michael Burry switch to preferred shares?
Burry bought junior preferred shares because preferred stock is expected to fare better than common equity if the government converts its senior preferred stock claim into common shares.