Michael Burry Warns Of Bull Trap As Fannie Mae And Freddie Mac Bets Await Government Resolution
Investor Michael Burry warned that recent record highs in stock markets could signal a "bull trap," though he is holding back on taking new short positions. Meanwhile, shares of Federal National Mortgage Association (OTC:FNMA) dropped 14.18% to $3.47, and Freddie Mac (OTC:FMCC) fell 14.40% to $3.15. Both mortgage giants have suffered seven consecutive weeks of declines and are down over 68% year-to-date.
Despite the declines in common stock, Burry holds an 8% to 10% portfolio allocation in junior preferred shares of both institutions. Burry shifted out of common stock into preferred shares because preferred equity ranks higher in the corporate capital structure. His thesis rests on potential gains if the federal government settles its $388 billion senior preferred stock liquidation preference, which stands at roughly double the combined book value of the two companies.
The timeline for any government resolution remains uncertain, though government warrants expire prior to the 2028 election. Analysts at Mizuho recently downgraded both stocks, assigning privatization odds by 2028 of 18% for Fannie Mae and 9% for Freddie Mac. Investors continue to monitor whether executive action or Treasury decisions will clarify the restructuring framework.
Key points
- Federal National Mortgage Association (OTC:FNMA) and Freddie Mac (OTC:FMCC) fell over 14% in a single session, extending a seven-week slide.
- Michael Burry warned of a potential market "bull trap" but is refraining from adding new short positions.
- Burry holds an 8% to 10% portfolio bet in Fannie Mae and Freddie Mac junior preferred stock, targeting gains from potential government resolution.
- Resolving Treasury senior preferred claims of $388 billion remains the primary hurdle for preferred share recovery.
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How we writeDisclaimerQuestions and answers
Why are Fannie Mae and Freddie Mac shares falling?
Shares have fallen due to ongoing uncertainty around government restructuring and recent analyst downgrades that lowered the probability of rapid privatization.
What is Michael Burry's position on Fannie Mae and Freddie Mac?
Burry sold his common shares and invested 8% to 10% of his portfolio in junior preferred shares, betting on a government resolution of Treasury claims.