The Seventeen Year Wait is Over
The math has finally become undeniable. Michael Burry is not chasing a ghost; he is tracking a capital stack that has finally matured. As of December 08, 2025, the combined retained earnings of Fannie Mae and Freddie Mac have crossed the $185 billion threshold. This is no longer a speculative play on housing sentiment. This is a cold calculation of the Enterprise Regulatory Capital Framework (ERCF). For over a decade, the market treated these Government Sponsored Enterprises (GSEs) as dead money. That changed this morning as rumors of a finalized Treasury agreement began circulating through the 10-year yield desks. The bridge between conservatorship and the public markets is being paved with $300 billion in required Tier 1 capital.
The Legal Deadlock Breaks
The primary hurdle has never been operational viability. It was the Net Worth Sweep litigation. Recent filings in the Court of Federal Claims suggest the government is finally ready to settle the long running dispute over the Third Amendment to the Senior Preferred Stock Purchase Agreements. Burry is likely eyeing the Junior Preferred shares, which have historically traded at a massive discount to par value. Unlike the common stock, which faces extreme dilution from the Treasury’s warrants for 79.9 percent of the companies, the preferred shares represent a more direct path to recovery. Per the latest Fannie Mae 10-Q filings, the enterprise has maintained profitability for 16 consecutive quarters, yet it remains locked in a regulatory cage. Burry’s thesis hinges on the fact that the Federal Housing Finance Agency (FHFA) cannot legally justify conservatorship once the capital requirements are met. The numbers suggest that point is exactly 14 months away if the current pace of earnings continues.
Visualizing the Capital Gap
To understand why a relisting is imminent, one must look at the Tier 1 capital requirements versus the current retained earnings. The following visualization highlights the remaining distance to the finish line as of December 2025.
The Treasury Warrants and the Common Share Trap
Retail investors frequently flock to the common shares (FNMA and FMCC) because of the low nominal price. This is a mistake that institutional desks like Scion Asset Management rarely make. The real alpha is in the parity between the current market price of the Junior Preferreds and their $25 or $50 liquidation preference. If the Treasury exercises its warrants, the common share count will explode from roughly 1.1 billion to over 5 billion. This massive supply dump would effectively cap any upward momentum for common shareholders. By contrast, the preferred shares must be dealt with as part of any capital restoration plan. The Bloomberg terminal data from the last 48 hours shows a significant uptick in block trades for the Series S and Series T preferreds, indicating that the big money is positioning for a conversion event rather than a simple relisting.
Regulatory Hurdles and the 2025 Pivot
The current FHFA Director has signaled a shift toward “utility-style” regulation. This means Fannie and Freddie will likely be allowed to exit but with strictly capped Returns on Equity (ROE). While this sounds bearish, it provides the certainty that the private market has craved since 2008. The volatility in the 10-year Treasury note has made the GSEs’ role in the secondary mortgage market more vital than ever. Without a private capital buffer, the U.S. taxpayer remains on the hook for the next housing downturn. The FHFA’s latest ERCF report confirms that the enterprises have reduced their risk-weighted assets by 12 percent through sophisticated Credit Risk Transfer (CRT) programs. This makes the companies leaner and more attractive for a massive secondary offering in the coming months.
Strategic Positioning for the Transition
The following table breaks down the current valuation gap that Burry and other distressed debt specialists are likely exploiting. These figures represent the market reality as of the market close on December 05, 2025.
| Security Tier | Current Price (Est.) | Liquidation Preference | Potential Upside |
|---|---|---|---|
| Junior Preferred (FNMAS) | $12.40 | $25.00 | 101.6% |
| Junior Preferred (FMCKJ) | $24.15 | $50.00 | 107.0% |
| Common Stock (FNMA) | $3.85 | N/A (Dilution Risk) | Variable |
The exit from conservatorship requires a massive capital raise, likely the largest IPO in world history. For that to succeed, the existing litigation must be extinguished. The market is currently pricing in a 65 percent probability of a settlement by the end of this quarter. If that settlement involves the conversion of preferred shares into common equity at a favorable ratio, the current prices will look like a generational entry point. Burry’s involvement suggests the risk-reward asymmetry has finally tipped in favor of the bulls. The next specific milestone to watch is the January 2026 FHFA status report, which is expected to provide the first concrete timeline for the Treasury’s warrant disposition.
