Michael Burry shifts Fannie Mae, Freddie Mac bets as $388 billion risk looms

Burry believes the shares of Fannie Mae and Freddie Mac could face further losses. He also warned that a possible government decision to convert its preferred shares into common shares could sharply reduce the value of existing common shares. The two companies play an important role in the US housing market. Their future also depends heavily on government policy. This is going to impact their shares, which are particularly sensitive to political decisions and changes in the economy.

Fannie Mae, formally known as the Federal National Mortgage Association, and Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation, support the US housing market by helping lenders provide home loans.

They do not generally lend directly to homebuyers. Instead, they buy mortgages from lenders, package them into securities and help make funds available for more home loans. Their activities are important to the flow of money through the American housing system.

Both companies came under government control during the 2008 financial crisis after suffering severe financial difficulties. The US government stepped in to prevent their collapse and protect the wider financial system. They have remained under government conservatorship since then.

Conservatorship means the government has control over the companies while they continue operating. Their future ownership structure and the possibility of returning to private control remain major questions for investors. Burry's decision shows his concern that common shareholders may not benefit even if the companies continue to earn money or eventually return to private ownership. According to his post on X, the financial claims held by the US Treasury could take priority over the interests of ordinary shareholders.

The $388 billion problem facing common shareholders

One of the biggest concerns is the senior preferred stock held by the US Treasury. These shares were issued as part of the government's financial support for Fannie Mae and Freddie Mac during the crisis. The liquidation preference attached to these shares represents the amount the Treasury is entitled to receive before lower-ranking shareholders in certain circumstances.

According to Burry, the government's senior preferred claim has grown to around $388 billion. This amount is important because the government could decide to convert its senior preferred shares into common stock. According to Burry, this would give the Treasury a much larger ownership stake in the companies and could sharply reduce the percentage of ownership held by existing common shareholders. Burry believes the possible dilution could reach at least 90 per cent.

Dilution happens when a company issues more shares, reducing the percentage of ownership represented by each existing share. If the government receives a very large number of new shares, current shareholders could find that their ownership represents only a small fraction of the company. Burry warned that the dilution percentage could increase further as the Treasury's liquidation preference grows each quarter. The risk is not simply that the companies might perform poorly. Even if they remain profitable, the way the government restructures its financial claims could determine how much value reaches ordinary shareholders.

Why Burry prefers junior preferred shares

Burry's decision to buy junior preferred shares instead of common shares is based on their position in the company's capital structure. Junior preferred shares are a class of preferred stock that ranks below to other senior preferred stock series, but still ranks ahead of common (ordinary) stock in terms of dividend payouts and liquidation claims.

Common shares represent ordinary ownership in a company. Their value can rise significantly when a business improves, but common shareholders generally rank last when a company distributes its remaining assets or faces financial difficulties. Preferred shares usually have priority over common shares for dividends and certain payments. However, they rank below senior preferred shares, such as those held by the Treasury.

Burry said Fannie Mae's junior preferred shares have a total face value of around $19 billion, but their combined market value is approximately $6 billion. Face value is the amount assigned to the shares under their terms, while market value is what investors currently pay to buy them. He believes these shares could offer a better risk-reward balance than common shares if the Treasury converts its holdings into common equity. Burry explained that junior preferred shares could benefit if dividend payments resume or if they are converted into other shares at their face value.

He estimated that potential returns could be roughly three to five times the current investment, depending on the particular series. However, this is an investment possibility, not a guaranteed outcome. Dividends are not cumulative, and the preferred shares could remain depressed or lose value if the government does not take steps that benefit their holders.

What the stock charts reveal

According to the charts posted by Burry on X, both junior and ordinary shares experienced a major rise during 2024 and 2025, with their prices climbing sharply and reaching peaks of around $15 to $16 in September 2025. The rally investor hopes that the Trump administration might change the companies' government-controlled status and unlock value for shareholders.

The chart also shows that the rally did not last. Both shares experienced sharp declines after their peaks, followed by several temporary recoveries. By the end of the period shown, Fannie Mae was trading at approximately $4.04 and Freddie Mac at around $3.68. These prices are close to levels seen during earlier stages of the rally, suggesting that much of the speculative gain has disappeared.

Burry described the pattern as a "giant head-and-shoulders-and-elbows top." This is his description of a chart pattern that he believes shows a potential collapse in share prices. A head-and-shoulders pattern is a technical analysis formation in which a price rises to a peak, climbs to another higher peak and then forms a lower peak before declining.

His reference to "elbows" adds emphasis to his bearish interpretation. It is not a standard technical analysis term. Burry also said the stocks had taken on "meme juice". He was referring to the speculative excitement that can push share prices higher even when the companies' underlying financial or policy situations have not improved enough to justify the gains.

His warning that the chart predicts "worthless stock" reflects his strongly negative view of common shares. It should not be treated as a certainty. Chart patterns can indicate market sentiment, but they cannot independently establish that a stock will become worthless. The volume chart below the prices also shows large trading spikes during periods of major price movements. These spikes suggest that trading activity increased during important market moves, although volume alone does not establish whether investors were buying or selling.

The political decisions that could change everything

Burry's concerns go beyond technical analysis. He argues that the future value of both companies depends on government decisions, particularly whether they are released from conservatorship and whether the Treasury's senior preferred liquidation preference is cancelled or significantly reduced. Ending conservatorship could give the companies greater independence and potentially open the door to a new ownership structure. Reducing the Treasury's claim could also improve the prospects for shareholders who currently rank lower in the capital structure.

Neither outcome is guaranteed. The timeline chart supplied with the material shows several political, financial and company-related developments alongside movements in Fannie Mae's share price. Its annotations include references to government decisions, public statements, management developments and changing expectations about the companies' future. The message is that share prices have reacted to changing expectations rather than following a steady path towards a confirmed policy outcome.

Investors have repeatedly responded to the possibility of reform, but expectations alone cannot deliver the changes needed to unlock shareholder value. Burry believes that other priorities have pushed the issue down the government's agenda. These include the war involving Iran, higher interest rates, weakness in the housing market and pressure on the US Treasury's finances. He also points to the market's strong focus on artificial intelligence, which has drawn attention and investment away from other stocks. He expressed frustration with the lack of progress, saying the companies "need Thor's Hammer to unleash the value," but added that "Thor's looking too fat and lazy to wield it."

A warning from history

The second image attached by Burry contains a historical passage discussing Fannie Mae and Freddie Mac, including Fannie Mae's financial position in 1981 and concerns about management accountability and political influence. The passage argues that the companies' importance to the national housing market can make it difficult for critics to challenge them effectively. It concludes that their apparent untouchability may indicate fragility rather than strength.

This historical comparison adds another dimension to the present debate. The companies are deeply connected to the US housing system, so major changes to their structure could have consequences beyond their shareholders. Their importance may encourage policymakers to protect the wider housing market, even when that does not necessarily protect every class of investor. However, historical problems do not automatically prove that the companies face the same financial risks today. The passage is best understood as a warning about institutional power, political influence and the difficulty of reforming organisations considered essential to the economy.

What investors should watch next

According to Burry, the central question is whether the US government will make changes that allow Fannie Mae and Freddie Mac to operate independently while resolving the Treasury's financial claims. Investors should watch for official announcements on conservatorship, the treatment of senior preferred shares, possible changes to the capital structure and any plans concerning the junior preferred shares.

The distinction between common and preferred shares is especially important. Burry's move suggests that he believes the two classes could perform very differently under the same government decision. His strategy does not mean junior preferred shares are safe. Their value still depends on the terms of any restructuring, future dividend decisions and the government's approach to the companies.