When billionaire hedge fund manager Bill Ackman proposed a restructuring plan for mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), he framed it as modernizing the mortgage finance system. Economist Peter Schiff sees something else entirely: a wealth transfer scheme dressed up as reform.

Why Schiff Calls This 'Fake Privatization'

In a post on X Thursday, Schiff didn't mince words. He argued that Ackman's plan is "a carefully engineered boondoggle" designed to enrich hedge funds while saddling taxpayers with the downside risk. The fundamental problem, according to Schiff, is that the government can't take these mortgage giants public without answering a basic question: Are their debts guaranteed by the U.S. government or not?

Ackman's plan sidesteps this inconvenient question by keeping both agencies in conservatorship, which means the government "never has to admit the truth," Schiff said. Nothing gets fundamentally reformed. The implicit guarantee stays in place. The public remains in the dark. And private investors get a path to cash out.

Schiff called this approach "fake privatization" that recreates the exact structure that existed before the 2008 financial crisis, complete with what he describes as "the most extreme form of moral hazard" where private profits get paired with fully socialized losses.

The Capital Requirements Controversy

One of Schiff's sharpest criticisms targets Ackman's proposal to slash the government-sponsored enterprises' capital requirement from 4.5% down to 2.5%. Schiff called this "one of the most dangerous parts of the entire proposal," warning that even a modest decline in home prices could completely wipe out their capital cushion under such thin requirements.

The structure, as Schiff sees it, shifts retained earnings and future dividends away from taxpayers and toward private investors. Eventually, he warned, "private shareholders, who own only 20% of the company, will effectively receive 100% of the real cash profits."

Bottom line, according to Schiff: The plan "creates the most dangerous and irresponsible structure imaginable" and "leaves American taxpayers holding the bag." He announced he'll be hosting a discussion on February 24 to "expose the full truth behind this so-called recap and release."

The Broader Fannie-Freddie Debate

Schiff has been consistently vocal in his criticism of plans to restructure Fannie Mae and Freddie Mac, which have operated under government conservatorship since the 2008 financial crisis. He's also pushed back against President Donald Trump's proposal to merge the two government-sponsored enterprises.

A merger, Schiff argues, would allow the combined entity to "leverage an explicit" government guarantee, effectively turning risky mortgages into the equivalent of government treasuries in terms of creditworthiness. This would create a "moral hazard" far greater than what existed before 2008, he said.

Ackman sees things differently. He's argued that merging the two agencies would create significant cost synergies that could help bring down mortgage rates substantially. "A merger would also reduce the cost and risks of government oversight as there would be only one institution that would require FHFA oversight," Ackman said while backing Trump's merger plan.

The fundamental disagreement boils down to this: Ackman thinks smart restructuring can make the system more efficient and less risky. Schiff thinks any plan that preserves government backing while privatizing profits is setting up taxpayers for another bailout when the next housing downturn arrives.