Hedge fund manager offers plan for Fannie, Freddie

(New throughout with comments from Ackman)

By Svea Herbst-Bayliss and Herbert Lash

BOSTON/NEW YORK, July 15 (Reuters) - Hedge fund manager William Ackman laid out a plan on Tuesday to restructure mortgage finance companies Fannie Mae and Freddie Mac as more investors expressed doubts about the government's proposal to prop up the battered institutions.

Ackman, who runs New York based hedge fund Pershing Square Capital and is known for betting big against bond insurers, said his plan would effectively recapitalize the two companies, leaving them with a healthier mix of equity and debt.

"It will take a few days to percolate, but someone is going to say this is a good idea, I think," Ackman told Reuters after announcing the plan, complete with slides on cable television CNBC this morning.

"I think I have something they are going to like," Ackman said, noting his plan would save U.S. taxpayers a lot of money.

The two companies hold or own about $5.2 trillion in mortgages, or almost half of all mortgages in the United States.

The fund manager, who is also known for his meticulous research, said he had already discussed a draft of the plan with senior government officials and will now begin calling legislators to speak about it in detail.

Ackman warned it would be a mistake for the U.S. government to invest in the equity of the companies. He is betting against their stock and junior debt, but he said saving them would be good, both for the long side of his portfolio and for the country.

Specifically, Ackman said the restructuring of Fannie Mae would involve the government offering to buy its $750 billion in senior unsecured debt at 90 cents on the dollar and giving debt holders 10 cents of new common stock in the restructured company.

The commitment of the U.S. government to purchase Fannie's debt would be on a stand-by basis for three years, he said.

Fannie Mae is leveraged 129 to 1 and Ackman warned this needs to be cut dramatically. Its balance sheet, along with Freddie Mac's, must be bolstered before confidence in the two companies and financial markets can be restored.

"This is not a confidence problem. This is a capital problem and Fannie Mae and Freddie Mac do not have enough capital to withstand the losses they are about to bear," he told Reuters.

Ackman said $11 billion of Fannie Mae subordinated debt, $21 billion of preferred equity and $24 billion of common equity should be extinguished. Holders of the extinguished securities should be given $56 billion in new stock, according to a copy of the plan he gave Reuters.

The shares of Fannie Mae and sibling Freddie Mac have cratered since last week over concerns they need to raise more capital. The shares tumbled further on Tuesday over fears the U.S. government rescue plan announced on Sunday would dilute the equity of existing shareholders.

The share prices of both companies plunged anew on Tuesday, with Fannie Mae dropping 27.34 percent to $7.07, while Freddie Mac tumbled 26.02 percent to close at $5.26.

Also on Tuesday, Moody's Investors Service cut the preferred stock and bank financial strength ratings of both companies and said it may cut them again. (Reporting by Svea Herbst-Bayliss, editing by Gerald E. McCormick and Andre Grenon)