Activist hedge fund manager William Ackman has suggested a rescue plan to restructure Fannie Mae and Freddie Mac which, he claims, will reduce leverage at the two government-sponsored but stock market-listed mortgage lenders.

Ackman, who oversees USD6bn at hedge fund manager Pershing Square Capital Management, advocates a restructuring of Fannie and Freddie in which the common and preferred equity would be wiped out and the subordinated debt exchanged for equity warrants.

He proposes that for every dollar of senior unsecured debt held, a holder would receive 90 cents in new senior unsecured debt and 10 cents worth of new common equity. 'That raises equity by USD75bn,' Ackman says. 'By eliminating subordinated debt of USD11bn, you are creating another USD11bn worth of equity.'

Under the plan, made public in a presentation entitled How to Save Fannie and Freddie, holders of junior Fannie debt would get warrants, while common and preferred shareholders would get nothing.

The bleeding continued at both institutions on Tuesday, with the stocks of both mortgage giants down by as much as 30 per cent, suggesting that investors were not comforted by Treasury Secretary Henry Paulson's plan announced at the weekend to recapitalise the two companies.

But following Ackman's public intervention, Fannie Mae rebounded 13 per cent to USD8.02 on Wednesday morning in New York, while Freddie Mac climbed 15 per cent to USD6.03 - perhaps indicating that the market is more impressed by the hedge fund manager's proposal than by the Treasury plans.

'You'd think a statement from the Treasury secretary would have more credibility than from someone who's short the stock,' says Richard Pzena, head of Pzena Investment Management. The times they are a-changin'.