Freddie/Fannie: What Did It Take to Get Management/Board Onside?

Why didn’t the Freddie/Fannie bailout deal wipe out the common shares? That’s one question most people have, myself included, as we look at the structure of the deal. Leaving common shareholders with 20% of the equity of the firms seems unnecessarily generous. Is that price that was required to get management on board during the transition to conservatorship? Was it the carrot?

Because it seems clear what the management stick was alongside the hypothesized carrot. That was the silly story planted in the media yesterday that Freddie/Fannie played games timing their liabilities, and so their balance sheets were squishier than regulators thought.

Gosh, you think? Did anyone really think that Freddie and Fannie played it straight up? There had only been a host of analysis suggesting same for some time — I even prattled about it on CNBC weeks ago. Leaking that information to the media now strikes me as a stick trying to get cooperation out of the two companies’ respective CEOs. You know, “Play along, or we’ll make you look like bad men for diddling the numbers.”

But was the other side of the deal not washing out the common shares? Granted, it’s not a huge carrot, but it is a carrot to avoid management/board lawsuits — notice how careful Paulson was to say that this was not management’s or the board’s fault — and even provide some wildly unlikely upside.

Originally published at Infectious Greed and reproduced here with the author’s permission.