Treasury Takeover of GSEs: 10 Key Points

I am still working my way through the details of the GSE takeover by Treasury, but here is my initial read of the details:

• FHFA will act as conservator of the two firms — meaning the US government has day-to-day control of Fannie and Freddie;

• The conservator’s goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company’s business and preserve and conserve the assets and property of the company.

• There is an immediate moratorium of the firms’ lobbying activities.

• New lending facility: “Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks;

” • Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS).

• Treasury purchases the mortgage-backed securities from the firms; no word about any derivatives or swaps owned by the two;

• Starting in 2010, the portfolios must be reduced at the rate of 10% per year.

• Both CEOs (Daniel Mudd and Richard Syron) dpart after a transition period. TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie; U.S. Bancorp Chief Executive David Moffett at Freddie.

• Senior preferred stock purchase agreement includes an upfront $2 billion issuance of senior preferred stock with a 10% coupon ($1B per GSE); Dividends are quarterly starting in 2010, and warrants represent an ownership stake of 79.9% in each firm.

• 3 Goals of the takeover: market stability, mortgage availability and taxpayer protection.

• The takeover is the result of a “detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve;”

This looks like a 80% haircut for the common holders, I am trying to figure out if this is a haircut for the preferred holders . . .

UPDATE: It seems the Preferred Shareholders take an even bigger haircut than the common, as they lose the present dividend payments.

Regarding common and preferred losses: “With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses.”

On Moral Hazard: “Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.”


Treasury Department, September 7, 2008

Treasury Department Reports:

FHFA Director Lockhart Remarks on Housing GSE Actions Fact Sheet: FHFA Conservatorship Fact Sheet: Treasury Preferred Stock Purchase Agreement Fact Sheet: Treasury MBS Purchase Program Fact Sheet: Treasury GSE Credit Facility

Originally published at The Big Picture blog and reproduced here with the author’s permission.