The original SPSPA provided Treasury a 10% dividend on their investment. This investment was equal to their Liquidation Preference. Liquidation Preference may be thought of as the “par value” of Treasury’s preferred stock. It is this par value upon which the 10% dividend (pre-3rd Amendment) was based.
The Liquidation Preference started as $1 billion and increased dollar-for-dollar with each draw of funds from Treasury. Currently Liquidation Preferences reside on each GSE’s Balance Sheet under Equity. For Fannie, it’s $117.1 billion and for Freddie it’s $72.3 billion. The Liquidation Preference virtually eliminates any value for both junior preferred and common shareholders in the event that the GSEs go into receivership, reorganization or their assets are sold off.
Based on the current Liquidation Preference, a 10% dividend paid quarterly for Fannie would be $2.9 billion and Freddie would be $1.8 billion. That would be the dividend owed under the original Agreement.
Just like most preferred, however, Treasury’s preferred stock could be redeemed by the GSEs once Treasury’s funding commitment ended. Yes, the GSEs could pay-off Treasury for the bailout. This was provided for in a separate document from the SPSPA, called the Designation of Terms for the Variable Liquidation Preference.
Now, if a court case challenging the net worth sweep (NWS) is successful to the extent that the 3rd Amendment is reversed, you could presume that, while a 10% dividend would still have accrued, any excess could have paid down the Liquidation Preference. This should be the basis of a claims award.
Where would that leave the Liquidation Preference today? If the 10% dividend were accrued, but any excess dividend paid to Treasury under the NWS paid down the Liquidation Preference instead, the current Liquidation Preferences (as of 9/30/2015) would be $20.0 billion for Fannie and $9.4 billion for Freddie.
Since this Liquidation Preference could have declined since the beginning of FY2012, so would the dividends. The 4Q2015 dividend for Fannie would be approximately $500 million and for Freddie it would be approximately $235 million. Anything Fannie and Freddie make above these amounts each quarter could go to recap or pay down the Liquidation Preference.
Notwithstanding the possibility that the GSEs could obtain external funding less than the 10% charged by Treasury and simply paid off Treasury in whole by now, Treasury could gradually be paid-off in full by the EOY 2017. This would not resolve the recapitalization issue, but it would pay-off the bailout.
