Fannie Mae (FNMA)

[obiterdictum]

Zargis, Ackman contracted a cash-settled total return swap with UBS AG.

Ackman's Pershing Square Fund's FNMA exposure has increased to 11.31% and his FMCC exposure has increased to 11.08%.

For example, it is stated in the FNMA Form SC 13D/A in this way:

As of March 31, 2014, the Reporting Persons beneficially owned an aggregate of 115,569,796 shares of common stock (the “Subject Shares”), representing approximately 9.98% of the Issuer’s outstanding common stock. The Reporting Persons also have additional economic exposure to approximately 15,434,715 notional shares of common stock under certain cash-settled total return swaps (the “Swaps”), bringing their total aggregate economic exposure to 131,004,511 shares of common stock (approximately 11.31% of the outstanding common stock). Shares of the Issuer’s common stock are not voting securities as such term is used in Rule 13d-1(i) under the Act. Accordingly, the Reporting Persons have determined to forego future reporting on Schedule 13D.

A cash-settled total return swap is an OTC derivative arrangement between Pershing Square Funds and UBS AG.

It is a leveraged hedge bet for Ackman. For Ackman to profit, the price must go up. UBS AG profits either way since a commission or rate of interest is automatically paid, plus, if the price goes down, UBS receives additional monies from Ackman (Pershing Square Funds).

Here is how it works.

If the price of the FNMA stock (referenced asset) goes up during the period of the swap which is from March 28 to April 30, 2015, then UBS AG will pay the difference in value between the increased share price and the share purchase price ($3.53). If the price goes to $4.00 then UBS AG will pay $.47 times however many shares are listed for Pershing Square funds. Profit for Pershing Square Funds.

If the price goes down, then Pershing Square must pay to UBS AG the difference between the original purchase price and the lower share price found on April 30, 2015. So, if the price goes down to $3.23 per share on that date, Pershing Square must pay UBS AG,$.30 for every share "purchased" by Pershing Square.

In addition, Pershing Square must pay an interest rate on the value of the notional shares contracted. The rate of interest paid to UBS AG is not revealed.

There are legal questions over beneficial ownership of the common stock during a cash-settled total return swap. And so Ackman reports:

"The Swaps do not give the Reporting Persons direct or indirect voting, investment or dispositive control over any securities of the Issuer and do not require the counterparty thereto to acquire, hold, vote or dispose of any securities of the Issuer. Accordingly, the Reporting Persons disclaim any beneficial ownership of any shares of common stock of the Issuer that may be referenced in the swap contracts or common stock or other securities or financial instruments that may be held from time to time by any counterparty to the contracts."

See this report for info on cash-settled total return swaps and ownership - http://www.akingump.com/en/news-publications/second-circuit-rules-on-formation-of-groups-no-decision-on-total-return-swaps-confer.html

Source:
SC 13D/A - FNMA
http://www.sec.gov/Archives/edgar/data/310522/000119312514122908/0001193125-14-122908-index.htm

SC 13 D/A - FMCC
http://www.sec.gov/Archives/edgar/data/1026214/000119312514122897/0001193125-14-122897-index.htm