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Proposal for recapitalization of Fannie Mae / Freddie Mac
Here is a plan I would submit for recapitalization of Fannie (FNMA) and Freddie (FMCC) and for exiting Conservatorship. The plan’s main goal is to ensure financial stability for the two companies and minimal disruption to the financial system.
The proposal involves issuing new common and preferred stock. The existing common and preferred shares will be extinguished. The existing common shareholders will be able to recover some of their losses, but the amount will be limited to $3/common share and $4/preferred share.
In the terms below, “company” refers to either Fannie Mae or Freddie Mac.
The company will issue 2Bn common shares to the Treasury in exchange for its warrants and senior preferred shares.
The company will issue and sell 3.5Bn common shares at $20 each. These existing common shareholders will be given priority to buy up 3 new common shares at discounted price of $19. Any shares not purchased by the existing common shareholders will be sold through an IPO at $20.
The company will issue and sell 1.2Bn preferred shares at $25 each. The existing preferred shareholders will be given priority to buy up to 2 new preferred shares at discounted price of $23. Any shares not purchased by the existing preferred shareholders will be sold through an IPO at $25.
Any common and preferred shareholders surrender their right to sue if they choose to exchange their shares for the new shares.
After this recapitalization, the company will have equity of about $100Bn
Common equity of $70Bn ($66.5Bn if all common shareholders exercise their right to buy 3 shares)
$30Bn preferred equity ($27.6Bn if all preferred shareholders exercise their right to buy 2 preferred shares)
There will be 5.5Bn common shares and 1.2Bn preferred shares. The preferred shares will pay about $2Bn/year in preferred dividends.
The current annual net income is $16-$20Bn range. That gives a net income to common shareholders of $14-18Bn.
Let’s assume the net income is only $14Bn/year. That gives an EPS = $2.54 and P/E=7.87. This means there is good reason to assume the common shares will rise to $25 within a year.
The companies will exit Conservatorship and will be allowed to retain the earnings, build capital and, eventually, pay common dividends.
Due to the importance of these companies, they will continue to have some form of support and will have the following limitations:
If the common + preferred equity falls below $50Bn, the Treasury will step in and provide funds to bring the equity back to $50Bn. Any funds provided by the Treasury will need to be paid in a double amount. (If equity falls to $40Bn, Treasury provides $10Bn and Company needs to pay back $20Bn).
If the common + preferred equity falls below $75Bn, the Company cannot repurchase shares or pay any dividends
The company top executives will have clawback clauses allowing all bonuses from last 5 years to be returned if common + preferred equity falls below 75Bn
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