Like this part:
"Necessary Conditions to Raise Capital
If new capital is to be raised, in addition to adequate return thresholds, private market investors
will require and must have visibility into the long-term earnings power of Fannie and Freddie so
that they can reasonably estimate the valuation of each Enterprise. This visibility decreases as
complexity increases around key assumptions such as required capital levels, making the
feasibility and cost of a recapitalization more challenging. To that end, we recommend that
required capital ratios be fixed rather than dynamic, and we would advocate abandoning the
RBC framework entirely, requiring the Enterprises to solely meet a fixed required capital level of
2.5%.
We do not believe that investors will be able to estimate long-term earnings power under the
RBC framework, as the dynamic nature of the RBC calculation makes future required capital
levels impossible to predict. Even with the improvements from the 2018 Proposal, the RBC is
still somewhat pro-cyclical, which would likely preclude any future capital raise due to investor
fears of a highly dilutive equity issuance during a downturn. With uncertainty about how RBC
might function under a stressed financial market, investors must assume they face material risks
in case the GSEs are compelled to seek substantial additional capital at a time of market
dislocation. For investors to be comfortable participating in a recapitalization now, they need to
be provided transparency and reassurance at the outset that they can predict the GSEs’ capital
requirements.
Finally, in order for the Enterprises to successfully raise tens of billions of dollars of new private
capital, we believe that legacy investors in Fannie and Freddie must be treated fairly. No new
investor will invest in Fannie and Freddie unless historic investors are protected from, and
compensated for, the expropriation of profits from the two companies that took place with the
Net Worth Sweep that has extracted more than $246 billion of profits from the Enterprises since
it took effect on January 1, 2013. This amount represents a return to Treasury greater than the
bargained-for 10% interest rate on its Senior Preferred Stock investment, including complete
repayment of the $191 billion invested by Treasury in the Enterprises.(7)
Wall Street’s memory of injecting tens of billions of dollars into Fannie and Freddie just prior to
their conservatorship ($24.6 billion of new junior preferred and common equity capital was
raised in 2007 and 2008), and the expropriation of both companies’ profits forever, just as they began to turn profitable, is still fresh. Completing the largest capital raise in history in a newly
restructured Fannie and Freddie will not be achievable unless and until investors in the
companies are treated fairly and receive commitments that the extra-legal action of the past will
be reversed and not recur. This is particularly true as there is likely to be considerable overlap
between the current and historic shareholder base of the Enterprises and the group of institutions
that is willing and able to invest in a new capital raise.
We would welcome the opportunity to address any questions you may have about our thoughts
above.
Sincerely,"
