Fannie Mae-No Politics (FNMA)

[Mnemonic]

As creditor, doesn't the holder of the debt get first place in line ahead of liquidation preference? My belief is Employess, Creditors, Preferences, commons. If so, why then is the UST piling on liquidation preference? Would that to place themselves in front of any other non-government funded "equity" that may exist?

Liquidation preference is essentially how much money it would take to buy the gov't out of its shares. Most of the time, companies would be able to buy these shares back at any time with capital on hand. In this case I believe they are only able to buy them back with capital from stock sales. The government is more than happy to collect 10% (if reinstated) from their SPS forever. The greater the liquidation preference, the more money we owe them annually under any non-NWS scenario.

Liquidation preference could come into play in a receivership scenario; someone would need to compensate MBS investors for their losses, as F&F MBS carry an implicit guarantee. They are first in line, followed by the gov't seniors, JPS, and then common. That said, it's more likely that the gov't would infuse F&F with more capital to keep the $5T mortgage market from completely imploding--and wiping out JSP & commons this time around. Once the companies recover, Treasury would certainly recoup some money from its investment and warrant execution.