Fannie Mae-No Politics (FNMA)

[familymang]

According to litigating shareholders, they disagree with you as they claim the admin (Calabria + Mnuchin + Trump) actually accomplished a lot on the road to recap and release the GSEs (4 out of the 5 steps they claimed were necessary). This is from a court filing last week..

“The “activities necessary” to recapitalize the companies were essentially five steps—the first four of which Director Calabria and Treasury actually took.

First, the PSPAs had to be modified so that the Companies would be permitted to retain net worth rather than being forced to hand it over to Treasury. This step is significant because it allows the Companies to build capital in two ways: the companies could retain earnings and add to their net worth; and the companies could raise additional capital through the issuance of new stock. (So long as the Companies were required to pay Treasury their entire net worth every quarter, the proceeds from the sale of any new stock would have been immediately swept to Treasury, resulting in no increase in the Companies’ capital levels.) To that end, Director Calabria and Treasury amended the PSPAs to substantially increase the maximum amount of net worth each Company was permitted to retain. U.S. Dep’t of the Treasury, Treasury Department and FHFA Modify Terms of Preferred Stock Purchase Agreements for Fannie Mae and Freddie Mac, https://go.usa.gov/xF6NS.

Second, the Companies had to cease paying Treasury quarterly cash dividends. Director Calabria implemented this change within months of coming into office in April 2019. See FHFA, TABLE 2: DIVIDENDS ON ENTERPRISE DRAWS FROM TREASURY, https://bit.ly/3tmDbKa.

Third, the Companies needed a regulatory framework for determining the amount of capital that would be required once they were under private control. Director Calabria issued a rule adopting such a framework. See 85 Fed. Reg. 82,150 (Dec. 17, 2020). The rule addressed a number of complex, highly technical issues and did not become final until December 17, 2020, leaving the Trump administration only a few short weeks to meet its objective of returning the companies to private ownership. There simply was not enough time left for the Administration to do the necessary legwork to complete its plan to raise new capital for the Companies through a major issuance of new stock.

Fourth, the Companies needed to hire investment bankers to prepare a new stock offering. Director Calabria directed the Companies to do just that. See Fannie Mae Hires Financial Advisor (June 15, 2020), https://bit.ly/3kQGuHa; Freddie Mac Announces J.P. Morgan as Financial Advisor (June 15, 2020), https://bit.ly/3zUxR32.

Fifth, the Companies’ capital structures needed to change so that their earnings would not go exclusively to Treasury—otherwise, as a matter of simple market mechanics, no one would buy the new stock the Companies planned to issue. See Prepared Remarks of Dr. Mark A. Calabria, Director of FHFA, at Mortg. Banker Ass’n Nat’l Secondary Mkt. Conf. & Expo 2019 (May 20, 2019), https://bit.ly/2Wa2u5D (acknowledging that an “important step on the path to building the necessary capital will be to address the Net Worth Sweep”); James Kleimann, Calabria: We need another round of PSPA amendments, HOUSING WIRE (Apr. 20, 2021), https://bit.ly/38RxU40 (quoting Director Calabria as saying that the PSPAs should be further amended “to deal with the capital stack” and that “given the structure of the balance sheets as they are today, it will be very difficult if not impossible to raise outside capital”). Treasury, for its part, had contemplated “eliminating all or a portion of the liquidation preference of Treasury’s senior preferred shares or exchanging all or a portion of that interest for common stock or other interests in [the Companies].” Id. at 27. With only this final step remaining, Director Calabria publicly stated that he anticipated the Companies could sell new shares of stock in 2021. Ben Lane, Calabria Now Expects Fannie Mae and Freddie Mac IPOs in 2021, HOUSINGWIRE (Feb. 28, 2020), https://bit.ly/3hXsKJ4.

Thus, if President Trump had been able to direct FHFA to pursue his policy goals from the beginning of his administration, as the Constitution required, FHFA would have collaborated with Treasury to amend the PSPAs in one of two ways: (1) to reduce the liquidation preference on Treasury’s senior preferred stock to zero and end further increases to the liquidation preference so long as the Companies did not make further draws on Treasury’s funding commitment; or (2) to convert Treasury’s senior preferred stock to common stock. In either event, Treasury’s entitlement to 100% of the Companies’ net worth would be gone, and the Companies’ other shareholders could share in the upside.”