Reminder for skateboard: Watch and Learn
"For the second time this month, I am leaving a comment by Fanniegate Hero on the blog in order to make a point about why I delete (or choose not to accept) certain comments from readers.
A word about the term “restructuring.” The drawback to using it with respect to Fannie and Freddie is that it’s too general, to the detriment of clarity. A typical financial restructuring involves the reorganization of debt, which obviously isn’t the companies’ problem. And even saying they need an “equity restructuring” is still unnecessarily general. Fannie and Freddie’s equity problems are literally unique: they have $193.5 billion in Treasury senior preferred stock that does not count as regulatory capital, that they were forced into taking because of non-cash expenses put on their books between the middle of 2008 and the end of 2011 by FHFA, and that they cannot repay (as Fannie reiterated in its 2022 10K), and Treasury also has a liquidation preference in them of $288.2 billion as of December 31, 2022, which will grow in every future quarter until it is eliminated. Since THAT’s their “equity problem,” why not just call it that? And it’s a problem only Treasury can fix.
One also might argue that Fannie and Freddie junior preferred stock are candidates for “restructuring,” but that’s in a very different category from the senior preferred and the liquidation preference. Those have to be eliminated first, before it makes sense to think about redeeming (or converting) the junior preferred and replacing it with some other form of equity. Moreover, I would argue that changing the amount, type or mix of junior preferred stock is a decision properly made by company management, in conjunction with their financial advisers, and not FHFA."
