Fannie Mae-No Politics (FNMA)

[stockanalyze]

tim howard
“I bought the e-version of Mark Calabria’s book in the hopes of gaining some insight into his efforts with Treasury Secretary Mnuchin to release Fannie and Freddie from conservatorship in 2020. Here is how he described the problem he thought they were trying to solve: “Despite some creative, but legal, accounting that allowed the companies to present financial statements in which the two sides of the balance sheet were in balance, the reality was that the liability side presented a huge overhang in the form of Treasury’s preferred equity.” And he described the solution to the problem this way: “To grossly oversimplify, cram down the liabilities to match the assets and then presto, you are good to go.”
Ignoring the reference to “creative, but legal, accounting” that implies (unspecified) nefariousness on the part of the companies, there was no “huge overhang” on the liability side of either company’s balance sheet “in the form of Treasury’s preferred equity”; the Treasury senior preferred was (and is) reported not as a liability but as a component of the companies’ shareholders equity. (Did Calabria not know that?) And saying that the solution is to “cram down the liabilities to match the assets and then presto, you are good to go” is nonsensical. In the summer of 2020, the value of Fannie’s and Freddie’s assets comfortably exceeded the value of their liabilities (with the difference being their net worth). The problem for both companies was (and continues to be) that the dollar amount of their Treasury senior preferred was much, much greater than the dollar amount of their net worth.
If that is the problem, before attempting to solve it you need to ask, “How did it happen?” We know the answer. First, Treasury made its senior preferred non-repayable without its permission (which it had done for no other company it “assisted”), so there was no way for the companies to get it out of their equity account on their own. And second, once the non-cash expenses put on Fannie and Freddie’s books by FHFA to force them to take the Treasury senior preferred (that they didn’t otherwise need) ceased and then began to reverse, Treasury and FHFA agreed to the net worth sweep, taking virtually all of Fannie and Freddie’s retained earnings between December 31, 2012 and June 30, 2019. For Fannie, that was $146.3 billion–$69.9 billion more than would have been paid on the outstanding senior preferred at a 10 percent annual dividend—and for Freddie it was $95.7 billion, $49.1 billion more than was owed at a 10 percent per year dividend. Had it not been for the sweep and the non-repayment provision of the Treasury senior preferred, the companies would have been able to use their torrents of retained earnings after 2012 to pay down their senior preferred, and then begin to build the capital necessary to allow them to exit conservatorship.
Both contributors to what Calabria called the “huge overhang in the form of Treasury’s preferred equity”—the non-repayment provision of the senior preferred and the net worth sweep—were the result of decisions made by Treasury, not the companies. So why should the companies’ equity holders be required to bear the cost of undoing the consequences of those decisions, particularly in light of the jury verdict in the Lamberth case that Treasury and FHFA “wrongly amended the stock purchase agreements” by entering into the net worth sweep?”
https://howardonmortgagefinance.com/2023/06/05/response-to-fhfa-pricing-rfi/#comments