“Tim, how much overpayments have been done with compound interest to date? Also why did FnF have to pay the 10% dividend and all of their net worth as liquidation preference even though they were and are undercapitalized (CET1), because that violates the cited FHEFSSA guidelines? Does that make sense? Taking out even a penny while undercapitalized should be illegal, let alone 10% and taking all of their net worth in perpetuity in the form of liquidation preference. Is that some other law that they are using? Has this been brought up in courts? Thank you!”
tim howard reply
“It is not easy to make economic or legal sense of the terms imposed on Fannie and Freddie by the Senior Preferred Stock Purchase Agreements (SPSPAs) if you are thinking of the SPSPAs as a legitimate attempt to help the companies get through the financial crisis. If, on the other hand, you view them as an effort by Treasury Secretary Hank Paulson to use the financial crisis as a pretext to put under government control two companies Treasury historically had opposed—and that, with the private-label securities market having imploded, and banks cutting back sharply on their mortgage lending, Paulson did not want to have to rely on as private companies to get the U.S. through the mortgage meltdown that was in process—the SPSPA terms you are describing make much more sense. They were designed to allow FHFA and Treasury to use temporary or estimated non-cash expenses, non-repayable senior preferred stock, and a 10 percent after-tax dividend (albeit with an option to not pay those dividends in cash, but instead add to Treasury’s liquidation preference in the companies at 12 percent per annum) to create and maintain a mammoth payment obligation to Treasury from which Fannie and Freddie would find it difficult to emerge before the companies’ opponents and critics could convince Congress to replace them with an alternative more to their liking. When that hadn’t happened by the time Fannie and Freddie’s non-cash expenses began to reverse and return as net income in 2012, Treasury and FHFA imposed the net worth sweep, taking all of their net income in perpetuity.
You are correct that Fannie and Freddie’s regulatory guidelines [FHEFSSA] would have prohibited them from paying cash dividends while severely undercapitalized, but FHFA suspended those guidelines because it wanted the companies to have to draw more senior preferred stock from Treasury to pay the annual dividends in cash, to balloon their outstanding senior preferred and increase their required annual dividends by still more. It was only after it was obvious that the companies were about to enter a “golden age of profitability” (because of the end and then the reversal of the non-cash expenses put on their books by FHFA), that FHFA and Treasury claimed to be concerned about a “death spiral” of borrowing to pay the senior preferred dividends in cash—and their solution was not the 12 percent annualized accrual of Treasury’s liquidation preference specified in the SPSPAs, but to impose the net worth sweep.
I can sympathize with your inability to make sense of Fannie and Freddie’s dividend obligations if you’re thinking of them as having been done for the reasons Treasury and FHFA say they were. But they were not.”
