Fannie Mae-No Politics (FNMA)

[955]

This is what Treasury was thinking when they placed Fannie and Freddie in conservatorship in Sept 2008.

From FASAB Final Meeting Minutes on October 22-23, 2008, p. 47-49

• Federal Troubled Asset Relief Program Status Report
47
Mr. Werfel noted that the first action was to place Fannie Mae and Freddie Mac into
conservatorship. The first question became whether to consolidate the entities in light of
the control exercised by the conservator—they looked to the FDIC’s treatment of banks
in receivership and found that these were not consolidated. After also reviewing the
SFFAC 2 guidance, they concluded that not consolidating was appropriate but would
continue to monitor developments.
Mr. Werfel explained that the second aspect was the $200 billion guarantee. Treasury
will provide an infusion of capital if the GSEs go into negative equity. The arrangement
provides Treasury with preferred stock up front – one traunch of stock was issued at $1
billion par from each GSE initially and this par will be adjusted as money is provided
through the guarantee. Treasury may also purchase mortgage backed securities issued
by the GSEs. In addition, there is a warrant for 79.9% of the common stock of the
GSEs.
Mr. Allen suggested that aspects of this arrangement go beyond a bank receivership
arrangement. Mr. Reid noted that the FDIC values the assets and liabilities of failed
banks and books a reserve for the difference—the FDIC’s expected loss due to
insurance. Over time, the bank is liquidated and the reserves adjusted. Mr. Werfel
clarified that receiverships lead to liquidation while conservatorships do not. Mr. Reid
agreed and noted that his point was that the banks are not consolidated but the liability
for losses are recognized by FDIC.

Final Meeting Minutes on October 22-23, 2008
48
Mr. Werfel explained that the control elements of a conservatorhsip are intended to put
the institution back on its feet—not to liquidate it. The conservatorship would be
terminated when the institution is on sound footing. However, the financial transaction—
the exchange of preferred stock and warrants for the guarantee—complicate matters.
Mr. Allen indicated that there does not appear to be a separation between the GSEs
and the government. The actions taken imply that the pattern could repeat itself –
conservatorship could repeat in the future.
Mr. Werfel indicated that the intent at this time is that the control is intended to be
temporary and the FASAB, FASB and GASB literature provide that temporary control
should not lead to consolidation. The intent of Treasury is not to exercise the warrants
that provide 79.9% ownership. The purpose of the warrants was to drive the stock price
down to next to nothing. When the government steps in to aid a publicly traded entity it
does not invite fair trading. The Treasury wished to freeze the market for this stock and
the warrant accomplished that goal. They have no voting interest and only own an
option to own the entities.
Mr. Farrell noted that the government seems to have absolute control of the GSEs even
if the intent is temporary. He explained that the FASB literature regarding temporary
control is designed to deal with a stepped transaction where you end up with control for
a brief period. He does not read the reports of the GSE activity to be temporary.
Mr. Werfel noted that these arrangements lead to a very dynamic situation. There are
steps in the future that would need to be taken to indicate that the intent is to
permanently control the entities. The intent of Treasury has been clear that this is a
temporary arrangement. If that changes, then the consolidation decision would be
evaluated.
Mr. Steinberg said that with these GSEs having an implied guarantee for many years he
wonders whether it is realistic to expect the GSEs to return to their former status.
Mr. Torregrosa indicated that CBO saw the relationship differently. The government has
effective control. CBO agrees that receivership and conservatorship are different. The
GSEs are being used to attain public goals. Therefore, CBO believes they should be on
budget.
Mr. Allen indicated that FASAB can not affect the FY2008 reporting through new
guidance. However, during the course of the year FASAB should review what was done
and consider new guidance.
Mr. Steinberg requested a briefing on the final accounting treatment in the CFR at the
December meeting.
Mr. Werfel noted that TARP had followed shortly after the GSE issues. This is a much
larger and more complicated program. He explained that the purchase of mortgage
backed securities is to be considered a direct loan; the TARP bill indicates that for
budget purposes such purchases would be treated under Credit Reform. However, for

Final Meeting Minutes on October 22-23, 2008
49
preferred stock the team reached the conclusion that there was not required pay back of
principal and that it was not in substance a direct loan.

FASAB Meeting Minutes, October 22-23, 2008
https://files.fasab.gov/pdffiles/oct08mins.pdf