Freddie Mac-No Politics (FMCC)

[955]

Purpose of the warrants was to drive pps to zero, never to be exercised, NOT collateral. There will be no exercising of the warrants. How many times must it be re-stated???

FASAB Meeting Minutes, Dec 17-18, 2008

Mr. Werfel clarified this by stating that a review of the accounting literature leads to the answer that generally 51 percent ownership would require consolidation with the exception that if the ownership is deemed temporary, then Treasury would not have to consolidate the GSE’s. Mr. Werfel further noted that the warrants which are analogous to stock options do not constitute control. Also, if the warrants were exercised with the intention of selling them off, there would be no requirement to consolidate.
However, Mr. Farrell noted that regardless of the exercise of the warrants, it seems that the government has at least the appearance of control as it can replace management and dictate Board appointments, approve certain transactions, etc. This led Mr. Farrell to ask about the concept of control.
Mr. Reid responded by stating that the government has set up this conservatorship in a manner similar to other conservatorships where in those cases the government did not consolidate; noting FDIC as an example.
Messrs Schumacher, Farrell and Allen noted similar concerns regarding the interpretation of temporary and what conditions might arise to redefine the relationship as permanent and whether or not the substance of the economic transactions were missing.
Mr. Reid responded by suggesting that the immediate issue faced by the Board is what the estimate of the government’s maximum (financial) exposure is. To this end, he noted that the GSE’s have not estimated this exposure (on an accrual basis) and since the maximum exposure has not been incurred on a cash-basis method, it is yet to be determined if the $200 B is sufficient. Mr. Reid further noted that the decision regarding the nature of the conservatorship is an administrative question and will be based on certain circumstances not yet known. Mr. Reid reminded the Board that the government owning the preferred stock with punitive dividend terms provides incentive for the GSE’s to work its issues out as expeditiously as possible. Furthermore, by design, the warrants were issued not to take ownership but rather to devalue the common stock.
Mr. Allen asked whether or not in an economic sense the government exercised the warrants. Mr. Reid explained that the government does not need to exercise the warrants to enter into conservatorship and that there is no economic reason to exercise the warrants since its rights are statutory in nature. Mr. Dacey concurred with this explanation as well as stating that the government has separate rights apart from the warrants.
Mr. Werfel then explained that it is important to understand the government’s intention. The intention was not to eliminate the ownership interests but to prevent current shareholder speculation resulting in speculators taking advantage of government intervention at the expense of others. Driving the stock market value to zero prevents
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Final Meeting Minutes on December 17-18, 2008
this manipulation from happening. Further, timing is important since on September 7 when the conservatorship took affect the stated policy and intention was, and continues to be, that the conservatorship is temporary. There are published statements from the Secretary of the Treasury that the goal is to get the GSE’s back to a stable fiscal position so that they can go forward operating as they were operating before the conservatorship. Since this is in fact the case, the OMB concern was that by consolidating the GSE financials, we are not only in conflict with the stated policy but the financial statements would be misleading. If conditions in fact change, then another decision will need to be made. This will require continual monitoring over time as circumstances change.