U.S. Reaffirms Backing
Of Fannie, Freddie Stock
By MAYA JACKSON RANDALL
September 12, 2008
WASHINGTON -- The Treasury Department reiterated that the U.S. government stands firmly behind the preferred-stock purchase agreement it entered into as part of its takeover of Fannie Mae and Freddie Mac.
The statement was included in a fact sheet on the stock-purchase agreement, and suggests it would be nearly impossible for Congress or executive branch to modify the agreement in the future.
The agreement was unveiled Sunday to protect current and future investors in debt and mortgage-backed securities issued by the two mortgage-finance companies. Under the agreement, Treasury can inject up to $200 billion in the two companies. In return, it received $1 billion in preferred stock from each company, along with warrants to purchase almost 80% of each firm's common stock. The Treasury hasn't paid out anything to the firms, but would inject capital into the companies as needed to keep them solvent.
The two-page fact sheet aims to ease concerns among investors that the government's pledge may not survive a potential court challenge or changes by a future Congress.
It also sought to clear up confusion among investors and analysts over how the Treasury would inject capital into the firms after its authority to buy shares in the companies expires in December 2009.
The Treasury said it wouldn't need to purchase any new shares in the companies in order to inject capital in them. If it injected capital, the firms would increase the value of shares Treasury already owns.
The Treasury emphasized that the agreement is "a binding legal obligation" and any potential congressional action in the future aimed at abrogating it would be "inconsistent with the U.S. government's long-standing history of honoring its obligations."
Such action would "also give rise to government liability to parties suing to enforce their rights under the agreement," the Treasury said.
Meanwhile, the Treasury made clear that the stock-purchase agreement protects debt and mortgage-backed securities issued or maturing after 2009. It also said that the ratings companies have reaffirmed the U.S.'s ratings status.
--Jessica
