Fannie Mae-No Politics (FNMA)

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It takes no special acumen to realize that the 2012 transaction was completely one-sided; FHFA and Treasury used a fancy set of legal maneuvers to strip both corporations of their assets for the sole benefit of the government. Generally, senior preferred shareholders are entitled to recover their principal and interest in full, after which their shares are cancelled. In this case, the government did precisely the opposite. It treated Fannie and Freddie as gifts that keep on giving, wiping out all shareholder profits.

This breach of duty is so blatant that the only serious question is how best to unscramble the omelet. To make a long story short, there are two ways forward. First, and easiest, is simply to annul the August 2012 Amendment so that the government uses its recent receipts to write down the principal and interest owed prior to that date. Second, and trickier, is to reevaluate the terms of the 2008 transaction and write down the size of the government’s senior preferred shares to fairly reflect the financial condition of the company at the same time.

ANOTHER LOVELY PIECE FROM STANDFORD!