let's see what the guy who made the plan says about that...
“The common shares would be substantially diluted by the exercise of the Treasury warrants options, but they would still exist,” Phillips said.
The result, Phillips said, is an unusual circumstance where there are both historic shareholders who suffered catastrophic losses when the companies failed, and opportunistic investors who purchased the stocks at pennies on the dollar in the hopes of a windfall when the companies emerge from conservatorship.The other oddity about the GSEs is that in conservatorship both the shareholders and the company leadership are essentially powerless. That leaves Fannie and Freddie under the control of the director of the Federal Housing Finance Agency, as conservator, and the secretary of the Treasury, through the terms of its preferred stock purchase agreements.Phillips said legally there are two paths forward for the GSEs. If FHFA Director Mark Calabria decides the two entities cannot be saved, he can put them in receivership and liquidate them. “The other option,” Phillips said, “is simply to have them exit conservatorship, which is an act that the Treasury secretary and the FHFA director can decide to do when they want under the PSPAs.”Calling receivership impractical, he said, “The companies should leave conservatorship, and these shareholders would continue to have their rights.”The former Treasury official then sketched out what he called “the math of the situation.”Noting that Fannie and Freddie are strong earners with reasonable returns on equity, he said, “I truly believe they can be fully recapitalized in four to five years, between retained earnings and raising shares from the public.”That new capital could come in the form of an initial public offering or, more precisely, what Phillips called a “re-IPO,” a capital raise by a company that, like Fannie and Freddie, has been dormant for some time.Phillips also reminded the audience that Treasury owns warrants to buy 80% of the common stock of the companies. That too, he said, will have to be accounted for in any recapitalization plan for the GSEs.This complex mix — historic shareholders and speculators; common, junior preferred and senior preferred stocks; Treasury’s ownership of senior preferred stocks and warrants on the commons; and finally, multiple litigants fighting it out in court —makes any recap and release of Fannie and Freddie daunting.Phillips suggested one way to proceed: Treasury should write down its senior preferred stocks.“The government did put $190 billion into these companies,” he said. “But they’ve now received dividends in excess of $300 billion. That’s a pretty good private equity deal. Now, we just have to turn the page on how we got here.”Phillips then offered a plan to move the net worth of Fannie and Freddie from negative to positive.“I think the only way to square the circle and give shareholders appropriate treatment is to really respect the rights of the current shareholders,” he said. That means selling new shares without completely wiping out current common shareholders.“The common shares would be substantially diluted by the exercise of the Treasury warrants options, but they would still exist,” Phillips said. “I think that a sensible path forward would also include an exchange of the junior preferred shares and the common shares to align their interests in the exercise.”But these moves wouldn’t be sufficient to put Fannie and Freddie in the black again, Phillips acknowledged.“We want a positive net worth,” he said. “Right now, we still have a negative net worth because of the bailout. But if the Treasury … writes down the senior preferred, that’s a big part of getting to zero.”
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