PAYDOWN --- The Treasury is actually being paid down.
This is how I see it. The Treasury owns 1,000,000 shares of Senior Preferred stock that actually has a face value of $1000.00 a share.
According to the Treasury reports, the value of those shares is increased with the amount of the draw that the GSE's had on the Treasury. So with a total draw of 185.5 billion, that increased the share value.
Senior Preferred Stock Purchase Agreements (SPSPAs)
Under the SPSPAs, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting variable liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) a non-transferable warrant for the purchase, at a nominal cost, of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September 7, 2028. Through December 31, 2012, the senior preferred stock accrues dividends at 10.0 percent per year, payable quarterly. Under the amended SPSPAs, the quarterly dividend payment will change from a 10.0 percent per annum fixed rate dividend to an amount equivalent to the GSE’s positive net worth above a capital reserve amount. The capital reserve amount is initially set at $3.0 billion for calendar year 2013, and declines by $600 million at the beginning of each calendar year thereafter until it reaches zero by calendar year 2018. The GSEs will not pay a quarterly dividend if their positive net worth is not above the required capital reserve threshold; in such cases, the Treasury may be required to provide funding pursuant to the amended SPSPAs.
Cash dividends of $18.4 billion and $15.6 billion were received during fiscal years ended September 30, 2012, and 2011, respectively. In addition, beginning in fiscal year 2011, the GSEs were scheduled to begin paying Treasury a Periodic Commitment Fee (PCF) on a quarterly basis, payable in cash or via an increase to the liquidation preference. This fee may be waived by Treasury for up to 1 year at a time, if warranted by adverse mortgage market conditions. Treasury waived the PCF payments for the calendar years 2012 and 2011 given that the imposition of the PCF at that time would not fulfill its intended purpose of generating increased compensation to the Government. Commencing January 1, 2013, the PCF will no longer be required pursuant to the amended SPSPAs.
The SPSPAs, which have no expiration date, provide that Treasury will disburse funds to the GSEs if at the end of any quarter, the FHFA determines that the liabilities of either GSE exceed its assets. The maximum amount available to each GSE under this agreement was originally $100 billion in fiscal year 2008, was raised to $200 billion in fiscal year 2009, and was replaced in fiscal year 2010 with a formulaic cap. This formulaic cap allows continued draws for a 3-year period ending December 31, 2012, at amounts that will automatically adjust upwards quarterly by the cumulative amount of any net deficits realized by either GSE and downward by the GSE's positive net worth, if any, as of December 31, 2012, but not below $200 billion, and will become fixed at the end of the 3-year period. At the conclusion of the 3-year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements (referred to hereafter as the “Adjusted Caps”). Draws against the funding commitment of the SPSPAs do not result in the issuance of additional shares of senior preferred stock; instead the liquidation preference of the initial 1,000,000 shares is increased by the amount of the draw.
Actual payments to the GSEs for fiscal years ended September 30, 2012, and 2011, were $18.5 billion and $20.8 billion, respectively. Additionally, $9.0 billion and $316.2 billion were accrued as a contingent liability as of September 30, 2012, and 2011, respectively. This accrued contingent liability is based on the projected draws under the SPSPAs. It is undiscounted and does not take into account any of the offsetting dividends which may be received as a result of those draws.
OMB issued guidance to Treasury on October 7, 2009, allowing the use of fair value accounting for non-Federal securities beginning with reporting for fiscal year 2009. As a result, the GSE investments are reported at fair value as of September 30, 2012, and 2011. In accordance with SFFAS No. 7, the annual valuation is classified as usual and recurring and thus a change in value is recorded as an expense or revenue to the financial statements. Annual valuations are performed as of September 30 for the preferred stock and warrants.
The current dividend DO count towards the value of those Preferred Shares. Thus the amount that the GSE's "owe" the Treasury is actually being paid down.
Senior Preferred Stock and Warrants for Common Stock
In determining the fair value of the senior preferred stock and warrants for common stock, Treasury relied on the GSEs’ public filings and press releases concerning its financial statements, projection forecasts, monthly summaries, quarterly credit supplements, independent research regarding high-yield bond and preferred stock trading, independent research regarding the GSEs’ common stock trading, discussions with the GSE’s management, and other information pertinent to the fair valuations. Because of the nature of the instruments, which are not publicly traded and for which there is no comparable trading information available, the fair valuations rely on significant unobservable inputs that reflect assumptions about the expectations that market participants would use in pricing.
The fair value of the senior preferred stock considers the amount of forecasted dividend payments. The fair valuations assume that a hypothetical buyer would acquire the discounted dividend stream as of the transaction date. The significant decline in the fair value of the senior preferred stock at September 30, 2012, compared to 2011 is primarily due to a decrease in expected dividend payments and an increase in the discount rate used in the current year’s valuation to reflect more of the variable nature of the future cash flows anticipated as a result of the amended SPSPAs compared to the prior fiscal year.
The fair value of the warrants are impacted by the nominal exercise price and the large number of potential exercise shares, the market trading of the common stock that underlies the warrants as of September 30, the principal market, and the market participants. Other discounting factors are the holding period risk related directly to the amount of time that it will take to sell the exercised shares without depressing the market and the other activity under the SPSPA.
This information posted can be found at the Treasury website here
fms.treas.gov/finrep12/note_finstmts/fr_notes_fin_stmts_note11.html
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