The following section is a part of the SENIOR PREFERRED STOCK PURCHASE AGREEMENT (SPSPA) between the US Treasury and Fannie Mae/Freddie Mac.

The clause states that if any part of the agreement is determined to be illegal or unenforceable, then the whole agreement should be rescinded. In other words, if the Third Amendment (which is obviously a integral part of the whole) is determined to be illegal, then the Warrants are also illegal.

6.12. Non-Severability. Each of the provisions of this Agreement is integrated with and integral to the whole and shall not be severable from the remainder of the Agreement. In the event that any provision of this Agreement, the Senior Preferred Stock or the Warrant is determined to be illegal or unenforceable, then Purchaser may, in its sole discretion, by written notice to Conservator and Seller, declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate.

The following section is also contained in the SPSPA:

6.7. Effect of Order; Injunction; Decree. If any order, injunction or decree is issued by any court of competent jurisdiction that vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of Conservator as conservator of Seller or otherwise curtails Conservator’s powers as such conservator (except in each case any order converting the conservatorship to a receivership under Section 1367(a) of the FHE Act), Purchaser may by written notice to Conservator and Seller declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate.

If a court rules that the Third Amendment is illegal, it will effectively be submitting an order that “curtails the Conservator’s powers.” This court order could lead to “declaring the entire Agreement null and void.”

Another section in the SPSPA describes its foundational authority:

4.3. Authorization and Enforceability. All corporate or other action on the part of Seller or Conservator necessary for the authorization, execution, delivery and performance of this Agreement by Seller and for the authorization, issuance and delivery of the Senior Preferred Stock and the Warrant being purchased under this Agreement, has been taken…The Agency is acting as conservator for Seller under Section 1367 of the FHE Act. The Board of Directors of Seller, by valid action at a duly called meeting of the Board of Directors on September 6, 2008, consented to the appointment of the Agency as conservator for purposes of Section 1367(a)(3)(I) of the FHE Act, and the Director of the Agency has appointed the Agency as Conservator for Seller pursuant to Section 1367(a)(1) of the FHE Act, and each such action has not been rescinded, revoked or modified in any respect.

I proved in an earlier post that Hank Paulson’s version of events on September 5 and 6, 2008 as described in his book On the Brink contradicts the official record of events as chronicled by the official Treasury calendar record. If anyone is ever allowed to review the corporate records of Fannie and Freddie it will either substantiate or refute my claim that the boards of both companies did not hold an official board of directors meeting. If there was no meeting, there was no board consent thus invalidating the entire conservatorship.

Also, if the Third Amendment is found to be illegal, there is a provision in the stock certificate that would reclassify the money returned to the Treasury as repayment of the money the Government injected into the companies:

Prior to termination of the Commitment, and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, out of funds legalJy available… 

Further, the Government’s action with Fannie/Freddie has been compared to its action with AIG. In 2008, the Treasury and Federal Reserve committed $182B to bailout AIG. In return, the Government received $205B from AIG — netting the Government $23B. The Government received and exercised 79.9% warrants in AIG, similar to Fan/Fred. The point is that the warrants were used to pay down the money AIG borrowed from the Government.

Details of the payback can be found here and here.

According the the ProPublica Bailout Tracker, Fannie and Freddie received $182B (similar to AIG) and have returned $250B netting the Government $68B — approximately three times the amount returned by AIG.

It is clear the purpose of the warrants in both cases (both equalling $182B) was to recapture the money injected into the companies. Therefore, there is no need for the Government to exercise the Fan/Fred warrants.

The Financial Times had a recent article that stated if the Government exercised the Fan/Fred warrants it could realize up to $200B from the sale. Think about that for a moment… The Government injected $182B into Fan/Fred; received $250B (to date) in return and would make an additional $200B if they exercised the warrants — a combined return of $450B…!

It is simply ludicrous to suggest the Government is owed $450B on a $182B injection (which many believe was unnecessary in the first place).

If the Government thought they needed to exercise the Fan/Fred warrants to recoup their investment, they would have already done so. With AIG, the bailout occurred in 2008 and the Treasury concluded all of their warrant transactions by 2013.

In summary, the Government acted outside its legal authority when enacting the conservatorship and the original SPSPA. It then acted greedy and reckless when it enacted the Third Amendment. Therefore, the Government should pay the consequence by having the entire senior preferred stock purchase agreement rescinded and unwound as clearly stated in their own Non-Severability clause in the SPSPA.

Repayment and Warrants

There has been much debate on whether Fannie and Freddie ever had the ability to repay the money that the Treasury forced upon them. Many in the government — and even in the media — claim that Fannie and Freddie lack the option to repay the money received from Fan/Fred by Treasury by stating that it is merely a return on investment.

However, reviewing this attached Treasury report published in 2012 it clearly states that Treasury believed then that Fan/Fred had not only the ability to repay, but also states repayment was likely.

Further, Treasury makes it clear that the warrants were merely a vehicle to recoup the investment into the entities. So, if all the money is returned to the Treasury, the warrants are pointless. This Treasury document claims nothing about “punitive terms” or “risk/reward return.” No, it clearly describes the purpose of the warrants — to recoup the original investment.

The following passage appears on page 8 of the Treasury report:

“Probability of the Enterprises and the FHLBs fulfilling the terms of their obligations – The structure of the PSPAs, with their liquidation preference over all other equity, including preferred equity, combined with the PSPAs’ restrictions on debt issuance, enhance the probability of both Fannie Mae and Freddie Mac ultimately repaying amounts owed.

Need to maintain the Enterprises’ and the FHLBs’ status as private shareholder-owned companies – Fannie Mae and Freddie Mac may emerge from conservatorship to resume independent operations, or they may emerge in some other form reflecting legislative changes to their congressional charters. Conservatorship preserves the status and claims of the preferred and common shareholders. The value of the warrants issued to the government under the terms of the PSPAs could potentially increase, thereby providing enhanced value to the taxpayers. Upon the government’s exercise of the warrants, the GSEs would be required under the terms of the PSPAs to apply the net cash proceeds to pay-down the liquidation preference of the senior preferred stock.”


The Treasury report can be found here: