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: https://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_GSE_508.pdf