A First Look Inside the Fannie / Freddie Bailout Plan

A First Look Inside the Fannie / Freddie Bailout Plan
http://seekingalpha.com/article/94304-a-first-look-inside-the-fannie-freddie-bailout-plan
Paul Kedrosky
posted on: September 07, 2008

Details on the just-announced Fannie/Freddie bailout plans were initially scant, but the OFHEO and Treasury websites now have most of what you're looking for.

Here is the gist:
1. The two mortgage giants will open Monday under Treasury control
2. New CEOs and boards are inbound
3. Common shareholders are being massively diluted as preferred of a preferred/warrant deal that is being held out as offering taxpayers upside.
4. The U.S. is now buying MBS securities direct from GSEs in the open market, and there is no explicit limit specified.
5. The U.S. just added a planet-sized new (red) line item on its national balance sheet.

For those of you who like more words, here is OFHEO's description of the bailout's key elements:

There are several key components of this
conservatorship:

First,Monday morning the businesses will open as normal,
only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per
month without capital constraints.

Third, as the conservator, FHFA will assume the power of the Board and management.

Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.

Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp. I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally
strong non-executive chairmen.

Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.

Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

Eighth, all political activities -- including all lobbying -- will be halted immediately. We will review the charitable activities.

Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market.

One of the three facilities he will be mentioning is a secured liquidity facility which will be not only for Fannie Mae and Freddie Mac, but also for the 12 Federal Home Loan Banks
that FHFA also regulates. The Federal Home Loan Banks have performed remarkably well over the last year as they have a different business model than Fannie Mae and Freddie
Mac and a different capital structure that grows as their lending activity grows. They are joint and severally liable for the Bank System’s debt obligations and all but one of the 12 are profitable. Therefore, it is very unlikely that they will use the facility.

And more here from the WSJ, straight from Treasury's description of the shareholder-diluting PSPA:

The Treasury said its senior preferred stock purchase agreement includes and
upfront $1 billion issuance of senior preferred stock with a 10% coupon from
each GSE, quarterly dividend payments, warrants representing an ownership stake
of 79.9% in each firm going forward, and a quarterly fee starting in 2010.

Lots more details to come, I have to think. The market is going to initially swoon for this, but Tuesday will be interesting as the ripple effects hit.