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RNC Suggests GSE Recap & Release is a Viable Option

September 15, 2017 at 1:27 pm, 5 comments

In its, “Resolution on Protecting Taxpayers by Restoring Safety and Soundness to Government-Sponsored Enterprises,” the Republican National Committee came close to endorsing a recapitalization of the GSEs and a release from conservatorship. The resolution says:


The Republican National Committee recognizes that the United States Treasury has recouped all of the money that it invested in Fannie Mae and Freddie during the 2008 financial crisis, plus over $80 billion in profits to date, and that the Treasury can generate an estimated $100 billion in additional cash profits by monetizing its warrants for 79.9% of each company’s common stock;

Treasury cannot sell common stock to the public until the Senior Preferred Stock Purchase Agreement is terminated and the GSEs are released from conservatorship.

More specifically, the GSEs cannot issue common stock unless investors believe they have a reasonable chance of capturing a future dividend stream paid after the companies have accumulated sufficient capital needed to weather a downturn. The senior preferred stock dividends— paid at a 10% rate or under the net worth sweep—would effectively prevent the companies from ever accumulating the requisite capital.

Also, common stock cannot be sold to the public if FHFA remains conservator, because the conservator “steps into the shoes of” the directors, officers and shareholders. So far, the conservator has agreed to the net worth sweep and other actions that seriously compromised the GSEs’ financial health.  Common shareholders would insist on a return to the checks and balances of traditional corporate governance.

Finally, the public would not buy common shares while shareholder litigation—brought by owners of the junior preferred and the pre-existing common—remained outstanding. The uncertainty of the outcome would be unacceptable to most investors.

The RNC may be tipping its hand in its description of the lawsuits:

RESOLVED, The Republican National Committee recognizes the sanctity of property rights in America, and acknowledges the need to resolve the outstanding claims of Fannie Mae and Freddie Mac shareholders in a manner that honors and respects the rule of law governing the rights of corporate stockowners;

Ordinarily, “the rule of law governing the rights of corporate stockowners,” refers to state corporate law, not the Housing Economic Recovery Act of 2008

5 comments - RNC Suggests GSE Recap & Release is a Viable Option

Anonymous - September 15, 2017 at 4:29 pm
Thanks for getting back into this.
anon - September 15, 2017 at 10:00 pm
Always pleasure to read your thoughtful analysis.
Thank you.
jr - September 16, 2017 at 12:55 am
What is your take on the sketchy last sentence in letter which implies that they are not entirely supportive of following rule of law or HERA. Such as change for when sweep which is illegal is processed. The narrative for Consertivatorship and the sweep in the first place is false and therefore spspa should be void as it was a contract that choreographered under false a pretense.
zach - September 16, 2017 at 9:39 pm
Common stock should have never been sold to the public if intentions were the demise of Fannie Mae & Freddie Mac and their shareholder's shares.

I hope this is being presented or will be presented in the courts.
Lawrence OConnell - September 18, 2017 at 9:27 am
This continued action by the government only shows us it's all about money. Republican or Democrat, it's all about serving themselves instead of the taxpayer. What a poor excuse to steal shareholders investments. Unfortunately the average taxpayer doesn't understand or care, thats why the government is stalling to resolve this issue. TBTF banks who caused this problem in the first place not only were caught with there hands in the cooking jar, they actually we're rewarded. I voted for President Trump and believed that he would address this problem and set it straight. I don't trust the S. Mnuchin the treasury secretary, a Goldman Sachs guy like all the other secretaries of treasury in the past. Guess what... It's nothing but a big club and you and I are not in it.
'sad'.

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