When Fannie Mae ("Fannie" (FNMA.OB)) and Freddie Mac ("Freddie" (FMCC.OB)) were placed into conservatorship by the newly-created Federal Housing Finance Agency (the "FHFA") on September 7, 2008, one of the goals was to "preserve and conserve the Compan[ies'] assets and property and to put the Compan[ies] in a sound and solvent condition" (Pg.2). And if economic conditions allowed for the possibility of such a recovery, the FHFA had a fiduciary duty to facilitate such a recovery for the benefit of both the taxpayers and the companies' shareholders.
Well, after almost five years it has become quite apparent that it is possible for both Fannie and Freddie to recover. In fact, the May 9th and 8th news releases from both Fannie and Freddie, respectively, all but confirm their ability to become solvent under the terms of their conservatorships. However, the recent amendment in August 2012 to the Senior Preferred Stock Purchase Agreements by the FHFA and the U.S. Treasury (the "Treasury") have made it all but impossible for the firms to recapitalize and exit their conservatorships. In other words, by placing this artificial barrier in the way of these two companies, the FHFA as conservator has breached its fiduciary duty and is, thus, in violation of the conservatorship agreements as well as its covenants to the shareholders. Even the Congressional Research Service stated in their September 2009 report to Congress that "by law, [Fannie's and Freddie's] conservatorship[s] will end if they meet the minimum capital requirements" (Pg.7).
This action seems even more egregious when you consider that if the two companies were permitted to apply earnings in excess of the 10.0% annual dividend amount to the aggregate liquidation preference, the senior preferred stock would be retired on or before the end of 2015 without the need for the Treasury to exercise its warrants. Let's take Fannie as an example. According to its May 9th news release, the company is set to send the Treasury approximately $59.4 billion on or before June 30th, all of which is considered by the Treasury a "dividend" payment. However, if the original agreement were still in effect, approximately $56.5 billion would be applied to the aggregate liquidation preference, leaving a balance of approximately $60.6 billion. If we assume that, going forward, Fannie will have quarterly earnings available for repayment averaging approximately $7.5 billion, the company will be able to repay its debt to the taxpayers in full (including the 10.0% annual dividend) by the fourth quarter of 2015.
Consequently, Ralph Nader and his associates are working on one last appeal to Congress and Treasury Secretary Lew to do the right and legal thing for both the taxpayers and existing shareholders. Mr. Nader's letter, dated May 23rd, chronicles the questionable actions taken by the FHFA and the Treasury, while providing a basis for the release of these two companies from their respective conservatorships.
If, however, lawmakers and government officials remain unconvinced and undeterred from their present course, there is a strong possibility that legal action could be taken this year. I thoroughly believe this would be the right direction to take, if the FHFA and the Treasury are to be compelled to comply with the intended purposes of the conservatorships that obligate them to permit the companies to be 1) recapitalized, 2) released from conservatorship, 3) returned to the shareholders, and 4) relisted on the New York Stock Exchange.
If Congress still wishes to reform these two entities, then they should do so but not at the expense of the taxpayers or the shareholders. A promise was made on September 7, 2008 to the shareholders of both companies by the FHFA and the Treasury, and that promise is being broken slowing over time.