Fannie CEO Wants To Attract Risk Capital To Protect Taxpayers

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Glen Bradford
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Summary

  • Fannie Mae management is very excited about the PSPA Amendment as it moves them towards eventually exiting conservatorship.
  • Fannie Mae management says that the best way to protect taxpayers is to become investable attract risk capital from the private sector.
  • Freddie Mac meets all of its goals to prepare for a transition out of conservatorship.

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two profitable companies that are retaining earnings on their path out of conservatorship that just put out their annual reports this past week. Last month, two letter agreements were signed between prior Treasury director Steven Mnuchin and FHFA director Mark Calabria (1) (2). These agreements finally put a complete stop to any government cash sweeps that prevented the companies from being able to recapitalize and exit conservatorship. As such, the cash sweep was terminated starting in September of 2019 and completely in January of 2021.

Even though the cash payments are no longer being made, the economics of the net worth sweep that prevents non-governmental equity holders from having any material economic interest in the companies were left in place. This makes the companies uninvestable. At their current rate of earnings and capital level, it would take them over a decade to retain enough earnings for them to exit conservatorship. On top of that, when they do eventually retain enough earnings to trigger an end to conservatorship, their current agreement continues to sweep all of their earnings to the government.

Investment Thesis

Government officials are arguing that the companies are at risk in failing in the next housing crisis until they are able to raise private capital. In Section IX of their most recent letter agreements, Treasury and FHFA have committed to restructure the equity to make this possible as part of the letter agreements. Settling the litigation is a pre-requisite to raising third party capital as part of the letter agreement as part of amended section 5.2. The focus then shifts to Treasury and Janet Yellen's willingness to take the actions necessary to settle the pending litigation. Assuming Treasury writes down the liquidation preference of its senior preferred stock, Fannie and Freddie will

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Glen Bradford profile picture
4.61K Followers
Glen Bradford MBA contributes to Seeking Alpha primarily to read people's negative feedback so that he can avoid generating unnecessary losses. "Uncertainty will certainly work for me." - Glen Bradford March 2009.Glen wishes you a bright sunny warm day filled with smiles, laughter, and love.The Supreme Court got it wrong, which is sad, but it's not over yet.

Disclosure: I am/we are long FMCCH, FMCCG, FMCCI, FMCCL, FMCCM, FMCCN, FMCCP, FMCCS, FMCKP, FNMAO, FNMAP, FNMFO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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