#Fanniegate, Lamberth Jury Trial, Day 1

Privatize Fannie Mae and Freddie Mac to Access $200B for Administration Priorities while Lowering Mortgage Rates

Overview

Fannie Mae and Freddie Mac are extremely profitable businesses, with combined annualized profits of $28.4 Billion  (2024Q3 [1] [2]).  Historical earnings ratios would indicate a combined valuation of approximately $280 Billion.  The US Treasury controls 80% of the common equity and has a large senior preferred equity position.  Treasury has already made more money through dividends than they invested in the companies, and now stands to make an additional profit of approximately $200 Billion which can be spent on any administration priorities, from border security to starting new cities.  However, accessing this capital will require moving quickly to privatize Fannie Mae and Freddie Mac in order to establish market certainty so that valuations can return to normal and Treasury's equity position can be liquidated progressively over the course of the entire administration.  

This will require the following simple actions that Treasury can take immediately in coordination with FHFA:

1. Exercise Treasury's warrants for 80% of the common equity
2. Resolve the Senior Preferred Shares (SPS)
3. Make a deal to convert the Junior Preferred Shares or resume dividends
4. Raise ~$70B of capital through a secondary offering, OR enter into a letter agreement to allow reasonable dividends to be paid immediately while continuing to build capital
5. Begin paying dividends on the common stock
6. Progressively liquidate Treasury's common stock position over the course of the administration

These simple steps could be achieved in a matter of months and would result in a steady income to Treasury of ~$50 Billion per year which could be used to advance the administration's priorities.  Failure to act quickly would leave some or all of this historic opportunity for a future administration to use as they see fit.

History

The ongoing conservatorship of Fannie Mae and Freddie Mac (since 2008) became a de-facto nationalization when the Obama Administration began a policy of sweeping all the profits of these companies to the treasury in 2012 (the so-called Net Worth Sweep).  The Obama Administration was able to use these funds to compensate insurance companies for their ACA losses, and this continued even after congress explicitly defunded those programs [3] [4].  Thus, it is well established that when the government realizes profits from Fannie Mae and Freddie Mac, Treasury can allocate these funds almost without restriction.  The current administration could use these funds to pay for border security, for the proposed renovation and beautification of cities, or as seed money for the proposed new cities.  

As part of their conservatorship and in order to provide a backstop for nervous bondholders during the financial crisis, Treasury entered into the Preferred Stock Purchase Agreement (PSPA) which would provide a capital backstop by agreeing to purchase senior preferred stock (SPS) in Fannie Mae and Freddie Mac if they ever had negative net worth.  The companies made use of this agreement during the housing crisis era (2009-2012), and Treasury has purchased $191 Billion of SPS with a remaining commitment of ~$250 Billion.  The SPS originally carried a 10% dividend, but this was changed in 2012 to an unprecedented and punitive "net worth sweep" (NWS) in which Treasury took all of the companies profits as a "dividend".  Needless to say this lead to several legal challenges but the Supreme Court ruled in favor of the Net Worth Sweep [5].  In 2019 the Net Worth Sweep was paused to allow the companies to rebuild capital, although the current rule would turn the net worth sweep back on once the companies are full capitalized with all buffers [6].  Regardless, over the course of the Net-Worth-Sweep (NWS) era (2013-2019) Treasury swept over $300 Billion in profits from the companies.  

Resolving Capital Requirements and Beginning Dividends

Treasury has two options for a quick release with a strong valuation.  

1. A small capital raise of ~$70B would meet the ERCF [7] requirement to allow a reasonable dividend.  
2. Alternatively, Treasury could enter into a letter agreement with Fannie Mae and Freddie Mac to temporarily allow a percentage of income to be paid as dividends as long as the companies continue to build capital toward the ERCF requirements.

The companies have built a combined net worth of $147 Billion and would need a small capital raise of around $70 Billion in 1H2025 to reach a capital level of $225B ($190B minimum capital + $35B which is 25% of their capital buffer to allow paying dividends) (all data as of 2024Q3 [1] [2]).  This capital level would allow the companies to pay out 20% of their income as dividends (see ERCF [7]), which would amount to a dividend of approximately $5.2 Billion, which would be ~1.8% at a $280 Billion valuation.  Moreover, the remaining income would continue to build capital so that in 2027 they would reach 50% of their capital buffer and could double the dividend.  This means that Treasure can maximize their total profit by liquidating their equity position slowly over the course of the next four years as the companies build capital and increase dividends leading to increased valuations.  

Resolving the Senior Preferred Stock Purchase Agreement (SPSPA)

With the outstanding balance of $191 Billion of SPS (which carry an even higher liquidation preference), the companies have a very unusual capital structure making them difficult to value.  Treasury can maximize the valuation of the companies by resolving the SPS to allow a traditional market valuation.  There are several possible methods of resolving the SPS:

• The SPS could be considered to have been paid back through the unprecedented and enormous amounts paid to treasury through the net worth sweep.
• The SPS could be converted to common equity, increasing Treasury's holding above the current 80% common equity control.
• The SPS could be converted to a fixed dividend at a less punitive rate.

Now that the companies have historically large capital buffers, the PSPA could be cancelled; however Treasury could also choose continue to provide this additional buffer to ensure market stability by simply leaving a nominal outstanding amount of SPS liquidation preference outstanding (e.g $1 Billion).

Resolving the Junior Preferred Shares (JPS), Legacy Common Shares, and Legal Considerations

Legacy common shareholders only control 20% of the current common equity and so once the Treasury exercises its warrants it would have a controlling interest in the companies.  The Junior Preferred Shares have a combined liquidation preference ("par value") of ~$33 Billion and would require approximately $2 Billion per year in dividends to be paid before common dividends could be paid.  Alternatively, the JPS holders would likely accept a reasonable deal to convert to common shares once the SPS have been resolved.  This would simplify the capital structure or allow additional capital to be raised through new preferred share issuance in a capital raise scenario.  While there were many legal challenges to the unprecedented net worth sweep and questionable actions by the conservator FHFA (which was found by SCOTUS to be unconstitutionally structured [5]); the legal issues have mostly been resolved and remaining liability would be de minimus, especially if the JPS accept a conversion.