Thursday, February 18, 2010

Is Fannie Mae a Direct Obligation Now?

Got an email from a Series 7 customer who is attending a live "crash course" this week. Apparently, the instructor allowed an argument to persist over whether Fannie Mae is now a direct obligation of the US Government. I don't argue without doing my homework, so I went straight to FNMA's website and ended up reading key sections of their annual and quarterly reports. It only took a few minutes to verify that FNMA is still just a "GSE," or government sponsored enterprise. The federal government has placed a conservator over them, an agency of the federal government, and that conservator has authority to run the business. The federal government has agreed to provide hundreds of billions of dollars to FNMA, but that's not the same as saying that FNMA is a direct obligation of the US Government. It isn't. The US Treasury has given FNMA billions of dollars in exchange for senior preferred stock that converts to common stock at a set price. FNMA has all kinds of different preferred and common stock issues outstanding, but no dividends can be paid to any other preferred or common stock holder without the Treasury's approval, which means that right now the only dividends that will be paid are the ones paid on the "senior preferred stock" that the Government holds. The following line from the 10q clarifies everything: although our conservator is a US government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the US Government does not guarantee, directly or indirectly, our securities or other obligations.

So, I hope they didn't lose too much time to the "argument." Not sure why the instructor didn't think to look it up over lunch or during the break. And, I know for sure that the 65/66 can ask you to pick only GNMA--not Fannie or Freddie--as a direct obligation of the US Government, so stick with what you've learned.

Kind of interesting though, isn't it, that when the Treasury provides capital to a financial institution, it's typically done by buying senior preferred stock that converts to common stock. This way, if the capital infusion works, the common stock rises, Treasury sells at a profit, and the "taxpayers win." What if the capital infusion isn't enough and the company goes belly up, anyway? Then the taxpayers, you know, don't.

To watch a VIDEO presentation of this topic:

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