PrefBlog

A WSJ article states:

The Treasury said its senior preferred stock purchase agreement includes and upfront $1 billion issuance of senior preferred stock with a 10% coupon from each GSE, quarterly dividend payments, warrants representing an ownership stake of 79.9% in each firm going forward, and a quarterly fee starting in 2010.

A press conference was held by Treasurey Secretary Paulson and FHFA Director Lockhart, with a press release issued by Treasury:

[Paulson said] Their statutory capital requirements are thin and poorly defined as compared to other institutions.

… but did not report his resignation.

[Lockhart said] To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

Lockhart also disclosed some startling news:

While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses.

Amazing! Common shareholders take first loss, preferred shareholders take second loss. Who would have thunk it?

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

This is interesting. Is Treasury preparing for a pre-packaged Chapter 11 at some time in the future?

Lockhart concluded:

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk.
…
In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.

Several reports are attached:

REPORTS

• FHFA Director Lockhart Remarks on Housing GSE Actions
• Fact Sheet: FHFA Conservatorship
• Fact Sheet: Treasury Preferred Stock Purchase Agreement
• Fact Sheet: Treasury MBS Purchase Program
• Fact Sheet: Treasury GSE Credit Facility

From the Preferred Stock Purchase Agreement:

In exchange for entering into these agreements with the GSEs, Treasury will immediately receive the following compensation:

• $1 billion of senior preferred stock in each GSE
• Warrants for the purchase of common stock of each GSE representing 79.9% of the common stock of each GSE on a fully-diluted basis at a nominal price

…
The following covenants apply to the GSEs as part of the agreements.

o Without the prior consent of the Treasury, the GSEs shall not:

• Make any payment to purchase or redeem its capital stock, or pay any dividends, including preferred dividends (other than dividends on the senior preferred stock)
• Issue capital stock of any kind
• Enter into any new or adjust any existing compensation agreements with “named executive officers” without consulting with Treasury
• Terminate conservatorship other than in connection with receivership
• Sell, convey or transfer any of its assets outside the ordinary course of business
  except as necessary to meet their obligation under the agreements to reduce their portfolio of retained mortgages and mortgage backed securities

• Increase its debt to more than 110% of its debt as of June 30, 2008
• Acquire or consolidate with, or merge into, another entity.

This entry was posted on Sunday, September 7th, 2008 at 11:44 am and is filed under Miscellaneous News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.