Option: Return Control to Stockholders Congres

Option: Return Control to Stockholders

Congress could decide to make little or no change to the GSEs’ charters. The GSEs would continue to be stockholder -owned companies with special charters and special obligations to support the housing market.

If this option were adopted, common stockholders would regain their right to elect the boards of directors, which in turn would appoint senior management. Dividends to preferred stockholders could resume. Dividends on the senior preferred stock owned by the federal government would continue. The GSEs would decide whether to retire the senior preferred stock held by the federal government. The boards of directors could resume common dividends . Bond payments would continue. As required by the contract with Treasury, the GSEs would shrink their portfolios by 15% annually until their portfolios were less than $250 billion.

Return to stockholder control implicitly assumes that the GSEs would return to profitability . Since all quarterly profits are paid to Treasury as dividends, the GSEs cannot accumulate funds necessary to leave conservatorship. In agreeing to conservatorship, the GSEs each gave the federal government warrants to purchase 79.9% of their common stock for $0.00001 per share. GSEs and the Government’s Role in Housing Finance: Issues for the 113th Congress Congressional Research Service 9.

Before effective control could be returned to common stockholders, the GSEs probably would need to reach some agreement with the federal government over the disposition of these warrants and the senior preferred stock. Based on similar past government intervention such as Chrysler in 1979, Continental Illinois in 1985, and more recently the troubled asset relief program (TARP), alternative dispositions of these warrants include federal government exercise, sale of the warrants through a federal government open market auction (which the GSEs could win), and federal government cancellation of the warrants.23 In early 2013, with its stock trading at approximately $0.25, Fannie Mae had a market capitalization of approximately $340 million. This would make 80% of the enterprise worth $270 million. In early 2013, Freddie Mac’s stock price was $0.30 and its market capitalization was slightly less than $185 million, making 80% of Freddie Mac worth $148 million. Because the GSEs “have succession until dissolved by Act of Congress,” it is not clear what limits there might be on an outside company purchasing the warrants.