Federal Takeover of Fannie Mae and Freddie Mac - Capital Infusion By The Treasury

Capital Infusion By The Treasury

The agreement the Treasury made with both GSEs specifies that in exchange for future support and capital investments of up to US$ 100 billion in each GSE, at the inception of the conservatorship, each GSE shall issue to the Treasury US$ 1 billion of senior preferred stock, with a 10% coupon, without cost to the Treasury. Also each GSE contracted to issue common stock warrants representing an ownership stake of 79.9%, at an exercise price of one-thousandth of a U.S. cent ($ 0.00001) per share, and with a warrant duration of twenty years.

The conservator, FHFA signed the agreements on behalf of the GSEs. The 100 billion amount for each GSE was chosen to indicate the level of commitment that the U.S. Treasury is willing to make to keep the financial operations and financial conditions solvent and sustainable for both GSEs. The agreements were designed to protect the senior and subordinated debt and the mortgage backed securities of the GSEs. The GSEs' common stock and existing preferred shareholders will bear any losses ahead of the government. Among other conditions of the agreement, each GSE’s retained mortgage and mortgage backed securities portfolio shall not exceed $850 billion as of December 31, 2009, and shall decline by 10% per year until it reaches $250 billion.