The process for ending government control of Fannie Mae and Freddie Mac could upend expectations for investors, according to a recent report from the Congressional Budget Office. While several strategies have been debated to end the government-sponsored enterprises’ conservatorships, the CBO closely examined two main approaches—each with significant consequences for both the Treasury and private shareholders.
In the first scenario, the U.S. Treasury would convert its senior preferred stock holdings in Fannie Mae and Freddie Mac into common stock. These senior preferred shares currently take priority for dividends and liquidations. The Treasury also holds warrants—essentially options—to buy additional common shares, representing its commitment to keep the GSEs solvent.
According to the CBO, the government could exchange these warrants for more common stock, then allow new public offerings of shares to raise capital and meet the requirements set by the Federal Housing Finance Agency. Over time, the Treasury would sell the shares it receives, potentially recouping around $170 billion from this process, the CBO estimates.
A second, and more drastic, option would see the FHFA place the GSEs into receivership. Under this process, the enterprises’ assets would be transferred to new entities—effectively winding down the originals. These successor companies would then sell common shares to private investors, holding a sizable portion of the proceeds to comply with capital requirements. The proceeds from liquidating the original entities would be distributed to their claimants in order of seniority.
However, CBO analysts conclude that the available amount would almost certainly fall short of the Treasury’s liquidation preference for its senior preferred stock, leaving nothing for other shareholders, such as holders of common or junior preferred stock.
Under receivership, the Treasury would likely recover $206 billion—about $36 billion more than if it pursued the conservatorship conversion strategy. The CBO notes that any portion of this that the Treasury agrees to forgo could result in some recovery for junior shareholders, but such a move is at the government’s discretion, not a requirement.
As GlobeSt.com and other observers have reported, ending the conservatorship of Fannie Mae and Freddie Mac will be a drawn-out process, marked by complex policy decisions and significant uncertainty for investors in both companies. Investors and market analysts are closely watching to see which route, if any, policymakers pursue—knowing that for many private shareholders, the potential for being left with nothing remains a very real risk, according to the CBO.
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