Wikinvest Wire

Just one question on the Fannie and Freddie bailout

Sunday, September 07, 2008

The financial news media is all over today's nationalization of mortgage giants Fannie Mae and Freddie Mac by the U.S. government. Here's a list of links with enough reading material to keep anyone busy until sometime around mid-week:

There's just one question that comes to mind.

One of the terms of the agreement stipulates that each GSE will receive up to $100 billion from the Treasury Department (at least, that's the ceiling for now) in return for preferred stock as needed in order for the mortgage giants to remain solvent.

In an apparent effort to make it look like this takeover isn't going to cost the taxpayer a tidy sum over the next couple years, the GSEs are required to pay the Treasury a 10 percent annual dividend on this preferred stock once issued.

Given the way things are going these days, these dividend payments could add up over time - after all, ten percent of half the current $100 billion ceiling would be $5 billion.

Can the GSEs just sell more stock to the Treasury in order to make these payments?

If so, that would be a sweet deal.

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4 comments:

Paul said...

If the dividend isn't paid in cash, the rate adjusts to 12% and is cumulative until arrears are bought current. The terms are listed in one of the documents released today but I don't have the link handy. And I'm tired - its bed time.

staghounds said...

Didn't we have a contest about when this would happen?

Anonymous said...

Tim,
You've obviously never worked in finance, but your point is well taken. The preferred stock deal is akin to getting a cash advance on a credit card so you can make your minimum payment due.
- WD

staghounds said...

Except the minimum payment doesn't even cover the interest, and the principal is, what, $100 billion? $200? $628? A trillion?

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