Net Worth Sweep and GSE PSPAs

What is the Net Worth Sweep?

The Net Worth Sweep is the 3rd amendment to the Preferred Stock Agreements (PSPAs) between the Treasury and Federal Housing Finance Agency (FHFA) in 2012. The agreement, governing the bailouts of Freddie Mac and Fannie Mae, has been of huge contention. It was entered into on August 17th, 2012 by the Treasury and acting FHFA head Edward DeMarco.

The modification insured that Every Dollar of Earnings Fannie Mae and Freddie Mac Generate Will Benefit the Taxpayer. The original Treasury press release is available here.

The agreement required a faster wind down of the companies portfolios and replaced a 10 percent-fixed-rate dividend with a variable structure directly all net income and net worth to the Treasury.

The 3rd amendment is an unprecedented agreement and required that every dollar of the companies’ earnings and net worth would go to the benefit of the government. The government already had precedence over private investors with it’s Senior Preferred and warrants owning 79.9 percent of the company, which would easily insure taxpayers would be paid back and some.  This wasn’t enough as unwinding the government support and selling the warrants would take a lot of time.

This agreement allowed the government to jump ahead of private investors and at the same time avoid exercising it’s 79.9 percent warrants of the company which would put the almost $5 trillion in liabilities on the United States governments balance sheet.

3rd amendment aka Net Worth Sweep being challenged in Court

The agreement has been challenged in several different Federal District Courts including, D.C, Delaware, Northern Iowa, Texas, and Kentucky, and Federal Claims Court.  Investors charge (with good evidence from Discovery in Fairholme v United States) that the Government knew the company was about to reverse large (paper) losses it took in previous years via a re-evaluation of the GSEs deferred tax assets.

Additionally the government has gone to great lengths to claim privilege or hide over 11,000 documents in court related to the enacting of the Net Worth Sweep. Efforts are underway in the Federal Court of Claims in Fairholme v United States to review those documents. (See RollingStone: Why is Obama Administration trying to keep 11,000 documents)

GSELinks has an excellent set of court filings on these cases.

Currently shareholders have lost most cases, although appeals are on-going.  Shareholders did win a limited remand from the D.C. Court of Appeals under breach of contract for liquidation preferences and dividend rights. These claims are more applicable to Preferred Shares then Common Shares and will be evaluated in the D.C. Circuit Court under Judge Royce Lamberth. Lamberth had previously thrown out the case denying injunctive relief because of 4617 (d) in the Housing Economic Recovery Act of 2008 (HERA) which bars it, and saying the plaintiffs breach of contract claims were not yet ripe. The ripeness was overturned by the D.C. Court of Appeals.

Most courts have held that the HERA has provided a bar to injunctive relief which has stopped the lawsuits from proceeding on merits. Under Judge Sweeney in the Federal Court of Claims, Fairholme v the United States is in discovery and is evaluating this as a taking under the 5th amendment of the Constitution.

3rd Amendment to PSPAs

The 3rd amendment to the Preferred Stock Agreements is the Net Worth Sweep. This changed the original 10 percent dividend or payment in-kind of 12 percent in stock to the variable Net Worth Sweep.

Fannie Mae 3rd Amendment to PSPAs
Freddie Mac 3rd Amendment to PSPAs

2nd Amendment to PSPAs

Fannie Mae 2nd Amendment to PSPAs
Freddie Mac 2nd Amendment to PSPAs

1st Amendment to PSPAs

Fannie Mae 1st Amendment to PSPAs
Freddie Mac 1st Amendment to PSPAs

Original Agreement – September 2008

The Original Fannie Mae PSPAs and Freddie Mac PSPAs provided for the payment of a 10 percent dividend or a payment of 12 percent in-kind (via additional stock). Each GSE issued $1 billion of senior preferred with a 10% coupon. The GSEs also provided common stock warrants representing 79.9% of the the GSEs at a exercise price of ($0.00001) per share with a duration of 20 years.

Fannie Mae Original Preferred Stock Purchase Agreement with Treasury
Freddie Mac Original Preferred Stock Purchase Agreement with Treasury 

Miscellaneous Treasury Links Related to the PSPAs
Frequently Asked Questions: Treasury Senior Preferred Stock Purchase Agreement
Fact Sheet: Treasury Senior Preferred Stock Purchase Agreement
Fannie Mae Preferred Stock Certificate
Freddie Mac Preferred Stock Certificate​​