Treasury: GSE Debt Guarantees Good Past 2009

In a statement yesterday designed to clarify the government takeover of both Fannie Mae (FNM) and Freddie Mac (FRE), the government managed to provide tidebits of information many might have missed when the original bailout was announced. Chief among them? The fact that senior and subordinated debt holders, as well as agency MBS investors, are backed by the government past the 2009 expiration of the preferred stock purchase agreement, at least into 2010. “The holders of senior debt, subordinated debt, and mortgage backed securities issued or guaranteed by these GSEs are protected by the agreement without regard to when those securities were issued or guaranteed,” Treasury said in a statement. “Debt and mortgage backed securities issued or guaranteed both before and after December 31, 2009 are protected by the agreement. ” Media reports had suggested that Treasury officials moved Thursday to reassure international holders of debt in both GSEs, particularly in Asia, that the government’s commitment to standing behind each GSE was solid; the Treasury statement, HW sources said, was meant to build off of those reassurances given, particularly for long-term debt holders. The Treasury also clearly sought to reassure investors that the current agreement would not be changed by the next administration or a future Congress. “Some may speculate that a future Congress could pass a law that would abrogate the agreement,” the statement said, “but any such law would be inconsistent with the U.S. government’s longstanding history of honoring its obligations. “Such action would also give rise to government liability to parties suing to enforce their rights under the agreement.” Paulson told Bloomberg News earlier this week that the agreement to place Fannie and Freddie into conservatorship didn’t resolve all outstanding issues surrounding the GSEs, despite widespread belief that the entities were nationalized. Technically, a decision to nationalize — meaning giving the GSEs the full faith and credit the U.S. — would require an act of Congress. “We should be clear, is there a government guarantee or isn’t there?” Paulson said in an interview, which gets to the technicalities of the agreement. In other words, conservatorship is one thing; nationalization is another, and the Treasury’s move this past Sunday likely moved the answer to Paulson’s question into the next administration. Separately, administration officials now say they are actively considering putting both GSE’s debt onto the Treasury’s balance sheet, according to a report Thursday at Bloomberg. HW reported earlier in the week that Peter Orszag, director of the Congressional Budget Office, had recommended earlier this week that the GSEs be put onto the federal budget. “It is CBO’s view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget,” he said in a post on a CBO-sponsored blog. “The GSEs’ revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.” The Treasury holds a warrant for up to 79.9 percent of either GSE’s common stock and said Thursday that it may exercise its right “at any time during the 20-year life of the warrant.” Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.