August 17, 2012, The Net Worth Sweep, And Fairholme’s 16 Questions

Seeking Alpha - August 18, 2015 - August 19, 2015

By Wayne Olson

August 17, 2012, was both a memorable and a terrible day for Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA) (together known as the government-sponsored enterprises or GSEs) common stockholders and preferred stock holders. On this day, the 3rd Amendment to the Senior Preferred Stock Purchase Agreements (SPSPAs) was announced, which included the establishment of the net worth sweep, which “eliminates the possibility of the Enterprises having to borrow from U.S. Treasury (Treasury) to pay dividends, which could have eroded market confidence. This change also ensures all the Enterprises’ earnings are used to benefit taxpayers.”

In addition to the FMCC and FNMA common stocks, the net worth sweep also affects the Freddie Mac and Fannie common stocks. Table 1 provides summary information - circa mid-2012 - on two GSE preferred stocks, FMCKJ and FNMAS. These preferred stocks are notable because they were issued shortly before the financial crisis. May 2, 2012 and August 17, 2012 were high-volume days for these preferred stocks. The trading prices of these preferred stocks had gradually risen during the May 2, 2012 to August 16, 2012 period - and then dropped like a rock on August 17, 2012.

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