The Original Agreement

Senior Preferred Stock Purchase Agreements (SPSPA)

"Under the SPSPAs, Treasury initially received from each GSE: (1) 1,000,000 shares of non-voting variable liquidation preference senior preferred stock with a liquidation preference value of $1,000 per share and (2) a non-transferable warrant for the purchase at a nominal cost of 79.9 percent of common stock on a fully-diluted basis. The warrants expire on September 7, 2028."

As part of its bailout agreements with Fannie and Freddie, the GSEs granted the government warrants to purchase just under 80% of the common shares of the two GSEs at a strike price of $0.00001 per share. The warrants were merely a backstop to pay back the taxpayers in case Fannie and Freddie could not pay back the Treasury. However, now that Fannie and Freddie are profitable, and paying back the loan to Treasury, the warrants cannot be exercised without violating the "Takings Clause" of the Fifth Amendment of the U.S. Constitution. In other words, the government, by law, is required to release Fannie and Freddie from conservatorship when the loan is repaid to Treasury and the businesses have enough liquidity/cash on the books ($150-$200 billion), as a backstop, to prevent another bailout from occurring.

We trust that President Obama is a fair and straight shooter. This Administration saved Chrysler, GM, AIG and the banking system, and resisted calls to nationalize a single private entity. So, in keeping with that management style: there is little reason to believe that the Obama Administration would be compelled to liquidate Fannie and Freddie. There is chatter about the Obama Administration spinning the GSEs off to the private sector; however, they will retain strong oversight of the loan originators and banks,  perhaps with an appointed government entity, in a position of strong influence on the Board of Directors -- keeping F&F clear of non-chartered activity.

We have great confidence that Mr. Obama will respect the rights of all stakeholders, including those with positions in F&F common stock.

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