Fannie Mae 2008 Annual Report Download - page 288

Neither the conservatorship nor the terms of our agreements with Treasury changes our obligation to make
required payments on our debt securities or perform under our mortgage guaranty obligations.
As described in “Note 17, Stockholders’ Equity (Deficit),” the senior preferred stock purchase agreement
includes a number of significant restrictions which prohibit us from engaging in a number of activities without
prior written approval from Treasury. The senior preferred stock purchase agreement also caps the size of our
mortgage portfolio at $850.0 billion through December 31, 2009, and then requires that we reduce the size of
our mortgage portfolio by 10% per year (based on the size of the portfolio on December 31 of the prior year)
until it reaches $250.0 billion.
The conservatorship has no specified termination date. There can be no assurance as to when or how the
conservatorship will be terminated, whether we will continue to exist following the conservatorship or what
our business structure will be during or following the conservatorship.
Financial Terms and Financial Statement Impact of Senior Preferred Stock Purchase Agreement
Pursuant to the senior preferred stock purchase agreement, Treasury made a commitment to provide up to
$100.0 billion in funding as needed to help us maintain a positive net worth. As consideration for Treasury’s
funding commitment, we issued one million shares of senior preferred stock and a warrant to purchase shares
of common stock to Treasury. Treasury’s funding commitment is intended to avoid a mandatory trigger of
receivership under the Regulatory Reform Act. Our net worth, defined as the amount by which our total assets
exceed our total liabilities, as reflected on our consolidated balance sheet, was negative $15.2 billion as of
December 31, 2008.
The senior preferred stock is senior in liquidation preference to our common stock and all other series of
preferred stock. Beginning on March 31, 2010, we are obligated to pay Treasury a quarterly commitment fee,
which will begin accruing on January 1, 2010. The initial amount of the fee will be determined by
December 31, 2009, with resets at five-year intervals thereafter. In lieu of paying Treasury this fee, we may
elect to add the amount of the fee to the liquidation preference of the senior preferred stock. Treasury may
waive the quarterly commitment fee for up to one year a time, in its sole discretion, based on adverse
conditions in the U.S. mortgage market.
On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price,
shares of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on
the date Treasury exercises the warrant. Treasury has the right to exercise the warrant, in whole or in part, at
any time on or before September 7, 2028. We recorded the aggregate fair value of the warrant of $3.5 billion
as a component of additional paid-in-capital. If the warrant is exercised, the stated value of the common stock
issued will be reclassified as “Common stock” in our consolidated balance sheet. Because the warrant’s
exercise price of $0.00001 per share is considered non-substantive (compared to the market price of our
common stock), the warrant was evaluated based on its substance rather than its form. The warrant was
determined to have characteristics of non-voting common stock, and thus is included in the computation of
basic and diluted earnings (loss) per share. The weighted-average shares of common stock outstanding for the
year ended December 31, 2008 included shares of common stock that would be issuable upon full exercise of
the warrant issued to Treasury from the date of the issuance of the warrant through December 31, 2008.
On September 8, 2008, we issued one million shares of senior preferred stock to Treasury. We did not receive
any cash proceeds at the time the senior preferred stock was issued. Under the terms of the senior preferred
stock, we are required to pay Treasury a quarterly dividend of 10% per year on the aggregate liquidation
preference of the senior preferred stock, but if we fail to pay timely dividends in cash on the senior preferred
stock, the dividend rate will increase to 12% per year until all accrued dividends are paid in cash. When
declared, dividends are accrued and recorded as a reduction to additional paid-in capital (“APIC”) until APIC
F-10
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)