Fannie Mae 2009 Annual Report Download - page 143

preferred stock is not included in core capital due to its cumulative dividend provision. For additional
information regarding our regulatory capital requirements see “Note 17—Regulatory Capital Requirements.”
On January 12, 2010, FHFA (1) directed us, for loans backing Fannie Mae MBS held by third parties, to
continue reporting our minimum capital requirements based on 0.45% of the unpaid principal balance and
critical capital based on 0.25% of the unpaid principal balance, notwithstanding our adoption effective
January 1, 2010 of new accounting standards that resulted in our recording on our consolidated balance sheet
substantially all of the loans backing these Fannie Mae MBS, and (2) issued a regulatory interpretation stating
that our minimum capital requirements are not automatically affected by the new accounting standards.
Capital Activity
Following our entry into conservatorship, FHFA advised us to manage to a positive net worth, which is
represented as the “total deficit” line item in our consolidated balance sheet. See “Executive Summary—Our
Business Objectives and Strategy” for a discussion of other objectives that may conflict with this goal of
managing to a positive net worth. Our total deficit increased by $124 million during 2009, to a total deficit of
$15.3 billion as of December 31, 2009. See Table 28 for a summary of the changes in equity and see
“Consolidated Results of Operations” for a discussion of the factors that affected our results of operations
during 2009.
Our ability to manage our net worth continues to be very limited. We are effectively unable to raise equity
capital from private sources at this time and, therefore, are reliant on the senior preferred stock purchase
agreement to address any net worth deficit.
Senior Preferred Stock and Common Stock Warrant
On September 7, 2008, we, through FHFA, in its capacity as conservator, and Treasury entered into the senior
preferred stock purchase agreement. Pursuant to the agreement, we issued to Treasury one million shares of
senior preferred stock with an initial aggregate liquidation preference of $1 billion and a warrant for the
purchase of up to 79.9% of the total number of shares of our common stock outstanding on a fully diluted
basis on the date of exercise, exercisable until September 7, 2028. As we discuss in more detail above under
“Equity Funding,” we have received a total of $59.9 billion under the senior preferred stock purchase
agreement that has allowed us to eliminate our net worth deficit and thereby avoid triggering mandatory
receivership under the GSE Act.
The senior preferred stock purchase agreement contains covenants that significantly restrict our business
activities and prohibit us from obtaining equity or subordinated debt funding without the prior consent of
Treasury, as we describe in more detail in “Risk Factors.” We describe the terms of the agreement and the
covenants it contains in more detail in “Business—Conservatorship and Treasury Agreements—Treasury
Agreements.”
Dividends
The conservator announced on September 7, 2008 that we would not pay any dividends on the common stock
or on any series of outstanding preferred stock. In addition, the senior preferred stock purchase agreement
prohibits us from declaring or paying any dividends on Fannie Mae equity securities (other than the senior
preferred stock) without the prior written consent of Treasury. Dividends on our outstanding preferred stock
(other than the senior preferred stock) are non-cumulative; therefore, holders of this preferred stock are not
entitled to receive any forgone dividends in the future.
Holders of the senior preferred stock are entitled to receive, when, as and if declared by our Board of
Directors, out of legally available funds, cumulative quarterly cash dividends at the annual rate of 10% per
year on the then-current liquidation preference of the senior preferred stock. As conservator and under our
charter, FHFA also has authority to declare and approve dividends on the senior preferred stock. If at any time
we fail to pay cash dividends on the senior preferred stock in a timely manner, then immediately following
such failure and for all dividend periods thereafter until the dividend period following the date on which we
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