GSE Recap/Release: The Substance and Optics of Cancelling Treasury's Senior Preferred Stock in Exchange for a "Golden Share"

In a financial transaction such as GSE recap/release fraught with political implications, optics are important. A "Golden Share" can satisfy both financial and political aspects of GSE recap/release.

I recently posted that it would be perverse for Trump 47 to accomplish a GSE recap/release by having Treasury convert its senior preferred stock (SPS) into common stock. See GSE Recap/Release: HERA's "Best Interest" Provision is a Two-Way Ratchet. Obama Administration Used It To Destroy GSE Shareholder Value. Trump 47 Can "Reverse The Ratchet" in a GSE Recap/Release.

Perverse because by doing so, Trump 47 would be giving full economic effect to the most egregious financial transaction in memory: the Obama Administration’s Net Worth Sweep (Obama NWS). Trump 45 railed against the Obama NWS,¹ calling the Obama NWS a “scam to steal the retirement savings of hardworking Americans”.

Converting Treasury’s SPS into GSE common stock in a GSE recap/release would only “seal the scam” to the lasting disadvantage of GSE shareholders. Why would Trump 47 want to do this?

Since Treasury’s SPS has already been more than paid off by the GSEs in accordance with its pre-Obama NWS terms, it would be entirely fair from a financial point of view for Trump 47 to cancel the SPS in any GSE recap/release.

However, the GSEs have been a political football tossed around by Beltway ideologues for the past three decades, and a GSE recap/release will be consummated in the context and maelstrom of the Beltway’s malign and self-interested political scrutiny.

This is where the “Golden Share” comes in. It can provide optical cover for Trump 47 to disarm the fraudulent Beltway claims that Treasury would be giving up hundreds of billions of dollars by cancelling the SPS.

But the Golden Share does more than just provide optical political cover.

There are two separate investor universes that need to be satisfied in a GSE recap/release: institutional equity investors and institutional MBS investors. Arguably, these two investor universes have opposing preferences regarding various features of a GSE recap/release, such as continuing governmental control over the GSEs’ boards of directors for a period of time after conservatorship release.

The genius of the Golden Share is that it can satisfy the opposing interests of these separate investor universes at the same time.

In a Treasury cancellation of its SPS in exchange for a GSE Golden Share, the Golden Share’s terms and duration can be bespoke designed to cause de minimus financial dilution to GSE shareholders while affording GSE MBS investors some measure of comfort that mortgage interest rates won’t be adversely affected by conservatorship release.

The use of a Golden Share in a GSE recap/release would be Trump’s “Art of the Deal” on full display, as I discuss below the paywall.