US Conservatorship vs UK Nationalisation; Fannie and Freddie - by Shum Ghumman

A commonly believed fallacy that the press seems to have propagated is that the UK government had no choice but to nationalise Northern Rock, however, it was worth noting that the US takeover of Fannie Mae and Freddie Mac that was announced over the weekend was conducted in a far more shareholder-friendly manner than the Northern Rock nationalisation that provided plenty of security for the US taxpayer.

The US economy is only five times the size of the UK economy yet Fannie and Freddie have $5,400,000,000,000 in mortgage backed securities (representing 80% of the US mortgage market) on issue that the US government is now officially backing (as opposed to NRK's mortgage book which was approximately one twenty-seventh of that amount).

I spotted the following differences between these two takeovers:

	US treatment of GSEs	UK treatment of NRK
1.	Conservatorship (i.e., shareholders retain rights to residual profits as per normal, however, management control temporarily passed to the government authorities)	Nationalisation with strenuous attempts made to pay shareholders close to nothing in compensation with complete deprivation of shareholders’ basic rights to corporate profits made in the interim.
2.	Dividends forcibly suspended in order to conserve capital as part of conservatorship plan.	Confiscation of shares after dividends were voluntarily suspended.
3.	Intended 10% p.a., wind-down in Mortgage backed security book through natural attrition with the aim of emerging as a more robust business in several years’ time.	Intended complete payback of government lending within three years to the exclusion of all else. Competitors permitted to “cherry-pick” best quality assets at low prices in order to achieve this goal more quickly at the expense of long-term stability.
4.	Co-operation and co-ordination between Federal Treasury and FHFA.	Very little co-ordination between the Tripartite authorities.
5.	Government support payments recognised as “senior preferred stock” with warrants issued to provide taxpayer protection. Government authorities recognise that this entails that the returns to the taxpayer will be strongly linked to the health of the business.	Government payments recognised as debt facilities. Government authorities fail to recognise this fact and are presently attempting to gain both equity-holders’ upside gains and debt-holders downside protection simultaneously.
6.	Cancellation of all GSE political activities (i.e., lobby-groups, political donations etc.) and likely cancellation of all corporate philanthropy to further assist in the conservation of capital.	Maintenance and extension of corporate philanthropy and sponsorship of sporting teams indicate dysfunctional populist decision-making.
7.	Outgoing management recognised as being in no way responsible for the credit conditions that have precipitated these problems.	Outgoing management used as scapegoats.