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Government Structure of Fannie Mae and Freddie MacSubmitted by: Marc Siegel, Head of Accounting Research and Analysis

We've been receiving quite a few questions lately asking why the government has structured the Fannie Mae/Freddie Mac takeovers at 79.9% ownership, rather than 80% or some other figure.

My answer is that it likely is related to taxes. The IRS did a special ruling in the last couple of weeks that basically allowed them to takeover Fannie and Freddie without it qualifying as a ?change in control? for tax purposes. A change in control would have threatened all the huge deferred tax assets which have built up with the recent losses. Without those deferred tax assets (in the form of net operating losses or NOL?s), the companies would be much less valuable no matter what they decide to do with it (keep in conservatorship, sell off in pieces, spin back out to the public?) The change in control formula limiting the NOL?s takes into account the market capitalization at the time of the change. So had they not issued this new rule, the plunging market caps at Fannie and Freddie would have substantially limited the NOL?s they would have been able to retain post change in control.

There?s a good article on this at cfo.com. To access the article, please visit here. The AIG loan/bailout is also just less than 80% I believe, for probably the same reasoning.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on September 18, 2008 (boomark / email).