NEW YORK, Sept. 6 /PRNewswire/ -- Pershing Square Capital Management, L.P. sent the following letter to the U.S. Treasury Department regarding Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE):

    September 5, 2008
    The Honorable Henry M. Paulson, Jr.
    Secretary United States Department of the Treasury
    1500 Pennsylvania Avenue, N.W.
    Washington, D.C. 20220
                                     Re:  Fannie Mae/Freddie Mac Restructuring
    Dear Secretary Paulson:

We understand that a Treasury plan for Fannie/Freddie ('the GSEs') may be announced this weekend. We thought you might find useful some further thoughts on potential GSE solutions.

As you are likely aware, we had previously distributed a proposed restructuring plan for the GSEs. In that plan, under a prepackaged conservatorship, equity interests would be extinguished, subordinated debt would be exchanged for warrants, and senior debt would be exchanged for new senior debt and common equity in the newly recapitalized entities. The government would write a put to the new common equity holders which would expire in three years.

It appears, however, that the GSEs may need help more quickly, and conservatorship may not be triggered until the GSEs are formally determined to be undercapitalized. As such, in the event the government needs to inject capital immediately, we suggest you consider the following transaction ('the Transaction').

In order to minimize risk to tax payers while being equitable to other constituents, we suggest that the Treasury consider purchasing senior subordinate debt in the two companies in an amount sufficient to address their capital needs in the short to intermediate term. This senior sub debt would be junior in right of payment to the outstanding senior unsecured debt and senior to the outstanding sub debt, preferred stock, and common equity. We refer to the outstanding sub debt, preferred and common stock as 'the Subordinate Securities.'

The issuance of senior sub debt is permitted under the GSE legislation and under the existing terms of the outstanding debt and equity securities of the two entities (please see the attached memo for further details). As a condition of Treasury's purchase of senior sub debt, the GSEs would defer the interest payments on the outstanding sub debt (which can be deferred for as much as five years), and the dividend payments on preferred and common stock. All of the Subordinate Securities would continue to remain outstanding according to their existing terms.

The new senior sub debt should have a market-based coupon and Treasury should receive low-strike price warrants (penny warrants) for a substantial portion, i.e., 49% of the two companies. The coupon and warrant structure should be as close to fair-market-value terms as possible.