Fannie Mae-No Politics (FNMA)

[LuLeVan]

Thank you FOFreddie. I would like to illustrate the "benefit for all" argument with some numbers.

The numbers are based on the following paragraph from Howard's latest article:

At June 30, 2023, minimum capital for Fannie and Freddie of 2.5 percent of total assets (not “adjusted total assets,” a measure contrived by Calabria that FHFA should drop) would be $189.4 billion. And with their senior preferred stock deemed to have been repaid, their adjusted total capital would jump from a negative $99.5 billion to a positive $101.7 billion, leaving a capital shortfall of $87.7 billion, compared with $408 billion were the net worth sweep and the ERCF to be left as they are.

If the ECRF were lowered to 2.5%, the SPS were deemed "paid" and only the warrants were exercised, Howard calculates that a capital raise of $87 billion would be sufficient. This is significantly less than the $140 billion maximum allowed in the January 2021 4th Letter Agreement.

But the really interesting thing is that the market cap of FnF at IPO essentially depends on annual earnings and the P/E ratio. According to Howard (and KThomp by the way) the initial market cap will be around 250 billion dollars.

A capital raise of "only" $87 billion (that's what comes from the subscribers to the new shares) leaves $163 billion for the government and existing shareholders.

Subtracting a $33 billion payout for the JPS at par leaves $130 billion for the government and legacy commons.

Since only the warrants are exercised in this scenario, the government receives 80% of this, or $104 billion, while the legacy commons receive the remaining $26 billion. With 1.8 billion legacy shares (FnF) out, this would result in a final share price for commons of $14.44.

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An SPS conversion would give the government 99.5% (instead of 80% if only the warrants are exercised). This would raise appr. $25 billion (or 19.5%) more for the government, but it could scare off new investors. The new shares might have to be offered at a greater discount, increasing dilution for the government and legacy shareholders. The supposed "$25 billion extra" for the government could thus be lost in other ways. And in the worst case, there may not be enough subscribers for the new shares offered, which could cause the IPO to fail.