Fannie Mae-No Politics (FNMA)

[capitalismforever]

The big difference between GM, KMart and the GSE's (Fannie Mae primarily) is that GM & KMart were insolvent. They had no equity value. It's been years since I looked at them (I was invested in KMart at one time), but I believe they both had negative equity value.

If you remove the assets and liabilities that are held in trust, and prior to 2012 were off-balance sheet accounts, Fannie Mae's equity is in excess of $40b. Nobody seems to be talking about this, my guess is that very few understand it. But the reality is, the trust assets, in bankruptcy, are not Fannie Mae's obligations. That's specifically why the preferreds have an asset backing whereas the commons is much smaller. It takes $19 billion to make the preferreds whole. In a liquidation scenario, $40+ billion of equity will more than satisfy that for the preferreds. It won't for commons.

With that said, the forthcoming DTA impairment charge will decrease the true equity value of Fannie to around $20b. When/if that happens, there'll be no equity value left for the commons. Again, most don't and won't understand this but it's the #1 reason why preferred holders are holding preferreds.