Fannie Mae-No Politics (FNMA)

[capitalismforever]

Preferreds have liquidation preference. Their value is directly tied to the equity of the business. As I showed the other day, after a 15% tax change, the tangible equity of Fannie Mae is $19b. Sr. Pfd's have first preference to $1b, Jr. Pfd's have second preference to the remaining up to $19b (because $19b equals par which is their contractual right). That leaves nothing left for commons, based on the current financial state of the company.

This is precisely why Berkowitz owns preferreds, hence he clarified in his last shareholders letter:

"We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators."

If your goal is to hit it out of the park, by all means, I wish you all the best of luck with your commons. But, I have a feeling there will be gnashing of the teeth after this is all done.

Sidenote for Ackman enthusiasts (I'm not one of them): as of December 31st 2016, he's been acquiring preferreds of the GSE's. After doing the math you'll see that his holdings is equal to an insurance policy. If his commons are wiped, the amount of preferreds he purchased will zero his losses if they make par. I find that interesting. It denotes a new uncertainty that he's recently acquired, to me at least.