Fannie Mae-No Politics (FNMA)

[kthomp19]

But if the payments were considered 10% interest and the rest principal, as of the last quarter or two all of the principal would have been paid off - a little at each payment that exceeded interest for the quarter.

Yes, this is exactly what would have happened if the NWS had never existed. The same as "revoking it retroactively."

Without the NWS all shares of the senior preferred would have been paid and retired as of now. With the NWS f&f still owe the full $187.5 billion and all senior preferred shares are still outstanding.

Correct. This is why the companies can't be released as-is, even if FHFA decides that no capital is needed.

The current balance sheet has the senior preferred as a liability, so it subtracts $187.5B from the total f&f net worth making in almost zero.

This is the problem in your argument. The senior preferreds are NOT liabilities. They are (positive) EQUITY. There is a vast difference between the two. Fannie and Freddie both list the senior preferreds as equity on their balance sheets so there is no disputing this point.

Removing the senior preferreds from the balance sheet REDUCES equity which in turn REDUCES net worth.

It all comes from Assets = Liabilities + Equity. Equity and net worth are basically the same here, at least for calculating net worth for the NWS: assets minus liabilities. If you remove the senior preferreds, FnF's combined balance sheets suffer a LOSS of $187B in equity; right now it's around $9B combined so combined equity would be NEGATIVE $178B. There are only three ways to balance this out:

1) Reduce assets by $187B
2) Increase liabilities by $187B
3) Increase equity by $187B

Number 1 involves paying off the $187B again, so that's out if we're talking retroactive revocation of the NWS. Number 2 is also out, it's basically #1 but borrowing the money instead of paying it out of cash or selling assets.

That leaves #3. Increasing equity by $187B basically wipes out almost all of FnF's accumulated deficit of $205B. The remaining negative $18B, plus whatever capital requirement is set by FHFA for release from conservatorship, is how much capital needs to be raised. If FHFA decides on a capital requirement of $100B combined (~2% of assets), FnF will need to raise $118B in capital to have enough retained earnings on the balance sheet to be fully capitalized and released.

2% is also on the low end of Watt's comment. He said 2-3%, so at the high end an extra $50B would need to be raised for a total of $168B.

This amount of money would take at least several years to accumulate through earnings only. An equity raise is by far the fastest and easiest path to recapitalization.