Fannie Mae-No Politics (FNMA)

[kthomp19]

Important note about the warrants.

The document controlling the warrants can be found here:
Fannie Mae Warrant to Purchase Common Stock

On page 4, in section 2.2, we see this:

...the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

X = Y (A - B) / A

Where X = the number of shares of Common Stock to be issued

Y = the number of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being exercised (at the date of such calculation)

A = the Market Price of one share of Common Stock (at the date of such calculation)

B = Exercise Price (as adjusted pursuant to the terms herein to the date of such calculation)

The Exercise Price is defined on page 1 as $0.00001 per share (1 thousandth of one cent). I didn't see anything in the document about how it can be adjusted, but I would assume that if both parties (Treasury and Fannie) agree, it could be changed.

But looking at the formula, if B ends up being greater than A, X is a negative number. Issuing a negative number of shares is obviously impossible. Therefore the Exercise Price (or strike price) must be below the Market Price on the day of exercise. So ideas about exercising the Warrant at a high strike price (I have seen $20 and $50 suggested) can only happen if the common stock price rises above that level first.

Even then, there needs to be an appreciable gap to have X be any sort of meaningfully large number. If the Exercise Price is too close to the Market Price, X will be quite small, and since Treasury would have to agree to modify the Exercise Price, they would be unlikely to do so in a way that results in them getting a ton less money.

And none of this considers the potential political blowback of increasing the Exercise Price: it essentially amounts to Treasury writing a big check to FnF, which Trump would get crucified for by Republicans (for giving away government money) and Democrats (for giving hedge funds a windfall).



I highly encourage everyone to read the entire document. It isn't terribly long, and can dispel many common misconceptions. For example, Treasury can exercise this Warrant in pieces and assign the shares to anyone they want (probably in exchange for cash), circumventing the December 31, 2009 sunset in HERA for purchasing FnF securities. Treasury can then essentially auction off the shares and can do so in small enough amounts to avoid triggering any poison pills or other voting-control provisions.