Fannie Mae-No Politics (FNMA)

[kthomp19]

Fair value accounting, as adopted by Fannie Mae, requires that a re-valuation of what went into cash gets removed from cash.

This doesn't make any sense at all. If something gets removed from cash, that means cash is flowing out of the company. To whom does that cash go?

By your rule, companies would have to send out cash any time they mark anything to market. But where would they send it?

Bottom line: a pref to common conversion is a non-cash event. An even stronger statement is true: it only affects lines in the equity part of the balance sheet. The entirety of the asset category, as well as the entirety of the liability category, remains completely unchanged.

Either way, the conversion in the case of Fannie as proposed by Moelis has a hugely deteriorating impact on core capital... which is the key challenge in recap and release.

I posted two accounting examples showing how to account for a preferred to common conversion. It involves zero change in core capital because the excess of pref stock above common par value goes into paid-in capital, a component of core capital.

On conversion of JPS to common shares... my opinion is different.

Accounting practices are not subject to opinion in this case.