Fannie Mae (FNMA)

[kthomp19]

lets go with ottings words
6 to 18 months
150B

Do you think we get the 16B extra plus 4q earnings?

Q4 earnings only if Calabria is confirmed in March. This doesn't seem too likely, assuming that the confirmation vote really is in June. At that rate, even the June NWS dividend might be paid.

I don't think the extra $16.1B will be coming back to FnF in cash. If the plaintiffs win, they asked the court to let Treasury keep that cash and instead give FnF some sort of credit, probably against future income taxes. Since no plaintiff has asked Treasury to return the money in cash, I don't believe it will happen; Treasury isn't just going to do it out of the goodness of its heart.

The problem with this approach, from a recap standpoint, is that the cash version adds to core capital (it would flow straight to retained earnings), but the credit version doesn't. So the recap amount needed wouldn't be reduced by that $16.1B.




Now the problem becomes apparent. If the new common buyers have to put up $150B in capital, and they only value the companies at $150B, they would insist on having all the equity. Why would they accept anything less? This brings the commons to essentially zero.

With a market cap of $200B, the $150B represents 75% of that. But then the idea of a certainty equivalent comes into play. Basically every market participant (and especially those with $150B to invest) would rather have $150B in cash than 75% of companies that are worth around $200B. Thus they would want more than 75% to make it worth investing, and probably much more because the perceived risk will still be pretty high.

This is why sky-high valuations are just completely out of the realm of possibility.