Fannie Mae-No Politics (FNMA)

[kthomp19]

It would be a disaster for the cost of capital so of corse it won’t happen...wtf?

I agree on the cost of capital part. I believe that Tim Howard said the same thing as well, but his comments are not very searchable.

However, I don't think this means that it won't happen. FSOC designating FnF as non-bank SIFIs would not be the first time something ideological has been done without considering the long-term ramifications.

So far in my research, 12 USC 5365 is the best statute I have found as to just what a non-bank SIFI's capital standards would be. It is pretty light on details, but section (j)(1) stands out (emphasis added):

(j) Leverage limitation
(1) Requirement

The Board of Governors shall require a bank holding company with total consolidated assets equal to or greater than $250,000,000,000 or a nonbank financial company supervised by the Board of Governors to maintain a debt to equity ratio of no more than 15 to 1, upon a determination by the Council that such company poses a grave threat to the financial stability of the United States and that the imposition of such requirement is necessary to mitigate the risk that such company poses to the financial stability of the United States. Nothing in this paragraph shall apply to a Federal home loan bank.

FnF have combined debt of $5.5T, so from my calculations that would require $367B in equity on the books at all times. They currently have around $6B, and cancelling the seniors would not magically add $193B to it the way it would with core capital.

Even the most optimistic investors don't have future FnF market caps as high as $360B, so raising that amount from equity issuances is out of the question.

As I have said in another post, I think a non-bank SIFI designation would be bad news for both common and pref shareholders.