Fannie Mae-No Politics (FNMA)

[FOFreddie]

Hi Kthomp19

What do you think the settlement will be for the preferreds. For Example FNMAT with the 8.25% coupon? I am thinking 175% of par - par plus loss dividends since the NWS in 2012? I know they are non-cumulative but the assumption is that FNMA would have had enough cash to pay divs since 2012 but for the illegal sweep.

If you think this is plausable - then FNMAT would convert at $43.75 of exchange value. Others would be less - for example 5.5% would convert at 144% of par - overall I am thinking average conversion would be about 160% of par or about $50 bn in face or an approximate $ 20 bn settlement gain.

Wouldn't a high par plus conversion make sense from a capital perspective - adding $ 20 bn to the $30 bn par of JPS would increase core capital which is the end goal and this would also make JPS holders happy?

If you assume the the UST was overpaid $30 bn and allocated $ 20bn to the JPS to get a settlement - why not allocate $ 10 bn to the current public common shareholders?

If you take the $10 bn and allocate $ 6 bn to FNMA common - this would be a settlement of $ 5 per share. Assuming Nomura and AGC are reasonable you are looking at $5 to $ 14 per share without a potential $ 5 settlement - maybe $ 10 to $19?

The flaw in your logic is that you think the UST will want to screw the existing common to make the new shares attractive to new capital. I disagree because the best strategy is to maximize the core capital potential of existing JPS and to minimize dulution of the UST warrants. It seems you are assuming that the UST will screw common and themselves by first consumating a dilutive JPS to common exchange and dilutive share offerings? This seems unnecessarily destructive?

Additionally you speak of an upcoming arbitrage opportunity - be careful because it is not clear the exchange will all happen at the beginning. We could have 4 tranches of new offerings over 4 years and the JPS could be exchaged equally over all four tranches in order to limit the stock overhang of the JPS conversion.

I dont see why it is smart to do a conversion of $ 30 bn + par of JPS just prior to a stock offering? It would seem really stupid because all the JPS holders that that been holding for over a decade will seek liquidity and cause a multi-year overhange. Dont you think the FNMA advisors will want to restrict common sales after the JPS exchange?