Fannie Mae-No Politics (FNMA)

[kthomp19]

That way out is extremely simple in its execution, but could well be the elixir that satisfies all parties enough to pull together to an end.

And that is this.....a simple book entry that categorizes the GSE's overpayment of over $100 billion as a prepaid asset. With the offsetting entry going towards core capital.

This sounds like something straight out of a Trump-like/Mnuchin Art of the Deal move.

There are only two overpayment return scenarios:

1) Treasury returns $25-30B (whatever the number ends up being) and cancels the seniors.
2) Treasury returns $125B and keeps the seniors.

#1 isn't enough to recap FnF (leaves them around $100B short), while #2 involves the seniors continuing to exist. Treasury would be certain to convert the seniors to commons (can't convert to non-cumulative prefs due to the CET1 capital requirements) to recoup the $125B.

A senior-to-common conversion is by far the worst-case scenario for the existing commons, and in my framework it is the one that ends up with a common share value of $0.69.

The courts might look favorably on this.....and so might the plaintiffs, as this makes the heavy lifting (capital raise) for the GSE's a helluva lot lighter......however the capital standards actually turn out.

The courts won't care what the outcome is if both the plaintiffs and defendants agree to settle. The capital raise becomes "easier" in that Treasury will be the one selling the shares rather than the companies. But make no mistake: this is where the existing commons face the most dilution. The commons have a $4B market cap right now compared to the $210B liquidation preference of the seniors. A senior-to-common converstion involves Treasury getting 98% of the commons at the very least based on these numbers.

And Treasury is savvy enough to structure the transaction to avoid ever having 80% ownership (or even 50% to get around controlling shareholder problems), so there are no worries there.

What happens to the prepaid asset? That will be a question for new administrations to ponder. By the time it becomes an issue, we will have been way down the road already of GSE freedom.

Another issue here is that Tim Howard, at the very least, believes that a prepaid asset like this would only accrue to core capital as it is earned, i.e. not all at once.

In the scenario where the seniors are cancelled and Treasury gives FnF $25-30B worth of tax credits, those credits would only add to core capital as they are earned, which is about $4B per year.

If the seniors are converted instead, I don't know the rate at which the prepaid asset would count towards core capital, but it seems there is a good chance it wouldn't all count at once. To the extent it doesn't, more core capital would need to be raised. A bigger re-IPO, in other words.