Fannie Mae-No Politics (FNMA)

[FOFreddie]

Hi Donot

Kthomp has made the point that the SPS to common conversion is within the power of the UST and would be highly dilutive. I believe he is thinking that common would be worth around $ 0.70 per share if this happened.

Assuming he is right - the UST would own almost all the existing common shares and 80 pct of the warrants. Theorectically the UST would make more from the SPS conversion than the warrants because of the massive dilution.

The goal of the capital rules is to get new investor cash on the balance sheet of FNMA with most of it being Tier 1 common. FNMA can issue new shares or resale outstanding common that was repurchased in year's past.

Also - the surviving litigation in Sweeney's court are derivative claims which mean that any recovery goes to FNMA itself after the lawyers are paid. If the derivative suit is successful then we as common shareholders would benefit pro-rata with the warrants because it is value received by the company we own. Ironically if the UST ultimately looses the derivative suit it also wins because it owns 80 pct of FNMA assuming the warrants are valid. Similiarly if the UST settles - the UST would also win because it owns 80 pct of FNMA.

I know the numbers are not exactly right but assume the SPS is 100 bn and is converted for new FNMA common worth 100bn. Also assume that UST settles the derivative lawsuit for 100bn and returns the newly issued shares back to FNMA. In this case the real economic status is the same as if the UST redeemed but FNMA would be deemed to have 100 bn of capital but with no additonal cash. My question is what if FNMA then resales the shares received from UST for new investor cash leaving it with 100 bn of new cash and 100 bn of capital. My question is if this is possible and is it a better scenario for existing common?