Fannie Mae-No Politics (FNMA)

[kthomp19]

So, in your calculations, converting JPS would raise CET1, Tier 1 and Core Capital all by $19.1B, leaving Core capital at $40B. Does that basically mean that the Net Worth would then be $40B?

Core capital for Fannie at the end of Q3 was $20.6B, but this already includes the juniors. The conversion only increases CET1; it leaves core and Tier 1 capital unchanged. Net worth would also be unchanged, at $20.7B.

The purpose of the conversion would be twofold:

1) Increase CET1 capital; this is important because CET1 it is its own requirement that must be met. This is also exactly why Citi offered its preferred shareholders a conversion.
2) Create room in the capital structure to issue new non-cumulative prefs; the capital rule leaves no room at all for new prefs to be sold because the difference between the CET1 ($57B) and Tier 1 ($76B) standards, as of June 30 2020, was $19B, exactly the amount of the juniors.

Elaborating on the second point: issuing new non-cumulative prefs without converting the juniors would make the CET1 and Tier 1 capital amounts diverge even further, so Fannie would hit the Tier 1 goal while falling short on CET1. Thus capital raises will have to be 100% common shares unless the juniors are converted.