Fannie Mae-No Politics (FNMA)

[kthomp19]

Let's start with a defination of Cet1 Capital. It has nothing to do with what you posted.

Wrong. FHFA's Fact Sheet on the capital rule spells out what is and what is not included in CET1 capital on page 15:



FnF don't break out the components of AOCI on the balance sheet, so if you want to quibble about whether that should be included in CET1 then whatever; it's barely even a rounding error.

You should go straight to the source anyway. Here is a link to the BIS's Definition of capital in Basel III – Executive Summary. On page 1 the definition of CET1 capital is listed:

Sum of common shares (equivalent for non-joint stock companies*) and stock surplus, retained earnings, other comprehensive income, qualifying minority interest and regulatory adjustments

Preferred shares and DTAs are not included here, therefore must be excluded from CET1 capital. It's that simple. And before you ask, FHFA's "regulatory adjustments" clearly don't include the juniors/seniors/DTAs because of the table above.

But here's a chance to make your point: what was FnF's CET1 capital at the end of Q1 by your calculation? And does your calculation involve leaving the seniors intact or them being written down?

The overpayment is disputed.

The Collins plaintiffs want a tax credit or other non-cash accounting adjustment in their preferred remedy, and the government wants no overpayment return at all. That's the dispute, but neither side wants an all-cash payment in this scenario (where the seniors are written off).

The plaintiffs' non-preferred remedy does involve a cash payment of $125B from Treasury to FnF, but that remedy leaves the seniors fully intact. That is far worse for FnF from a capital standpoint because Treasury would seek to monetize the seniors at that point (they wouldn't, and probably even couldn't, just write them off for nothing in return), and the only monetization that helps with CET1 capital is a conversion to commons.

There is no "conversion to commons" on the table

Of course there is. Both Calabria (https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html, start at 1:34) and Mnuchin (4th bullet point in Section 2 on page 27) mentioned it, and it would increase CET1 capital by $33B in an instant. Acting as if this can't happen is pure wishful thinking.

And while we are on the subject of what the Collins plaintiffs want, they encourage Treasury to exercise its warrants in full. Let that sink in.