from yahoo message board, this is the end game that i believe will happen:
Howard latest article he suggests the 2.5 percent minimum would be far above Fannie and Freddie’s risk-based requirement, and thus be binding. And he said, If the administration at the same time deeming Fannie and Freddie’s senior preferred stock repaid and canceling Treasury’s liquidation preference, the companies’ core capital would rise to a positive $60 billion, leaving them with a gap to adequate capitalization of $115 billion.” From article: “Capital fact and Fiction.”
Keep in mind $115 billion is the amount for both companies.
If the administration would adopt the above suggestion from Mr Howard, the amount for both companies a total of $115 billion to adequate capitalization.
From 2nd Quarter 10Q 2021,
“Fannie Mae is a leading source of financing for mortgages in the United States, with $4.2 trillion in assets as of June 30, 2021.”...
$4.2 trillion x 2.5 percent = $105 billion minus $37.3 billion shareholders equity = $67.7 billion need to raise in a secondary offering to adequate capitalization.
Freddie Mac would need to raise $47.3 billion, the amount needed in a secondary offering to adequate capitalization. $47.3 plus $67.7 = $115 billion both companies.
Mr Howard did not suggest canceling the warrants, but in my first calculation below will not use the warrants. It’s wrong for the Treasury to claim the warrants at 79.9% of the company shareholders equity. Second calculation will include warrants.
Simple Fix
If the Treasury will cancel the liquidation preference, as the government’s been paid back in full plus 10 percent interest and the 79.9% warrants held by the Treasury canceled. A secondary offering could easily raise enough money as to satisfy the capital requirements of our regulator the FHFA. And this could be done at minimum dilution for the rightful owners the Common Shareholders. I will use the number $67.7 billion as an example in the calculation below;
Fannie Mae’s common stock outstanding 1,158,087,567
Fannie Mae’s net earnings 4 billion per quarter, a projection of 16 billion net per year. I think the Market would willingly pay a Market Cap of 230 Billion easily for that amount of earnings: 230 Billion / 16 Billion = Price to Earnings Ratio 14.37 (fair value).
Market Cap 230 Billion / 1,158,087,567 = $198 Per Share Intrinsic Value.
Example: If the company Fannie Mae is required an additional $67.7 Billion as a capital requirement to reach the $105 billion of 2.5% of total assets, and to make the offering attractive the secondary offering could be at an extreme discount of 20% and in this case the secondary offering would price at $158.40 per share;
$67.7 Billion / 158.40 = 427,398,989 million new shares.
Market Cap 230 Billion / 1,585,486,556 Billion Shares = $145.07 Per Share Intrinsic Value.
With the WARRANTS: Fannie Mae’s common stock outstanding 1,158,087,567 diluted by the warrants at 79.9% adds a total of 5,761,629,686 shares outstanding…
Market Cap 230 Billion / 5,761,629,686 = $39.91 per share
Example: If the company is required to hold $67.7 Billion as a capital requirement to reach the $105 billion of 2.5% of total assets, and to make the offering attractive the secondary offering could be at an extreme discount of 20% and in this case the secondary offering would price at $31.92 per share;
$67.7 Billion / $31.92 = 2.12 billion new shares.
After the secondary offering total of 7.8 billion common shares
Market Cap 230 Billion / 7.8 Billion Shares = $29.48 Per Share Intrinsic Value.
The Treasury would not have to provide a consent decree going forward. The Treasury needs to get out of the way. The company could still function for the purpose of its charter.
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