Fannie Mae (FNMA)

[LuLeVan]

...the government would still be 99% owner before new money. How would they be able to raise 25B when they control the board and pretty much all of management as is today.

Fannie Mae was fully government-owned when it was founded in 1938. When Fannie went public in 1968, the government was 100% owner. Nevertheless, the IPO was possible and successful. Of course, this led to the government no longer being 100% owner afterwards.

It could happen again today, even if the government owned nearly 100% of Fannie and Freddie at the time of the IPO. This would be the case if the government converted its SPS into common stock. At current common stock prices of less than $1, this would result in dilution by about factor 190. The share of the companies remaining with the old common shareholders would then be practically negligible at well below 1%. The equivalent share price of the old commons (after recap/release) would be just 50 cents or lower.

I agree with you, however, that this could scare off subscribers to the new shares. They will look very closely at how the government has dealt with the old shareholders over the past 13 years, because something similar would be likely after the next housing crisis (if one comes). The new subscribers are not voluntarily going to get slaughtered.

Thus, to a certain extent, there is also psychological pressure on the government not to treat the old shareholders too badly. Talking about "fair treatment" here also has little to do with "moralizing" (KThomp19). It is, in my opinion, simply an economic necessity.

A SPS swap to commons could formally be justified by asserting that FnF were indeed bankrupt in 2008 and therefore a restructuring similar to Chapter 11 would be acceptable even today. Nevertheless, it would be a very "brutal" procedure that would effectively expropriate the common shareholders.

It would be far more appropriate for the government to voluntarily delete the SPS administratively (by consent decree), which also Tim Howard considers the best and fairest solution. The government could then, to implement Calhoun's (or Thompson's) affordable housing plans, merely exercise the warrants. Afterwards it would own 7.2 billion FnF commons, while existing shareholders would continue to own the 1.8 billion shares they own now. In this scenario, the commons could reach an equivalent price of $7 after recap/release, leaving the government about $50 billion (7.2 billion x $7) for affordable housing.

Deleting the SPS and just exercising the warrants would be a signal to subscribers to the new shares that the government - for all its shenanigans like the NWS during conservatorship - wants to show at least some fairness.

As long as the SPS and the warrants exist, I think there is no way of FnF going public at all. Your idea that the warrants could be exercised a few years after the IPO seems unrealistic. The subscribers to the new shares want clear conditions already at the time of the IPO so that they can calculate reasonably.

Assuming that the PE of the two re-released and recapitalized firms will be 12.5 (a bit high due to political risk), Fannie and Freddie, earning $20 billion per year, could reach a market cap of $250 billion.

An estimated 60% of that market cap - or $150 billion - would be claimed by subscribers to the new shares. Therefore about $150 billion would have to be raised from outside via the capital increase. This just about coincides with the 4th Amendment of Jan. 15, 2021, which provided for 2 x $70 billion as the maximum amount for the capital increase.

The remaining $100 billion from the (future) market capitalization would have to be split between the government and existing shareholders (commons and JPS). Exactly how this will play out remains to be seen.

But it also means that the government will claim less than 40% of the FUTURE market cap at the time of the IPO. It is a mistake to confound the status quo before the IPO (when the government can own up to just under 100% of FnF) with the status quo after the IPO.