Fannie Mae-No Politics (FNMA)

[kthomp19]

These companies are obviously not going to liquidate

This is true, but don't make the mistake of thinking this means liquidation preference has no value outside of an actual liquidation. If that were true, why would Treasury have bothered to include the liquidation preference ratchet as FnF retain earnings?

Liquidation preference affects the capital stack, FnF have to restructure their equity in order to exit conservatorship (no matter when it happens or how much earnings are retained), and liquidation preference is of huge importance in a restructuring.

The liquidation preference ensures that Treasury continues to hold all the cards in how the restructuring is performed, whenever it happens. FnF's core capital is around negative $133B right now; an organic release through only retained earnings is decades off if that's the route taken, and even then Treasury would have such a huge liquidation preference that it would control the whole capital structure anyway.