Fannie Mae-No Politics (FNMA)

[kthomp19]

except that it realistically needs to be based on 3%

I made one minor change in the spreadsheet: changing the cap req from 2.5% to 3%, leaving everything else the same.

Guess when FnF hit that cap req? The answer might surprise you: it's never.



You can play around with the assumptions, like a higher earnings base, higher earnings growth rate, lower asset base growth rate, etc. But the above chart shows how precarious it all is.

Hitting any reasonable regulatory capital requirement (whether it's 2.5% or 3%) means the seniors must go, whether it's via cancellation, conversion to common, or some combination of those.

In regard to commons - I see Bill Ackman's estimate of a potential $30 as very reasonable. Based on $20B earnings, Nomura said that you would expect about 2/3s handed out as dividends. This would be $2B for JPS based on their current rates and $1.20 per share of existing commons if the warrants were exercised. Based on a 4% return - this would be $30. A win, win for all shareholders and a home run for commons if the warrants go away.

I don't think this adds up.

1) Tim Howard said that in normal (pre-conservatorship) times, FnF paid out around 30% of annual income in dividends.
2) You haven't accounted for the dilutive effect of a capital raise. If the new investors insist on 2/3 of the overall equity in return for their capital, which I find pretty reasonable (they will be asked for around $100B if it happens in the next several years), you would have to divide your $30 by 3.
3) I don't see any way that Treasury would neither exercise the warrants nor convert the seniors to commons. Doing neither would amount to cutting a giant check to common shareholders for nothing in return; terrible political optics plus throwing money into the garbage can doesn't seem like something a President of either party would do.