Fannie Mae-No Politics (FNMA)

[kthomp19]

Technically they are not recapitalizing they are just retaining cash

Nope. FnF really are recapitalizing. Their core capital, the type that matters for regulatory purposes, has been steadily increasing since the NWS payments stopped, albeit from a hugely negative base.

By law, core capital is simply the sum of some lines on the balance sheet. The enormous accumulated deficit has been decreasing as FnF have retained earnings, and the senior pref liquidation preference on the balance sheet has remained the same.

For example, Freddie's Q1 2020 earnings release showed an accumulated deficit of -$74.255B. The Q3 2021 earnings release showed it at -$57.737B. The senior preferred stock line has remained steady at $72.648B.

The dollar-for-dollar senior pref liquidation preference increase as earnings are retained is off-balance sheet, which is why FnF really are building capital right now (core capital is only the sum of certain on-balance sheet entries).

that cash technically still is a part of treasurys liquidation preference.

It's also part of capital. The two are not mutually exclusive. For example, the junior prefs' $33B liquidation preference on the balance sheet counts towards core capital.

Now, while FnF really are building capital, it's from such a hugely negative base (-$126B core capital right now for FnF combined) that Treasury will have to restructure the seniors to have the commons (existing plus new shares for warrants/converted juniors/capital raise) be worth anything prior to the warrant expiration date in 2028. So FnF building capital right now is a necessary but insufficient step towards recapitalization and release from conservatorship.

Also, $1 of senior pref liquidation preference is not worth $1 of cash. Presidential budgets have consistently valued Treasury's FnF equity stake at around $110B even though the senior pref liquidation preference has gone up over $40B in the last two years.