Fannie Mae-No Politics (FNMA)

[LuLeVan]

"If the government ever mentioned bankruptcy, there would be no way possible to raise capital"

Capital raises worked very well for AIG and GM, although in both cases there was a Chapter 11 bankruptcy. The problem was overwhelming old debts.

GM got rid of old debts through Chapter 11. In addition, the old shares became completely worthless. This made the company interesting for new investors, who later bought the newly issued shares. The fact that GM had previously been choking on old debts was no longer a counterargument for them, because they looked at the future.

Before investors buy new FnF shares, the legacy burden at FnF must disappear as well. This includes the conservatorship, the SPS, the warrants and, to some extent, the old shares, because the holders of the old shares have claims that conflict with the interests of investors in new shares (who want to buy them as cheaply as possible). The power is in the hands of the new investors because they have and give the urgently needed capital. The old shares, on the other hand, are economically worthless as long as no fresh capital is added.

The "solution" will most likely be heavy dilution of the existing shares, however unfair this may seem to existing shareholders. After all, the less the old shareholders receive, the more is left for the government (SPS holder), the JPS (whose rights are contractually secured) and for subscribers to the new shares. The tone of the negotiations is set by those who invest the most money - i.e. the government as SPS holder and the new investors.

The government meets the interest of these new investors the most if it converts the SPS into commons, which leads to maximum dilution. This suits the government (it then gets about $100 billion for itself, which can be used for affordable housing), but it also suits the new investors, who want as much of the pie for as little money as possible. The losers are the old shareholders, because they are in the worst legal position and, on top of that, are the most dependent on the other parties providing the capital.