Fannie Mae-No Politics (FNMA)

[familymang]

Wow someone who actually understands this stuff. If you don't mind please entertain me on the following:

1) What's your view on the 3 main litigation cases playing out this year? (Collins en banc unconstitutional remedy case, Lamberth contracts case, and the takings case).

2) I agree that the best case for common holders is warrants getting exercised and the senior pfds being written down to zero. More likely outcome is warrants getting exercised and some sort of senior pfd equitization (or maybe simply exchange into a line of credit for a perpetual ~$5b annual commitment fee type security). But if you're a realist and believe that the government actually wants to accomplish this successfully, does it matter if they get their fair share through the senior pfds or the warrants? Maximizing the senior pfd value hinders their warrant value, and vice versa. I sort of seeing it like they have a pie of ~$100b to play with, whether it all comes from warrants, senior pfds, or combo of the 2 what's it matter for them? And the path of least resistance to get the litigation shareholders to drop all the lawsuits (which is a pre-requisite to any recap/release) is to maximize the warrant value and not the senior pfds. They will end up with the same ~$100b or so but with less resistance IMO.

3) Finally you say "Furthermore, all this talk of 'organically recapping' is a fairy tale. It would take 30 years (likely more) of retained capital since their portfolios keep growing. 5 bucks in 30 years probably won't be worth a dollar, assuming you haven't died of old age (for a lot of you)." The GSEs should have ~$75b of capital between the two after Q4. According to the letter agreement they can exit conservatorship via consent decree when they hit the minimum required capital (not the full required ~4%) which is ~$180b based off Sandra Thompsons updated capital rule. They are earning roughly ~$25 - $30b / year which would take them 3-4 years to get to $180b minimum required not 30 as you state (i know you were exaggerating but still). I'm assuming you are using "30 years" because every $ in cash they retain the liquidation preference increases, but we both know that issue has to be addressed and resolved before any equity raise happens and an organic recap will NEVER occur as long as that issue stays. At some point the government should be forced to deal with this issue as not only have the GSEs been completely reformed for the better but will have their desired cash capital on the books shortly. Bottom line if you think the government WANTS to recap and release the GSEs and monetize its warrants, they will have to address these issues in a sensible way (aka come up with realistic solution for the $250b senior pfds), if they don't then we are just banking on litigation and we can stop debating what the government will do if its just status quo for ever. Does Biden want to or not want to monetize the warrants for his affordable housing mission, that is the million dollar question (recall BBB is dead and that had ~$150b tied to affordable houseing). Maybe he will only want to IF (big if) one of the cases pushes him in that direction (or if he loses Congress after midterms and he is desperate for an administrative win that he can accomplish on his own).

Bonus is that in in the Collins case, worst case the Judges don't agree privatization would have been completed in time if Trump could have fired Watt day 1, the GSEs at a minimum should get over $45b in cash back to balance sheet since the cash payments of the NWS suspension would have happened day 1 instead of 2 years later as Trump stopped the NWS immediately so no need for hypotheticals (Yes the liquidation preference would go up, but the government would still need to write a $45b CASH check in exchange back over to the GSEs which is definitely not a desired outcome and hopefully prompts some kind of resolution). This would cut ~3-4 years down to ~1-2 years.