Fannie Mae-No Politics (FNMA)

[familymang]

"As to #3, because core capital is negative it's a fairy tale to think they can organically recap with retained earnings. Kthomp19 put together a nifty spreadsheet on this...because core capital is negative and the assets keep growing, and the regulatory requirement is a % of assets, it's damn near impossible to close the gap."

The balance sheet capital is only negative because the artificially inflated senior pfd balance. I am only focusing on actual cash on the balance sheet which today is $75b and the goal is ~$180b. With respect to KTHOMP the math he is doing is irrelevant if the government actually wants to recap/release. Like I said if your assumption is that the government doesnt want to achieve recap and release than this is irrelevant and lets focus on the litigation because that's all you have left, but if they want to achieve this they obviously must address the senior pfds in a sensible manner.

"As to #2, the government doesn't care about common holders."

That's nice but the JR pfd and common holders are currently litigating 3 material cases against them. To get rid of those cases they have to address the the senior pfds in a way that appeases the jr pfd holders enough to want to drop all the litigation >$5b (and common to an extent as I think jr pfd holders hold much more leverage in litigation after the SCOTUS APA ruling) . All 3 cases are almost all surely worth >$5b in damages today IF plaintiffs win.

"It matters because if they use a combo of the two they can dilute legacy shareholders more than 79.9% and any additional dilution is more money for them. You hear it over and over that commons may be worth 5-10 bucks (the 20.1% assumption). If that were true, the government can take 90% of that 20.1% if they wish, thus adding say another 15 billion to their take."

Read my original comment re: this issue.. "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."

Let's walk through the math: in the first scenario assume the GSEs are worth $200b and they do an equity raise for ~75b total. If they exercise the warrants the government will own 80% of $125b or $100b (50%) as its safe the say the new equity investors will only put up capital POST government exercises not before, the current holders will own $25b (12.5%), and new holders will own $75b (37.5%). Obviously this is over simplistic as their might also be jr pfd conversion but we can ignore them for now. (P.S. i am being extremely generous to the common holders in this simplistic recap scenario as realistically the GSEs would need to raise more than $75b and the existing common holders will own much less than 12.5% of the remaining pie).

In the second scenario assume the government wants to monetize extra $ via the senior pfds. In that same example above, sure they will get "more shares" but they are just increasing the total shares outstanding, lowering the value of their warrant position, and like the warrant exercise it's safe to assume the new equity will only participate after both the warrant and senior pfds are exercised not before. So they can extract some value from the ~12.5% current common holders above but not much ($25b maximum if they fully wipe them out) as in my assumption the new equity holders will still want atleast 37.5% of the pie or $75b. So if the GSEs are worth $200b and the government wants to get super greedy they can take some value from the existing common holders but not the new equity holders, their total pie to play with is $100-$125b depending on how aggressive they want to be with existing common holders. Said another way, why wipe out the existing common in totality for an extra possible $25b when they keep the senior pfds outstanding with a small balance as a line of credit that the GSEs have to pay a annual $5b fee into perpetuity (which has a two fold value of being much higher NPV and also continuing the implicit guarantee of the GSEs which is probably necessary for them to be freed). Or maybe they will wipe the common out and leave them with 1-2% of the pie, honestly doesn't affect much in the grand scheme. (To me you have to believe the common shares are worth over $10 share today to have better returns than the jr pfds which is a discussion for another today.)

As to #1. It really doesn't matter. Collins: The government (treasury) will never 'write a check'. They may write down the seniors $45B in best case scenario but that doesn't get us released and seems like everyone expects treasury just to deem the SPS paid in full any how.

I agree here the government will never write a check (especially one for $45b) which is why I think any litigation ruling that forces them to will lead to immediate settlement / recap+release (why pay out cash when you can monetize $100b of cash). The remedy question in Collins is interesting, assuming we lose the ideal remedy (to make jr pfds whole etc), the judges should surely agree with the $45b cash payment portion. I'm not sure how the judges can rule to simply write down the snr pfds $45b when the real world outcome if Trump could have fired Watt day 1 would have been +45b cash on GSE balance sheet (not a 1:1 write down). Anyway that's something for the en banc judges to decide not us. I also agree any release would void the lamberth and takings case as it would restore value to the jr pfd shares hence no remedy left to fight over.

Of course it benefits the government to release the GSEs re for a multitude of reasons, and for one reason or another the government/fhfa insists that the GSEs retain more capital from their earnings (when they amended the last senior pfd letter agreement they made a deliberate choice to let them continue retaining capital instead of turning back on the NWS, I think this is the KEY data point to what they are actually planning).