Fannie Mae-No Politics (FNMA)

[kthomp19]

And i'm explaining why any "organic recap" that starts from negative $250b of equity as a starting point (and not the actual cash on the books) is a fairytale and recap/release is irrelevant if that's the case because its never happening and lets just focus on litigation instead.

The inaccuracy in your first post in this chain is saying that FnF have $67B of capital right now. That isn't true at the moment, and would only be true when $193B of the seniors (the amount on the balance sheet) are cancelled, converted to common, or some combination of both.

Currently, core capital sits at -$126B, Tier 1 capital is -$145B (core minus $19B of DTAs), and CET1 capital sits at -$178B (Tier 1 minus $33B of juniors). There are also AOCI considerations but those are generally less than $1B.

Senior pref cancellation/conversion adds $193B to each of those, bringing them to $67B core, $48B Tier 1, $15B CET1.

the minimum requirement to exit conservatorship via consent decree (as per the last letter agreement and updated Sandra Thompson capital rule) is ~$180b.

Another inaccuracy. The minimum to exit conservatorship per the January letter agreement is CET1 capital equal to 3% of adjusted total assets. See Section 5.3(b) at the bottom of page 7.

FnF's balance sheet asset base is $7.122T right now, and adjusted total assets are generally around 4% higher than balance sheet assets (the adjustment varies, but I've found 4% to be a good ballpark estimate). 3% of 104% of $7.122T is $222.2B. Considering that FnF's CET1 capital even after the seniors are gone is $15B, you see there's a $207B gap. And earnings only close that gap slowly because the asset base is rising too.

At first it might have seemed like I was picking nits here, but hopefully the numbers show you that changing a core capital requirement of 3% of balance sheet assets (the lowest allowed by HERA is 2.5%) to a CET1 capital requirement of 3% of adjusted total assets makes a huge difference. From your estimate of $80B to a reality of $207B.

With a $207B gap that only goes down by around $11-12B per year (earnings minus asset base growth), it wouldn't be 30 years to organically recap but it could take close to 20.

This analysis also shows that, if CET1 is used as the capital target (as is specified in the letter agreement), either the juniors will have to be converted to commons (adding $33B to CET1) or $33B more worth of common shares will have to be sold as part of the recap process.

Note that Sandra Thompson's recent update to Calabria's capital rule (lowering the PLBA from 1.5% of assets to around 0.5%) didn't touch the CET1 requirement or language.

At $25b, net income is ~17b, 12x p/e for this business (~8% return on equity seems right for monoline insurers implicitly backed by a gov't gaurentee) = ~$200b market cap.

You have underestimated net income here (in the past it's been around $20B, might be more like $22B now), and perhaps overestimated the P/E (I believe FnF are pricing right now to a 10-11% ROE, leading to a P/E of 9-10).

Overall I think it's right, though. I estimate FnF's post-release market cap at $200-250B.

P.S. i was just trying to have a friendly conversation/debate. No need to get hostile! Happy new years friend

I wouldn't take it personally. There is so much common nonsense on this board (nonsense believed by common shareholders) it's understandable to get frustrated. As for me, I'm glad you have chimed in; you bring a lot of good discussion to the table.



One other thing: I wouldn't assume that new common share buyers would accept a portion of the company equal to the capital they contribute. For example, using your numbers, a capital contribution of $75B for a market cap of $200B is 37.5%, but the certainty equivalent says that $75B of cash is worth more than 37.5% of a business that only might be worth $200B.

With those numbers ($75B raise, $200B market cap) I expect the new investors to demand 50% of the equity at a minimum, and probably closer to 60%. They are taking a huge risk given how much power FHFA has, FHFA's past actions, and the Supreme Court's Collins ruling that hid FHFA's elephant (preserve and conserve mandate) in a mousehole (incidental powers clause).