Fannie Mae-No Politics (FNMA)

[familymang]

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.

I thought i made this point clearly enough but let me clarify so no further confusion. They have $67b of CASH capital on the books as of Q3 and i estimate another ~8b of Q4 earnings so $75b of strictly CASH capital today. I am ignoring the senior pfd liquidation preference balance because I am assuming in any recap release they either get fully converted or wiped out to an extent so that negative value is gone. Furthermore I am assuming the same for the Jr Pfds (they will probably get converted/exchange to new equity or new pfds or mix of the 2 as the Treasury plan contemplated).

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.

I recall seeing this figure tied to $180-185 , I'll try to find the source later today and reply back, but for now lets assume ~$220b as you mention (I see 3% of total assets at ~$210b today so growing to $220b over a couple years makes sense). Its a difference of ~$145b, $12b/yr of which will be made up in earnings net of asset base increasing as you mentioned, so call it $120b in 2 years is the gap needed to close in on via equity raise (assuming 3% not 2.5%), also recall as per the letter agreement the GSEs can raise up to $70b of capital each so this would fit in to the <$140b capital raise figure. Would also cut organic recap down to ~12 years (not 20-30). Again true "ORGANIC RECAP" is irrelevant IMO as it needs to be a mix of 1-2 more years of retained earnings + equity raise if the admin truly wants to move forward with this I doubt they sit on this for 10 years+ (btw the warrants expire by then). I would not be sticking around for organic recap nor would I encourage anyone else to.

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.

I was using a simplistic example to back the government into $100b of warrant value using $200b market cap. I agree that new equity will want a bigger piece of the pie here, and will demand so at a discount to fair value (call it 20-25% discount). They aren't signing up to pay $100b in recap to get $100b of equity at 10-12 p/e. They would probably want access at 6-8x P/E (thats what I would demand as a new recap investor for the reasons you mentioned in your post).

Thanks for the notes/discussion.