Fannie Mae-No Politics (FNMA)

[kthomp19]

Who ever heard of a 14 year conservatorship with the GSES making $20B to $30B per year?

As I see it, there have been three phases to the conservatorships:

1) September 2008 - August 2012: FnF were losing money (mostly due to accounting shenanigans), running up the senior pref balance with Treasury, and many politicians thought they should be wound down due an alleged perpetratory role in the financial crisis.
2) August 2012 - September 2019: FnF were making money but Treasury was sweeping every dollar. There were still calls to wind FnF down, even by President Obama himself, but the huge cash inflows were a good enough reason to keep FnF around.
3) September 2019 - present: FnF are increasingly stable, safe, and fantastically profitable. But now the government has no direct financial gains from FnF: $1 of liquidation preference isn't worth nearly as much as $1 in cash because FnF can only be worth so much as companies, and the time value of money makes the disparity even greater.

I find the last phase to be even stranger than the first two. The main reasons I see to continue the conservatorships at this point are:

1) FnF don't have (nearly) enough capital according to the capital standards, and the leverage (minimum) standard of 2.5% of balance sheet assets can't go any lower due to the letter of the law in 12 USC 4612(a)(1).
2) The Supreme Court said the NWS was perfectly fine, meaning an administration (now or in the future) could choose to just turn the cash sweep back on and not fear legal repercussions.
3) FHFA retains much more authority over FnF in conservatorship than out of it, letting the administration have more control over the housing finance system.

All of these have mitigating circumstances:

1) Treasury writing down or converting the seniors, plus a big enough capital raise, can take care of the capital shortfall pretty quickly.
2) The repercussions in the housing system would be potentially catastrophic, though, and Treasury can make money off of recap/release via warrant exercise or senior pref conversion.
3) FHFA's greater level of control can be extended past conservatorship with a properly-crafted consent order.

All in all, there is less reason than ever to keep FnF in conservatorship, and as they retain more and more capital it will be harder to justify keeping them in. Remember that the main point of the NWS was to prevent FnF from building capital and "escaping" conservatorship.