Fannie Mae-No Politics (FNMA)

[NeoSunTzu]

Bradford, here are some of the issues I take with much of what you post. First, let me commend you for fighting for shareholder rights for as long as you have. Second, let me state that if "the government" is sensible it WILL redeem the junior preferred shares at full value. Third, it is NO great insight, in fact, recognition that junior preferred shares carry less risk than common shares and what that implies or may imply in restructuring and bankruptcy is first year finance student basics. Finally, none of this is personal, but since you seem to be the lead junior preferred cheerleader, the issue I take with you is the level of understanding, insight, or expertise you imply you have, the certainty with which you make your arguments, the extremely sloppy "analysis" you put together on the number of new shares and associated common dilution, and the hubris you display when you post such things as in the below quote:

Tim Howard does not seem to want to convert the spspa to common even though there is no legal basis for the government taking a loss on its spspa liquidation preference by writing it down he continues to advocate for this inferior deal for taxpayers
He was a good cfo
But he would never cut it in investment banking. Just my opinion. I respect the guy

Given the history of our government, its waste, its corruption, the well-known facts about the forced conservatorship, the timing and real reason for the third amendment, the amount that has been paid back to the U.S. Treasury, what the government has wasted on litigation and creation of yet another government agency (FHFA), and what it will waste on that agency over its lifetime the "inferior deal for taxpayers" you reference above in regard to the spspa liquidation preference is nothing less than laughable. While it has been sanctioned by the courts it's almost as if supporters of jps relish its standing in the belief that it ASSURES you will be made whole while commons are massively diluted. The reality of that assurance may be very different than you imagine as I'll try to exhibit below.

The implication in your post regarding your knowledge of investment banking vs. Tim Howard's is the hubris I mentioned in my opening paragraph. Someone with your background shouldn't tread on such thin ice. Let me begin with a caveat that NOBODY knows how this will transpire and ALMOST ANYTHING is possible, but there is either some great leaps of faith being made at FHFA, UST, and the CBO, or they are ignorant of the historical stats of the IPO market, or they are deceptively looking for a back door receivership.

Let's start with the realities of raising the kind of capital the CBO uses in their analysis. (I could write a dissertation on the problems associated with relying on the CBO for anything, but that is an entirely separate topic.) You just have to pick a number and go with it on the 4.5% regulatory capital because there are too many moving parts and assumptions which adjust this number, but in the end the differences don't matter much to the wider argument - for this purpose we'll pick $2ooB. With the additional $19oB senior preferred and $35B junior preferred - bringing the total to $425B. By necessity, the CBO presents a limited number of capital raise scenarios looking at retained capital and what would need to be raised in 2023 and the same for 2025. To their credit they state that the capital raises can be done in stages and then make the curious remark that it wouldn't change the basic argument much. They also make two other statements that run counter to what you have stated in your posts. In footnote number 30 they state that it believes a reduction in the value of the senior preferred shares could be undertaken as part of the recapitalization of the GSEs.

The other more shareholder damaging statement is that failure to raise the necessary capital could result in receivership and the creation of a new entity which would raise capital - only paying back current shareholders IF it raised enough excess capital - NOTHING would be guaranteed to either class of shareholders. How plausible this scenario is will be determined by how unreasonable "the government" is and the realities of the IPO market as discussed below.

Returning to the $425B estimated required capital for the GSE obligations noted above it is important to look at some historical IPO numbers. To date, as far as I know, the largest IPO in history was Saudi Aramco which raised roughly $29B. From the data I found the largest year on record for total IPO proceeds (the ENTIRE IPO market) was 2021 which raised $286B. That figure fell last year to $175B. The entire IPO market for ALL 8 years prior to 2020 was less than $425B. Just the required regulatory capital ($200B) alone is nearly seven times the largest IPO on record, nearly as large as the largest year on record for the ENTIRE IPO market, and larger than every other year on record. Looking at these figures, the state of the economy, the logistics and mechanics of the IPO market, and a host of other statistics from the top 10 IPOs of all time, and the past 15 years of the total IPO market presents some truly daunting hurdles for the GSE capital raise. Obviously, the capital raise could be accomplished in stages, but it should be clear the challenges that remain in relation to the history outlined above. I'll refer you back to the CBO remarks about receivership. All of this is why Tim Howard recognizes the need for or advocates for reduction in the regulatory capital requirement percentage and the spspa obligation (or its elimination). Again, the CBO suggests the reduction could be undertaken with the GSE capital raise.

Fully addressing the insane share counts you alluded to in your previous analysis of common dilution would fill the entire space I've used already. But quickly, I believe the largest IPO share price on record was $78 per share with the vast majority of IPOs having share prices well below that figure. Furthermore, combining the figures I gave you earlier on the share counts of some of the largest global corporations (Apple, Exxon, Walmart, Facebook, Amazon) with the usual the number of shares offered from the top 10 IPOs further dismantles your back of the envelope share count dilution figures - even with a massive reverse split - especially when you look at the accepted literature on reverse splits, the usual ratios and the reasons they are undertaken. Combining this with the IPO historical stats above presents further daunting hurdles for the GSE capital raise. What kind of share price would be paid for a company with such a relatively outsized massive shareholder base whose profits are hampered by a government regulator with severe regulatory capital restrictions under the watchful eye of a dysfunctional Congress looking to buy votes with giveaways to the underprivileged.