Fannie Mae-No Politics (FNMA)

[kthomp19]

Don't let Wall Street know the GSES are in bankruptcy. Last time I checked Fannie Mae Corporate Debt was rated AAA by Moodys.

FnF bondholders don't stand to lose any money until and unless FnF burn through the $92B in net worth on the balance sheet on top of the around $250B in remaining funding commitment from Treasury. Their AAA rating is well deserved, even with FnF in their current bankruptcy-like state.

If Treasury restructures its seniors in order to allow FnF to exit conservatorship the bondholders won't be affected at all.

Notice the rating on JPS.

That reflects the facts that the juniors are non-cumulative and stand behind a mountain of liquidation and dividend preference in the form of the seniors prefs. If the commons carried a rating it would be even lower than that of the juniors.

Really? What if JP Morgan or Morgan Stanley or whomever the FHFA and UST hire to advise them on double dipping from the theft, tell them their is little if any appetite for Wall Street to fork over $100B to $200B in fresh equity capital into a 1st Loss Position after Wall Street does its due diligence here and is skeptical of the claim from the FHFA and UST that they won't obliterate equity Shareholders ever again?

That's not what I said. Treasury must restructure its senior prefs if FnF are to exit conservatorship before 2040. A capital raise may or may not be necessary depending on when this happens and how much in earnings FnF retain between now and then.

If new investors are so spooked by government misdeeds that they won't contribute any capital, no matter what rate of return they are promised, then FnF are stuck in conservatorship for at least another 5 years. And since the senior pref liquidation preference keeps growing, even a no-capital-raise exit from conservatorship could result in just as much dilution to the existing common than one that includes a capital raise.

Isn't the essence of this Private Capital in a 1st Loss Position/Public Mission partnership centered on the very notion that Wall Street can trust the federal government NOT to Nationalize their capital and take it ALL for themselves for nothing in return?

I understand this "fool me once" type of argument. But I don't think previous government misdeeds will prevent new investors from coming in, instead it will just lower the price they will pay. If the government offers a 500% return on investment would they dig into what happened to the last guys? 700%? 1000%? Everyone has their price.

What if the FHFA lowers the ERCF?

FHFA can't meaningfully do so. I put the details in this post from earlier today. The upshot:

1) HERA says FnF's minimum capital requirement cannot be less than 2.5% of balance sheet assets (though the FHFA Director can require more).
2) If FnF's core capital is less than their minimum capital requirement outside of conservatorship, FHFA must classify them as "significantly undercapitalized" which gives FHFA almost as much authority over FnF as conservatorship does.

The only real change FHFA can make is to eliminate the 6% (Fannie) and 16% (Freddie) asset adjustments so that the capital requirements are based on balance sheet assets (as the base requirements in HERA use) instead of "adjusted total assets" (a term FHFA invented).

It seems to me that if the UST wants to 'maximize' its payout

Treasury converting the seniors to commons instead has the exact same effect, except that they get even more money (that would have gone to the existing common). So if the topic is Treasury maximizing its stake, the discussion starts and ends with a senior-to-common conversion.

The reality is that the US federal government is NOT in the 'profit maximization business', rather the US Government is in theory here to serve the American people.

That doesn't change the fact that converting the seniors makes more sense for Treasury than cancelling them. Why would Treasury leave any more money behind than is absolutely necessary? (Which is next to nothing.)

What exactly would happen in the event the federal government attempts to implement the 'dilution solution' (i.e., dilute the existing common into oblivion) and a legitimate challenge to the abusive and coercive governmental overreach here is filed in a federal circuit court?

That depends on the specific claims brought. A takings claim would necessarily be direct and would be limited to the share price drop as a result of the conversion. That's less than $1B of liability to Treasury at today's prices.

No claim will be able to undo the dilution anyway. Courts won't be able to take away shares that have already been issued to Treasury and sold to outside investors. The best they could do is try to make the legacy common "whole" with respect to the senior-to-common conversion, which is probably again just damages in the amount of the share price immediately prior to the conversion.

What's the significance of 2040?

That's the point where, if nothing changes, FnF actually hit CET1 capital equal to 3% of adjusted total assets (the exit threshold defined in the January 2021 letter agreement) even with the seniors in place. This assumes that Fannie makes $15B and Freddie $10B each year, and that balance sheet assets and earnings each grow at 3% per year. All reasonable assumptions, in my opinion. Tim Howard seems to have calculated a similar date for exit if the seniors aren't dealt with.



Again, don't get me wrong here. I wouldn't mind a senior-to-common conversion but I would much rather Treasury cancel the seniors. But this isn't about what I think should happen. It's about what I think will happen. So much of the discussion about a senior-to-common conversion is about why Treasury shouldn't do it, but that's utterly meaningless. Why can't (or won't) Treasury convert the seniors to commons?

The only answer I've heard so far is "lawsuits", which I believe can only result in damages equal to (or less than) the share price before the day of conversion, and in any case can't undo the dilution once it happens.

The NWS took shareholders by surprise, and I guarantee you had they been asked what they would do if told about it beforehand, "lawsuits" would have been the first answer. And we have now seen what happened to those: most are dead and the few that remain are either on life support (still at motion to dismiss stage) or can only result in a buck or two per share in damages (Lamberth). After-the-fact lawsuits against a senior-to-common conversion will be even harder to win.