Fannie Mae-No Politics (FNMA)

[familymang]

The businesses don't need to be restructured as they are operating well enough, but the capital structure needs to be restructured, not sure why this is so complicated to some people on this board to understand.

Let's say the GSEs are worth ~10x P/E, thats = ~$250b total market cap.

But the capital structure, which no court has ruled is illegal at this stage, is currently:

1) Senior PFD liquidation preference: ~$290b,
2) Jr PFD liquidation preference: ~$30b,
3) Government warrants for 80% of the common equity + legacy common shareholders: Remaining equity value

As you can see the total value of the GSEs ($250b) isnt enough to cover even the $290b senior PFD liquidation preference today, so there is currently no value for both Jr PFD or legacy common shareholders as of now. A capital structure restructuring to modify the senior preferred liquidation preference (such as via conversion to common) would fix the capital structure and may allow 1) Jr Pfd to participate in the new capital structure, or 2) both Jr Pfd and common shareholders to participate in the new capital structure of the businesses going forward. TBD

But if you read Calabria's last book, he shares some insight on how the treasury as an institution is thinking about restructuring and what they think is acceptable and legal.

1) They believe writing down the senior preferred balance is ILLEGAL,
2) They believe the most workable solution is to convert the senior preferred and jr preferred to new common shares on an equal basis. This would leave very little for legacy common holders unfortunately.

So outside a court win, the common shareholders are screwed if thats truly how the treasury believes this should be restructured. I hope everyone here is getting ready to fund another 10+ year litigation as if they decide the pursue this route, as common shareholders will be diluted to oblivion.

Straight from Calabrias book if anyone is curious:

"There had been some calls over the course of the conservatorship for Treasury to just forgive all or part of its claim. That was a nonstarter, politically, for Treasury. Moreover, Treasury claimed it could not legally do so. A conversion of all preferred equity was the only way to fix the companies balance sheet in a manner acceptable to Treasury."