Fannie Mae-No Politics (FNMA)

[familymang]

Great question. Calabria does discuss this in his book and implies its the LP. There is a section where he discusses a conversation with Senator Warner and having to explain to him that economically the government can never realize the full LP value of the senior pfds, therefore must take a haircut via conversion to capture as much economic value as they can via this route.

Interestingly enough, the longer they push off the exit, the more value treasury (and JPS) can recover of the LP since as they get closer to reaching the capital requirement, there would be less and even possibly no dilution/ipo needed.

"If senior redemption is based on LP then Treasury’s percent of the conversion will keep growing while JPs will shrink."

This is only true once the GSEs reach the required capital requirement to exit cship, as the JPS (and senior pfds) value actually increases over time since less and less dilution/ipo is needed prior to that point. For example, Fannie is expected to hit 2.5% minimum capital requirement at some point in 2026, at which point the JPS would have max conversion value. Once they pass this point, and Fannie begins overcapitalizing itself, all the benefit now begins accruing to the Treasury since there is no more of that offsetting dilution impact that's happening currently between now and 2026. My math has JPS at 5.8% ownership if equal conversion where to happen today, 7% at 2026 when an IPO is no longer needed, and drops about ~30bps/yr every year after as the benefit now starts accruing only to treasury. (Also keep in mind the GSEs earnings power (and overall entity value) should be increasing overtime inline with US GDP, so while ownership is shrinking past 2026, its of a pie thats growing every year.)