Fannie Mae-No Politics (FNMA)

[FOFreddie]

The CBO values the UST warrants between 110 bn and zero depending on the valuation parameters at Exit. The implied value of common by the CBO is between $ 27.5 bn and zero.

Here is the CBO discussion of the valuation parameters:

If investors required a 10 percent return on their capital, they would value the GSEs’ combined equity at $306 billion, CBO estimates. That equity valuation would be large enough to cover the expected capital shortfall of $172 billion and the $35 billion in outstanding junior preferred shares, leaving about $98 billion to pay the Treasury for its outstanding senior preferred stock.34 In that scenario, the Treasury could exercise its warrants for common stock, but it would receive very little value for them, CBO estimates, because of the projected dilution of existing shares.

Using the lowest values from the ranges for the GSEs’ capital requirement (3 percent) and investors’ return on capital (8 percent) and the highest annual growth rate for the GSEs’ earnings after recapitalization (8 percent) would reduce the amount of the GSEs’ capital requirement to $200 billion at the end of 2024 and increase their combined equity value to $434 billion (see Table 3, Scenario 1). In that scenario, recapitalization and repayment of the Treasury’s full stake would be much more feasible. CBO estimates that the Treasury would not only receive the full $190 billion for its senior preferred shares but also receive $110 billion from exercising its warrants.

Conversely, using the highest values from the ranges for the GSEs’ capital requirement (6 percent) and investors’ required return (12 percent) and the lowest value for earnings growth (zero) would make recapitalization and repayment difficult even with five years of retained earnings. In that scenario, the GSEs would have a capital shortfall of about $273 billion at the time of the common-stock sale and a total equity value of $242 billion, CBO estimates (see Table 3, Scenario 3). As a result, the GSEs could not raise enough from the sale to cover their capital shortfall, which suggests that they would remain in conservatorship or be put in receivership.

See Table 3: This paragraphs below are set out just below Table 3

https://www.cbo.gov/publication/56511#_idTextAnchor037