Fannie Mae-No Politics (FNMA)

[JOoa0ky]

If 1. the conversion of the government's stake into commons is determined by the value of its liquidation preference (currently just under $300 billion, while the SPS are on the balance sheet at only $193 billion), and 2. the same percentage haircut is to be applied to the Liquidation Preference and the JPS (according to Calabria's book), it follows:

The longer recap/release is delayed, the bigger the haircut will be on the JPS.

Simply because the LP is getting bigger and therefore the haircut the government has to take on its LP is getting bigger.

On the other hand, the value of the JPS on the balance sheet is not increasing, it is fixed at $33 billion.

That is incorrect. Regardless of what the current retained capital is, the conversion of seniors to commons will result in the GOVT owning 99.99% of FnF.

The current retained capital of 100B... conversion results in 99.99% of FnF ownership for govt.
Conversion at 2028 with X amount of capital.... results in 99.99% of FnF ownership for govt.

Converting JPS to commons will take 33B off of the total in both scenarios since it is fixed.

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Seniors get paid first so they will grab 99.99% of both companies from the get go.
Conversion of juniors is not a necessary payout in the restructuring. It is an option to raise capital to bridge the required capital gap.

It is that bolded line which results in juniors reaching PAR.
Juniors can permanently stay on without conversion... The new owners of FnF at the time, govt with their 99.99% would just have to raise an additional 33B of capital to offset the juniors.

IMO a great way to think of this is who is the owner.
After senior conversion, govt is the de facto owner of FnF with nearly 100% ownership.
Now they are faced with a capital shortfall once that happens.
For them to "raise capital" they must "sell off" parts of their equity.

New investor capital... converting JPS... those are all "sources" of capital.
You can even think of the JPS as quasi new capital.


Consequently that is WHY the commons have no security and no leverage because they don't provide anything of value in the capital raise.