Fannie Mae-No Politics (FNMA)

[JOoa0ky]

There are two separate processes that happen during recap and release from conservatorship.

The biggest barrier to exit is the seniors and how treasury will get "compensated" for what they've done and what they are owed.

The second thing that most likely has to occur is a capital raise, which occurs after the seniors have taken their share. Seniors got paid first.

There is a slight nuance in this but seniors cramming down is NOT a part of the capital raise. JPS conversion is an option for raising capital. That puts them closer to being on the same boat as new capital.

The reason why that distinction is important is that JPS does not have to do anything. An alternative option is leave JPS as is with no conversion. FnF can simply raise an additional 33B.

Of course people will kick a fuss about how no new capital wants to be underneath of old JPS.

Yes, it is true that treasury had plans to do it "all at once" because they want to leave no room for anybody to take advantage of the process once the ball gets moving.

That's not true IMHO. An important question is in which order a conversion of SPS and/or JPS into commons takes place.

According to Calabria's book, any conversion of SPS and JPS into commons is supposed to take place simultaneously, and that would be an acceptable outcome for JPS holders.

But it would be much less favorable if first the JPS were converted into commons and afterwards the SPS were converted into the (then already JPS-"prediluted") commons. Because in the latter transaction JPS and commons would both be extremly diluted due to the immense volume of the SPS (SPS at $193 billion; LP at almost $300 billion).

However, JPS holders could invoke their contractual rights and refuse to approve the second variant.

Worst "order" for JPS holders:

1. Warrents execution, then
2. JPS to common conversion, then
3. SPS to common conversion

Most likely outcome: first (1), then (2 + 3) taking place simultaneously with equal haircut terms, if any.