Fannie Mae-No Politics (FNMA)

[kthomp19]

This is the first I've heard of it. Is this from the Calabria book or is there some other source?

Calabria's book. navycmdr was kind enough to post screenshots of the pertinent section.

The gist is that if Treasury had converted the seniors to common in late 2020, the amount of money they estimated they could recoup from selling those commons would have been only around 30% of the full liquidation preference of the senior prefs. Treasury then made an offer to the junior pref shareholders to accept a similar 70% haircut to stated value and have everyone convert to common at once. Mnuchin wasn't willing to just convert the seniors to commons and leave the juniors in place.

However, the juniors were trading above 30% of stated value (what most of us call par, even though technically it's incorrect) so they rejected the offer. Maybe now they wish they had taken it, but rejecting it at the time was understandable.

The reason for such a large haircut is that FnF hadn't retained much earnings yet, meaning there would still have to be a huge capital raise to hit the capital requirement needed for exit. If an equivalent offer happened today the haircut to both the seniors and juniors would only have to be around 50%, and by 2026 it would only be 35% or so. 2026 is the point at which Fannie would hit its minimum capital requirement without needing a capital raise (though Treasury would still have to convert the seniors to common).