Fannie Mae-No Politics (FNMA)

[Robert from yahoo bd]

TH and Bryndon today:

"Bryndon Fisher
AUGUST 21, 2023 AT 12:41 PM
“Had it not been for the sweep and the non-repayment provision of the Treasury senior preferred, the companies would have been able to use their torrents of retained earnings after 2012 to pay down their senior preferred, and then begin to build the capital necessary to allow them to exit conservatorship.”

Exactly. And, if the redemption of the senior preferred stock was done on a quarterly basis, beginning 1Q2013, both companies would have completely retired this obligation by 3Q2017 while simultaneously paying the originally agreed upon dividend. Moreover, this quarterly redemption process would have allowed the companies to keep approximately $220.4 billion more in retained earnings ($135.5 billion for Fannie and $84.9 billion for Freddie) than what actually occurred under the net worth sweep.

https://drive.google.com/file/d/15978NWfDcTtuClMBnwgWFmoPnwK94vWn/view?usp=drive_link

What Dr. Calabria and the “conversion crowd” don’t seem to understand (and I’m being kind with that characterization) is that converting the senior preferred stock to common shares does absolutely NOTHING to resolve the negative balance in each company’s retained earnings (i.e., accumulated deficit). The glaring accumulated deficit numbers will, at the very least, cause rational investors to question how and why these billion-dollar companies have these adverse amounts on their equity statements. Raising additional funds in the capital markets will be virtually impossible if the government follows the vaguely illustrated path outlined in Dr. Calabria’s book."

TH response:

"Bryndon—While you are correct that converting Treasury’s senior preferred stock to common “does absolutely nothing to resolve the negative balance in each company’s retained earnings,” it WOULD increase their regulatory capital by the amount of the converted senior preferred, thus bringing them much closer to their required capitalization (since common stock, even if owned by Treasury, is classified as regulatory capital by FHFA, whereas the Treasury senior preferred is not). But I agree with you that this conversion would very likely make it quite difficult, if not impossible, to attract new investor equity into the companies–or to allow Treasury to monetize the value of its virtually 100 percent ownership of Fannie and Freddie by selling its shares to third parties (while raising no net new capital).

You reference the “vaguely illustrated path [for exiting conservatorship] outlined in Dr. Calabria’s book.” There was literally no useful information in that book to indicate what Secretary Mnuchin might have been contemplating, and whatever it was, it seemed obvious that Calabria had not been in the loop on it (otherwise, he would not have described it so befuddlingly). Which makes me wonder: WAS there an actual plan, that the companies’ investment bankers thought could be executed successfully, and if so, what was it, and why wasn’t it carried out? The excuses Calabria gave for not doing so—first the impending election, then the fact that the Trump administration lost that election—are not convincing, since the timing of the election was known to everyone working on the alleged plan, and the possibility of losing it also would have been taken into account.

I’ve never understood how Treasury could continue to insist counterfactually that it had rescued Fannie and Freddie (as opposed to effectively nationalizing them for policy reasons, as the evidence shows it did), and that this rescue was of such value that full ownership of their earnings forever was fair compensation, while at the same time expecting them to ever be able to raise any significant amount of new equity again. If Treasury does want to “stick with its story” about a rescue of Fannie and Freddie of incalculable (and non-repayable) value, it seems its only real choice for their futures is formal nationalization. I suspect Mnuchin may have realized that—and wasn’t willing to just cancel the net worth sweep—so he pulled the plug on “recap and release” without ever telling Calabria, or anyone else, why."