Fannie Mae-No Politics (FNMA)

[LuLeVan]

"A conversion is akin to the poison pill; however, it not only harms the shareholders, it harms a taxpayer/shareholder entity."

This statement is debatable. The continued existence of Fannie and Freddie (outside of conservatorship) is in the interest of all taxpayers, especially those who want to buy a house on favorable terms. There should be no denying that Fannie and Freddie as FIRMS will be financially stronger after recap/release because CET1 will be at the target level (even though it's overstated under Basel III). Once free, FnF can also expand their credit volume.

A SPS conversion would undoubtedly be a financial disaster for legacy commons as they will be left almost empty handed. However, one should be careful not to lump legacy shareholders together with all taxpayers.

So the crucial question is what is more important: the welfare of the legacy shareholders or the welfare of the two companies? The government will certainly argue for the second (also out of self-interest, because there will be $20 billion more for them in a SPS conversion, compared with warrants exercise alone).