Fannie Mae-No Politics (FNMA)

[LuLeVan]

Tim Howard: "...If this or a future administration turns around on the way it treats Fannie and Freddie, even given the history of the past fifteen years, a P/E relative to the S&P 500 of 50 percent would seem to be attainable, and one higher than that would not be out of the question. A relative P/E of 40 percent would put the market value of Fannie and Freddie at around $250 billion, which would be split among Treasury, existing shareholders, and whatever new investors are needed to help the companies meet their new, more reasonable, capital requirements (with Treasury’s percentage being inversely related to the amount of new equity issued) *❗️

Fannie and Freddie’s $25 billion in annual earnings, high-quality books of business, and results of their last three years of Dodd-Frank stress tests highlight the fact that there is no reason for them to have been kept in conservatorship for 15 years, and certainly none to keep them there for another 15 years. The net worth sweep and the unreasonable capital requirements of the ERCF prevent the companies from getting out on their own. But here, the August 14 (jury) verdict against FHFA in the Berkley Insurance case involving the sweep and the pointed criticisms of the ERCF in response to FHFA’s request for input on Fannie and Freddie’s capital and pricing give the current administration, or a future one, legitimate reasons to question both. Whichever one does will discover that there is an easy way out of the conservatorships that is a win for all parties—the administration taking the action, its Treasury, the mortgage finance system, homebuyers, and the new and existing investors that supply the private capital Fannie and Freddie need to carry out their missions."

https://howardonmortgagefinance.com/2023/09/11/an-easy-way-out/comment-page-1/#comment-30401

(Emphasis added by me)

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*❗️: The important point here: The lower the capital requirements (ERCF) are set, the less the dilution of the legacy shareholders in the capital raise, and the more the government "earns" from recap/release, because a smaller percentage of the final market capitalization goes to outside investors (the subscribers to the new shares). So lowering the capital requirements is a win-win that benefits both the government and the legacy shareholders.

Calabria's excessive capital requirements have therefore harmed both the government and the shareholders. Presumably, their main purpose was to delay recap/release for as long as possible. The main beneficiaries of this strategy were the TBTF banks, which could gain market share.