Fannie Mae-No Politics (FNMA)

[kthomp19]

Yes, although this doesn't mean lawsuit/s won't be filed after the fact. They just have a near-zero chance of success.

I agree here.

Saying that lawsuits will be filed if Treasury dares to convert the seniors to commons is a prominent bit of common nonsense. It ignores the fact that such lawsuits have to actually succeed to matter.

While it's possible the 300+bn worth of SPS gets converted, it's also possible it's less than that.

What is your estimate on how much will be converted versus written down?

I think it's a 25% chance of none converted and all written down.
50% that all of it is converted.
25% that only the $193B worth of balance sheet SPS is written down and the rest is converted.

That latter scenario exists because a conversion of the balance sheet SPS involves moving that amount into the common stock line rather than retained earnings. Both common stock and retained earnings count towards all forms of regulatory capital so that's not an issue, but it might be odd to have this enormous common stock amount on the balance sheet while having hugely negative retained earnings (accumulated deficit).

There is no reason for FHFA to say no to any conversion ratio of the SPS though, so there probably isn't any functional difference between Treasury converting the entire LP and only converting the part that is off the balance sheet.

The amounts CAN be altered with a pen swipe.

Again, whether or not this is possible isn't really the point. What matters is the probability estimate of whether or not it will happen. I have a SPS writedown at 25%, and if anything I think that's too high. KBW has it at 0%, for example.

Your number is clearly much higher, though you haven't yet said what it is or why.

Possibilities don't matter here, probabilities do.