Fannie Mae-No Politics (FNMA)

[kthomp19]

KThomp, you appear to have a solid, in depth understanding of FnF history as it pertains to FHFA and Treasury.

Thank you for the kind words.

How do you see the preferreds and commons doing? I realize there are numerous possible outcomes, but I'm curious what you think.

Short version: I think the juniors will end up with somewhere between 50% and 100% of par (stated) value via a conversion to common. Not converting the juniors makes no sense due to the CET1 capital requirement in the ERCF.

I think the commons are worth about $8 at the most when FnF are recapped and released, and that's only if Treasury chooses to write down the seniors entirely. If they convert those seniors to commons instead, as Mark Calabria wants them to do and as KBW expects, they will be worth somewhere between $0.25 and $2.00 per share, depending on how FHFA and Treasury structure the transaction. Probably towards the lower end of that range since there is no reason for either FHFA or Treasury to fear any lawsuits and that the situation for FnF common shareholders is far worse than that of AIG common shareholders, who got diluted down to 8%.

I expect the commons to rise and fall roughly in line with the juniors until recap/release time so I wouldn't short them, at least not for more than very short periods as an attempt at statistical arbitrage, but I avoid them entirely.