Are we having fun yet? The Commander said, if we’re not having fun we’re not doing it right.
My Daily Commentary
Treasury and FHFA must agree to cancel the net worth sweep (NWS increase dollar for dollar on retained earnings) eliminate Treasury’s liquidation preference, and cancellation of the Senior Preferred. Fannie Mae and Freddie Mac in the minds of investors the companies already have repaid their senior preferred stock, to make the companies repay their indebtedness to Treasury twice after receiving $301 billion will be questionable to new investors.
Using my value investing strategy, (link below) the outcome of the described political agreement regarding Fannie Mae's conservatorship would be a dramatic unlocking of intrinsic value. This would almost certainly re-categorize the company from a speculative "Turnaround" or "Asset Play" into a more solid Stalwart or Slow-grower, potentially meeting my "bargain price" criteria at its current levels.
How the agreement impacts my strategy
1. Unleashes "Earnings Power"
Cancels the Net Worth Sweep: Eliminating the Net Worth Sweep would immediately end the practice of the Treasury seizing all of Fannie Mae's profits. This would allow the company to retain capital and reinvest in its business. This fundamentally changes the company's financial model and allows it to fully realize its "earnings power" for the first time since 2008.
Eliminates Liquidation Preference: Removing the Treasury's senior liquidation preference would clear the way for common shareholders to eventually receive dividends or see the value of retained earnings reflected in the stock price. With the government's claim forgiven, the billions of dollars in accumulated earnings would belong to the common equity holders.
2. Recalculates Intrinsic Value
The Overhang is Removed: The cancellation of the senior preferred stock removes the massive government overhang that has depressed the stock price for years. The intrinsic value calculation would no longer be hampered by a massive and senior liability, allowing for a much cleaner valuation based on the company's true earning potential.
Significant Upside Potential: With a conservative estimate of Fannie Mae's intrinsic value, the agreement would likely create a scenario where the stock is trading at a significant bargain relative to its new, unencumbered value. Some analysts project a substantial increase in intrinsic value per share once the conservatorship is resolved favorably.
3. Shift in Categorization
From "Asset Play/Turnaround" to "Stalwart": The removal of regulatory risk fundamentally changes the company's risk profile. It would transform Fannie Mae from a speculative play on a political outcome to a high-quality financial business with a strong government-backed brand. It could be reclassified as a "Stalwart" or "Slow-grower" depending on the assumed long-term growth rate of its earnings.
4. The "Bargain Price" Analysis
Meets the Criteria: Under the terms I described, it is highly likely that Fannie Mae's stock price, at its current levels, would meet or even exceed my 67% margin of safety requirement. The market price, based on past fear and regulatory uncertainty, would likely be a massive discount to the company's intrinsic value once its earnings power is fully unleashed and the political risk is resolved.
A "Mr. Market" Moment: This is the precise scenario my strategy is designed for: acquiring a high-quality business for a "bargain price" during a period of unjustified pessimism or regulatory uncertainty. The political agreement acts as the catalyst that proves Mr. Market was wrong.
Important considerations for my strategy
Not a Guarantee: An agreement, even a detailed one, does not mean the outcome is 100% certain. Political and regulatory actions can change.
Calculation is Key: This analysis assumes that my intrinsic value calculation, once the regulatory risk is removed, would be high enough to meet my margin of safety. This requires my continued analysis of the underlying business performance using 10Q and 10K reports.
Timing: The timing of such an agreement is uncertain, and this strategy requires patience to wait for the event to unfold.
In conclusion, if the hypothetical agreement were to occur, my strategy would likely classify Fannie Mae as a strong buy, and would be in an excellent position to benefit from the significant unlocking of value.
Market Data 
Markets 
