Replies to post #436773 on Fannie Mae-No Politics (FNMA)

[MannSinger]

Assets=Liabilities+Equity, How DTA play role in here?

What happens once senior preferred is considered paid off and lower DTA because of tax rate goes down from 35% to 25%?

$187B liability goes to zero

DTA goes down from $60B to $30B.

[contrarian bull]

What happens if the NWS is retroactively revoked and the senior preferreds are extinguished?.

bcde (and you, if I interpret your last few posts correctly) believe that it would amount to an instant recap with no additional equity raises needed, while I believe that extinguishing the senior preferreds would just erase the accumulated deficit, leaving the companies with the same amount of capital they have now, i.e. nearly zero.

The junior preferred and senior preferred show up as a liability (stockholder equity) because it is a REAL debt that must be paid back. If the NWS was revoked and the senior preferred were considered as paid, this would immediately subtract $187.5 billion from the deficit side of the balance sheet and give them that much net worth.

I do not think it would affect the accumulated deficit as far as I know. That amount was paid and will still be paid unless they gave back the previous payments in addition to cancelling the senior shares - which would only happen if that cash was sent on the back of a unicorn. My understanding is retained earnings subtract (add?) to that negative retained earnings. Cancelling the senior preferred shares is not a cash transaction, and would not show up as earnings in my opinion.

So the net worth would go up for f&f by that $187.5B. I think the scenario of cancelling the senior preferred is still way less likely than a black swan, but more likely than a unicorn.

Just to answer a question I have - when does that accumulated deficit drop off the balance sheet? I guess when earnings are retained? And why is it there? It's not owed, it's not cash, it's already been paid. Seems like it has no reason to be there except to make the numbers work. Seems like it's fudging. This has always worried me when analyzing the balance sheet for f&f because if that number went away the balance sheet would look really bad.