Replies to post #436777 on Fannie Mae-No Politics (FNMA)

[kthomp19]

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.

You're going to get two different answers here. My answer is that (until I am convinced otherwise) once the senior preferreds are extinguished FnF will have capital positions around where they are now. The other answer is that extinguishing the senior preferreds will put more than enough capital in the equity portion of the balance sheet to offset a reduction in the value of the DTAs.

Fannie reported a total stockholder equity of $3.468B in its last 10-Q. That's essentially the net worth, what's leftover when you subtract liabilities from assets. The DTAs' reported value is $30.454B. Lowering that proportionally (multiply by 0.25/0.35) gives $21.753B, so the DTA writedown would lead to a reduction of $8.7B. That reduction in assets would be balanced by a reduction in retained earnings (actually an increase in the accumulated deficit), and the net worth of the company would be 3.468B - 8.7B = -5.233B. Thus Fannie would have to draw $5.233B from Treasury to maintain non-negative net worth.

Of course this would be offset by any income Fannie makes in the next quarter. The DTAs will also decrease in value naturally by the amount of tax Fannie otherwise would have paid. It might not be enough, though, so the "threat" of a draw is quite real as things stand.

So in my scenario, even if the senior preferreds are declared extinguished (NWS is rolled back) there will need to be a capital infusion once the DTAs are written down.

[Pecker9Wood]

Talk too us like we are eighth grades please.

[bcde]

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

MannSinger,
In terms of accounting entries it will be difficult to understand for many.

It will be best understood in terms of net worth or capital reserves =(assets - liabilities - Shareholder funds).

1. If SPS is paid off due to revocation of NWS retroactively then net worth goes up by $187.5B.

Net worth = 0 + $187.5B = $187.5B

2. If DTA reserves lose value because of lower tax rates, then net worth goes down by $21B ( tax rate 20 percent from 35 percent).

Networth = $187.5B - $21B = $166.5B

It is as simple as this.

----------------------------------

Fannie, Freddie may write down $21 billion due to U.S. tax cut: BMO
http://www.reuters.com/article/us-fanniemae-tax/fannie-freddie-may-write-down-21-billion-due-to-u-s-tax-cut-bmo-idUSKBN1722O6