Replies to post #438602 on Fannie Mae-No Politics (FNMA)

[kthomp19]

What are you talking about? Did you actually READ any of the f&f 10-Q's?

Not word for word, but I did look at the balance sheet.

Senior preferred stock is under "LIABILITIES AND EQUITY" under the sub-heading of "Stockholder's Equity".

Yes. This means the senior preferred is not a liability. If it was it would be listed under "Liabilities". The only reason "LIABILITIES AND EQUITY" are put together like that is because it is the right side of the Assets = Liabilities + Equity equation. But the two things are fundamentally different.

Well - I know that if my mortgage company suddenly said my debt to them was zero, my net worth would go up half a million bucks. I don't see how forgiving a loan would decrease my net worth...

Preferred stock (junior or senior) is not a loan. If it was, it would be listed as a liability.

If you were to make a personal balance sheet your mortgage would be a liability. When you make a mortgage payment, you reduce assets (cash), reduce liabilities (by the amount of the principal in your payment) and reduce retained earnings (by the amount of interest in your payment).



Since the senior preferreds are not a liability, it works differently for FnF. Let's assume the NWS was never put in place (same as it being revoked retroactively) and FnF could pay down the senior preferreds (with payments above the 10% interest) as per the terms of the original SPSPA. When a quarterly dividend payment was made, FnF would reduce assets (cash) by the amount of the payment, reduce senior preferred stock (by the amount of principal in the payment) and reduce retained earnings (by the amount of interest in the payment).

With the NWS in place, each quarterly payment causes assets (cash) and retained earnings (equity) to both go down in the amount of the payment because the senior preferred is non-repayable.

(Aside: actually the senior preferreds are repayable, the problem is that only excess amounts over the dividend amount, currently all net worth minus $600M, can reduce the balance, and per the NWS FnF are not allowed to pay excess amounts)

The only difference between the NWS and where we would have been if it had never happened is that the money sunk into the accumulated deficit would have gone to paying down the senior preferreds instead. So Fannie's balance sheet above would have no senior preferred line, and accumulated deficit of $9.476B (126,625 - 117,149). The net effect is that total stockholder equity would still be the same: $3.648B.

Going forward, of course, the NWS is much different. Without it FnF would not be making any dividend payments at all, with it all payments are lost money that is highly unlikely to ever come back.

[kthomp19]

Well - I know that if my mortgage company suddenly said my debt to them was zero, my net worth would go up half a million bucks. I don't see how forgiving a loan would decrease my net worth...

One more point about this. You're absolutely right: if the bank forgives your mortgage then your net worth goes up $500k. Your liabilities would go down $500k and your retained earnings would go up $500k. Since equity is basically your net worth, your net worth increases $500k.

But since the FnF senior preferreds are equity and not a liability, forgiving them would reduce equity (senior preferred balance) by the same amount it increases equity (retained earnings). The net effect is no change on net worth because total equity remains unchanged.


This is the key difference between (incorrectly) viewing the senior preferreds as liabilities. It absolutely matters that they are equity.

[bcde]

contrarian bull,

Since you have understood the concepts, this is to provide you and others with more details.

1. This is how it works when Tsy invests $187.5B in FnF:
The invested cash of $187.5B becomes assets for FnF and in return, FnF issue SPS worth $187B to Tsy. So this cash assets of $187.5B is balanced by SPS liability of $187.5B in book keeping.

2. If original SPSPA agreement were to be used:
All the $286B payments will go for paying off SPS libility of $187.5B and 10% Dividend and that would result in zero SPS liability. In this scheme, the accounting entries would have reduced both liability of SPS+interest and assets by $286B. But there is no theft of FnF capital.

3. Under NWS:
$286B was paid as dividend (no 10% interest) without reducing SPS liability of $187.5B. In this scheme, only assets are reduced without corresponding reduction in SPS liability. Currently FnF have net worth of $600M. That means SPS liability of $187.5B has corresponding assets of $187.5B. If today FnF were to be liquidated then Tsy gets $187.5B and JPS/CS get $600M.

4. If NWS were to be revoked retroactively:
$286B would be added back to assets resulting in networth of ($0.6B + $286B + $187.5B) with SPS liability of ($187.5B + 10% interest). Then $286B can be used to pay off SPS liability of ($187.5B + 10% interest). This results in networth of $188.1B ($0.6B + $187.5B).

5. If NWS were to be revoked proactively:
FnF can pay off SPS liability of $187.5B with corresponding assets of $187.5B maintaining current net worth of $600M. In this case, NWS would steal net capital of $187.5B from FnF. After this FnF will have to raise $150B to $200B capital from markets to meet regulatory requirements.

[Donotunderstand]

Contrarian

Question

Re the Senior Preferred ....

If in any way like a normal preferred --- Fannie would have received cash for the amount of equity shown ("issued")

Did that occur or is the investment in equity (the SPS) a line of credit ?

I have raised before and do not understand BCDE

Is it correct to believe that cash came over with the SPS so that the entry was Debit cash (or cash special reserve) and debit Equity

So if Fannie needs to buy back the SPS --- it has this money in special reserve - and the buy back is a WASH and does NOT increase the need for capital ?

I would love this explained in simple like English as it confuses the shist out of me