Replies to post #438614 on Fannie Mae-No Politics (FNMA)

[Clutch29]

Sorry guys havnt been around all day beenn to busy building my bed from wood of Jesus manger. Never know when im gonna need good tidings. Heres a thought I would write.
Dear Mr Mulvaney,

For Christmas I would ask of you to throw away the Average Joe Plan and all this business of Moelis and take that money you found un-papered and wrap it up for FnF shiteholders. I want to surprise them on New Years with it. Call it a bonus or what not but I want that average joe to shit his pants so he can go buy new ones. After all Tonto and Pocahontas didnt get anything and had to sleep in a makeshift mannger, but you know these Americans are the greatest. They are ready for N.K they just wont see it comin cause they blew out our sattelites. Well on second thought we could probly use that money for somethin. Just keep it close by. Were gonna need it.

K.I.T

Mr. President

[imtheshadow]

kthomp, that's the way I see it as well. great explanation. cheers

[rekcusdo]

Though I agree with you that this is how it works in practice, this isn't how the market would react to it. A "forgiving" of the SPS would drive up the price even though equity has not changed. The market would react to it as though the net worth has increased.

[contrarian bull]

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.

AAARGH! I just can't leave this standing... I will beat this dead horse one more time.

Yes - those preferred shares are EQUITY that f&f loaned to someone else (Treasury) in exchange for cash (the draws).

I'm sorry you have such a misunderstanding about this. I suppose it's partially because the senior preferred (as well as junior preferred) is under a heading of "Liabilities and Equity". That would "equity" could trick you into thinking it's a positive thing for f&f. It's not. It's an equity stake in f&f that f&f sold to an outside investor. It is absolutely, positively a liability.

Yes - it's not a "loan" but it is an investment. And one day treasury will want to get paid back for that investment. Just like junior preferred stocks are not a loan, but they kind of act like loans as far as the balance sheet goes.

Look at that balance sheet again and this time imagine that the heading says "Liabilities and Debts". And imagine that instead of a line item of "stockholder's equity" it says "stockholder loans to us". Then maybe it will make more sense?

Using the word 'equity' is long-standing tradition, but can confuse some.

This really is an important point.