Replies to post #461875 on Fannie Mae-No Politics (FNMA)

[amelia43]

To say there are no risks whatsoever with commons is ridiculous. The current pps reflects tons of risks. If this had no risks whatsoever it would be trading at $80+. Let’s not be irresponsible here.

[kthomp19]

-Dilution: HERA doesn't allow to exercise the warrant, only authorized to protect the taxpayer. Also a nonconvertible P cannot get converted to C, besides it doesn't increase Capital.

1) How does HERA not allow warrant exercise? If you reference the December 2009 sunset provision that doesn't allow Treasury to purchase securities, keep in mind that the warrant allows them to assign it to anyone they choose, or even break it up. Thus Treasury could sell the warrant itself in pieces without ever actually buying any shares.

2) Converting P to C doesn't increase capital, but it doesn't decrease it either. Issuing new Ps afterwards DOES increase capital.

3) An equity raise (new common shares) is by far the cheapest and fastest way to recapitalize the companies.


Watt has constantly bemoaned the companies' lack of capital, so more must be raised. He has also said that new private capital must be attracted to the market to protect the taxpayer. If FnF had enough "capital" in this shadow account that nobody knows about, no new private capital would be needed at all!

That private capital will have to be in the form of equity, be it common or preferred stock (or more likely, both). Therefore that new capital will get an ownership stake in the company alongside those of us who currently own stock.

Face it: dilution is coming. It's not a matter of if, it's a matter of how much. THAT is the risk inherent in the commons. Commons have the most upside, yes. But you seem to completely ignore the downside that I laid out.