Replies to post #509119 on Fannie Mae-No Politics (FNMA)

[kthomp19]

1. UST will need to refund the excessive NWS payment ($16.1B as estimated in a court case).

The Collins plaintiffs actually asked that the $16.1B not be sent back to FnF. Instead the money would stay with Treasury, but FnF would get $16.1B worth of credits, presumably either against future income taxes or the backstop fee Treasury wants.

2. Bailout is fully repaid. So, warrants are no longer valid.

Nope, this is completely and 100% wrong. The existence and exercise of the warrants has absolutely nothing to do with whether the bailout money was repaid. I explained it here.

It's the seniors that play the role of collateral, not the warrants.

4. To release from C-ship, FHFA may waive the capital requirement for 5 years.

This would directly conflict with Calabria's words in the same paper he used to denounce the NWS. A conservator's job is to restore the charges to a sound and solvent status, and Calabria has said that "sound" means fully capitalized.

Allowing FnF to exist outside of conservatorship but undercapitalized also keeps taxpayers on the hook until fully-capitalized status is achieved. Treasury has veto power over release, so they would have no reason to allow a slow recap when they could insist on a fast one (which keeps taxpayers safer).

But, I don't think the capital requirement needs to be $100B.

I take that to mean that you don't think the companies will need to raise $100B in equity. You can plug your own number for #2 in my framework and it will give a new answer.

However, keep in mind that:

1) Once the seniors are cancelled or converted, FnF core capital will stand at roughly $12B
2) Watt's proposed capital rule set minimum capital standards of either $103.5B or $139.5B (under two different alternatives)
3) Calabria has argued in the past for even higher capital requirements

You can get the capital raise number as low as $50B (use the lower alternative of $103.5B, subtract $12B of core capital and $40B for two years of retained earnings), but it could also be as high as $127B (instant all-common recap), and could be higher if Calabria decides on an even higher minimum capital standard.