Replies to post #511718 on Fannie Mae-No Politics (FNMA)

[Fully Diluted]

Hi cclose1,

there are two golden accounting rules. Unfortunately I don't know any. :-(

But I can tell you that at the start of the conservatorship the FHFA suspended the statutory requirements for Fannie. And the company now has such a high accumulated deficit that it would exceed the SPSPA line of credit.

Good that you are here now - bright thoughts! Especially the shrinking book value of the SPS is an interesting point, which I have already noticed positively as well. Unfortunately, the value of the SPS has increased recently.
If an exercise of the warrant brings in the book value of the SPS, then Mnuchin can well argue that he gave nothing away by cancelling the SPS. Very important - assuming we continue to lose in court.

GLTY

[kthomp19]

a guarantee would reduce the liabilities on the balance sheet

How so?

Thus, reduce required core capital of the company.

The required core capital is called the minimum capital requirement. Read section (a) of 12 USC 4612 to see the definition. Notice that reducing liabilities would in no way reduce the minimum capital requirement.

The argument can be made that this government guarantee is already in place through the existence of the SPSPA and their line of credit.

Good point. This is true. But it doesn't affect core capital now, so it wouldn't in the future either.

Also, it is important to note that the government currently views this line of credit as "core capital" for the purpose of satisfying the statutory requirement

No they don't. Go read the definition of core capital I posted, and also read Fannie's own core capital section on page F-50 (page 239 of the pdf) of their 2018 10-K, where they define core capital as:

(1) The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; (c) our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income or (b) senior preferred stock.

A government backstop does not fall under any of those categories.

The more i learn and follow this the more i think that many are underestimating the role accounting will play in the recap and release.

Absolutely right. Be very careful about whose posts you give credence to when it comes to accounting. There is a lot of false information on here, such as the idea that the seniors (or even the juniors!) are liabilities as opposed to equity.

Read the law carefully, especially the three sections linked to in my previous post.