Replies to post #549531 on Fannie Mae-No Politics (FNMA)

[kthomp19]

They are a drag, just not a drag on core capital. The are NOT DEBT!

I agree, the seniors are not debt. Believe me, I spent hours on this board making that exact point. Technically it's not them that is the drag on core capital, it's the massive accumulated deficit that resulted from all the dividends paid on the seniors.

Right now the seniors do not count towards core capital because they are cumulative. Fannie's core capital was negative $115B at the end of 2018 according to page F-50 of their 2018 10-K, and Freddie's was negative $68B (see page 337).

If the seniors are cancelled, retained earnings would rise by the same amount; neither assets nor liabilities would change. Since retained earnings counts towards core capital, core capital would rise by $187B to around $4B.

If the seniors are converted to non-cumulative prefs then the accumulated deficit would stay the same, but core capital would still rise by $187B because now they would count. The same if they are converted to commons: no change to accumulated deficit, but the senior pref amount on the balance sheet would be added to additional paid-in capital.

My previous post was in response to the assertion that an en banc win would mean dilution doomsday for common shares.

Right, and what you missed is that if Treasury really does send $131B to FnF, they will not be instantly and fully recapped because the seniors would still exist. Adding $131B in cash to the balance sheet only brings core capital up to negative $54B. It's cancelling the seniors or converting them to something that counts as core capital that would finally get FnF to fully recapped status and eligible to be released.

But that means the conversion would happen before release because Calabria won't release them while they are undercapitalized. That means it would be FHFA, not the boards of directors, that would be negotiating on FnF's behalf. And FHFA has no fiduciary duty to existing shareholders. They have no reason to avoid crushing dilution to the commons.

Even FD agrees that a senior-to-common conversion is the worst case for current common shareholders.