Replies to post #607021 on Fannie Mae-No Politics (FNMA)

[Guido2]

Great point!

[kthomp19]

The writedowns are better than retained_earnings!

With retained earnings their capitalization goes up, but F&F have to increase liquidation preference by an equal amount.

With a writedown they also get to increase capitalization by retaining earnings, but they do not need to increase the senior liquidation preference. WIN!

This is quite the jump to conclusions. "Writedowns" (which are really write-ups to loss reserves) mean less retained earnings, which in turn mean FnF have less core capital.

See this comment by Tim Howard for the refutation to your argument:

For these reasons, I view having more loss reserves and less core capital as at best neutral, and more likely a modest negative.