Replies to post #611088 on Fannie Mae (FNMA)

[Guido2]

Good first post ashes15. Welcome to the board.

[curious999]

from google search:
What is included in cet1?
CET1 represents the bank's core capital. It includes ordinary shares, retained earnings, stock surpluses from the issue of common shares and common shares held by the subsidiaries of the company.
NOW do you understand why jps converts?

[HoldenWalker99]

Doesn’t matter how you interpret the intent of CET1. Conversion increases CET1 by $33B. $76B CET1 required per capital rule proposal.

Same thing happened with $C. We’ve been talking about this for years. I don’t understand how people are still in denial.

[kthomp19]

Let's think about this, if you're converting JPS to commons how is this improving liquidity for the firm? It's just swapping one form of equity for another, right?

The junior-to-common conversion has nothing to do with liquidity. Instead, it boils down to two main things:

1) It increases CET1 capital by the par value of the juniors converted. If all of them convert, that's $33B, a significant chunk of what FnF need ($76B CET1 requirement plus $99B PCBBA buffer).
2) It clears $33B of liquidation preference and $2B of dividend preference from in front of the re-IPO commons. It is quite possible, and likely in my opinion, that said re-IPO investors will insist on the existing juniors being converted to commons.

As far as CET1 under Basel III, I think your interpretation is slightly off. CET1 covers assets that can be easily liquidated on the market in case of another great recession.

Check page 15 of the capital rule fact sheet. It shows that counts towards CET1. Namely, common equity, some types of AOCI (which are a rounding error for FnF), and retained earnings.

So if your PS become Common, how does it help the GSEs weather another downturn in the market?

Don't ask me, ask Mark Calabria. He's the one that has a separate CET1 capital requirement, which counts common equity but not preferred equity.

Another thing, a huge conversion of PS to Commons under CET1 will actually drive down the market value of any restricted shares on their books due to dilutive factors...which actually reduces their CET1 value.

No, this is completely wrong. The amount of CET1 capital has nothing to do with the market value of the commons.

Again, a JPS to common conversion is not only unnecessary it's counterproductive to reaching initial capital requirements.

Again, completely wrong. A junior-to-common conversion both directly adds to CET1 capital and makes the re-IPO easier.

In addition, there is no reason not to do it. The conversion is completely legal and advances the recap/release agenda.