Replies to post #619834 on Fannie Mae-No Politics (FNMA)

[mrfence]

You're big picture assessment is very reasonable and also very generous to the Government Agency Purps. IMO, we'll negotiate that as a minimum success target which is nothing to sneeze at :-)

[955]

C) forgot one


budesonide

[kthomp19]

1) First wave of core capital will come fairly cheaply in a private placement. I see Buffett and another group or two vieing for those initial shares, as they smell out the huge profits that will be made from that purchase inside of 2-3 years.

Plausible. We don't know yet at what point Calabria will be comfortable with release, but he did say "It has always been my view that an exit from conservatorship is going to require a large capital raise by Fannie and Freddie." and "The shareholders will be heavily diluted when we raise capital." so I would expect this private placement to be large and highly dilutive. A consequence of that is that it will be at a low share price, which could very well be even lower than where the share trade today.

2) Next will come release from conservatorship with consent decree, followed by the GSE's setting up terms for a public placement at significantly higher prices

Plausible again, but by then most of the dilution will have already happened. "Significantly higher prices" than the private placement could still be below $5 per share (adjusted for a likely reverse split).

This will open the door of attractiveness for major competition for the public placement to yield the significantly higher share prices in that placement.

The private placement investors gain more money the more they dilute the existing commons, and with it being a private placement there is no competition to drive the share price up in that round unless Treasury exercises the warrants.

The private placement round could easily occur at $1-2 per share for the commons (or even lower), so even a large rise later might not get it above $5.

As for lawsuits, I still think the settlement might look something like what has been noted before; warrants cancelled, no overpayment returned, but a prepaid asset granted for most or all of that overpayment to the GSE's, with corresponding offset to core capital towards the FHFA standards set.

There is no reason for the warrants to be part of any settlement. No case challenges them, except WF which has already been dismissed and whose plaintiffs can easily be settled with individually (from a position of strength because of Sweeney's dismissal).

The rest is plausible, though if Treasury grants FnF a tax credit as the overpayment, that will only accrue to core capital as the taxes are earned: around $4B per year. Given FnF's high capital requirements, that's not enough to make a material difference in the offering price (either private or public).