Replies to post #653526 on Fannie Mae-No Politics (FNMA)

[HappyAlways]

Yes, that what I heard in this board. JPS is not capital. Common is capital.

[FFFacts]

I think it depends on what terms they get converted. A dollar for dollar par conversion or a premium or discount to par.

[kthomp19]

By "increase the capital," I assume you mean they take some of the cash they have in the bank and reallocate it from Tier 1 to CET 1. So it does not actually increase their cash, but simply changes the way they designate it.

It's not about cash at all. Core, Tier 1, and CET1 capital are all just calculations based on balance sheet entries.

Take the balance sheet on page 74 of Fannie's 2019 Q3 10-Q (page 76 of the pdf). Starting with the $20.7B they have as total stockholder equity:

To get core capital, subtract the seniors ($120.8B) and AOCI ($0.1B).
To get Tier 1 capital, subtract DTAs ($12.8B) from core capital.
To get CET1 capital, subtract the juniors ($19.1B) from Tier 1 capital.

Since Mnuchin has stated that FnF need to raise third-party capital, I assume that the seniors, at least in their current form, will be gone soon. I cannot imagine any investor willing to buy shares with the seniors in place. While the seniors remain on the balance sheet, all types of capital are hugely negative. So with the seniors gone (either cancelled, converted to commons, or some combination of those) the end-of-Q3 numbers are:

Core capital: $20.6B
Tier 1 capital: $7.8B (there are $12.8B of DTAs)
CET1 capital: -$11.3B (there are $19.1B of juniors)

Converting the juniors to commons would make CET1 rise to $7.8B, matching Tier 1.




For completeness, the end-of-Q3 numbers for Freddie are:

Core capital: $12.9B ($13.9B total equity minus $1.0B of AOCI)
Tier 1 capital: $7.0B (there are $5.9B of DTAs)
CET1 capital: -$7.1B (there are $14.1B of juniors)

As with Fannie, converting Freddie's juniors to commons would make CET1 become $7.0B, matching the Tier 1 number.

[sortman]

With this quarter earnings they will have $40B in retained earnings plus $33 B in converted preferred = $73 B