Replies to post #673053 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Looks like you put some thought into you calculations using worst case scenarios, which isnt a bad exercise.

Thought, yes. Worst case, not even close.

So IMO your share price estimate is absolute minimum after recap/release.

Unfortunately the numbers are wrong, therefore so is the conclusion.

1) Warrants add 7.2B shares, not 5B.
2) Junior conversion at $3B adds 11B shares, not 13B.
3) The $180B exit threshold is based on CET1 capital, of which the companies had -$12B at the end of 2020, and likely around -$7B now due to earnings. The $45B starting point is incorrect.
4) The potential overpayment return from Treasury is $29B, not $35B. And this is an optimistic scenario, not worst-case. Treasury might negotiate its way out of paying anything at all in cash, and they could also grant this in the form of a tax credit which would only accrue to capital over the course of several years.
5) The total is then -$7B in current CET1 plus $33B for the junior conversion plus $29B for the overpayment return (again, this is best case) gives $55B. That's $60B less than the original post, leaving $125B to be raised.
6) FnF's market cap of $300B in the original post is also optimistic, not pessimistic. FnF make around $20B per year and that doesn't rate to grow much, and Tim Howard said that FnF's P/E tends to be only around 60% of other financials.
7) That means FnF would have to raise $125B, and the new investors will demand a minimum of 42% ($125B / $300B) to 50% ($125B / $250B) of the equity. That's another 14.5-20B shares.

With these corrected numbers, the final share price comes out to $8.70 ($300B / 34.5B shares) or $6.25 ($250B / 40B shares). And that's with rosy assumptions like full overpayment in cash and investors not insisting on a higher percentage. All of this assumes a recap and release outcome too; a senior-to-common cramdown would make things much worse.

But if SCOTUS rules in plaintiffs favor or shareholders win in other lawsuits, then Treasury gets to negotiate with a $300Bil sword of damocles hanging over them.

It's not $300B. It's either $125B (with the seniors remaining in place) or $29B (with the seniors eliminated).

They might be willing to make a deal for warrants or capitalization under that circumstance.

Pure wishful thinking here. No plaintiff, not even Washington Federal, wants the warrants struck down. January's letter agreement shows that Treasury intends to exercise the warrants in full and doesn't fear any lawsuits over them (and those lawsuits couldn't undo the dilution anyway).