Replies to post #677485 on Fannie Mae (FNMA)

[kthomp19]

Its an assumption primarily based on your own Preferred bias, not on any real indications that our government will "convert JPS to commons" to raise capital.

False. There were three real indications from the government that a junior-to-common conversion is on the table:

1) Calabria said "Whether we can do some sort of conversion with preferreds" at 1:34 of this CNBC interview.
2) Mnuchin put "Negotiating exchange offers for one or more classes of the GSE’s existing junior preferred stock" as part of recapitalizing FnF on page 27 of Treasury's Housing Finance Reform Plan.
3) Calabria's inclusion of a separate CET1 capital standard in his capital rule, which forces any capital raise to be entirely commons unless the juniors are converted.

If you wish to convert your preferreds to commons, you can do so now: Just sell your prefereds and buy commons. Simple.

There is no reason to do that when I stand to gain far more common shares by holding my prefs and waiting for a conversion. And even if it doesn't happen, I believe the prefs will still outperform because divs will turn back on when capital is raised, which will need to happen sooner rather than later because FnF aren't making any meaningful progress towards their capital requirements (even if they were greatly lowered to 2.5%) with retained earnings.

There will be no meaningful rise in the common share price before release, no release without a capital raise, and no capital raise without immediate common (and thus also junior pref) dividends.

where preferreds are given a bucket of cash at common shareholders expense

It won't be "at common shareholders expense" because that compares to a counterfactual (recap/release with no conversion). This is a logical fallacy because there is no way to know what the common shares "would have been worth" in a counterfactual scenario. For all we know, the conversion scenario could result in a higher common share price!

There is no justification for this...

Yes there is, see above. More justification is provided by Citi's pref-to-common conversion offer in 2009, where Treasury allowed its warrants to be diluted by that offer. That offer was also made by an independent board of directors that had a fiduciary duty to its shareholders, so that argument also falls flat.