Replies to post #694418 on Fannie Mae-No Politics (FNMA)

[Clark6290]

Boom! Worse case scenario, we are all still very rich. Certainly great Wednesday news my friend.

[JGlen]

Make it or break it, I’m confused, are you saying that the secondary offering would be higher than the stock value after the secondary? Why would anyone invest in it without a discount? Or am I reading it wrong?

[trunkmonk]

now ur talkin my language. maybe i buy, will someone tell me when this should happen. u know, like a fly on the wall.

[Golfbum22]

Sticky please

[Donotunderstand]

Aside from the ????????????? pps of an SPO AT 158 ----

I wonder about the logic of this statement

If the Treasury will cancel the liquidation preference, as the government’s been paid back in full plus 10 percent interest


While I hope the GOV calls it even - 300B for 200B or whatever

the arguments you present fall off the table - In my personal opinion - when you talk about interest paid as if this was a declining balance loan which it was not

right or wrong - do not shoot the messenge - the money advanced from the Treasury is viewed as Senior Equity investment not a loan and everything paid out so far as EARNED dividends (not interest)

By accounting principles and the exact language of all documents describing the inflow ---- nothing has been paid back yet - that is the reality !!

Now - can the GOV agree to kill any pay back obligation on the equity senior paper investment --- SURE and I think the argument is strong for that ---- but ---- I then see the GOV able to use its Warrants

That gives Treasury an incentive for higher v lower PPS for that exercise (forget the SPO for now) ---- so think say $30 a share and all such money - by pre written agreements and prospectus and executive order is then - to get DEMS on board - kept in a trust to be used for low income WORKING people (recall the author who suggested breaking F into two companies so this is a bit easier legally)

Summary
I hope the GOV negotiates a drop of pay back - but in real terms nothing has been paid as its all dividends
I assume the GOV may well do this but then want to keep the WTS - which IMO is fine -- for those of us interested in say $20-$40 a share at the ceiling
Then we do not actually need an SPO !! the GOV can agree to be a back up re insurer until we reach such agreed to level of capital via earnings 9say 4 years)

All a wish

[s404n1tn0cc]

Mr Howard Was in FNMA during its collapse and was part of its trouble as an insider. Why should I or anyone listen to him now. We wouldn't.
Tell him to go eat his Neutella
See here.

[kthomp19]

Thanks for the laugh, I needed it.

The numbers started off reasonable. $100B has always been my ballpark for a capital raise size.

$4.2 trillion x 2.5 percent = $105 billion minus $37.3 billion shareholders equity = $67.7 billion need to raise in a secondary offering to adequate capitalization.

Freddie Mac would need to raise $47.3 billion, the amount needed in a secondary offering to adequate capitalization. $47.3 plus $67.7 = $115 billion both companies.

But the extreme bias of the post shows in the phrases "It's wrong for the Treasury to claim the warrants" and "the rightful owners the Common Shareholders". These two things are not just opinions: the first is extreme wishful thinking (the warrants have nothing whatsoever to do with whether or not the seniors have been repaid) and the second ignores the fact that once new common shares are issued, those holders become part of the "rightful owners", even if that includes Treasury (via warrant exercise and/or senior pref conversion) and the existing juniors (via an exchange offer).

Fannie Mae’s net earnings 4 billion per quarter, a projection of 16 billion net per year. I think the Market would willingly pay a Market Cap of 230 Billion easily for that amount of earnings: 230 Billion / 16 Billion = Price to Earnings Ratio 14.37 (fair value).

Fannie's normalized earnings are more like $12B. Projecting 2020/2021 earnings into the future will lead to overestimates. A P/E of 14.37 is at the high end of reasonable, so a market cap of $170B for Fannie could make sense.

This does ignore the fact that share offerings are usually conducted at a discount (in terms of P/E) to later values. A P/E of 6-10 at the time of the offering, which should be the point of comparison here, makes much more sense than 14.37.

Example: If the company Fannie Mae is required an additional $67.7 Billion as a capital requirement to reach the $105 billion of 2.5% of total assets, and to make the offering attractive the secondary offering could be at an extreme discount of 20% and in this case the secondary offering would price at $158.40 per share;

Lunacy. If new investors are asked to contribute $67.7B towards a capital requirement of $105B, they will have to get a bare minimum of 2/3 of the overall equity. That means the "extreme discount" needs to be upwards of 75%, not 20%.

$67.7 Billion / 158.40 = 427,398,989 million new shares.

This shows exactly what is wrong with the thinking in that post. New investors aren't going to agree to a share price and then have the number of shares counted from there. They will insist on a certain number of shares, and the share price gets calculated afterwards.

New investors getting 2/3 of the overall equity, after warrant exercise, will give them a total of around 11.5B shares.

That also means the re-IPO price won't depend at all on what the market price of the common is the day before. The market could push the common shares up to, let's say, $8 on rumors of a re-IPO only to have the offering conducted at $2.50. There is nothing preventing that from happening.

The Treasury would not have to provide a consent decree going forward. The Treasury needs to get out of the way.

Treasury "getting out of the way" means just giving up the seniors and warrants for no consideration? Never going to happen voluntarily. And no court other than the Fifth Circuit (Collins) is being asked to get rid of the seniors; those plaintiffs would be just as happy with the seniors being converted to commons.

[amelia43]

Is Howard actually being asked to advice the administration or is he just doing creative writing on his own blog?

[JCRod2018]

very good, thanks for the analysis

[chessmaster315]

This makes sense.

[CallmeBull]

Pretty sure Howard mentioned writing down and canceling the Spsa and warrants and well as the NWS. Nice write up and thanks for the maths!

[Remul]

Or just recovery the needed capital by selling from their trillions in assets - after liquidation preference is removed & gov relinquishes their ownership - bam done.. no mumbo jumbo manipulation... fully capitalized and running without all the shell games...

[JosephS]

50 year timeframe? At this point in time, administration action seems a few decades away. Maybe after socialism is gone.

[Stern is Bald]

Can you do this for Freddie's stock?