Replies to post #695661 on Fannie Mae-No Politics (FNMA)

[LuLeVan]

...the government would still be 99% owner before new money. How would they be able to raise 25B when they control the board and pretty much all of management as is today.

Fannie Mae was fully government-owned when it was founded in 1938. When Fannie went public in 1968, the government was 100% owner. Nevertheless, the IPO was possible and successful. Of course, this led to the government no longer being 100% owner afterwards.

It could happen again today, even if the government owned nearly 100% of Fannie and Freddie at the time of the IPO. This would be the case if the government converted its SPS into common stock. At current common stock prices of less than $1, this would result in dilution by about factor 190. The share of the companies remaining with the old common shareholders would then be practically negligible at well below 1%. The equivalent share price of the old commons (after recap/release) would be just 50 cents or lower.

I agree with you, however, that this could scare off subscribers to the new shares. They will look very closely at how the government has dealt with the old shareholders over the past 13 years, because something similar would be likely after the next housing crisis (if one comes). The new subscribers are not voluntarily going to get slaughtered.

Thus, to a certain extent, there is also psychological pressure on the government not to treat the old shareholders too badly. Talking about "fair treatment" here also has little to do with "moralizing" (KThomp19). It is, in my opinion, simply an economic necessity.

A SPS swap to commons could formally be justified by asserting that FnF were indeed bankrupt in 2008 and therefore a restructuring similar to Chapter 11 would be acceptable even today. Nevertheless, it would be a very "brutal" procedure that would effectively expropriate the common shareholders.

It would be far more appropriate for the government to voluntarily delete the SPS administratively (by consent decree), which also Tim Howard considers the best and fairest solution. The government could then, to implement Calhoun's (or Thompson's) affordable housing plans, merely exercise the warrants. Afterwards it would own 7.2 billion FnF commons, while existing shareholders would continue to own the 1.8 billion shares they own now. In this scenario, the commons could reach an equivalent price of $7 after recap/release, leaving the government about $50 billion (7.2 billion x $7) for affordable housing.

Deleting the SPS and just exercising the warrants would be a signal to subscribers to the new shares that the government - for all its shenanigans like the NWS during conservatorship - wants to show at least some fairness.

As long as the SPS and the warrants exist, I think there is no way of FnF going public at all. Your idea that the warrants could be exercised a few years after the IPO seems unrealistic. The subscribers to the new shares want clear conditions already at the time of the IPO so that they can calculate reasonably.

Assuming that the PE of the two re-released and recapitalized firms will be 12.5 (a bit high due to political risk), Fannie and Freddie, earning $20 billion per year, could reach a market cap of $250 billion.

An estimated 60% of that market cap - or $150 billion - would be claimed by subscribers to the new shares. Therefore about $150 billion would have to be raised from outside via the capital increase. This just about coincides with the 4th Amendment of Jan. 15, 2021, which provided for 2 x $70 billion as the maximum amount for the capital increase.

The remaining $100 billion from the (future) market capitalization would have to be split between the government and existing shareholders (commons and JPS). Exactly how this will play out remains to be seen.

But it also means that the government will claim less than 40% of the FUTURE market cap at the time of the IPO. It is a mistake to confound the status quo before the IPO (when the government can own up to just under 100% of FnF) with the status quo after the IPO.

[Louie_Louie]

Pretty darn good post there KevinLM. KEEP THE FAITH

[FOFreddie]

Hi Kevin,

The exercise price for the warrants is $0.00001 per share.

https://www.treasury.gov/press-center/press-releases/Documents/warrantfnm3.pdf

Thanks for your discussion with Kthomp.

Have you seen the CBO Administrative Recap Analysis? At 3% risk capital and an investors required rate of return of 8%, the CBO EV is $402 bn for a stock offering beginning 2023.

Probably will have to raise around $90 to $ 100 bn of equity. ( $ 210 minus retained NW of $90 to $ 100bn plus $ 34 bn of Tier 1 cap from JPS).


UST Govt projected profit would be about $ 270bn ( $ 402- $100bn new equity - $34 bn JPS Par value). They could pay down the SPS or just exercise the warrants which would leave significant upside for common.

If legislation is introduced the UST could recognize 50% of expected profits now based off CBO Metrics.

[kthomp19]

Thanks for your reply and thanks for the link of the framework you wrote all the way back early 2019. Appreciate the detailed reasoning.

Thank you as well, the cumulative content and reasoning in your few posts here already raises the level of discussion. Glad to have you aboard, and please don't take continued disagreement on my part personally. It's rare to have a good, reasoned back-and-forth here.

I don't believe the government would be able to raise 100 B on the market for something they own almost 100% of. The largest raise was Ali baba was it not? 21B.

Even raising 25B would be a far stretch. Whoever that is going to invest in this in large sums would have read up on how the government managed this conservatorship the past 13 years.

In my opinion Alibaba is not nearly as good a comparison as Petrobras. Petrobras managed to raise $70B, and the Brazilian government retained control of the company afterward. If they could raise $70B, I think FnF could easily raise over $100B.

The new money would want to know what happens to the warrants. The senior preferred and warrants would have to be dealt with before new money comes on board. If the senior pref are converted to commons does it not deem the warrants worthless?

Yes, a senior-to-common conversion would render the warrants worthless. The two main reasons for Treasury to convert the seniors to commons rather than cancel them is to gain more value for the taxpayer (99.9% > 79.9% after all), and to leave less value for the "evil hedge funds".

(Whether or not that last characterization is accurate doesn't matter. It will be talked about as if it were.)

And if the conversion of senior pref to commons does occur, even if a reverse stock split is done to get it out of OTC , say NYSE at minimum $4 bucks, the government would still be 99% owner before new money. How would they be able to raise 25B when they control the board and pretty much all of management as is today. With a mandate to provide affordable housing and ensuring accessibility to applicants with lower credit scores, profitability is a conflicting interest.

The capital raise will need to happen alongside release from conservatorship. The government won't want to release FnF while they are significantly undercapitalized, and new investors won't buy shares in companies they have no control over. Simultaneity is the only solution here.

The last point is what points to a utility model: fixed rates of return (more or less) for investors as opposed to profit maximization, which makes tech companies a particularly bad comparison.

They control fHFA they control Treasury they control everything.

This wasn't actually true until a few months ago when the Collins ruling came out. Past Presidents had wanted to fire the FHFA director and believed they couldn't: Obama with DeMarco and Trump with Watt.

Your point stands looking forward, though, which is more important than in retrospect anyway.

JPS investors are betting on the court outcome. Common investors on the other hand are betting the government has no other way to advance their affordable housing agenda and protect taxpayers from another bailout besides a recap and release.

I think it's exactly the opposite. TINA (There Is No Alternative) is my primary investment thesis for FnF, and a consequence is that the junior pref shareholders will have to be dealt with (i.e. offered at the very least a significant percentage of par) to accomplish release from conservatorship. By contrast, the senior-to-common conversion possibility shows that FnF can be recapped and released while the existing common get crushed at the same time. It's the commons who are much more dependent on a court victory that either kills the seniors (Collins) or gets $125B returned to the companies (USCFC cases).

As core capital accrues the warrants will rise as well.

So would the converted seniors.

Some food for thought: Treasury could convert the seniors to convertible non-cumulative prefs with a total par value of $193B, a dividend rate of zero, and a mandatory conversion to common at a pre-determined rate upon sale to anyone else. This raises core capital by $193B (the same as cancelling the seniors or converting them to commons), gives Treasury no incentive to hold the shares (due to the zero dividend), and lets investors buy the shares at their own pace. It basically gives Treasury as many (pre-capital raise) common shares as they want (probably 1T or more pre-reverse split) while never giving Treasury ownership of any common shares at all. This avoids voting rights problems as well as any potential forced balance sheet consolidation.



There's a lot here, I'll respond to the rest in a later post. I used to make such long posts due to the 15-post daily limit, now it's just a habit.