Replies to post #705934 on Fannie Mae-No Politics (FNMA)

[Patswil]

The govt can't be a shareholder---

if the government exercises the warrants - and thus becomes a major shareholder - it would implicitly side with the shareholders, because the many shares the government receives through the warrant exercise will only become worth the expected $50 to $100 billion through recap/release. Therefore, the government could voluntarily cancel the SPS after (or when) the warrants are exercised.

[kthomp19]

Bill Ackman said he favores the government exercising the warrants.

Yes, he has been very consistent on this front. A major part of his thesis for owning the commons is that Treasury's incentives, via the warrants, align with those of the commons.

Whether he demanded the cancellation of the SPS as a condition for this is beyond my knowledge.

The existing commons, which include Treasury's warrant shares, are economically worthless while the seniors exist in their current form. I don't think Ackman is in a position to make demands (and neither does he, see below), but senior pref cancellation is a prerequisite to the existing common and warrants having value to the market.

Therefore, the government could voluntarily cancel the SPS after (or when) the warrants are exercised.

Right.

Just beware of a senior-to-common conversion, at which point Treasury's incentives would oppose those of the existing common. That opens the door to the existing common being worth well under $1 when FnF are finally recapped and released.

When Ackman bought some juniors in 2017, one of his stated reasons for doing so was "it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares". That's him directly acknowledging that the juniors can outperform and that he won't necessarily be able to do anything about it.