Replies to post #705942 on Fannie Mae-No Politics (FNMA)

[kthomp19]

79.9% is the critical limit.

It's only a critical limit.

This post by obiterdictum does a great job of explaining pushdown accounting.

Short version: if Treasury owns 80% of FnF common stock they can choose to consolidate FnF's books onto the governments. At 95% ownership they are forced to.

For a real-world example, Treasury owned 92% of AIG common at one point and never consolidated balance sheets.

If the government additionally converted the SPS into common shares, this limit would be exceeded. Therefore, it can also be argued that the warrant exercise (advocated by Ackman) prevents an additional SPS swap.

Let's say FnF, at the direction of FHFA as conservator, create a class of non-cumulative 0%-div-rate preferred shares with a stated value of $1,000 that automatically get converted to 4,000 common shares whenever they are sold. This would instantly add $193B to core capital, bringing it from its current value of -$126B to the $67B you see on the balance sheets.

Treasury converts the seniors to 245M of those shares (to match the seniors' liquidation preference). Then Treasury owns no common stock, but can sell those new preferred shares as if they are commons (because that's what they become once sold). It's a de facto 99.27% common stake without owning a single share or having any voting rights.

That is just one way Treasury can end up with a >99% FnF common stake without having to consolidate books or worry about majority shareholder laws/duties.

[jeddiemack]

In reality, the government that has "control" of the entities and dilutive / functional control / ownership of 79.9% of the stock and 100% of the voting interest, evidencing control; already by accounting rule ... in the US known as GAAP should have already "consolidated" both of the GSE's into their financial statements.

The fact is the 80% threshold is not the critical factor... its "control" and they have it.

This is an accounting myth they've conjured up on everyone.

But, hey they don't have to follow SEC Reporting Guidelines, now do they.