Replies to post #708651 on Fannie Mae-No Politics (FNMA)

[bradford86]

okay show me other options that give the commons value.

[Louie_Louie]

This is probably more realistic of the outcome...government wants to keep their grubby little paws on the milking teet as long as possible. Hoping for #2 myself

[kthomp19]

They could use the liquidation preference as a loan that diminishes the value over time. Or any scheme/variation thereof.

How would that work?

Converting the seniors to debt is a real problem because that really would decrease net worth and capital because the seniors would move from the equity to the liability part of the balance sheet.

Given HERA's definition of core capital, which currently stands at -$126B for FnF combined, and that FnF's capital classification outside conservatorship depends (partially) on meeting the minimum capital standard, which is calculated from core capital, there are only three things that can be done with the seniors to alleviate the massive core capital hole:

1) Convert them to non-cumulative preferred shares (that could rank above the juniors)
2) Convert them to commons
3) Write them down

A combination of these is possible, of course. The existence of the CET1 capital standard in the capital rule (which Thompson did not remove from Calabria's) means #1 isn't even an option at the moment.

You think that whatever they decide would be immediate dilution or write down but that is not necessarily the case it could be a long process with milestone requirements.

The longer this process takes, the longer it will take FnF to meet their capital requirements.

The only real purpose of writing down the seniors is to help meet those requirements, and conversion does that along with lining Treasury's pockets even more. Why would Treasury choose to drag that process out?