Replies to post #717266 on Fannie Mae-No Politics (FNMA)

[kthomp19]

kthomp, if I'm optimistic that SCOTUS will pick up the Fairholme v. US case, and even more optimistic that the derivative takings claim will succeed, how would you value the commons? If SPS get written down, what is price floor?

EDIT: For the record I'm mostly JPS, but don't mind dipping my toe in the water for FMCC.

The derivative takings claim succeeding would either result in Treasury writing off $193B of the $262B senior pref liquidation preference and sending $29.6B to FnF, or sending $125B to FnF and keeping the seniors intact.

One thing the "treat past NWS payments as paying down the seniors" argument misses is that if the seniors were to be paid off completely, the funding commitment would disappear. That would send seismic shockwaves through the MBS market, and the SPSPAs don't allow FnF to do this anyway.

That means even success in the derivative claim (which is on life support pending appeal to the Supreme Court) couldn't write down the $69B of liquidation preference the seniors have added since the letter agreements have gone into effect. Treasury could then convert that $69B to commons even after losing the derivative takings claim.

So even in this highly optimistic scenario, the commons could still get diluted to well under $1 because the USCFC/CAFC can't force a full senior pref writedown and Treasury has no reason to give up any part of the seniors when they can monetize them instead.