Replies to post #717648 on Fannie Mae-No Politics (FNMA)

[Achilles deFlandres]

They are not out to make money but it is arguable they are out to prevent us from keeping our money.

[kthomp19]

Can you see a scenario where Treasury will take less than 100% of the value for the SPS?

They're going to have to. The senior pref liquidation preference right now is $168.9B for Fannie and $100.7B for Freddie, as of March 31.

This post, with tables from FnF's Q1 10-Q forms, shows that in order to hit even the lowest capital requirement set forth by FHFA (the 2.5% core capital requirement), without buffers, the seniors will have to be written down or converted to common and FnF will have to do a massive equity raise ($61B for Fannie, $51B for Freddie).

The new investors will certainly insist on a large portion of the released FnF's equity, and FnF make somewhere around $22-25B in normalized income now (2021 income was skewed by lots of refis, etc). FnF's post-release market cap is unlikely to exceed $300B, especially at re-IPO time when the P/E multiple will be suppressed enough to attract the huge amounts of necessary capital.

All this is to say that even if Treasury converts the seniors to commons, they won't be able to realize a cash amount anywhere close to the $270B of senior pref liquidation preference they hold.

Treasury is not out to make money. That is not their mandate and purpose. 230b profit is a win to sell to the public and that will put the cap on and finally end the 2008 financial crisis......

The first part might be true, though Treasury certainly hasn't acted like it.

But it's an entirely different thing to say that Treasury will just cancel the seniors rather than convert them to common. There is no reason for them to do so.