Replies to post #727406 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Do you have an estimated tipping point for when FnF have retained enough capital that it just makes it too hard for the govt to pass up recapitalizing?

Without any political prejudice... just from a numbers perspective.

Interesting question. To hit Thompson's lowest capital requirement (base leverage: 2.5% of adjusted total assets), Fannie would have to raise $59B and Freddie $51B. In addition to Treasury writing down the seniors or converting them to common, of course.

That was as of the end of Q1. Those numbers don't go down dollar-for-dollar with retained earnings because FnF's balance sheets keep inflating. We will get an update on how much progress FnF made versus their capital requirements in Q2 when their earnings are released next week.

I made a simple spreadsheet that assumes the following:

1) Fannie makes $15B per year (growing at 4% per year)
2) Freddie makes $10B per year (also growing at 4% per year)
3) FnF's balance sheet assets go up 4% per year
4) Fannie's asset adjustment stays at 6% (meaning Fannie's adjusted total assets are 106% of its balance sheet assets)
5) Freddie's asset adjustment stays at 16%
6) Core capital equal to 2.5% of adjusted total assets is when FnF are released
7) Fannie starts with $4.229T of balance sheet assets (will update next week)
8) Freddie starts with $2.998T of balance sheet assets

With those assumptions, and if the seniors are written down/converted, Fannie hits its exit point in early 2028 and Freddie in mid 2029.

If the government is willing to release them at a lower capital level, or even do something like put in cash in return for more equity (or to make their existing equity more valuable sooner, in a senior-to-common conversion scenario), that can be hit faster.

The problem with trying to release FnF below the leverage (minimum) capital requirement is that HERA gives FHFA a ton of authority when FnF have less than the minimum capital standard, including the authority to essentially hand-pick the boards of directors (via veto power over any selection) and tell FnF how much capital to raise and in what form. That's why I think FnF won't be released while their core capital is less than 2.5% of balance sheet assets (letter of the law in HERA), and probably not below 2.5% of adjusted total assets (Calabria and Thompson's base no-buffer requirement).