Replies to post #729389 on Fannie Mae-No Politics (FNMA)

[M I A]

Yeah, I was referring to seniors. My belief anyway.

Thanks for responding.

[JEBL]

Huh?! Preferred shares are equity? Since when?

Investing 101.

Preferred shares do NOT carry any equity as they do not provide ownership stake on the companies; nor they have any voting rights.

Preferred shares only carry preferential payments such as fixed or variable dividends and so on.

Only common shares provide ownership stake of the companies but don’t have a guaranteed dividend.

[kthomp19]

But, preferred shares are equity.

Of course they are. They are in the equity portion of the balance sheet. I don't see how anyone could argue that they aren't equity.

One good way to tell who owns a company is look at the BS. If they are listed as Equity, they are owners.

"Ownership" is not well defined here. Some common shareholders like to say that "common shareholders own the company!", to the exclusion of preferred shareholders, but that argument hinges on voting rights. At the moment, common shareholders have no voting rights at all because HERA says that FHFA succeeds to those rights as conservator. Which in turn means that current common shareholders have no ownership of FnF at all.

I believe the Seniors are also not convertible.

Treasury does not have the right to convert the seniors to commons without FnF's consent, but nothing is stopping FHFA (as conservator) and Treasury from agreeing to a senior-to-common conversion.

What I do believe is that at the end, the gov will take a cut in the RV for reasons previously stated.

Treasury's senior pref liquidation preference right now is $173B for Fannie and $104B for Freddie. The companies would most likely be worth less than that on the open market.

Since FnF will have to raise capital to get out of conservatorship any time in the next 6 years, and since new investors will want some of the equity of the companies in return for their capital, Treasury will have to take a haircut on the liquidation preference of the seniors.