Replies to post #744426 on Fannie Mae (FNMA)

[Guido2]

Still gets me how someone claiming to be in the legal profession repeatedly promotes SPS conversion as a judicial solution. Pity the clients he misrepresents.

[kthomp19]

The NWS IS the most anti conservator thing to do and the FHFA and UST may or may not have difficulty attracting Private Capital in a 1st Loss Position in the future if they decide to pick winners and losers in the capital stack.

The government picked winners and losers in 2008. They arbitrarily decided to make all bondholders 100% whole, all the way down to the bottom-most unsecured creditor, but wiped out 100% of all pre-conservatorship equity holders' interests.

If new investors care about past government mistreatment of shareholders then all capital raises are already dead and nothing the government does now can change that. Which is why I think new investors won't care at all how past shareholders were treated as long as they get a good enough return (i.e. a low enough per-share re-IPO price).

I think MC said he would leave it up to the board of the GSES to decide how to raise capital, if that day ever comes, but reversing the NWS seems like it might give them more flexibility.

He did say that, but he also published a capital rule that (perhaps coincidentally) had a gap between Tier 1 capital (to which the juniors contribute) and CET1 capital (to which they don't) almost exactly equal to $33B, the total stated value of the juniors. Sandra Thompson didn't change this.

The definition of core capital in HERA already restricts any capital raise to only commons and non-cumulative prefs, and the Tier 1/CET1 standards in Thompson's capital rule mean that even if the boards have free rein to raise capital however they want, it will either have to be all commons, or the juniors will have to be offered conversion to commons first to make room for more non-cumulative prefs to be issued.

And since the capital raises need to happen before conservatorship ends, the boards won't have any fiduciary duty to shareholders to worry about because HERA's succession clause will still be in effect at the time.