Replies to post #745055 on Fannie Mae-No Politics (FNMA)

[LuLeVan]

"In principle this can give a Board the leverage necessary to force a change in the par value."

Wouldn't lowering the par value of the JPS automatically make the commons worthless - because the JPS rank higher in the capital stack? If commons become worthless, the government could neither earn money with a warrant exercise nor with a SPS-to-commons-conversion. Therefore, such a solution would not be beneficial for the government.

[kthomp19]

Yes IMO the doctrine supplies a principle for FHFA to use to deploy a circumvention.

I've put some thought into this, which is why I took so long to respond. It's an argument I haven't run across before.

One issue with FnF trying to buy out the juniors below par is that the full par value of the juniors counts towards core capital. That would disappear in a buyout. At a time that FnF are trying to build capital, losing $33B of it in an instant is probably a non-starter.

Even if the accounting works out to where capital only decreases by the amount of the buyout, that's still an unnecessary expenditure of capital. Without concrete proof that junior preferred shareholders are somehow holding up a capital raise I don't see any defensible upside to this breach.

I don't see how that below-par buyout could be considered an efficient breach when it actually harms the companies' capital positions. Especially vis a vis just leaving the juniors as-is, which is the default option. Their dividends are non-cumulative so it's not like there's any inherent harm to just leaving them alone.