Replies to post #745590 on Fannie Mae-No Politics (FNMA)

[make it or break it]

i agree on the 80/20 situation, that makes way too much sense

[FOFreddie]

Well stated Louie

If the UST already owns 80 pct why would a USG Govt entity take economic, political and execution risk to unjustly take the other 20 pct.

Best case assume that the GSEs are worth $ 200 bn - does it make sense for the USG to screw common for a possible $ 40 bn ? Just think about the precedent this will be for investors in US Govt entities and debt? Why not just default on the MBS market then?

Furthermore it probably would not even make economic sense since it is unlikely that Common would get nothing. So what are we realistically considering and extra 10 to 15 % or $ 20 to $ 30bn ? This extra $ 20 to $ 30 bn could easily be negated by a hung IPO due to market event and/or higher risk premiums required by investors to take future nationalization risks.

[LuLeVan]

"No, simple to understand. Government has 80% and the rest of us have 20%. Why would they shoot themselves in the foot not to maximize the 20% ?"

The final market capitalization of FnF after recap/release is expected to be between $220 billion (T. Howard) and $250 billion. Of this, around $140 billion is contributed by subscribers to the new shares.

That means the government and the old common shareholders account for $80 billion to $110 billion of the final market cap (post release).

Let's set this sum at $100 billion.

If the government only exercises its warrants, it will receive 80% of this sum - i.e. about $80 billion. The old common shareholders would be left with $20 billion. The exercise of the warrants increases the number of common FnF shares from 1.85 billion to 9.25 billion. The price after recap/release would therefore be around $10.80. (Because 9.25 billion pieces x $10.80 = $100 billion).

However, if the government converts its SPS to common stock, it subsequently owns about 99.5% of the total, or $99.5 billion. The old common shareholders are left with only $500 million. The final price of FnF common stock would then be just 28 cents. The government nevertheless comes up with the aforementioned $99.5 billion because it will own about 355 billion common shares due to the heavy dilution of the old shares that the SPS swap brings. Legacy shareholders will continue to hold only their 1.85 billion pieces.

355 billion pieces x 28 cents = $99.5 billion (government).
1.85 billion pieces x 28 cents = $500 million (old common shareholders).

Adds up to $100 billion as well.