Replies to post #747523 on Fannie Mae-No Politics (FNMA)

[kthomp19]

That is simply not true. Central to the assumptions in Scenarios 2 & 3 of the CBO Analysis is the conversion of SPS to common with the implicit conclusion that the UST warrants do not have value due to the prospect of a senior to common conversion.

Nope, try again.

The reason the warrants don't have any value in the two Scenario tables on pages 15 and 17 is that FnF wouldn't be able to raise enough money to redeem the seniors and cover FnF's capital shortfalls. The tables say "Amount of the Treasury's senior preferred shares redeemed" on the third-to-last line. Redeemed, not converted.

Your assertion also fails logically. If the warrants have no value at all, neither would converted seniors.

A senior-to-common conversion is mentioned in Box 1 on page 6 (though the CBO doesn't recognize that conversion to anything other than common would leave an enormous hole in FnF's required CET1 capital):

For example, the Treasury could delay redeeming its stake in the GSEs, perhaps by converting its senior preferred shares to common shares, junior preferred shares, or debt.

and on page 11 in footnote 24 (note the direct comparison to AIG, where Treasury ended up with 92% of the common):

One way in which the Treasury could modify the agreements would be to convert its preferred shares into common shares, into warrants for common shares, or into some form of debt in the GSEs.24

24. Converting preferred shares into common shares would be similar to the approach that the Treasury took during the financial crisis when it intervened to help other firms, such as the American International Group, known as AIG.

Twice in the whole paper, and only incidentally.



Converting the seniors into warrants for even more common shares than the existing warrants allow for is an interesting way to handle Treasury monetizing its FnF equity stake. Treasury could exercise the warrants piecemeal in the future and sell them off a bit at a time. They could even sell off pieces of the warrants themselves and avoid ever owning a single common share, which would pre-emptively defeat any challenge regarding majority ownership, voting rights, or balance sheet consolidation.