Replies to post #749659 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Right, IF the Exit from conservatorship is tomorrow.

No. The seniors on the balance sheet must be dealt with in order for FnF to hit the lowest minimum capital requirement by statute (core capital equal to 2.5% of balance sheet assets) before 2040. That's just math.

The only way to "deal with" the seniors that actually adds to core capital is to do some combination of the following:

1) writedown
2) conversion to common shares
3) conversion to non-cumulative preferred shares

#3 would leave a huge hole in Tier 1 and CET1 capital, so that possibility is essentially off the table.

It is clear which of #1 and #2 is preferable to Treasury, and their incentives are the ones that matter given the near complete control they have over FnF's exit from conservatorship.

But what EXACTLY will ANY current or future Litigation, federal government policy, and/or reactions from the market have on the seniors?

The only way around that is new legislation that updates or removes the relevant parts of HERA. I don't know what your estimation is of the probability of this happening, but mine is zero.

In order for any of those things to fix FnF's huge core capital hole, it will have to be one (or more) of the three things above. And to also fix the huge Tier 1 and CET1 capital holes, it will have to be one (or both) of #1 and #2.

I don't see why market reactions in and of themselves would have any effect on the seniors.