Replies to post #751133 on Fannie Mae-No Politics (FNMA)

[Patswil]

Is there an argument for release now in light of the recent bank failures?

[kthomp19]

There's the fallacy in your view " the only way they can put the screws to JPS is in receivership", there's a hundred ways for them to screw JPS, thinking otherwise is naieve.

The CBO, who has a great deal more credibility and experience than you, said otherwise in its August 2020 report:

it recognizes that changing the GSEs’ commitments to junior preferred shareholders would be difficult outside a receivership scenario
...
If, however, the Treasury wanted to raise capital through the sale of new common shares without resorting to receivership for the GSEs, the claims of junior preferred shareholders would have to be addressed.

The only way to completely zero out the juniors is to transfer FnF's charters to newcos, and the only mechanism in HERA for doing that is receivership.

Every one of those JPS certificates of designation are suspended as of 2008.

Wrong. The terms of the junior pref contracts have been in force all along. FnF haven't paid any dividends on those shares since 2008 because they are non-cumulative.

In that designation certificates it gives government ways to screw the JPS

Really? Where? Section 4(d) you quoted below only applies in a liquidation; see the title of the section ("Liquidation Rights").

In a liquidation, I agree that the juniors (and existing common) will get zero. But I am assigning an infinitesimal probability to that outcome.

So what makes you think they can't or won't take the JPS holders, who are primarily hedge funds, out behind the wood shed before this is done?

The junior pref holders do have relatively little leverage in negotiations due to the outcome of the court cases so far, but they at least have a seat at the table. All FHFA and Treasury need to do to "screw" the commons is just have FnF issue a ton more shares. That is fully legal and in accordance with the charters, and doesn't require newcos (receivership) or any negotiation with existing common shareholders.

You also seem to be ignoring the fact that wiping out the juniors completely would reduce FnF's regulatory capital (core, Tier 1, CET1) by $33B. Why would FHFA and Treasury do that when they could just leave the juniors alone? There's a reason that Calabria's book says that Mnuchin wanted the juniors converted to common (alongside a senior-to-common conversion).