Replies to post #769007 on Fannie Mae-No Politics (FNMA)

[kthomp19]

Likewise, I've never said SPS conversion has a zero percent chance. It's certainly possible, but should not be stated as if it's a forgone conclusion. Even if I conceded to you the 75% probability for illustrative purposes, what is the result of the other 25%?

Let's use a $1000 hypothetical example based on $0.50 common cost basis and ignore any JPS for easier math.
- 12% chance common gets wiped out through receivership or other means. My $1000 goes to zero. I go live on a beach and mooch off my family.
- 75% chance common gets diluted by SPS and warrants. My $1000 goes to $10. I buy myself a scratch off ticket and lose that too.
- 12% chance common get diluted by warrants only. My $1000 goes to $76K (based on ~$38/sh) may take some time to stabilize and get P/E to double digits. I patiently watch my investment grow and buy a cheap bottle of wine and go about my life.
- 1% chance common not diluted by anything, both SPS and warrants rescinded. My $1000 goes to $380K, and I buy a car and nice bottle of wine, and I can still afford a lawyer after I get a DUI.

Even with a combined 87% probability of a horrendous outcome, the weighted return on this risk is about 12:1 so I am likely to make money.

Alright, now we're getting somewhere.

1) Where did you get $38/share in #3? With Treasury exercising the warrants there would be 9B shares in total, for an implied FnF-combined market cap of $342B. That seems quite high considering that they make around $25B combined, and in this post you said the P/E will likely be in single digits upon release. A P/E of 9 would make for a share price of $25.

2) Your 1200% gain is extremely dependent on the values in #3 and #4. Lowering the values in #3 and #4 to $50k and $250k respectively (based on the $25/share above) lowers the overall gain to 750%.

3) Why did you not account for a capital raise or junior-to-common conversion in #3 or #4? That serves to push the per-share price down even more.

4) The juniors, by contrast, go to at least 100% of par in #3 and #4 (and perhaps more if they get converted to common) and at least 60% of par in #2, meaning they get 58% of par on average for a 750% gain from today's prices on the less liquid series.

Those things combined mean that the juniors and commons have similar upside, but the commons have a drastically higher variance of outcomes, depending on a 1% shot to have any hope of outperforming the juniors.

This situation is exactly why I think the juniors are a better investment than the commons: same upside, far less risk.

IMO - the entire above scenarios represent no more than 50% of the likely outcomes. The other 50% is a resolution that we are unlikely to predict, unique to the GSE issue. I'll call that a net-zero gain for now because it could be good or bad, totally unknown but should be accounted for as it becomes clearer.

I agree that this kind of consideration should be seen as a net-zero, and as such it doesn't affect the math or the decision as to what mix of commons and juniors to own now.

There is no point bashing Common holders if they are willing to take the risk or are riding out the risk due to the situation they were handed years ago.

I don't bash people, I bash bad arguments.

I don't understand what "riding out the risk" means, though. If you decide investment A is better than B, having held B for a long time shouldn't affect that decision. Especially since FnF are probably at least a year away from exiting conservatorship, meaning that swapping over now wouldn't cause any short-term vs long-term taxation problems.

[kthomp19]

Do you expect to receive a rotten salad after reading a review that a restaurant had a rotten salad at a specific point in time?

You have totally misunderstood my metaphor. My point was that you have held me to an extremely stringent evidentiary standard, to the point of absurdity, and far more than anyone else on this board.

I gave you a direct quote from Mark Calabria, who related his negotiations with Treasury over a senior-to-common conversion and you have nitpicked it to the nth degree rather than accepting it.

On the other hand, you gave blanket agreement here in response to a post that was factually incorrect (FnF cannot pay down the seniors without Treasury's permission) without any questioning or pushback.