Replies to post #794690 on Fannie Mae-No Politics (FNMA)

[kthomp19]

You are inferring the impact to common, but what happens to JPS in each scenario?

My scenarios have the juniors taking an equal percentage haircut to full LP as the seniors, though since neither FHFA nor Treasury has a fiduciary duty to shareholders and FHFA has no reason to care at what rate the seniors are converted, the latter two scenarios are basically the same. Both involve Treasury diluting the legacy common to a greater extent than they did with AIG.

Planning for success means planning for both - probabilities and possibilities.

Those two things are not mutually exclusive, instead one is a subset of the other. Probabilities are quantified possibilities. The quantifying part is crucial in performing an expected value calculation, which is the only quantitative way to tell if buying or owning the commons or juniors is a good idea at these prices.

If common goes to $2 and JPS gets 50%, I get a 3x return

How do you calculate that? When you wrote this post FNMA was around $1.50 and FNMAS around $5.00. FNMA going to $2.00 would be a 33.3% return and FNMAS going to 50% of par would be a 250% (2.5x) return. Any combination of FNMAS and FNMA would have a return between those two numbers.

If your first scenario of all write-down happens, I'll be swimming in it.

That depends on if you own enough of the juniors. Even if the seniors are written down, it's possible for warrant exercise + junior conversion + capital raise to dilute the commons enough that the juniors still come out ahead. In fact, all of the scenarios I have run for the common (that I think have a >5% chance of happening) involve the juniors coming out ahead of the commons in terms of total return from today's prices. That mainly stems from the fact that I don't see how the commons ever go above $10 or so without a junior conversion, and with that conversion then any appreciation past that point for the commons also accrues to the juniors.