Replies to post #115345 on Fannie Mae-No Politics (FNMA)

[mrfence]

Allow me please. The cost to government to exercise the warrants would be next to nothing at .00001 so lets just call it zero.

Basically, there would be 4 government shares issued for each share you own. The share price would not change because of that unless they dumped them all in one day. No reason to do that because the government would only have 5billion common shares and at $1 per share that's not a lot of money when looking at the governments budget, or the amount extended for the bailout.

However, should the PPS rise to full book value then it could be very attractive option for the government to exercise. At full book value the shares would pull $60 per share. 60 x 5bil = 300bil.
Now there's a motivation to exercise the warrants and convert to commons right there. Worst case fully diluted the price per share would be knocked down to $12 which would be more realistic based on todays book value.

I've rounded down the numbers here to conservative values short of exact figures for simplicity. The actual number crunch hits the mid teens. Of course if the GSEs continue to be profitable with expanding business as projected over the next 3 years then so would the book value.

Hope that helps :-)

[obiterdictum]

No. it is not computed in that manner since the outstanding shares are left out. It is not made explicitly clear what type of warrant was issued, but given the financial reports, the warrant for 79.9% of the common stock is a 1:1 call warrant. In this case, if it is the case, the US Treasury pays the strike price per share to Fannie (and/or fFreddie) of .00001 per share ($46,040) before the expriation date and Fannie issues 4.604 billion shares to the US Treasury. The latter number of shares would be equivalent to 79.9% of all shares outstanding. The total shares outstanding after the exercise of the warrant would be 5.762 billion (1.158 billion plus 4.604 billion) according to Fannie Mae's 10-Qs 2013.

This will dilute the value of the common shares and decrease the price by 80%. If the price of a share before the full exercise of the warrant is 1.30, after the full exercise of the warrant the value per share will be approximately .265 per share. The US Treasury would earn .265 per coomon share and be in the money.