SnarkyPuppy

Is there a risk that Congress passes something effectively winding down F&F before Mnuchin has an opportunity to settle this? Or a risk that Congress can/will override Mnuchin's "going concern" actions? Or are the Treasury Secretary's actions immune to any response in the House?

I'll be honest, my sizing in the preferreds is significantly higher than I've seen posted on here. Very small amount in commons for optionality.

either you are aligned with trump (taxpayer) if warrants are kept or if warrants are ditched, even better. Meh - I still don't see the commons as +expected value in most recap scenarios. I have to spend time trying to do pro forma capital if you assume 10% dividends+excess pays down sr pref with a NWS invalidation to have more granular figures though. I haven't seen any convincing detailed figures which show the upside that everyone is claiming. Ackman contemplates certain share prices but assumes recap over ~10 years or additional dilution. Is anyone aware of an analysis that was done to arrive at pro forma assuming NWS never came to fruition (before I sit down and try to figure it out)?

lots of assumptions go into a common price target, many of which are completely unknowable right now: a) what happens with the warrants b) capital ratio target, and by when c) what type of capital is raised, at what price, and over what time frame d) long term earnings power and e) PE multiple an appropriate range is $0 - $75, imo, with a base case somewhere around Ackman's targets. The spreadsheet I attached includes a-e). Capital ratio target seems reasonably placed at 2.5% if you triangulate different sources but of course you can adjust. I believe Ackman uses 2.5%.

And I guess back to my initial point - regardless of how you account for the reduction of the Sr Pref Balance from the capital structure, Fannie Mae will likely still only have roughly ~$4bn in capital against $3.2bn in assets which is about a 13bps capital ratio. 250bps capital ratio seems to be in the general range of likely outcomes. I don't really see how anything above $7-8 per share is possible under this scenario.

I guess I'm missing the final connection between how no change to equity capital in our example would result in the companies not requiring a capital raise? I'll take it away and try to figure it out - I sense I'm the one who's uninformed here. gses will need a huge capital raise. So we've been on the same page this entire time not when you show a sr pref line of $117B Result seems to be the exact same thing, but point taken

I guess I'm missing the final connection between how no change to equity capital in our example would result in the companies not requiring a capital raise? I'll take it away and try to figure it out - I sense I'm the one who's uninformed here. gses will need a huge capital raise. So we've been on the same page this entire time

I guess I'm missing the final connection between how no change to equity capital in our example would result in the companies not requiring a capital raise? I'll take it away and try to figure it out - I sense I'm the one who's uninformed here.

Got it - this is helpful, thanks. Just to humor my final understanding - how would the capital structure be modified from an accounting perspective (I just want to have the full picture in numbers under this scenario). You would reduce the Sr Pref Equity position obviously, but what would the corresponding entry be? If you reduce the St Pref surely that causes your residual equity balance to go down so the other side of the entry would only bring it back to where it is now? this would essentially be pro forma entries. every dollar that went out the door as a NWS dividend in excess of the 10% requirement would still be out the door, so you dont debit/credit cash, but you instead debit (reduce) the senior pref outstanding line. real simple Right. So debit Senior Pref Outstanding. What's the credit? Said another way: On the 9/30 FNMA Balance Sheet, reducing (debiting) the $117bn simply by the full amount for simplicity brings the senior pref equity balance to $0. Presumably Accumulated Deficit would be credited by the same amount (increased) bringing the net impact to the financials to $0. I'm conceptually missing how the 4.1bn Equity balance changes? I think the answer is that FNMA would have retained earnings in excess of the $117bn liquidation preference?

Got it - this is helpful, thanks. Just to humor my final understanding - how would the capital structure be modified from an accounting perspective (I just want to have the full picture in numbers under this scenario). You would reduce the Sr Pref Equity position obviously, but what would the corresponding entry be? If you reduce the St Pref surely that causes your residual equity balance to go down so the other side of the entry would only bring it back to where it is now?

snarky, let me say this very slowly and very clearly. listen. there is no recap w/o rolling back NWS. no one puts a buck in w/o that. now, run the sr pref line down to $10B, which is about what it will be with a NWS rollback (w 1% interest on overpaid amounts). now redo and see if that doesnt spell mother. Apologies if I'm being dense. The supposed rollback for sweeps in excess of the 10% dividend would simply be debit to the accumulated deficit account, effectively increasing net worth? I believe that's what you're saying...which would effectively reduce/remove any need for a capital raise if $100bn is simply added to Fannie's equity. Am I on the right track with your line of thinking?

I just put the following attachment together which lays out the capital structures per both GSE's 9/30 Financials. It then shows a few scenarios while making assumptions pertaining to capital ratios (2.5%), equity raise per share, warrants dilution, etc. Can someone smarter than me please have a look and explain to me how a reduction to the "Sr Pref Govt (Redemption Value)" line item would impact this analysis? I have to run to dinner but will work on it later if nobody is able to. FNMA_Capital_-_Personal.xlsx

Right. I'm just highly skeptical of the $15-20pps that's thrown around given the discussion above. Still is probably a +EV bet, I just like where the preferreds currently stand much more (as many of you have already stated).

real tim howard posits sustainable net income of $10B/yr for fnma. somewhat conservative, especially if there is tax reform, but let's go with that. assumes only guaranty business. i place 12x p/e to get to $120B equity valuation. if NWS invalidated or rolled back in a recap (and in order to raise new money, dont you first have to quite explicitly tell market that NWS was wrong and will not advantage govt ...other than to move forward in time receipt of what govt originally contracted for), then senior pref = $20B. there is $19B in junior pref, at par. leaves $81B for common equity, divided by 5B shares on a fully diluted basis, gets you to $16/share. to be sure subject to dilution for new equity raises to raise capital levels. also, would fnma interest costs rise after "implicit" guarantee is explicitly "removed"? interestingly, real tim howard thought that interest rate borrowing benefit for fnma mostly allowed fnma to build up mortgage portfolio for credit arbitrage, and that it did not benefit core guaranty business, so going forward, there would not be much of a downside delta from removal of implicit guaranty. How do the inevitable >= 2.5-3.5% capital requirements play into this scenario? Government warrants?

My understanding is 60bp g-fee is only relevant with a government implicit guarantee- is this incorrect? Definitely possible I'm incorrect. ^ just reviewed Ackman's deck and looks like I'm likely wrong on this in his scenario (although his scenario isn't full privatization which seems to be where things are directionally headed)

Sorry, maybe "wipe" was incredulous - you're both much more informed on the topic. But if we assume the approach is full privatization, I think Tim Howard's post with respect to Demarco's proposals (risk transfer mechanisms) is relevant. Effectively "first loss capital" would have to be raised at 3.5% of assets = $158bn. Tim Howard argues that the proposed sources of the risk-sharing capital are largely insufficient to reach the $158bn (probably can only account for ~$20bn of the $158bn); in this event is the solution not an offering of common stock significantly diluting the shares (consistent with KBW analysis) effectively making them a poor investment?

Seems evident to me that privatization plans hinted by mnuchin/carson are consistent with Republican proposals for privatization and is the very likely outcome. Seems probable that in this scenario (release, private recap, removal of govt guarantee), prefs are made whole and commons are likely wiped (short of favorable legal outcomes). Probably reiterating what everyone has been saying here, but this further solidifies that idea. Understand that there are serious risks with going full private route (articulated well by Tim Howard), but I'm not confident that his concerns will be recognized. The thesis that "there is no replacement for the GSEs" seems at risk if predicated by a government implied guarantee. Preferreds still remain attractive given liq pref and clear interconnectedness between mnuchin/pref holders

Ben Carson appointed head of Housing and Urban Development. Per Carson's site, https://www.bencarson.com/assets/docs/prescription-for-responsible-and-efficient-government.pdf "Beyond completely overhauling the operating budgets of departments and agencies, we must also scale back or eliminate numerous federal programs that are wasteful, inefficient or unnecessary. A number of blueprints already exist for implementing these reforms. In particular, the U.S. House of Representatives’ Committee on the Budget has approved a plan – titled “A Balanced Budget for a Stronger America” – that identifies $5.5 trillion of spending cuts that can be made over the next decade. Savings would come from repealing Obamacare, eliminating corporate welfare, reducing government interference in the energy industry, privatizing housing giants Fannie Mae and Freddie Mac and other measures. " Per the referenced “A Balanced Budget for a Stronger America” - http://budget.house.gov/uploadedfiles/fy2017_a_balanced_budget_for_a_stronger_america.pdf "Eight years after the federal government bailed out Fannie Mae and Freddie Mac, taxpayers remain exposed to more than $5 trillion in outstanding commitments by these two government sponsored enterprises. This budget envisions the eventual elimination of the mortgage giants by calling for the privatization of their operations and an end to their government guarantee and taxpayer subsidies." Seems this is clearly directionally where we are headed.

Not very material for Trump. Ericopoly also used non recourse leverage (warrants/LEAPS) while shorting downside exposure in related competition- neither of which are applicable here.

Also own a sizable position and it's taking serious willpower not to trim here.

What a day.

Definitely take your point on smaller countries / no changes though - interesting point to follow up on.

I am sure you have great intentions. I am also pretty sure that your proposal if-adopted would be used to suppress votes from marginalized groups including based on race. But since this has pretty much no chance of being adopted, we won't know whether your positive expectations or my negative ones are closer to reality. BTW, I think that demonstrating basic proficiency won't change the results of elections much if at all. I base this on smaller countries that have close to 100% literacy and where most people know the people standing for election. But again - we won't know what this would do in US. Take care. Edit: I think I skipped over the part of your proposal where you suggest voting for candidates without knowing their names just the positions. This is somewhat interesting, but it is somewhat like voting for parties (in various countries). And it's very unlikely to be adopted in US. I don't know if it would be positive or negative. My belief (anecdotally from talking to people) is that the majority of otherwise well intentioned and seemingly intelligent individuals vote for senators and reps simply based on democrat/republican designation. It was mentioned that it is a rational individual choice to not spend excessive time researching - I don't dismiss that and this system would seek to facilitate that research process by providing voters with key information + making the day a mandatory holiday/day off. The anonymity of candidates within the voting booths (candidate x, candidate y, candidate z) seeks to remove that element of voting simply based on D/R designation. The quiz element seeks to a) ensure voters have a basic sense of what they are voting for and b) informs voters of what the candidates policies are. You could also remove the "quiz/test" aspect, but utilize the reading prompt + anonymous candidate designations. You'd have to read (or have someone recite to you) the stances of candidate x, y, z and then you can vote. This truly would not be suppressing votes- rather any individual must either read/listen to candidates prior to voting under the current system (the difference being the last information you'd be receiving would be from an unbiased writing prompt, rather than CNN/Fox News). You're right that this likely won't play out (I have no actual say) but I think it's relatively important for these discussions to be had within our culture, regardless of immateriality.

The system is not "fine" if by "fine" you mean "ideal", but there are no simple solutions that Internetz forum chat will magically deliver. Restricting votes to X will never pass since it's not what democracy is. And if it passes, it's very likely to be for the worst not for the best - i.e. back to some form of fascism rather than to enlightened "rule by smart dedicated altruistic etc. superhumans" utopia. Things may change when humans get the Musk/Kurzweil brain implants that allow them instant access to cloud intelligence and thinking/education becomes less of a chore. Maybe. I'm not superconfident. Things will also likely change a lot when we get non-human superhuman intelligence. I would argue my proposal isn't antithetical of a democracy though. Everyone has an equal opportunity to vote - you just need to demonstrate effort and reading comprehension. Put systems in place for those who cannot read (live quizzes) / modified quizzes for elderly / tutoring on the exam. It's not a perfect system (no such thing exists) but I think marginally better than our current "democracy"

I'd be ok with that as long as there was legislation cutting a lot of the tax rebates allowed to lower/middle class individuals so that this doesn't discriminate against the 40% of the population that pays next to nothing in federal income tax. (Yes, I know - that's only Federal income tax, but I don't really count payroll taxes as those are "fees" for services that will be used by most within that populace). Yes. It is. But that is what we have, that is what a democracy inevitably ends up as, and it will end when it can go on no longer. Realistically, the president SHOULDN'T be all that influential - the gov't operates in three branches and the executive branch was intended to be just the branch that enforces the laws and control the military. It was never intended to be a position where you can use your pen and phone to backdoor legislate when Congress doesn't do what you want, or for you to have the ability to involve yourself in international trade deals impacting private companies, or for you to bomb/invade countries Congress hasn't declared war on. The first step to limiting the damage of an ignorant populace voting for presidency would be to go back to limiting the presidency and allowing the checks and balances to prevent most of the damage of trigger happy presidents and the ignorant populace who puts them there. Yes. But the only thing this really accomplishes is increasing voter turnout for those that are even lazier than most now, right? You'll never get this passed. Voter disenfranchisement by laziness, intelligence, or by demographic (since poor people are less likely to have the flexibility to take off work to go vote, let alone take a 2 hour test), is not a way to really makes you appealing to said voters. Do you have any proposed solutions? Or is the system fine in your eyes? You make valid points and I'm not negating them - I'm curious to see if you have any alternative views other than limiting the power of the executive branch. Surely senators and house reps being voted simply due to D/R, male/female, black/white designation is a problem which warrants consideration?