Fannie Mae (FNMA): The Widowmaker Trade
1. Executive Summary
Fannie Mae (and Freddie Mac) underpin the entire US housing market, guaranteeing trillions in mortgages. Since 2008, they have been in government conservatorship, sending all profits to the Treasury. The thesis is a binary political bet: Will the government allow them to recapitalize and exit conservatorship?
Key Thesis Points
- The Capital Build: Fannie has been allowed to retain earnings recently, building a capital buffer of over $80B. This suggests a path to eventual release.
- Legal Battles: Years of lawsuits by shareholders (Perry Capital, Fairholme) have mostly failed, leaving the "Administrative Solution" (Treasury/FHFA action) as the only path.
- Valuation Asymmetry: If privatized, FNMA could trade at $10-$15 (vs. ~$1.50 OTC). If nationalized permanently, it is worth $0.
2. Business Overview
- Guarantee Business: Collecting a "g-fee" (guarantee fee) to insure mortgage backed securities against default. Extremely profitable in good times.
3. Risks
- Dilution: The government holds "Senior Preferred Shares" with a liquidation preference equal to the entire net worth of the company. Converting these to common stock would dilute existing shareholders by 99%.
- Political Gridlock: Democrats generally favor the status quo (affordable housing focus); Republicans favor privatization but botched the execution during the last administration.