So, in a real crisis, the Federal backstop is the guarantee for MBS, as we have learned. Woe betide us if that ever fails.

Kinabalu is correct: while the senior debt and the guarantees are pari passu as far as Frannie is concerned, the value of guaranteed MBS depends first on the value of the mortgage collateral (which is not a Frannie asset) and then on the Frannie guarantee; if the mortgages are good then the Frannie guarantee doesn’t even come into play. The value of the Frannie debt, on the other hand, depends only on what net assets are left at Frannie after the Treasury has finished pumping in its support.

Nonetheless, it may be notable that in bank receiverships (on which the Frannie receivership statute is modelled), the FDIC has taken the position (supported by some courts) that guarantees are contingent obligations that have no value — none — unless they were triggered and reduced to a claim before the receivership started. So in theory the FHFC as receiver might be able to repudiate the guarantees and pay no damages. But, as with the Frannie senior debt, such an approach is politically unthinkable.

The bottom line is that, if the Frannie senior debt and the guaranteed MBS are trading at about the same level, the market must be relying mostly on the Treasury support rather than on the value of the mortgage collateral. (Which sounds reasonable enough to me.)

It’s also worth noting that the FHFA as conservator or receiver, like the FDIC in a bank conservatorship or receivership, has lots of special powers (to repudiate contracts with limited damages, etc.) that are not available to an ordinary bankruptcy trustee. If the SEC had similar powers with respect to broker-dealers then this wouldn’t be such a nail-biting weekend.

Your original post was prescient, particularly with respect to the sub debt (the fact that Terasury chose a conservatorship which protected the sub debt does not change the fact that they could have done otherwise; and an eventual receivership that would effectively eliminate the sub debt is still a possibility), and identifying the long zeros was brilliant. Congratulations.

-JAFDC

If they were subordinated, they would trade a lot wider. If they were senior, they would be a little tighter.

It is relatively easy to do a secondary IPO if the new buyers think they are getting the net worth of the firm at a bargain price. Now imagine that the net worth is negative. What would a person pay to buy an asset that is under water? If is is not far under water, they might do it, but they would buy it for a nominal sum, and pump money into it after the purchase.

Deeply under water, no one will buy it. Read my post this evening for more details.

In other words, would you rather own 100% of a massive negative net worth, or 30% of a somewhat positive net worth?

I guess the “kill” argument is for owners who don’t yet realize that the company is a zombie / Dead Man Walking. But the damage (apparently! — no claim to security analysis here) was done steadily over the past years, and the management can be valuable to existing shareholders by bringing in others.

No? What am I missing?