morningstar

The dealer doesn't owe them money at any point in their business model; CCAC pays dealers. So writing off the Dealer Loan is writing off a cash liability, not a cash asset - waiting longer is more conservative. If CACC is going to lose money, it will be on the consumer loans where they are owed money by questionable counterparties, not on the Dealer Loans where they owe holdback to auto dealers.

Nice Catch - Nell. So let me understand this - they write off loans generally after 10 YEARS. This is totally nuts. So basically if writeoffs only occur after 10 years (perhaps 5 years after the borrow defaults then who knows what the earnings are. Wow. Who knows how long this one can go on. writeup on the writeoffs https://www.hvst.com/attachments/13770/Credit-Acceptance-Corporation_Thesis_11-Feb-18.pdf Borrowers basically never (cannot) default on Dealer Loans - the dealer effectively has no obligation to pay the money back. So I think this specific accounting practice means much less than you think it does. The important thing is the evaluation of the underlying Consumer Loans. The company's stated practice on that front is "We monitor and evaluate the credit quality of Consumer Loans on a monthly basis by comparing our current forecasted collection rates to our initial expectations." Variances then flow through the income statement on a quarterly basis.

how is trump going to find new shareholders to put up serious capital if the old shareholders are screwed? Same as with any other recapitalization or bankruptcy. I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place. This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with. If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever. This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it. I think the bulk of the global investor community would offer a very different account of events. The prevailing view, I think, is: FNMA/FMCC failed in about the most catastrophic way possible and were bailed out by the government (consistent with expectations that the government effectively guaranteed GSE debt). Economically, the equity and prefs were zeros. Had they simply been written off at the time, nobody would have blinked an eye (despite, according to your view, that being an even greater miscarriage of justice). But they weren't and a few hedge funds continue to fight a legal battle to recover a windfall gain. Should the GSEs get restructured into clean start capital structuers, there will be plenty of investors, same as there are in banks, insurance companies and so on - all of which exist with the understanding that the government has wide power to protect its guarantees. The risk of failing during a downturn widely applies to financial companies, and is accounted for in the required return on equity capital. EDIT: In my view, the much bigger challenge to finding new investors is the unsettled future of the company - I don't think new equity investors will be easy to find without either (1) successful GSE reform passed by Congress or (2) some tacit acknowledgement from Congress that there will be no substantial reform.

There's no expiration, although with quarterly volatility in earnings and no ability to retain capital, the GSEs would eventually hit the caps on facility size (sometime well after 2018).

FNMAS has a coupon floor of 7.75%, so it would be even better than that. The problem is the low likelihood of the coupon ever being turned back on. The biggest appeal of FNMAS/FMCKJ is liquidity - this explains most of why they trade at a premium, I think.

Supposing that a court agreed with this argument and gave preferred holders a damages claim for their liquidation value, and the FHFA responded by putting the GSEs into receivership rather than paying out in cash - where would that claim stand in ranking as that receivership carried on?

It seems to me that they aren't including any future returns and simply counting the $187.5 invested vs the $245.6 dividends to date. What a bunch of garbage. Are plaintiffs allowed to file another brief in order to reply to this nonsense? It's easy for us to notice the obvious error but I fear that non-finance people (the judges) will only see this at face value! Even a pretty generous assumption about the gov'ts future returns (say, that their current preferred is worth face and their warrants are worth the stock price) gets you a total return not inconsistent with equities over the period - I don't know that a group of hedge fund plaintiffs want to spend time arguing about what constitutes a windfall.

To start with, Italy's real GDP is down several percent over that period.

Having been bearish on this thread for awhile, I tend to agree with this. The GSEs incontrovertibly required a bailout, in my view; in fact they had been bailed out from day 1. The question is whether the US implicitly guaranteeing the debt was a sufficient bailout. I do think there's plenty of room to dispute this from a market perspective, but the fact (which equity holders knew all along) is that the companies exist and function at the sufferance of the Government. They still do. So when the government says hop, the GSEs hop and the FHFA in assuming the powers of their boards has slid comfortably into that role. Ultimately that's why I'm skeptical a court would say, for instance, that the Sweep was a failure of fiduciary duty - it's hard to negotiate with someone who is at once your controlling shareholder, your only creditor, and your only customer.

Yes, I sort of agree on rhetoric -- but I think the point is that if the holding ends up being that preferred shareholders can bilaterally, with the agreement of management, decide that they will transform their preferred shares into new common shares that are above the rest of the capital structure, that's going to be bad for the stability of companies in general. Theoretically, the very next day, I would go out and start picking up preferred shares and contacting management to carve up companies 50-50. (Change my preferred dividends to a full sweep, and I will vote to increase your pay by a ton!) A few unscrupulous management teams will probably go for it! I'm not sure this is much different than buying a bunch of debt and contacting management teams to file Chapter 11 with a restructuring agreement that gives me the equity - a pretty well established tactic. Doesn't really matter for the stability of companies in general because almost all companies are solidly solvent and therefore very difficult to this type of attack. I think if the NWS were eliminated by a court the preferreds would go to around $17-18 at the moment. Very little chance I would think of dividends starting again in the next several years even absent the sweep, given that there is no current traction in Congress to reform the system. Clearly, however, they should trade well ahead of the ~$10-11 where FNMAS was trading pre-Lamberth.

Why would they try to do this? If the government wants to put these companies back in the public domain it would just amend away the NWS itself and sell them - I think this would happen even if the NWS has been affirmed by the courts. I think the government's view of the economic reality here (with which I'd agree) is that private capital involvement in the equity of the GSEs serves no purpose; the government creates all the value and there's no point in sharing the equity, especially since the cost of capital for all the potential buyers is so much higher. Rather, if the NWS is affirmed I would expect to see the current status quo continued indefinitely. At least until we get a political consensus on how to reform the subsidies provided for housing, if that ever occurs - at which point good chance Fannie/Freddie are allowed to run off to near-zero.

It's also worth pointing out that there are economic/fundamental considerations here as well. For instance, it's highly unlikely that a judge is going to restart dividends on these preferreds. The government has enormous discretion/capacity to control the path of the GSEs as companies. So when you look at the prices of the securities, there is a lot more informing those price movements than just the prospect of litigation.

In that case why not just release them regardless of the courts? Actually I agree that 80% up front is better for multiple reasons and wouldn't be surprised if does just that right before the election. It makes for a great headline number, and if I were a politician I'd rather spend 80% all by myself than share 100% in perpetuity with others. But again, why fight it to death in the courts? Re: the capital, in the Government's hands they have an infinite line of credit to cover any losses so it's not like they need all that capital at all times or any given moment. I didn't read Watt's statements yet but I don't understand why do all these people think that recap and release is essential? From their perspective (non financial) what are they worried about if they have essentially unlimited govt backstop in the situation we have today? I think his acutal concern is basically that in the future, a draw on the Treasury's facility would create a political excuse for Republicans in Congress to break down the GSE system. While Watt and others have also made comments on the future financial stability of the GSEs, I think the status quo is satisfactory from that perspective and that a release/recap would probably be damanging to investor confidence in the enterprises, not supportive. 100% of the creditworthiness of the GSEs is driven by the effective substitution of their credit with that of the US, and the demand for the securities they issue is all created by this fact. To the extent that a release/recap involves reducing any aspect of that support, it would seem destabilizing.

how do you reject this argument? Outside of fiduciary duty issues, it's not very clear to me that this would be at all troubling. Assuming that the board of directors (of this theoretical company not in conservatorship) did something like this, and assuming that it was capable of defending itself against fiduciary duty claims, why would it be objectionable? For instance, imagine a company facing a choice between (1) a net worth sweep and (2) bankruptcy, in which the equity is expected to be cancelled. Can you explain why a court would wish to foreclose option (1)?

What was the meaningful carrot in the Third Amendment? The Periodic Commitment Fee was set at zero, basically for as long as the structure set up by the Third Amendment is in effect. Since the economic value of Treasury's commitment is extremely hard to measure, being so unlike any liquidity facility existing in the private market, you could have a huge range of views about what that is worth.