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.

You seem very confident in par as the outcome here - do you not worry at all about a Starr type outcome? i.e. judgement for the plaintiffs but determination that the amount of just compensation is far less than one might have desired. It's an appealing outcome for the judiciary b/c it avoids a huge and highly unpopular negative windfall for taxpayers while upholding all the basic principles at stake. I think its also easy enough to defend from a financial perspective. After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

FNMAS back to below the Lamberth ruling lows ... Personally a bit surprised Corker got his provision into the omnibus, after none of the previous attempts to GSE-related legislation moved an inch.

That's true, but it's absolute portfolio returns that matter for wealth, not absolute returns on individual investment line items. And risk matters too (especially when you are levered up), and shorts tend to reduce certain market risks in an obvious way.

Assuming merkhet's assessment is correct (and I know he'd likely insert his disclaimer here) and it comes to a legal decision (no settlement), I have a couple questions. (1) How in the world will Steele lose the Delaware case? As the former Chief Justice he would likely have to grossly misinterpret law in his own state, a state in which he was arguably the most knowledgeable and experienced of the judge and attorney profession given his position. It's similar to a university mathematics professor making mistakes while helping his grade school child with his addition and subtraction homework. And using more than 50 pages to show his ignorance of basic addition and subtraction (reference to Steele's 50+ page case filing). Not impossible, but doesn't seem likely much at all. So... (2) If Steele wins the case, what actions can the government take that would prevent FNMAS from returning to par? They would obviously appeal the decision which would extend the process, but can the Delaware courts demand that dividends be reinstated for FNMAS while the case is going through the appeals process? Other than appealing, can the government just ignore the Delaware court decision? I'm trying to guesstimate how shareholders of FNMAS could get hurt even if Steele wins the Delaware case. It is becoming increasingly difficult to resist the urge to have an out-sized position in FNMAS. Many thanks for input! I think there's a lot they can do to keep the preferreds functionally worthless if they want to; the GSEs will still have no capital, so if they set out to target building up capital through earnings alone, the government would have plenty of justification to continue omitting the dividend for years. Furthermore, the government would still have plenty of capacity to drain earnings away - e.g. they provide a mammoth credit facility to the GSEs which the private sector would probably find impossible to replicate (current availability: $258bn combined!); in any case this commitment is what affirms the government's support of the entities, without which they likely cannot do business. If the third amendment were voided, especially retroactively, I don't see why the commitment fee would not be re-imposed, perhaps also retroactively. This could easily consume the entirety of available profits for the GSEs - the fee is effectively at the discretion of the Treasury (again, unless you believe the GSEs could and would replicate it in the marketplace). Big picture, these companies require the government's continued support to function. So the answer to what can the government do to impair their equity securities will likely always be "a great deal". The real question is how much does the government care about continuing to grind away here rather than potentially working out a deal with partners who, although relatively small, might be able to help get private money back into the mortgage market place.

The rate was set 10% before the NWS. Meek is right as usual that the argument is much better because as Steele argues the NWS is "unenforceable ab initio"....from the beginning. That was the rate before the Sweep. Steele's argument is that the current dividend isn't a rate at all; why 10% of face value is a rate and 100% of net worth is not where I lose him. I just think that a judge is very unlikely to make a $100+ billion ruling against the government on the basis that this preferred stock structure doesn't look like typical preferred stock.

There's still probably a healthy gap from this sort of document to being certain a court will grant relief, I think. e.g. if you go back to the Lamberth decision, he pretty much concludes that the reasons for the FHFA's actions are not relevant, so depending on the claim it's not clear if these documents would matter much in a court's decision. That said this filing is obviously good news! I think the Amici Curiae from former Delaware Supreme Court Justice Myron Steele is more helpful than the documents in the Perry brief if the appeals court agrees that FHFA has broad discretion on how it operates as a conservator. (https://www.dropbox.com/s/iyhdmn2o1vnhuy3/2015-07-06%20myron%20steele%20amicus%20curiae%20brief.pdf?dl=0) However, it remains to be seen whether using the GSE cash flow for political purposes (allegedly to keep from hitting the debt ceiling) would be a permissible conservator action. I think that's where the action is in terms of the appeal re FHFA's powers as conservator. The Steele brief felt pretty valueless to me unless someone has a predilection to rule against the government and is looking for an easy technical reason, but perhaps more qualified legal minds would disagree. Maybe there is some precedent that would invalidate setting a rate proportional to net worth, but Steele doesn't provide it, and in the absence of that why would this be a compelling argument? Meanwhile he gives the definition that "“in preference to” means that dividends cannot be paid on junior securities until full cumulative dividends are paid on the senior security" while claiming that this is not true of the relationship between the senior preferred and other securities post the Sweep, which doesn't seem at all convincing. I agree that the best evidence is material that demonstrates a muddled distinction between FHFA and Treasury and thereby taint the FHFA's actions with the Treasury's own obviously political motives. Because I think just viewed on its face, you could easily argue (and the government will) that the Sweep is totally consistent with the FHFA's mission.

There's still probably a healthy gap from this sort of document to being certain a court will grant relief, I think. e.g. if you go back to the Lamberth decision, he pretty much concludes that the reasons for the FHFA's actions are not relevant, so depending on the claim it's not clear if these documents would matter much in a court's decision. That said this filing is obviously good news!

I think their banking system would face insolvency and illiquidity on an enormous scale post-default - the country would likely face a choice between allowing its financial system to completely collapse or recapitalizing it. With no access to any Euros, recapitalization would presumably have to occur in a different currency. The alternative of financial system collapse just seems untenable.

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs. More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders. Sorry, I do not understand. How was the bailout structure NOT an explicit guarantee of F&F? Only in the most technical sense, in that if Fannie happens to default, you can't show up at the Treasury and demand repayment - there is no pledge of the credit of the United States covering those obligations. Obviously the intent is to fully support the firms, but if you read articles from the time period its pretty clear that there was a desire for them to remain separate from the actual US gov't balance sheet. e.g. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXJSThdqLsXg

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs. More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders.