beaufort

I wish I had been more disciplined in keeping more cash around. I am fully invested. I suffer from Berkowitz's affliction of premature accumulation. Edit: And I don't learn! I was fully invested by fall 2008 after that horrific week when financials were going down 5% a day.

I am observing the vast majority of commentators saying significant recession or potentially mild/moderate recession moving forward, or here now and lower equity prices. Seems very one sided with everyone in agreement. That's usually a positive for the market. I know the worse I feel when buying, the more money I usually make with those purchases.

That's now how I understood it. [*]FnF never had (and currently does not have) the ability to pay down the seniors voluntarily because the funding commitment still exists: this is in Section 4(a) of the original contract that is not being contested. More technically, they can't pay down liquidation preference increases due to draws, which have been the source of all such increases. Thus the proposed remedy that pays down the seniors violates the original contract, while the other remedy (UST keeps the seniors but sends back $125B) respects it. Why would the Fifth Circuit choose the former over the latter in that light? [*]The funding commitment, whose removal could very well collapse the housing market, is tied to the existence of the seniors. Extinguishing the seniors entirely would alter large parts of the original contract, and I would imagine even the plaintiffs don't want this. Writing the liquidation preference down to its original value of $1B helps, but then the 1:1 increases in last week's letter agreement as FnF retain capital would stay in force. [*]My interpretation of the questions before SCOTUS is that they won't be determining the form of backward relief on the constitutional claim anyway, only if it should be available; the form would be remanded back down to the Fifth Circuit. Is this correct? [*]The same reasoning applies to the APA claims. On that front SCOTUS is only being asked if the APA claims should be dismissed due to either 4617(f) or the succession clause. A victory for the plaintiffs there merely means upholding the Fifth Circuit's ruling on that front, remanding the case back down the Judge Atlas, right? There are no facts in evidence to support the payments, unless there is an admission I am not aware of. I doubt it, given the litigation has been handled so far. In addition, the payments will be subject to expert opinion, which won't be served yet. A win at SCOTUS is a remand to the lower court for fact finding. On the other hand, this newest letter agreement will be brought to the attention of the court. SCOTUS will see how vile it is and would hopefully grant the remedy and consequences that @cherzeca references above.

@IG. At the right price, I would consider it. But I am beat up right now, so hard to get to that price. Edit: "Tsy doesn't have $125bn laying around. If they lose (or think they will lose) APA Collins or Schwartz, then they're going to want to deal. Sending back $125bn in 2023 and hoping to receive cash 10 years later is remote odds, maybe 10%. that leaves 90% odds for a new PSPA, new deal, in this scenario. Also yellen isn't a jerk. Finally this is America as TwoCities wrote and at some point the right thing gets done - after all the current market cap of all public common + pref is currently 6 months of FnF earnings -- there are ways to pay us off if all else fails." Plaintiffs have asked for accounting entry as remedy. Not sure how much Treasury has, but I don't have confidence that this is a sufficient impediment. I see your points. But they are soft points as far as I am concerned and not an investible thesis.

@midas You are correct that I did not interpret the SPS getting their dividends at the end after subtracting from net worth. Assuming you are right, and I accept that you are, dividends get paid at some point in the future if nothing changes again due to another letter agreement, for example, while in conservatorship. I have assumed that Treasury doesn't care about making money here. As long as the companies are well capitalized, that will be good enough. You have my other assumptions. I can't think of any new money coming in as things stand. But who knows, it's possible. Edit: One more point that I made previously, but really shook me up. My thesis is this letter agreement was made for litigation. It is a blueprint alright, for how to marshal facts that will defeat the claims. "Something else to consider is that 4% of adjusted total assets, the threshold at which the SPS divs turn on, was $265B as of last June and grows with FnF's asset base. I use 2.5% per year as a ballpark. FnF's combined core capital, though, was negative $167B at that time. That's a $432B gap! FnF make around $20B in earnings per year, but the 4% target grows at $6.6B per year right now and faster in the future as the 2.5% increases compound. Carrying out the math, that means not only will FnF not be fully capitalized through retained earnings by 2028, it will never happen at all! The smallest the gap between FnF's core capital and the requirement gets is $72B in 2065, then the compounding of the 2.5% becomes greater than $20B per year and the gap starts to widen again. Now, assuming flat earnings of $20B per year is probably unrealistic. If they also grow at 2.5% per year, which I think is reasonable because FnF's earnings are also roughly proportional to the size of their asset base, the $432B gap closes in a finite amount of time, but not until 2044. Note: only the SPS balance on the balance sheets count (negatively) towards core capital, a total of $193B for FnF combined. Increases to the liquidation preference due to the letter agreements, including the one from Thursday, are not reflected on the balance sheet and thus don't affect core capital at all." I accept all of these points. My thesis is they never leave conservatorship, until a court forces them out (if at all), long into the future, at a time I can't predict. I recall a statement by a judge that conservatorship is not an end state. More potential lawsuits. @IG I acknowledge that I might be wrong. I didn't base my decision on sentiment on a message board. New facts came to light on Thursday and I changed my mind on the investment on the downside v. the upside with current prices. Other people are free to have a different view.

I don't disagree with any of these scenarios and at 20% of par, if it works out, that will be great. My problem is the MOS when looking below. I have no way of knowing whether this works out and I have proved it to myself.

Assumptions: 1. No settlements because they don't need to. 2. No obligations to shareholders by anybody leaving only judicial remedy. 3. No exercising of warrants. Expiry in 2028. New litigation: can shareholders get remedy if UST doesn't exercise warrants. I don't know, but we are relatively confident that much litigation will be pursued to that end, which makes exit impossible for yet another roadblock that Mnuchin put in. 1. Expropriation. Shareholders will not have been expropriated completely. In 2028, FnF are recapped through retained earnings and/or Collins APA win. GSEs pays out dividends to Treasury according to cap structure and the new deal: 10% of SPS liquidation preference at time of dividend payment, which will have been increasing 8 years straight. FnF won't make enough money to ever pay much to JPS holders. Common are 0. Low yielding JPS are basically a 0. But neither JPS or common holders are not expropriated completely. They just have really crappy economic interests. Nobody promised us a good deal and no remedy for crappy economic interests. I have had problems with expropriation claim for some time in assessing damages, even though I think they are likely there. If the facts are that FnF were in trouble at time relevant time, arguably the original position was already low, so low damages. If the facts are that they were valuable at relevant time and have not been expropriated by the crafty new letter agreement, up to SCOTUS for review, and then back down. 2. APA claim. Assumption shareholders will win with SPS writedown. The new letter agreement requires all earning to raise the liquidation preference again - NWS by another name - more litigation - starting from scratch, because of the new cause of action. Success means FnF only have their retained earnings to pay out on in 2028. This still leaves little money to pay out to shareholders. 45B now in net worth. 20B a year moving forward x 8 = 160 plus 45B now 205. 10% on that is 20B. How much is left for shareholders? Assumption shareholders will win lawsuit and remand to lower court. More litigation for many years down the road until remedy. But we still come back to the 10% dividend in a number of years. 3. Constitutional claim. Even with win, same problem as #2 - arising from the new letter agreement. Any increase in GSE net worth increases liquidation preference of SPS and further raises their dividend entitlements. 4. Lamberth claims. Direct. Fact driven. Possible win - toss up, with good upside given remand to lower court. But, will be appealed all the way to SCOTUS. Years before shareholders see any money. 5. Hindes litigation. UST learned. Clearly everybody will in fact be cut out of capital structure except SPS, but this has now been decided. Res judicata. In addition, defendants have better facts now. There will potentially be something left for other classes of shareholders, just not much. The original deal was a bad deal and here we are. MOS for shareholders from lawsuits: Other than Lamberth, there isn't one. In its current form, I can't get an approximation of the odds for Lamberth claims. At current 20% of par, too rich for me.

Yes you are interpreting my view correctly InvestorG - no settlement by UST - there is no reason to. Edit: FnF will be operating soundly. They will be very well capitalized. The 30 year mortgage will be fine. Calabria doesn't care about shareholders and he thinks that shareholders should have been wiped out in 2008. He has made that clear. He will be adhering to HERA. Shareholder lawsuits have taught UST over the years the necessary facts they need to marshal to defeat the various claims. This letter agreement smoked us and is proof of that. If I am wrong, it will sting, but I am still rooting for those in this. This is because I disagree with the way shareholders were treated after 2008 until today. But that is no investment thesis.

+1 regrettably. But I am less optimistic. The newest letter agreement destroys the margin of safety from the lawsuits, including rendering the Collins case moot, but from a different angle. Even if the accounting adjustment entry is done and UST sends back the money, FnF still can't get out because of the warrants until 2028. In addition, the letter agreement drafters learned from the ongoing litigation. They are using the Hindes precedent as a method to get all of the money by cutting out the other classes out of the capital structure and sending the money to UST eventually, but not completely, at least on paper. After FnF retain 3% of assets and a commitment fee is negotiated, 10% goes to UST or lift in net worth for the quarter. That leaves almost nothing for preferred shareholders. Commons are a 0. The APA claim moving forward is done. Calabria will now be conserving and preserving assets - for FnF benefit. The fact that the shareholders don't get anything doesn't matter. Calabria will be doing his job. After FnF are capitalized, in 10 years, UST gets all of the money because of the agreement that Calabria signed, which he can do. That leaves the expropriation claim. Maybe. The problem is UST/FHFA are now creating the necessary facts to defeat that lawsuit by not completing cutting out shareholders, but almost. I acknowledge the various points re potential admin action moving forward, but I can't handicap that, and I have demonstrated that with Mnuchin. We were sold out. The beneficiaries are, amongst others, buyers of MBS. They will have a mountain of money in front of them, and the LOC. They will be taking no risk for their investment, printing risk free money. Treasury also gets to keep this money making machine to itself moving forward, or until special interests manage to buy it for a song later. This letter agreement is deviously brilliant. This was a chess game and we lost. I didn't even realize the adversary was Blackrock, Pimco etc until Thursday. My thesis changed on Thursday night. My margin of safety was eviscerated by this new letter agreement. There may very well be new lawsuits arising from this letter agreement - but I have no way of handicapping this. I was wrong on Admin action. I therefore sold out of my positions yesterday. As InvestorG is fond of saying, good luck everybody.

Yeah the warrant issue is a problem. Litigation can be resolved by winning at SCOTUS if it's the one I referenced and abandoning the other lawsuits with prejudice. That leaves the warrant to cooperate on. Most of the cases are deep pocketed investors who will want to get these done. We were sold out and Mnuchin has been running the clock for a long time.

I am underwhelmed and still digesting, but it could be worse. The litigation now screams for a settlement and JPS holders are incentivized to settle very quickly. If plaintiffs want everything, we'll be waiting a decade. If we get what we want with SCOTUS NWS held to be illegal, with accounting remedy of liquidation preference deemed paid down, we get a long way to exiting. The warrants still need to be exercised and that requires Yellen. Expiration I recall is in 2028, but I don't recall exactly. If not clean SCOTUS victory re NWS with pay down, or if remand to trial level for fact finding, negotiation with Yellen will be required, and JPS holders have less leverage and may have to settle for less than the totality of the past sweep payments written down. Overage over the SPS liquidation preference should be given up by litigants to get this done and my guess is that will not be a problem. Consent decree 'lite' s. 5.3(b) Then Calabria has the right to push them out unilaterally if they meet the conditions agreed to in this letter agreement: 3% of CET1 assets, and no outstanding litigation. The amendment to s.5.3 is very significant. No more periodic commitment fee arguments for the past. There is a path out. And the incentives are to get out very quickly.

We may eat crow but it very hard to accept that Trump, who won’t attend Biden’s inauguration, will leave him the NWS in place in some fashion and the SPS to negotiate and monetize. The NWS that Trump is not currently using. Set up Biden and stick it to donor Paulson. It doesn’t make sense.

Yep and the expropriation claim. Not sure on timeline for that one ie. if it's been set down for trial. We need a trial date. I recall Holdenwalker saying 500 until trial for Lamberth. Not sure about accuracy. Expert evidence is due 90 days before trial. Don't expect settlement until all of the evidence is in. We still have our MOS, but it will be a pretty terrible outcome if there isn't admin reform in the short term, for example, today.

I suspect this is a bit of an overly optimistic take and the most honest/appropriate assessment of the current situation given the reporting is that there will be a PSPA amendment, but it will ultimately only achieve a similar outcome as the Sept 2019 letter agreement. There are good reasons why this may be wrong, but I unfortunately this has to be your base case at this point. Haven't sold any shares since, to your point, nothing specifically concrete has been reported. But at this point you have to consider this as a very real possibility. No question and I think the market has priced this in at these prices. Im not sure what the purpose of this would be though outside of kicking the can. They should have just made the 2019 LA with bigger caps if this was the plan in the end and I dont know it meshes with gasparinos path out of conservatorship and Mnuchins raising 3rd party capital. Both a path out and raising 3rd party capital have to deal with the Sr Preferred in some fashion. You cant have either without. A thought I had was a 1:1 paydown of Sr preferred with capital raised, essentially an exchange once in a subordinate fashion I guess which fits with what WB_82 has said. Granted we have multiple sources with differing agendas and different terms but you are correct a LA is base case. What a waste of time this was for all involved. Would Calabria even sign on to that tho? Is he following the law if he does that? I guess kind of. I agree with Snarky and Orthopa.

All of the press are a bunch of hit pieces/misinformation. It is easy to interpret Light's article as follows. 1. NWS "Most significant, Fannie and Freddie won’t have to pay their profits to the government until they have much bigger capital buffers to protect the companies against losses." NWS is done. No commitment fee until hitting a certain amount in buffers. And "[p]eople briefed on the plans said it wasn’t clear how much capital the companies will be permitted to keep but said the changes were framed as an end to the so-called net-worth sweep, a controversial policy implemented during the Obama administration that requires they send their earnings to the Treasury." 2. Warrants "However, Treasury opposes reducing the government’s ownership stake in Fannie and Freddie, a longtime goal of the companies’ private shareholders." This can easily be understood to be the warrants and not the SPS, becuase in the very next sentence, Light addresses the SPS. 3. SPS "Whether to modify the Treasury’s senior preferred stake is under consideration at the White House, said one person familiar with the matter." There is no reason 'modify' can't be interpreted to mean liquidation preference paid down. 4. Conditions precedent for release "With the agreement, the Treasury and FHFA plan to set out recommendations for what needs to happen before Fannie and Freddie are freed. But the suggestions won’t be binding for Biden’s Treasury, the people said. That means the changes effectively amount to a blueprint for eventually making Fannie and Freddie fully privatized companies." It will be up to the GSEs to meet the conditions precedent in order to get out. Of course that is not 'binding' on Biden's treasury. The conditions precedent must be met by FnF. As for anything still to be negotiated, sure, maybe the Biden admin makes further agreements. 5. Conflating SPS and warrants There is a distinction between SPS and warrants, but Light conflates them here. I base this on the fact that he acknowledges that the SPS is a WH decision above: "One of the thorniest issues that Treasury intends to leave unresolved will be the government’s stake in Fannie and Freddie, a position that now exceeds $220 billion in senior preferred shares as well as warrants to acquire nearly 80% of the companies’ common stock." All in all, sloppy work from Light, as usual. In this regard he is matched by Ackerman and Gasparino.