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.

Possibilities: 1. Mnuchin has been bought, is currently running the clock and has been running the clock for a long time. 2. Joe Light is doing what he has always done, which is to spread misinformation. If misinformation, there is usually a correction in the press fairly quickly. 3. This is an orchestration, to ensure that there was a hard fought contract negotiated. 4. Mnuchin has no balls and requires Trump to make the decision. 5. SPS write down comes along, as does end to NWS, but warrants stay in play. Consistent with Light's article. If Calabria can't be an effective conservator by Mnuchin's design, receivership has to be on the table.

Following up on locust and orthopa's posts 1. I assess the odds at much higher than 50/50 that SM will act. This assessment is based on the fact that SM said he will likely act. I also have a view that SM is cautious with language. He knows what likely means. I place emphasis on that. Edit: Of course, I am not only making my decision based on SM's recent comments. I am basing my view on the last 4 years of activity, all driving towards the PSPA amendment. See Orthopa's posts on all of the activity of the last 4 years, with which I agree. FnF are an investment because after a careful review, FnF offer safety of principal and an acceptable return. This is a special situation with two related catalysts, judicial and administrative. The MOS is the lawsuits. The simplest distillation of the MOS is the the following rule: the US government cannot expropriate without compensation. There are many other claims advanced, but the expropriation rule is the backstop. Edit: In other words, this is not a 50/50 bet. It is an asymmetrical bet on excellent upside to par value in acceptable time, with limited downside, mainly in the time value of money and lost opportunity. 3. The cynic in me thinks that the reason the imminent 4th amendment has been so well telegraphed is that SM wants politicians of all stripes to profit from this investment if they want to; this avoids a backlash by people who are thinking about their own pocketbook. Given how long this plan has been in the works, anybody who wanted to buy could have. Everybody gets to wet their beaks. This is also why I think SM was calling both democrats and republicans in the last couple of months, putting the word out that this is happening. Things don't always happen for the reasons they are purported to happen. I went to Morocco about 15 years ago. My GF and I were looking at a map for a restaurant. A helpful guide befriended us to assist as he was walking by. When we got to the restaurant, the guide spent a bit of time talking in Arabic with the restauranteur. I only read about and realized later that it was during that conversation that he was negotiating his commission for bringing us in. 4. The lawsuits are what gives many investors in these companies their required margin of safety. They are necessary for me to have made the decision to invest, despite expecting an administrative solution the whole time. The lawsuits mean that I won't lose my principal, given the prices I have paid. If the lawsuits take another 5 years to work out, including appeals, I will still do well when taking the time value of money into account. But it will not be the homerun that my purchases last week will be if it works out in the next week or so, that's for sure. Final purchases I bought my last allocation last week, finishing yesterday, representing between 20-25% of the final investment. My calendar has cleared up for the next couple of weeks. I'm going to do a lot of skiing and wait. Speculation re JPS prices following 4th amendment next week I think the market has prices right, given how efficient it is. If the 4th amendment is a writedown of the SPS, end of NWS and a very significant commitment fee, as I expect it to be, I see a double right away for JPS to approx 50% of par value. From there to par value, we will need clarity on an exchange and a timeline for a capital raise. I will not be surprised at all if there is a one and done capital raise. Especially if the incentives are there by virtue of an onerous commitment fee pending full capitalization, in addition to management being incentivized to quickly raise capital to get bonuses. Investors will also want their dividends right away. How I interpret the press I don't think Gasparino et al have much understanding of what they are saying, but I do accept as an assumption that he is being fed tidbits of information that are accurate. For example, he says bankers and lawyers have recently met with Treasury. It's possible they are meeting for simply another letter agreement, which I have previously argued is not a PSPA amendment because it uses different language, but I don't think it is most likely. There have been two letter agreements, one with Watt, another with Calabria. Both have been agreements that modify the cash flows, but don't change the ownership structure. I don't have a memory of this much reported professional activity in the past letter agreement episodes. Bankers were not yet even engaged previously. Edit: To further clarify, I accept the basic facts that Gasparino et al are reporting; ie Mnuchin met with Calabria in November twice. I don't accept any of the opinions that he reports unrelated to the facts, or opinions related to the facts. His opinions are worth nothing. @cherzeca The paragraph you cite in the Calabria letter agreement looks like an agreement to later agree, which isn't contractually binding in Canada. The rule may be different in the US. It is interesting that the Treasury would go so far as to purportedly bind itself to a future agreement. I make the point to illustrate that Treasury was at that time willing to insert a soft paragraph that pushes the bull thesis buttons as well. It doesn't make sense to insert the further agreement language unless you want a further agreement. Why open up Treasury to more litigation for failing to agree to a further amendment? Even if I am right about the binding nature, why bother creating problems where they don't exist and get involved in that argument at all? The simplest answer is that Treasury and FHFA intend to do exactly what they have said they are going to do which is to modify the agreements. Edit: One more note. Whatever political cover SM needed, from SCOTUS or otherwise, is no longer needed. It's time to act.

I added again today as well. I've been noticing the same thing re yields.

It's possible that nothing happens or that what happens is underwhelming; some agree with the likes of MM on that point. But there are some of us that don't think that's is probable and vote with our wallet. I bought more FNMAT this morning for 6.55. This is why we have a market. I don't think the volume says anything right now, but I am not a 'technician'.

There is some debate as to whether Mnuchin will amend the PSPAs with finality or simply raise the amount that FnF can hold, offset the same amount in the liquidation preference. Mnuchin is quoted to have said he is likely to amend the PSPAs. He is deliberate with his words and knows what likely means. The previous change to retained earnings of 20B and 25B was done by way of 'letter agreement' which is of course a different term than 'amendment to PSPA'. The change in the use of terms to me is significant, along with all of the other information we have so far. If the change was simply increasing the retained earnings held by FnF and offset by an increase in liquidation preference, I think Mnuchin would use the words amend the letter agreement.

I'll add number 6. Why is the capital rule being published in the federal register tomorrow?

Yes Snarky agreed.

I'll use an analogy. A contracts to buy a house from B. A says the offer, or ability to perform the contract, is contingent on the following: 1. A needs to secure financing of 100k. A wants 90 days to secure financing at a rate of no more than 2.5% for a 25 year term. 2. A needs to get a home inspection that is satisfactory to A's banker. A needs 60 days to get a home inspection and A needs B to let A into the house so A can do that. 3. A wants access to the house 3 times so A can show it to A's mother in-law all three times. A wants to do that once a month over 90 days. A proposes to close March 15, 2021, failing which the proposed deal falls apart. If B agrees to the offer, A and B have a binding contract. At this time, Dec 15, no money has changed hands. A may not have the money yet. The home inspector hasn't come by or done his report. But there is a contract capable of being performed if A chooses to do so. If A: 1. gets the 100k; 2. gets the home inspection that is satisfactory to the banker; 3. gets access to the house 3 times; A and B have a deal provided all is done on March 15, 2021 and A is hosting dinner for his extended family. If not, B is free to sell the house to somebody else, or not sell, and there is no deal with A. Now, admittedly, A doesn't have a house under the scenario above by the time Biden becomes President. But A and B have a deal that is capable of being performed and it is up to A to get money, at the rate he wants etc. Importantly, all of A's conditions are for his benefit. As long as A meets them, A will get his house. Deal is done over a period of 3 months.

Would this be legally irreversible though even with a new Treasury/FHFA? Section 5.3 of the PSPA is the concerning language that needs to be specifically amended. I am not an expert in this area of the law, but I don't see how the Biden admin can unilaterally back out of a contract. If all of the elements of a contract are in place, I don't know why the PSPA would be any different unless there are specific rules related to, among other issues, whether lame duck parties have capacity to consent. Consent is one element of a contract.

My read is that we get a consent decree if the relevant target capital is met. For example, Treasury contracts with FHFA for consent decree if X dollars are raised/retained by Y date. Then the terms of the contract have been met and the GSEs are out on consent decree. If the terms are not met, GSEs are not out. If I am right, perhaps the GSEs hit the relevant capital target with a private placement and get out by the inauguration. If not, my speculation is there will still be time after that to perform under the contract. I have been trying to buy more this morning but I am having difficulty getting my bid.