Flynnstone5

As cherzeca said there's no way they immediately exercise warrants. I'm hoping that capital buffer is between $80-$100B. Min 2.5% +DTA effect from anticipated tax cut. No way its $60B or less IMHO.

I just don't think an immediate recap makes any sense. There's nothing wrong with them coming out with a plan that takes 3-4 years until complete resolution. It would make zero sense to call the prfd's as that only worsens the capital picture. Why would they structure some payout for prfd and reduce retained earnings when they can convert to common and avoid div payments? The more I look at this, the more I see value in the common shares as a key. Maybe I'm 100% wrong and just don't get it. When I look at the massive dilution to common as a potential path and what the gov would make, ramifications etc. as opposed to a much more intelligent plan that makes the gov just as much money, why not go with the plan that encourages future investment, higher pps and protects all shareholders. Because most of the preferred require outdated dividend payments, and FnF can't just continue making $billions$ and not pay them. Best to replace them, in time, at realistic rates. Sure, but it makes more sense for the gov to convert them instead of reducing retained earnings. Their not going to pay off prfds when the company's are way short on capital. Converting is replacing and opens the opportunity for 10% capital raise at today's realistic rates.

I just don't think an immediate recap makes any sense. There's nothing wrong with them coming out with a plan that takes 3-4 years until complete resolution. It would make zero sense to call the prfd's as that only worsens the capital picture. Why would they structure some payout for prfd and reduce retained earnings when they can convert to common and avoid div payments? The more I look at this, the more I see value in the common shares as a key. Maybe I'm 100% wrong and just don't get it. When I look at the massive dilution to common as a potential path and what the gov would make, ramifications etc. as opposed to a much more intelligent plan that makes the gov just as much money, why not go with the plan that encourages future investment, higher pps and protects all shareholders.

So this assumes that the warrants are reversed or the strike price goes up to $10 minimum. Bold predictions imo, but nice spreadsheet. Hadn't seen this, but I like the basis. I just don't see where such an adj. on warrants is such a far out idea. We know they're going to be adjusted in order to be able to raise capital and as a likely part of settlement. Doesn't Trump/Mnuchin desire to achieve overall larger goals outweigh the idea that they choose massive dilution as the answer?

I agree with much of your point. It makes a great deal of sense IMO for a conversion of prfd to common, but in order to get everyone on board the common has to maintain a value that makes sense. It gives the gov the ability to put off large divs towards retained earnings, it allows them to issue a full 10% of new prfd at low rates, and if they're willing to adjust their warrants then they enable some further recap and still make a good chunk of money. Ends virtually all suits. and enables a full recap in relatively short term - 3-4 years. This strikes me as a reasonable solution given variables and is not as difficult to achieve recap as many seem to think.

This may be a foolish question from a non-lawyer, but could Cooper make a call to Sessions right now if he wanted to discuss GSE case details or is that not possible for whatever reason?

CNBC Exclusive: Fannie Mae executive with ties to Mnuchin is among candidates for consumer protection boss http://www.cnbc.com/2017/02/09/cfpb-white-house-is-looking-at-fannie-mae-exec-as-boss.html

They wouldn't. I'm 50/50 prfd/common and my hope is that a plan is structured that allows for a common pps of $20-$25 with a conversion offer of at least 2:1. A conversion makes a lot of sense here as it simplifies the capital structure of the company, allows them to hold off on prfd divs which are way too high for current environment, therefore allows greater raise through retained earnings and they can raise additional capital through new prfd issuance at much more reasonable rates.

Just a guess that common is easier to manipulate by MM. It would be nice to get out of OTC land. Side note: “We are going to be announcing something over the next two or three weeks that will be phenomenal in terms of tax,” President Trump says in meeting with airline CEOs.

my biggest concern is lamberth II. you never know. im actually hoping mnuchin settles with Ps before dc court rules on the appeal Agree. How could they not rule for remand at the very least in light of new docs, but who ever thought Lamberth 1 would happen. I think we see a stepped up timeline because everyone expects tax reform asap and they will need to handle GSE's first IMO.

Totally agree. We don't know until terms of a settlement are known as to what that conversion will be. My point is simply that I believe a conversion is likely and that it will based on a value relative to the prfd par value. Should common hold then I think a historic 2.5:1 is realistic. If as you say we see dilution at $8, then 3:1 would be the ratio.

Page A-6, Section 7(b) (partial): It appears a forced conversion would be inconsistent with the first sentence in section 3(d). And we already know that the major preferred holders are willing to fight for their contractual rights in court, so a "we're going to do this anyway, see you in court" stance by the government is unlikely. If the major P's can get a deal that provides more money to them through a conversion and the gov receives the benefit of a more manageable capital structure, why would anyone remain in court? Makes no sense.

By "catch up" I meant using the strike as part of the conversion ratio. $25 par divided by $10 gives the 2.5 ratio in your post on the previous page. I had assumed that you got the $10 from the hypothetical new strike price on the warrant. Apologies if that's not what you meant. Under the (admittedly unrealistic) assumption that Berkowitz could sell any quantity of his holdings in FNMAS for current market prices, he could get 2.45 shares of FNMA for each share of FNMAS. He has chosen to stay entirely in the preferreds. The preferreds offer contractual rights and much more certainty than the commons. I just think the deal would have to be sweetened considerably given that your conversion ratio is achievable in the market right now. As an aside, if the government could force a conversion I think they would have done so by now. That would neuter many of the lawsuits that rely on breach of contract claims. No. I'm using a par of $25 and a common of $10 because as this proceeds, I believe the common trade up and this fits with historical ratio between the two. Of course Berkowitz isn't making a move now given prfd's are more secure, but if was offered such a settlement knowing the admins plan moving forward, capital structure and expected pps based on that, of course he would take that. No chance the gov would have forced anything by now. Obama admin was about fighting P's and never releasing. Trump is exact opposite. We don't even have Sessions as AG yet.

I don't see any reason to believe that the commons would "catch up" to any set strike price. The only purpose of raising the strike price is to recap FnF in a way that doesn't make it obvious that the government is giving back the dividend overpayments. The commons could very well rise because the warrants would finally be gone, but it would take more certainty about the future of the capital structure to have the shares really take off. I got a ratio of 7:1 by looking at the current stock price. The par to common price ratio is about 6:1 right now but I would want a better deal due to the preferred dividends having been off for so long. What do mean catch up? You'd have 5B shares at a market cap of $150B - $30/pps. The exercise price just means that Fannie Mae keeps the money raised per share up to that price, then the gov receives anything above. Recap of $65-$75B in 3-4 years easy. New prfd issuance of 10% = $15B Exercise price $10 x 2B shares = $20B or $30B if raised to $15 3-4 years retained earnings @ $10B = $30-$40B You don't think Berkowitz or any prf'd holder would want $75 instead of their $25 par? Even if they issued another 1B in additional common shares, you're still at $25 and co. raises another 25B. We've got an admin. that wants to preserve the companies, has said it's a top priority, has mentioned stakeholders, appears to respect property/shareholder rights and knows housing is an economic key. Does the idea of just diluting the hell out of common really fit? Obama/HRC I'd say sure, they'd steal every penny for the gov, but it just doesn't seem to fit under Trump.

$65-$75B based on Tim Howard's analysis.

One thing to note is that a preferred-to-common conversion, or any other amendment to the terms of the preferred contracts, would require the approval of 2/3 of the (share-weighted) holders for each series. To get that sort of approval you would need a much higher ratio than 2.5. I know that I would personally want at least 7 commons per $25 par preferred share to even consider it. And that would be only after the exercise or cancellation of the warrants. If the warrants were to still be outstanding at the time of conversion I would hold out for 35 shares per $25 preferred. This would essentially wipe out the current commons. I would imagine that most people who invested in preferreds chose them over the commons because of safety, mostly due to contractual protection and the lawsuits seeking to enforce it. Those holders would need extremely attractive terms to agree to conversion and would want even more certainty than I would, i.e. warrants are resolved, recapitalization plan in place, reasonable assurance of no near-term secondary common offering, etc. Please correct me if I'm wrong on this, but I believe the (junior) preferreds count as core capital towards a capital requirement, so conversion to common would require $19B more to be raised, a complete nonstarter in my opinion. I don't see how you would ever expect that kind of ratio - seems totally unrealistic IMO. If par was $25, then 2.5 based on $10 common would be more than reasonable. Also, if major P's believed that common could see $30 for example, they could agree to conversion in a settlement and it's possible gov could force the conversion for others without a vote. Wasn't this done with Citi? No offense, but this is the kind of crazy talk that you see in so many other areas. You might say that you'd never accept less than 7 common shares/prf'd, etc., but if major P's agree to settle, then whose going to carry your litigation? A solution is going to have to be realistic. I'm interested in examining some scenarios that could have a reasonable probability of working based on factors at play.

http://seekingalpha.com/news/3241593-tax-cuts-mean-frannie-need-treasury-draws-fitch?app=1&uprof=51#email_link

If outstanding prf'd is $19B and was converted to common at 2.5 common/prfd (seems reasonable using par), would I be correct in estimating new common to be approximately 1.8B shares? Trying to mull some ideas. If above is correct and I add to existing, then I'm at 3B shares common outstanding. Gov adjusts warrants to 2B shares, raises exercise price to $10 - $15? Between retained earnings, maybe 10% new prfd issuance, capital up to the new exercise price - is it not realistic to see Fannie Mae recapped in 3-4 years, commons at $30 and gov makes $30-$40B? I may be totally wrong here so apologies if simply incorrect. I'm surprised that given so many experts in finance/restructuring, there are so few ideas put forth anywhere as to workable solutions. Many unknowns, but you would think it has to be possible to get some sort of clearer picture with assumptions of preserving, recapping, shareholder rights, settlement of some sort and gov maintaining some benefit aside from strengthening housing.

bingo. the lack of creativity by investment professionals in regard to the warrants is astonishing. if/when trump sits down to decide on amendment 4, after being briefed on the contents of most if not all of the 12000 documents and given the financial return to date for the taxpayers, what's he going to do?!?! Despite litigation status, do Trump/Mnuchin already have access to majority of docs? Also, from a legal aspect can Fairholme reach out to Sessions and DOJ following his confirmation or is that not allowed during active litigation? We know the players who'll be making the case for prf'd shareholders, but I wonder who makes it for the common in the event Icahn is no longer an owner. Ackman can certainly get a meeting, but there seems to be no relationship. if they keep the warrants in some fashion, then you're on trump's / taxpayer team in common. if they don't keep the warrants, even better (in most scenarios). if the shares were higher it would require bigger thinking than this simplified analysis imo. but at a 5bn - 25bn mkt cap (with decent odds it's not the high end)?!?!? those selling imo are betting on either confirmation troubles or immediately pending negative court news, which clearly are risk factors. I think a lot of people are overlooking the serious risk of dilution to current common shareholders. I only own some for optionality and for the unlikely event of a retained earnings recap There hasn't been a day that I don't worry about dilution to common. I find it so easy to go back and forth. Part of me thinks Trump will protect all shareholders, want to maximize common for their own benefit through some sort of warrant exercise, convince prfd litigants to a mandatory prfd to common conversion based on a solid future common pps that provides even greater returns to prfd, nice higher strike on warrants exercise price, faster recap possibilities through a higher common pps, etc., BUT next day I think prfd's get what they want especially given the major friendly's around Trump, and commons some how get screwed, who's making the case for them, Ackman seems to have no real relationships with key admin, suppose Icahn doesn't even own any more, whose briefing Trump and what if everyone benefits at the expense of commons. I'm 50/50 and really entered the prfd as a hedge on my common. WTF knows? My hope has been the gov provides a line of credit and adjusted exercise price with the intention of encouraging investment and achieving a strong common pps, get prfd's to convert to common based on larger future returns over par and gov can sell off some adjusted blocks as we go. I hope it's a another Trump/Patriot ending. Be nice to take the cash or own a sizeable position in a Fortune 50, move on to the next opportunity. Just noticed Sargent at Arms has dragged senators in tonight to pull Sessions vote forward. Also, Warren has been denied the ability to speak during Sessions debate do to violation of rule 19 as in STFU Pocahontas.

bingo. the lack of creativity by investment professionals in regard to the warrants is astonishing. if/when trump sits down to decide on amendment 4, after being briefed on the contents of most if not all of the 12000 documents and given the financial return to date for the taxpayers, what's he going to do?!?! Despite litigation status, do Trump/Mnuchin already have access to majority of docs? Also, from a legal aspect can Fairholme reach out to Sessions and DOJ following his confirmation or is that not allowed during active litigation? We know the players who'll be making the case for prf'd shareholders, but I wonder who makes it for the common in the event Icahn is no longer an owner. Ackman can certainly get a meeting, but there seems to be no relationship.

Right, but as written, how does FnF raise capital from new issuance when Treasury automatically takes 80% and only 20% goes towards a capital buffer?

I don't know. I have read this a few times and I think this is an incomplete argument. Exactly WHY would it be an insurmountable hurdle? At current prices we are talking $15B in stock vs a company that will probably trade north of $100B once recapped. As far as recap goes, it creates like a 2 foot hurdle to raising enough equity. So maybe they need to retain profits for 1 more year, after 9 years in conservatorship, big deal. If anything it will be easier to bring them out of conservatorship if warrants are exercised because the government is getting their share and it is an easier argument to the taxpayer. Or like spekulatius said, convert and sell. I know, talking against myself here but since I don't have any influence I might as well at least be rational. It's a hurdle because as written, who would invest knowing they can instantly be diluted 5x? To convert and sell screws shareholders and only hinders the ability of the companies to raise capital. Their goal is going to be to raise capital quickly with the overall purpose of strengthening the housing market. Not to say this means they void them, but it certainly appears that they have to be adjusted in addition to whatever P's are able to achieve through settlement.

Some additional very interesting points from Tim Howard regarding warrants: "I wrote that response too quickly (and it’s also a very complicated issue). In September 2008, Treasury granted itself 79.9 percent of the outstanding shares of the common stock of both Fannie and Freddie as a component of its purported “rescue” of them. Treasury’s action, however, was not a rescue; it was a takeover of two companies it historically had opposed, done for ideological and policy reasons. When Treasury granted itself these warrants, it had no intention of ever exercising them; its purpose was to reduce the stock prices of both Fannie and Freddie by a factor of five (since Treasury instantly gave itself the right to four-fifths of the companies’ earnings in perpetuity), in order to contribute to the sense that they were in financial free-fall (which they were not). Treasury’s intention at the time it took the companies over was ultimately to liquidate them, and to allow the warrants to expire worthless. But Treasury, and its allies, never could come up with an alternative to Fannie and Freddie that worked as well as they did, and that Congress was willing to take a gamble on and legislate. So here we are, nine years later: the warrants still are outstanding, and Treasury Secretary-designate Mnuchin is talking about reforming Fannie and Freddie and bringing them out of conservatorship. And the warrants have become a complication. The term sheet for the warrants says they may be exercised “in whole or in part, at any time during the exercise period [which runs through September 7, 2028]”…and that the warrants entitle Treasury to 79.9 percent of the outstanding shares of Fannie and Freddie not as of the date the warrants were granted (September 7, 2008), but “on the date of EXERCISE,” which could be any time up to September 2028. When Treasury granted itself the warrants back in 2008, it never contemplated that the companies might issue new shares of equity to recapitalize (because it intended to kill them). But now that they might, that 2008 warrant language definitely is a problem. Unless Treasury exercises all of its warrants immediately–which would cause massive dilution and create a nearly insurmountable hurdle to reforming them and bringing them out of conservatorship–whatever percentage of its warrants for Fannie and Freddie’s “outstanding common shares” remains unexercised when they do their equity issues to recapitalize will, by the language of the 2008 Senior Preferred Stock Agreement, have to be turned into NEW shares for Treasury, for which it will pay an exercise price of one one-thousandth of one cent (meaning Fannie and Freddie will get negligible proceeds from this equity). THAT is what I called the “deal-killer.” As long as the 2008 language governing the exercise of the warrants remains in force, the companies will not be able to recapitalize. That language never was intended to apply to companies that were going to recapitalize and come out of conservatorship. Now that this prospect is on the table, the language relating to the warrant exercises–along with other aspects of them–clearly has to be in play for alteration, amendment or cancellation. I hope that makes this more understandable (as I said, it IS a complicated issue). "

Curious how many here have examined Ackman's proposal and what thoughts are regarding it as a viable solution. It seems to be very well crafted, but the amount of time for recap is so long that I can't see how it fits with Mnuchins comments. It does, however, allow for solid value in terms of warrants. Not that Trump would care at all, but if they ever adopted this plan I think they would be relentlessly attacked on the grounds that all the hf benefit, but the companies remain unsafe, taxpayers at risk, etc. (suddenly the capital matters from the crowd who completely ignored last 5 years). I also wonder what/if any relationship between Ackman and Mnuchin, as well as, Ackman and Berkowitz.