Midas79

The seniors have to disappear so that the companies can rebuild capital. Getting rid of the seniors gets rid of both the NWS and the 10% dividend requirement. It doesn't actually recap the companies, but it is a necessary step. Until now I have assumed that either a court would force Treasury to cancel the shares, via finding the NWS illegal and recharacterizing past payments, or that Treasury would declare them redeemed. But selling the seniors, or more likely converting them to either junior preferred (pari passu with the existing ones) or common shares could also work, though it makes the recap more difficult. Let me think out loud for a minute. The problem with converting to common is that the senior pref balance, plus Treasury's warrants, would give Treasury an extremely large portion of the total common stock. Like over 99.9%. I believe that would force the government to consolidate FnF's balance sheets onto their own, raising the national debt by $5.5T overnight. I don't know if Treasury could perform some sleight-of-hand, like doing many partial conversions and selloffs to keep Treasury's stake under 80% at all times. In fact, this specter could be part of the reason the common share price keeps dropping. That much dilution would make those shares nigh worthless. The problem with converting to junior preferred is that the dividends on that much par value of preferred shares would eat up a ton of the companies' earnings. In fact, if it eats up all earnings then the NWS would de facto continue, though the companies' earnings would be shared with existing junior preferred shareholders. Common shareholders would never receive a dividend again, perhaps another reason the current share price is so low. If the converted seniors are non-cumulative, they would count towards core capital. Does this amount to an instant recap, even though the giant accumulated deficit currently on the balance sheets would remain? I also don't know if the converted seniors would necessarily have to be pari passu with the current juniors. Perhaps they would remain senior. Bad news for us in that case.

Two more recent views from Calabria: (from January 2016): http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf (from November 2017): https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship He certainly seems to have at least taken several steps back from the "kill FnF" ledge. However, that 2016 paper calls out Treasury for lots of bad (and even unlawful) behavior. If Mnuchin really is going to hand-pick the next FHFA director, would he choose Calabria knowing about Calabria's views on Treasury's actions? (of course, Mnuchin wasn't in office then, but he hasn't really acted much different than Lew other than last December's letter agreement) The 2016 paper shows that Calabria is anti-NWS, but would he have enough power to really do anything about it? Would he go so far as to withhold the dividend payments? Things will get interesting soon, and this is a key thread to follow.

Doesn't this just lead to the juniors getting 20% of par? Why would they agree to a conversion if the warrants have yet to be exercised?

Given what we know about Carney, and the rest of the horribly biased article (which I regret reading, as with all of his stuff), he's using this line to warn Congress and those in the administration that are not pro-Moelis. Given Carney's obvious biases, I'm not sure we can even trust this line that you quoted.

Would be terribly difficult as their is already legal precedent for those rights transferring with the securities in a sale. While it seems simplest, it flies in the face of precedent AND would cast into doubt how to handle such cases in the future as we'd now have legal precedent for both the rights transferring and the rights not transferring calling into question what exactly you're biting each time you buy an equity security. How does this affect the Washington Federal suit, which only asks for damages for (all of) those who held shares on the day of conservatorship? If an award is actually made, who gets the money?

Sure, because the commons would only be disadvantaged vis a vis the juniors. Relative terms, not absolute terms. The warrants are magic, Treasury might not care how the total pie given to the current commons and juniors is split. In that fight the juniors hold all the cards. so you are saying in effect that the ratchet in the warrants ('magic") will protect treasury after the common and preferred hash things out. I see that. not sure screwing the common holders before you exercise and try to sell all of your common will be a wise execution strategy, but it is available. I guess I'm too cynical. I see the new common buyers as having more of a "sucks to be you" attitude towards the current common holders, and less of "what if this happens to me?" Everyone else benefits by screwing the current common holders.

Sure, because the commons would only be disadvantaged vis a vis the juniors. Relative terms, not absolute terms. The warrants are magic, Treasury might not care how the total pie given to the current commons and juniors is split. In that fight the juniors hold all the cards.

http://www2.ca3.uscourts.gov/opinarch/173794p.pdf From today's Third Circuit affirmance (page 24) The claim Lamberth allowed to process was breach of contract, right? And the claims in front of Sweeney are Constitutional claims. It looks like this ruling shouldn't affect those cases in that regard. Later on page 24 How does Treasury writing a check to shareholders unravel the NWS? It doesn't make any sense to me.

Any thoughts on the Fifth Circuit having granted an en banc hearing in the Collins case? http://www.glenbradford.com/wp-content/uploads/2018/11/17-20364-00514719656.pdf I wonder how much of the oral argument will focus on plaintiffs arguing that the NWS should be overturned versus defendants arguing that the FHFA is constitutionally structured. At least the plaintiffs get another chance to pound on the points made in Willett's dissent. The constitutionality part seems mostly moot to us shareholders because Trump will have appointed a new FHFA director by the time the oral arguments even happen.

If so, would she have to recuse herself on matters involving the GSE cases? Seeing as she has already written an opinion on one of them.

I do not remember maxine wanting to liquidate FnF. that certainly was hensarling It was both. https://democrats-financialservices.house.gov/uploadedfiles/media/file/003%20maxine%20waters%20legislation/gse%20bill/waters_046_xml.pdf She might have changed her mind since then, though. This was in 2014.

It's going to be high theater watching Trump try to deal with a Democrat-controlled House. High comedy too. Evidently, Maxine Waters proposed a bill in 2014 to wind down FnF. Mnuchin has shown no desire to do that, so does that (and the fact that the Dems have the House) shut the door on legislative reform? I'm trying to think of what common ground there could be between Trump and the House, and I'm just not seeing enough of it to make a difference.

FNMAT up 0.34 (5.57%) on 9x average volume. FMCKJ hits a milestone: it now trades at 5x FMCC ($6.55 vs $1.31). Was there something in Fannie's release that got people buying prefs again? Price movement is strong, volume is middle of the road overall.

Short version: FHFA was the only agency allowed to put the companies in conservatorship and they did, no legislation needed. Or more accurately, FHFA's power to do that is outlined in HERA. Treasury must approve a release from conservatorship per the terms of the SPSPAs. No legislation is needed for FHFA to release the companies, but they will need some level of capital. I think this stands to reason, but I don't know if it's specifically in HERA.

Those Moelis numbers cannot necessarily be counted on. Phillips said that Mnuchin wants the companies out of conservatorship by the end of this presidential term, and I take that to mean the companies will be recapped first. Moelis ran its numbers from mid-2017 to the end of 2020, but starting at the end of 2018 means you have less retained earnings to recap with. That means more equity needs to be raised, which means more dilution. Also, Moelis was going to offer a 3:1 conversion rate (3 commons per $25 of par value) because the JPS holders have to agree to any conversion. But the FNMAS:FNMA ratio then was around 2.5:1. Now it's 4.4:1, and a bit higer for FMCKJ:FMCC. That probably means a 5:1 conversion rate instead, so more dilution again. I'm starting to think that $5 is actually a stretch for the commons, and if Treasury tries to cram through a really really fast recap then common holders could actually lose money from here. I'm staying away from them.

True, but it also mentions a director's "absence" and I couldn't find another applicable section of HERA covering what would happen if the director's term ended without a replacement. The closest I could get was 1312(b)(4). I guess that means Watt can stick around until his successor is actually confirmed? Or does "appointed" just mean Trump picking someone, meaning that Watt would have to leave pending the Senate's confirmation of the successor? If he resigns after January 6 but before Trump appoints someone then the other section I quoted would apply.

What's BI? And do you have a read on how plugged-in they are?

That would be quite the scoop if these comments by Mnuchin really weren't public! Another quote that jumped out at me was this. Josh Rosner tweeted a while back that HERA doesn't allow for this. I found it in HERA, section 1312(f). Trump could only appoint one of three specific people to be interim director between Watt's term ending and Senate confirmation of a new director. Presumably these people were picked by Watt and wouldn't necessarily share the administration's desire to shrink FnF. Then again, if Trump gets the authority to remove the FHFA director at will in the meantime, he could just keep firing people until one of them marches to his tune. Can Trump fire the director at will right now (because the Collins appeal decision said he could), or does he have to wait for SCOTUS to deny cert or uphold the decision? In the latter case, it will take less time to just get his own pick confirmed by the Senate. Oh, and I should also thank you for posting this, it is very interesting, and if it turns out that this newsletter's sources really are credible then we get even more insight into the administration's future plans. I didn't know that shrinking FnF's activities was so important to them, but it's basically the whole point of the article: privatization is almost a side issue.

Do we know how accurate this is, or how credible the source is? Unless Mnuchin has said this very recently, I missed it. Or is it just being extrapolated from the privatization comments?

They basically argue the following... "Judge Lamberth, we know we lied to your face in your original ruling. So sorry about that. But please consider your lack of legal logic (i.e. you're an idiot) as grounds for changing your mind. Thanks!" Except that Lamberth already upheld the dismissal for everything else even after finding out about the Fairholme discovery documents. If he really took so much umbrage to the defendants' prior behavior, wouldn't he have found more than just one count to allow to proceed?

Now the government wants the one count Lamberth declined to dismiss to also be dismissed. http://gselinks.com/wp-content/uploads/2018/10/13-mc-01288-0089-Motion-for-Reconsideration-10-16-18.pdf How much merit does this argument have? Can Lamberth change his mind at this point?

Phillips' comments seem good. hopefully they are 'all in' to get this done in 2019 rather than just talking points. His bullets appear to confirm the Mulvaney OMB plan from a few months ago and don't seem aligned with the House republicans' ginnie mae lovefest. muted reaction could possibly be a) disappointed people who were still clinging to near term administrative action and b) supply overhang from hedge funds like highfields (gse owner) closing and possibly forced redemptions from owners like fairholme (see their performance). hopefully they go hard in 2019 on this. assuming they throw in some affordable housing $, it is not impossible for Congress to get this done next year with base case Pat Toomey and Maxine Waters leading and getting a lot but not all of what they want. I take it we should be rooting for the Democrats to take the House then. I just don't see Phillips's comments as being all that special, other than a reiteration and crystallization of Treasury's stance. The charter repeal and explicit guarantee are Congress-only items. It is starting to look like the administration won't act alone after all, except for perhaps a panic move in mid-2020 if they fail to get anything going in Congress up to that point. What would happen if a shareholder-friendly court decision happens before then? I always thought Treasury had incentive to act on its own and quickly, but unless getting their own FHFA director installed is extremely important for that, they are otherwise just dragging their feet. Speaking of the new FHFA director, why hasn't Trump nominated anyone yet? He doesn't (and shouldn't) have to wait until January, and given how long the Democrats are dragging confirmations out, Trump should have had his pick in months ago. Does anyone really want another "acting FHFA director" saga?

I'm thinking that the plaintiffs don't want a trial, they want a settlement. That involves delaying, and next Monday's conference could be very important. What could they possibly be conferring about? If the Democrats take the House in November then that could give the plaintiffs more leverage, pointing out that legislative action is even less likely with a divided Congress (if for some reason the administration is delaying in hopes of Congress passing something).

What about them? Those things are meaningless. Sunk cost fallacy takes care of most of them.

Treasury and FHFA filed their motion to dismiss yesterday. http://www.glenbradford.com/wp-content/uploads/2018/10/13-465-0421.pdf Has anyone read through it yet? I did and I hope the Ps tear this thing to shreds. My thoughts: Argument VI ("Plaintiffs That Did Not Own Shares At The Time Of The Alleged Taking, Illegal Exaction, or Breach Lack Standing To Pursue Their Claims ") is reiterated on page 2. Does the idea that every NWS dividend is its own taking have any traction? Page 2: "Under the stock purchase agreements’ fixed 10 percent dividend obligation, these cash infusions require d combined dividend payments of nearly $19 billion per year from the Enterprises to Treasur y—more money than the Enterprises had made in all but one year of their existe nce." Um, no. The companies had the option to pay in kind, which Ds continue to completely ignore. Page 3: "First, plaintiffs’ claims are not against the United States; FHFA as conservator stands in the Enterprises’ privat e shoes and plaintiffs cannot show that FHFA as conservator is an “agent and arm of Treasury” such that it should be treated as the United States for Tucker Act purposes. This point is dispositive." Doesn't Judge McConnell's opinion in Rhode Island at the very least cast doubt on this? Heading B on page 7 (https://ecf.rid.uscourts.gov/cgi-bin/show_public_doc?2017cv0005-39) reads: "The Plaintiffs can prove that Fannie Mae and Freddie Mac are government actors for purposes of constitutional claims." D's point is not dispositive at all. If McConnell can rule that not only is FHFA a government actor but that Fannie and Freddie themselves are government actors for the purposes of constitutional claims, so can Sweeney and D's point is defeated. The Ds like to say that every court before has ruled in such and such a way. Is Sweeney really going to care about that? Page 8: "As a condition of such purchases, Congress directed Treasury to make a specific determination that the purchase terms would “protect the taxpayer” and, to that end, specifically authorized “limitations on the payment of dividends[.]” Convenient that they leave out HERA's mandate that Treasury take into account ‘(iii) The corporation’s plan for the orderly resumption of private market funding or capital market access. ‘(v) The need to maintain the corporation’s status as a private shareholder-owned company. when making the conservatorship essentially permanent when signing the NWS. Page 12: "anticipated future draws would be necessary to pay those dividends. See Fannie Mae 10-Q at 12-13 (Aug. 8, 2012); Freddi e Mac 10-Q at 10 (Aug. 7, 2012). " Don't forget here that FnF were controlled by FHFA at this point, who is a defendant in this case. As such, the companies' assertions (notwithstanding that they aren't even true, they were never required to pay dividends in cash so the "death spiral" narrative is false) are not independent here. Page 23: "Accordingly, because this Court lacks juri sdiction to entertain claims against the Enterprises, which are admittedly not the United St ates, the Court lacks jurisdiction to entertain claims against FHFA acting as their conservator. " See the McConnell ruling above. Not that it's binding on Sweeney, but that it provides an avenue to deny this point. Page 28: "Unless a stockholder can establish that “t he duty breached was owed to the stockholder” and the stockholder “can prevail without showing an injury to the corporation,” the stockholde r’s claim is derivative" Good for us that Lamberth just said that the implied covenant of good faith and fair dealing claim cannot be dismissed! That's a direct claim because the covenant is between the stockholders and the companies, who acted at FHFA's direction. It's also good that granting relief to plaintiffs, be it money damages and/or recharacterizing excess NWS payments as redeeming the seniors, won't injure the corporations. Page 41: "In this case, the Court lacks ju risdiction to hear plaintiffs’ contract claims because Fannie Mae and Freddie Mac shareholders (1) have no cont ractual privity with the United States, and (2) cannot demonstrate that they were intended beneficiaries of any c ontract with the United States. " Again, McConnell. And the succession clause bites both ways! If FHFA steps into the companies' shoes, and it is deemed to be a government actor, then shareholders' contracts really do have the government as a counterparty. Page 56: "The Court explained that the “‘only duty a contract imposes is to perform or pay damages,’” so even if the Government impe des performance, no taking occurs unless the Government also “substantially takes away the right to damages in the event of a breach.” " Isn't "taking away the right to damages in the event of a breach" exactly what the government is trying to do by getting this case dismissed? That would be pretty meta: dismissing the case causes a taking to occur? Page 61: "Even if the 10 percent dividend remained in pla ce, plaintiffs allege no scenario in which the Enterprises would rebuild sufficient capital to pay down Treasur y’s $187.5 billion liquidation preference at the termination of the commitment and leave any mo ney remaining to distribute to the private shareholders. " Um, except for exactly what is happening at present?? If the NWS had never happened the seniors would be paid off and the companies would have around $14B between them, which could be distributed to private shareholders. This line of attack completely ignores reality and I hope Ps hammer on it. In fact, Treasury knew that the companies would eventually be able to "escape", which was the whole point of the NWS in the first place!! Page 62: "The Penn Central inquiry looks at three f actors to determine whether a plaintiff has a regulatory takings claim: (1) the regulation’s economic im pact; (2) the extent to which the regulation interferes with investment-back ed expectations; a nd (3) the nature or character of the governmental action. Penn Central , 438 U.S. at 124. Here, because the complaints fail to allege that the Third Amendment satisfies any of the Penn Central factors, the Court should dismiss plaintiffs’ takings claims. " The second is certainly satisfied with respect to investment-backed expectations. Lamberth just addressed this. But I don't know if all three have to be satisfied or just one. Page 63: " Moreover, plaintiffs fail to allege how th eir liquidation preference could have been more valuable before the Third Amendment than it wa s after. Although plaintiffs recognize that Treasury’s senior liqui dation preference was worth nearly $200 billion before the Third Amendment, see Fairholme ¶ 117, plaintiffs do not allege a but-for scenario in which the Enterprises would have had a surplus to distri bute to private sharehol ders after payment of Treasury’s senior li quidation preference." All Ps have to do is point to reality. P's liquidation preference is basically zero because it stands behind almost $200B of seniors. If the NWS had never happened the seniors would be paid off and the juniors' $33B in liquidation preference would be much more meaningful because it would be at the front of the line for equity. Page 66: "And plaintiffs’ purported expectation that FHFA would independently terminate the conservatorships at the first signs of recovery, see Fairholme ¶ 102, Cacciapalle ¶ 55, is unreasonable when HERA establishes no fixed expira tion date or mandatory termination criteria. " I am very glad that Lamberth addressed exactly this. Did the Ds not read his opinion? Lockhart's own words helped form that expectation. Ps can hardly be blamed for relying on them. Page 73: "Moreover, plaintiffs’ assertion that the “overr iding” purpose of the conservatorship is to resurrect the Enterprises to their pre-conserva torship condition conflicts with HERA’s plain language, which specifies that FHFA may appoint a conservator “for the purpose of reorganizing, rehabilitating, or winding up the affairs” of the Enterprises." That last part is clearly misreading the statute. A conservator cannot wind up affairs of the company, that's a receiver's task. Sloppy wording in HERA, but the meaning is clear. Even then, the NWS doesn't attempt to wind up the companies. Page 74: "HERA makes no mention that Treasury should consider the interests of shareholders in its determination." But it does say that when Treasury must consider (vi) Restrictions on the use of corporation resources, including limitations on the payment of dividends and executive compensation and any such other terms and conditions as appropriate for those purposes. when purchasing securities. The NWS only puts restrictions on dividend payments up to the companies' entire net worth. That defeats the spirit of (vi) utterly, which is designed to help the companies preserve their capital. Page 78: " Thus, the complaints fail to show any intent to contract by either the Government or the boards because (1) the Government did not need to bargain for the Enterprises’ consent, a nd (2) according to the complaints, the Enterprise boards provided consent to avoi d litigation and potent ial liability—not as a ma tter of contract. " Point 1 is wrong. None of the other conditions in HERA for imposing conservatorship applied, so yes the government actually did need to bargain for consent, and they bargained in bad faith because their threat (to impose involuntary conservatorship) was actually empty. What are the next dates for this case? Ps and Ds each get one more brief, and I thought I remembered the last brief being due in January but I can't find where that date is.