Midas79

Hmmm .. i defer to the experts but the arguments about inability to amend terms for classes of shares under Delaware law in combination with Treasury/FHA's assertion that it was just that (p. 19) seems new to me and would be yet another angle of attack in a Delaware case? yes, this is the crux of fairholme's claim: " Furthermore, where an amendment to the certificate of incorporation [the NWS] would “affect” a particular subset [junior prefs] of shareholders “adversely,” those shareholders have the right to vote on the amendment as a class “whether or not entitled to vote thereon by the certificate of incorporation.” DEL. CODE tit. 8, § 242(b) (emphasis added); see Orban v. Field, 1993 WL 547187, at *8 (Del. Ch. Dec. 30, 1993). The Delaware Legislature’s decision to distinguish between issuing new shares and amending existing shares makes sense. While Boards of Directors sometimes need to act quickly to raise capital by issuing new shares at a market price, there is seldom need to swiftly amend the terms of existing shares. Moreover, amendments to shares the corporation has already issued are far more likely to involve self-dealing—a fact that this case illustrates." the problem here? lambreth is a crusty dc fed district court judge who knows jack about delaware corp law. he should really certifiy certain questions to the delaware supreme court for advisory opinion. How does this argument get past FHFA assuming all rights of shareholders and therefore voting on it as such? Or is this exactly the "self-dealing" they describe, with FHFA (as shareholder) voting to approve FHFA's (as board of directors) decision?

Is this the Fairholme reply that was filed under seal? If so, was it recently unsealed or did I just miss it completely? http://www.gselinks.com/Court_Filings/Fairholme/13-cv-01053-0076.pdf

Where did you hear this? I only remember them saying that they won't immediately act once it is clear that legislative reform by the current Congress is dead. And I might be in the minority here, but I am more than willing to wait another year or two if it means actually getting par. I thought I remembered Phillips saying that Mnuchin will resolve the situation before the end of this presidential term, though I can't recall where exactly I heard that.

In recent months, we purchased preferred stock of both companies. Our preferred stock represents approximately 21% of our total investment in Fannie and Freddie, or about 1% of net assets. While the substantial majority of our investment historically has been in Fannie/Freddie common stock, we acquired preferred stock recently because (1) we believe that the timing of a favorable outcome for the two companies is more proximate (timing is an important consideration for the preferred shares as they are noncumulative and perpetual), (2) it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares, and (3) we found the trading prices of the preferred securities attractive at current levels. We still prefer our investment in the common shares because the government and taxpayers’ interests, as owners of 79.9% of the common stock of both companies, are aligned with the interests of common shareholders. If housing reform is successful, we believe that both FNMA and FMCC common and preferred stock will likely be worth multiples of their current share prices. Is this the reason preferred shares have been collapsing? Ackman appears to be anti-Midas. I don't know whether to be flattered or mortified! ??? On a serious note, my speculation is that the prefs have been collapsing due to more Fairholme redemptions, and perhaps Berkowitz is shorting the common as a hedge in the meantime. If he opens and closes a short common position during a quarter does he have to report it? There is also a lot of tired money that has sold out, as in tired of waiting for a resolution. I am fortunate enough to not have any short-term need of the money I have in FnF as well as no other investments I find more compelling. So while I won't put any more in, I also don't plan to take any out until we get big news one way or another. I guess it's possible that Berkowitz sold some prefs directly to Ackman. Ackman has around 10% of the commons of each company, so right now that's 180M shares at around $1.42 per share, or $256M. A pref position of 20% means he has 1/4 of that amount in prefs, or $64M, which represents around $330M of par value. That's barely 3% of Berkowitz's position as of the last Fairholme annual report.

Mnuchin can unwind the entire SPSPA by himself if any part of it is found unenforceable, and a court injunction would certainly do that. But I have no idea what unwinding the whole agreement from the beginning would entail. I think it would either lead to FnF being critically undercapitalized (and thus at risk of needing a taxpayer-funded bailout) or Treasury having to send a check of potentially large size to FnF (money that comes out of taxpayers' pockets). Neither jives with Mnuchin's stated desire to protect taxpayers. On the surface I don't think Mnuchin would lob a grenade into the process by unwinding the SPSPAs at the first possible opportunity, but I would need to think about it more.

Fair point, and I agree with what you said. But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create. It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

I just had a thought about the NWS and its potential unwinding. If the NWS had never happened then FnF would have just finished paying down the seniors last year when they passed the 10% moment (credit to Pollock for that term, it's very useful). They would have a few billion extra in capital, though that would only plug the hole left by the DTA writedowns. Pollock calculated Treasury's IRR on Fannie alone as 10.04%, meaning that without the NWS they would have a present net worth of approximately zero, though with no future dividend obligations to Treasury. Freddie would be positive by perhaps a few billion. But if I understand the SPSPAs right, once the seniors are redeemed/paid back/gone, Treasury's funding commitment would be cancelled as well because the dividends they receive (their consideration for providing the backstop) are proportional to their senior pref share ownership. So wouldn't voiding the NWS ab initio leave Fannie and Freddie critically undercapitalized? Watt has suspended their capital requirements for now but I don't think he can justify continuing to do so with no Treasury backstop. So if the NWS had never happened FnF could have been paying down the seniors. However I don't think they necessarily would have put every penny available towards them, given that the aim of paying them down would be to get free from the need to rely on the Treasury backstop. More likely is that Watt would have set a capital standard and FnF would have built up enough capital to be considered fully capitalized, and only then put money into paying down the seniors. I would be willing to run the numbers on this but only if I can be reasonably sure that it would be informative. The upshot of all this: I think the narrative of "if it wasn't for the NWS then FnF would be out of conservatorship by now" is not necessarily true. I might ask Tim Howard this but if my understanding here is just completely wrong then I can save some embarassment. :-X

The highest weekly closing price was at $12.31 on March 2014. I don't have an Ameritrade account, but I would give this a 99.999% chance of being fake. The poster who posted this is mostly a troll in sheep's clothing, saying the opposite of other trolls like CatBirdSeat. An announcement like this doesn't make any strategic sense either. An offer like this would be negotiated and only with large holders. I highly doubt that poster has a large enough position to matter.

My point about "investor" versus "speculator" is a matter of connotation: positive for the former and negative for the latter. Especially when used in the phrase "hedge fund speculators". The FnF saga is at least as much political as economic, just see how often David Stevens has used not letting hedge funds get a "windfall" as a reason not to recap and release the companies. I only brought the point up to muse about whether Kudlow's proclamations about shareholders getting screwed is necessarily good news for post-NWS buyers in the event Kudlow does end up heading the NEC.

The primary intent of the warrant was to drive the share price down and make it appear that the companies were in more trouble than they actually were. FHFA's extremely shady accounting practices were the final nail in the coffin. I believe this is in one of the released documents from the Fairholme discovery. Legally yes. But I'm trying to get more into Kudlow's mindset. If Kudlow believes that only pre-NWS shareholders were screwed, and if enough shareholders bought after the NWS (making them easy to demonize as dirty speculators), then Kudlow might conclude that it's not worth "unfairly" compensating post-NWS holders to make pre-NWS holders whole. Of course that assumes that Kudlow has that much power over this process.

Pre-NWS shareholders shouldn't be worried at all. How exactly have post-NWS holders been screwed? Or more to the point, what reason does Kudlow have to believe that post-NWS holders have been screwed?

This is why Tim Howard advocates for hard up-front equity capital, i.e. shareholder ownership, as opposed to the pro-cyclical risk sharing deals that don't actually transfer risk in any economical fashion. But I still don't know where current shareholders fit in. All of their capital was put up when the shares were issued and then eventually swept to Treasury, so the equity capital to absorb first losses has to be put up by others, and they would have to receive actual equity for their capital. Dilution of commons is basically necessary here, right?

I'm not sure a change of charter is possible without Congressional action, which I highly doubt is forthcoming.

https://www.bloomberg.com/news/videos/2018-03-07/mnuchin-says-dodd-frank-bill-will-be-good-for-economy-banks-video This was Mnuchin's comment about FnF when asked what Treasury's near-term priorities are. Less taxpayer risk would have to mean more private capital. Unfortunately current shareholders are not going to contribute any more future capital unless there is a rights offering of some sort. "Restructured" can have ominous overtones as well. Could that possibly mean anything other than the capital structure? And why would the capital structure need an overhaul anyway?

You're right that the deal was structured to last until the companies could be eliminated. But what then do we make of Mnuchin's comments that the largest 8 banks are too big and that he wants the conservatorships ended before Trump's term in office is over?

I just asked about this on Tim Howard's blog but I will cross-post here as well. Today (March 2) marks the 61st calendar day since December 31 when FnF's net worth went negative due to the DTA writedown. HERA section 1367(a)(4)(A)(i) states If FnF's balance sheet is only updated quarterly then Watt has to have already asked for the draw (actually, FnF have to already HAVE the money) or else he is forced to put FnF into receivership. If the balance sheets are updated more often then Freddie should not have to take a draw at all; it should have only taken them a couple of weeks to make back the $312M deficit they face. Fannie should also, in this case, not need a draw of the full $3.7B. If Watt asked for the money then Treasury had to send it per the SPSPA. Watt deliberately delaying so as to trigger mandatory receivership goes against everything he has said: if a draw is a "dereliction of duty" then choosing receivership would be akin to treason! Whenever Watt does ask for the money will we know about it in any sort of timely fashion?

Just to be clear, are you using the same context as Watt did when you mention "exigent circumstances?" Watt's quote about the letter agreements was So you think that an economic downturn, or some other large-scale event, will get Treasury to allow FnF to keep their profits rather than paying to Treasury? Or be prompted to finally deal with the conservatorships rather than kicking the can further down the road?

Speaking of big blocks, over 16M shares of FNMAT have traded today at $5.90 or $5.95, other trades around that time were around $6.40. Total issuance is 89M so that's almost 20% of the float that has been dumped at prices well below market. That's some serious sell volume. This isn't Fairholme, they didn't own any FNMAT as of the 2017 annual report. Around 1/6 of my total pref position is in FNMAT due to relative weakness in January. For whatever it's worth anymore, the correlation value of the junior pref series prices versus dividend yields has been climbing steadily and is up to 0.87 now. For much of 2017 it was around 0.90 but dropped significantly in the fall, going as low as 0.55. I have taken that value as a proxy for the probability the market places on dividends being resumed as opposed to the juniors being redeemed or cancelled in a large-scale settlement. Freddie 25-par prefs are about as strong against the commons as they have been since December 7 (when the last big divergence between commons and prefs happened), around 99th percentile, Fannie 50s are 85th percentile, Fannie 25s (higher yields) are 96th percentile. I keep feeling tempted to switch some of my position into common (currently 100% pref) but I keep hesitating and then being glad that I did so. 10% of the total position seems like a reasonable upper bound, and I suppose if I ever were to do that small reallocation I should do it now (non-taxable account). But it just doesn't feel right and I don't really know why.

I have read through the Owl Creek complaint. They bought junior preferred shares after conservatorship but before the NWS. http://www.glenbradford.com/wp-content/uploads/2018/02/18-00281-0001.pdf The plaintiffs go to great lengths to claim that their claims are direct and not derivative, and presumably thus not subject to 4617(f). They also take pains to shoot down the argument that the NWS was a potential risk they should have anticipated, showing multiple public statements by DeMarco that non-government shareholders still had their economic rights to company profits once the conservatorship ended and that preservation and conservation of assets was their duty. The claim that there is an implied-by-fact contract between FHFA and the companies appears to be new. The complaint says (several times) that conservatorship was only lawfully imposed due to 4617(a)(3)(I) (the boards consented) and that no other reason in 4617(a)(3) applied. They then say that the boards' acceptance of conservatorship was partially predicated on the promise that FHFA would actually act as a conservator in the traditional sense of the word, conserving and preserving the companies' assets with the view of a future release. That this understanding created an implied-in-fact contract that was later breached by the NWS is beyond my (not very substantial) legal ken, but I don't remember seeing this argument before. I do wonder why they waited so long to file this lawsuit given that it has been 5.5 years since the NWS. I suppose their case would have been consolidated with others had it been filed earlier, and waiting gave them the chance to get around all of the reasons for dismissal that have been used so far, as well as making extensive use of released documents from the Fairholme case that undermine many of the government's previous arguments. Next week I think it will be instructive to compare the Owl Creek complaint to the amended Perry complaint. The Owl Creek complaint brings up something that I don't remember seeing before, though it is likely the fault of my memory rather than an oversight by all other plaintiff lawyers so far. It says that the NWS must be unwound because it basically was at the direction of Treasury, and HERA 4617(a)(7) says that FHFA is not subject to the direction or supervision of any other agency of the United States when acting as conservator. The SPSPA includes language not allowing FHFA to distribute dividends or any other assets to junior preferred or common stockholders, as well as not allowing FHFA to release the companies from conservatorship without Treasury's permission.

The NWS didn't just accelerate payments to Treasury, it allowed them to keep the entire liquidation preference when it otherwise would have been paid down and eliminated by now. Treasury has come out around $200B ahead so far of where it would have been without the NWS, assuming a dollar-for-dollar cash value for their liquidation preference (perhaps a bad assumption). You're right that if the administration wants the GSEs revived they can pretty easily do it. Doing that without pissing off a large number of Rs is the issue. Hensarling and Corker, while on the way out, still wield a lot of power. A court decision would have been really helpful in allowing the administration to say "look, we have no choice." It's all about political capital: releasing the GSEs will cost a lot of it given the R control of Congress. If the Ds gain control of both houses in November the equation changes significantly: Trump can use the release of the GSEs to get the Ds to pass legislation he wants. I still think the RNC resolution has to mean at least a little bit of "something." Why else would it exist? I would really like to know who wrote it and who approved it. One possible upcoming tell is the RNC Spring meeting and subsequent release of resolutions.

In the past I have mentioned that my understanding of something Craig Phillips had said in his talk last month was that Mnuchin was committed to ending the conservatorships during this presidential term. So I went back and listened to it again, twice, and didn't hear any of that. Was I hallucinating before? Did anyone else hear the same thing I did the first time?

Tim Howard weighed in on the potential impact of the "quick peek" documents in the amended complaint due tomorrow. https://howardonmortgagefinance.com/2018/02/05/waiting-for-mr-corker/#comment-5907 In particular he mentions the Perry remanded case and the Fairholme case as the main beneficiaries: Apologies if this has been mentioned before, but if the court eventually does award damages would they only go to the plaintiffs, all shareholders who own the same class and series of shares as the plaintiffs, all junior preferred holders, or some other combination? Is that up to the judge or is it specifically requested in the complaint?

Was just about to post this myself :-) Petrou was described by the American Banker in 2012 as the “sharpest mind analyzing banking policy today -- maybe ever.” Wonder if there's any truth behind her hinting that GSEs will be utilities. I don't know how I missed it, but Karen Petrou wrote this fantastic piece about the Corker bill two weeks ago: http://www.fedfin.com/blog/2604-karen-petrou-on-how-to-love-a-mortgage-monopoly I would certainly believe American Banker's quote is accurate. She cuts straight through all the BS and shows that the only viable endgames are utilities (without competitors) or government-owned corporations. I hope she has the ear of some of the power players involved. Does anyone here have access to today's article? I had been wondering if there were any significant changes in Fannie's filing and it sounds like this is one such.

I doubt rumors of Corker seeking re-election would move the needle much. He hasn't been able to get any legislation through yet, and Phillips said that the conservatorships will end during this presidential term.

A tell from the administration: https://twitter.com/joelight/status/963096845424656385 The proposal in question is doubling the 0.1% g-fee increase to help pay for an old tax cut to 0.2%. How much significance can we give to this proposal? It is rare to see official forward-looking language like this.