Midas79

I can't agree with Bove here. What is there for SCOTUS to review anyway? Are they really going to bypass the entire district and appeals process by issuing a final ruling now? I would instead expect them to defer their decision on whether to take the case until after Judge Atlas makes her ruling, and probably after that ruling gets appealed and ruled on (again) by the Fifth Circuit.

Both lead to a massive issuance of common shares. If anything, I think the underwriter would make more in the cramdown scenario because the offering would be bigger. This assumes, of course, that there is enough investor appetite out there to buy that many common shares. I believe there is, and if there isn't then the recap process is in jeopardy because it can't take too long lest a new administration decides to change course.

I suppose I have a blind spot when it comes to this, then. I am not seeing how the senior cramdown option is any more difficult than cancel seniors + SPO + warrants. I'm estimating the value of the warrant shares plus the SPO shares to be $120B; $50B for the warrants and $70B for the SPO. The $70B of SPO shares would all have to be sold at once: investors won't buy before release, and I don't see a path to FnF getting enough capital for release (even with a consent decree) without the SPO. On the other hand, if Treasury converts the seniors to commons they will get somewhere around $160B worth. I don't think this is materially different enough than the $120B above to say that it is only a remote possibility. If you see a flaw in my reasoning please point it out, I won't take it personally. I would much rather be corrected than persist with a fallacy.

Yes, this is exactly what I mean. With the caveat that it takes both the check and a senior conversion to reach regulatory (minimum, in this case) capital levels. Neither alone is enough because core capital stands at something like -$170B right now. By the terms of the PSPAs, repayment of the $124B and an end to the NWS (via converting the seniors) constitutes a full unwinding. Can the judges in the injunctive relief cases dismiss those cases as moot at that point? I'm not sure what else the plaintiffs could want that the terms of the PSPAs allow them to get. (Voluntary repayment of the seniors was never technically possible) Also, it's the plaintiffs who claimed that the overpayment amount was $124B, and they didn't include interest. Would Sweeney be able (and willing) to add interest in? If so, what's an appropriate ballpark rate? The more I think about this cramdown, the more plausible it seems to me. It checks all the boxes, and I don't see who says no, other than existing commons who don't have a say anyway. Treasury selling its commons essentially takes the place of the SPO, and there are possibilities like Treasury converting the seniors to non-cumulative convertible prefs that keep them from ever approaching 80% ownership. I also don't think it would take Treasury anywhere close to 10 years to unwind its converted senior position. I don't think the dollar amount of the total common shares sold is going to be hugely different in the two scenarios (warrants + SPO versus senior conversion), and the SPO part of the first one has to be done rather quickly. So while the $124B is a significant outlay to Treasury, it should be able to recoup it without too much trouble. If it can't, the SPO was never all that realistic anyway. One argument against the cramdown is that it results in FnF being fully capitalized nigh instantaneously. This conflicts with the idea of release with a consent decree before full capitalization.

Here's a link. It's not easy to find now that gselinks doesn't update its Court Filings page. http://www.glenbradford.com/wp-content/uploads/2018/10/13-465-0422.pdf To find old court filings I do a search on Glen Bradford's site and hope that it comes up in the first page. There's a button to go to other search pages but it never works for me.

This isn't my point. I'm saying that if Atlas orders Treasury to make that huge payment, Treasury could just say okay and convert the seniors into enough commons to pay for that and then some. It's no harder than an SPO, right? I think this could be even cleaner than the other remedy. Is my read of the contract correct, at least? I'm just trying to figure out what happens if Treasury resists the idea of writing off the seniors. Josh seems to think that Calabria should move things along by suing Treasury for just that, and I'm saying that it isn't possible.

By what I understand of the PSPAs, FnF never had the ability to pay down the seniors any time they wanted, even if they had the money to do so. The important parts are in section 3(a) and 8(b) of the senior pref stock certificate. https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/Stock-Cert/Third-Amend-FNM-Stock-Cert-as-amended_09-30-2019.pdf The optional paydown while the funding commitment exists can only apply to (ii) and (iii) of 8(b), which pertain to missing or partial past commitment fee and dividend payments. By contrast, it is part (i) that ballooned the liquidation preference from $1B to $187B. Since the funding commitment never terminated, the implication that FnF (represented by FHFA) can demand Treasury to write off the seniors isn't correct because FnF never had the option to pay down the seniors, even if the NWS had never happened. If I understand the contract correctly, FnF's only real path out of conservatorship (other than receivership) was to get to a point where they could sell $187B worth of stock and put that money into paying off the seniors. While technically possible, this was a near impossibility in practical terms. It's the PSPAs themselves, not just the NWS, that is the concrete life preserver. The funding commitment is very important going forward because it provides the limited (entity-level) government guarantee that the administration wants without having to go through Congress. Thus there can be no attempt to retroactively (or even prospectively) terminate the funding commitment to allow the paydown. The upshot: Treasury must agree to write down the liquidation preference of the seniors. If the contract didn't allow for it, a court isn't likely to mandate it. That would make the gist of Josh's tweet incorrect: FHFA can't plausibly sue Treasury to write off the seniors. Josh's next tweet, where he said "The contract is for principal plus 10%. That has been satisfied.", is also incorrect because the seniors are not debt. Dividend payments do not reduce their balance. The contract has no terms for being satisfied if FnF were to (and did) pay back all the Treasury draws plus 10%. If I remember some of the unsealed Fairholme discovery documents correctly, the reason that Treasury chose equity and not debt was to keep FnF in conservatorship more or less permanently, at least until Congress could deal the killing blow. This also goes to the very core of the remedy that Judge Atlas will prescribe, assuming that the case ever gets that far. I think this is very important, and if I am correct about this then Atlas will not be able to order the seniors extinguished because it would violate the terms of the contract while the other proposed remedy (Treasury returns all past quarterly payments that exceeded the 10% dividend and keeps the seniors) does not. The $125B number floating around is that overage: the amount that FnF would have right now if they kept all past NWS payments and paid the 10% dividend instead. The Collins plaintiffs said $122B and one more NWS payment happened after that. Hoewver, this assumes a 0% interest rate. Taking the time value of money into account, it's $148B at 3% and $179B at 6%. If Treasury decides to convert the seniors into common (which both accomplishes the recap in conjunction with this payment and gives Treasury a way to recoup the expense), they will want enough commons to cover everything they send out and then some. That means the higher the interest rate used, the more commons Treasury will want. This is the basis of my worst case for the commons; they could go well under $1 if Treasury has to shell out $180B and wants nearly all the common equity in exchange. This solution should actually appeal to everyone other than existing common shareholders, incidentally.

my problem with ACG is that like any other consultant that advises clients for a fee, it must not give away to the public what it charges its clients. but it can't seem to keep form hitting the twitter button, halfway as it were, with tidbits that it doesn't want to elaborate upon...which leaves non-clients not knowing the whys and wherefores, or whether what they think makes sense Agreed. It's tough to know whether they are offering guesses/predictions based on information they have heard vs. concrete facts based on what they have heard. I am guessing the former. With that said, David Metzner said this earlier this morning... The key to the Settlement will be the overpayment being credited back to the #GSEs as a prepaid asset for future commitment fees. Means less capital to raise. #housingfinance Seniors will be deemed paid back. ROLG's twitter reply: Using the royal third person? ;) I think you're underestimating the line of credit amount, though. Right now the undrawn amounts are $110B for Fannie and $140B for Freddie if I remember right. Given the relative sizes of the companies, I would expect Fannie's to go up by $100B if Freddie's stays the same. That would make the total undrawn amount $350B, and 50 bps on that is $1.75B. It would still take 14 years for that to add up to $25B, but that's more reasonable than 50 years. The time value of money doesn't have as great an effect over a 14-year span. We could also see something crazy like an increase of the credit limit to $500-600B. This sounds outlandish, but it essentially becomes an explicit guarantee while raking in more cash for Treasury each year without materially increasing Treasury's risk; the last $150-250B of that fund would have a vanishingly small chance of ever being needed.

Does anyone have a list of all the cases in front of Sweeney handy? I'm trying to figure out which cases and claims just got dismissed. If all direct claims are dismissed, and the dismissal is not reversed by a higher court, does that close the door on any monetary damages being paid directly to shareholders? I do find it strange that so many plaintiffs in other cases went to great lengths to show that their claims were direct, while Sweeney went the other way and is only allowing derivative claims to go forward.

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at. It's clear that they're putting a lot of resources into the saga, though.

This is exactly what I was thinking. I didn't use the term arbitrage but I probably should have. If the big junior holders have as much influence as I think they do, this is exactly the kind of thing they would do. In fact, they would be stupid not to. I still agree with something orthopa said a while back about the juniors not just wanting to win, but win versus the commons. Ackman bought some prefs in 2017 and a lot more in 2018; we will soon find out what he did in 2019. I found his pro-common comments very suspicious: he was either talking his book or trying to manipulate the market.

12.5x is my top-end scenario based on the Citi conversion, where the conversion was offered at 3x the previous day's ratio. FNMAS just hit 4x FNMA today. I won't be disappointed if it doesn't happen, but since FNMAS is 4x FNMA right now, I don't expect a conversion offer at anything lower than that. Otherwise it will be declined or undersubscribed, defeating the purpose. 4.5x (4.5 common shares per $25 of par value) is my baseline scenario at the moment, though I'm probably going to adjust this upward with Phillips' talk of a conversion at market value. 4.5x would require the commons to reach $5.56 before the conversion is offered, and I think that's a stretch. The first Moelis plan got this right, with its 3.5x conversion ratio somewhat above that in the market. The updated plan has conversion ratios of 1.7 and 2.1 which just won't get it done. The cases have to be settled, and a weak conversion offer like that doesn't do any good. Also remember that the Moelis plan was paid for by pref shareholders; I find it very suspicious that their plan would disproportionately benefit the commons. The idea that the existing prefs' dividends could remain off for a long time is utter garbage, though. There's no way the cases get settled while this is possible, and I disagree that selling common shares will be easy with no short-term prospects of a common dividend. Why make the capital raise harder rather than just turning the pref dividends back on or offering them a generous conversion and saving money at the same time?

I took the "prevailing market prices" part of Phillips's exchange comment to refer to the common share price, i.e. the juniors will be offered a conversion at a common share price based on that in the market at the time of conversion. Citi offered their prefs a conversion at 85-95% of par at $3.25, where $3.25 was the average of the previous 22 trading days' common closing prices. That's what I'm expecting with FnF, and is the basis for the tweet I made earlier today. Shorting the commons to buy prefs, driving the common price down for a bigger conversion ratio, and then covering the short with some of the converted shares is highly tempting if there is a strong reason to believe that FnF's conversion will work like Citi's. https://twitter.com/midas79_/status/1201551381733281792

There are some very specific and relevant recommendations in there. What we need to ask is: how much of what Phillips is saying is just his view compared to what Treasury is actually thinking?

Not only is the government schizophrenic (Judge Sweeney's words previously), they have also acted like the mob (again, according to Sweeney). According to this transcript, she has already completed a rough draft of her ruling. Seems to me like this case won't be dismissed: "I want the parties to have their day -- well, we’ll have many days in court, but I mean, for this initial oral argument. Let me just -- we’re going to go off the record just for 10 minutes so we can just..." Yeah, I don't see how "I want the parties to have their....[day] in court" squares with her granting the motion to dismiss.

Those are all parts of the Moelis plan, yes. But I wouldn't assume that the conversion would happen at anything close to Moelis prices. They think the juniors will convert at 1.7 to 2.1 commons per $25 of par value, when the market ratio now is closer to 3.5. It is quite easy to keep everything in Moelis the same other than the conversion rate, and end up with a common share price in the mid to high single digits. Moelis also only has half of juniors converting, when it could be either all of them or even a voluntary conversion, when the total amount won't be known until the end, as with Citi. Also ask yourself this: why would junior pref holders hire Moelis to come out with a plan that gives the commons a much greater return? "Smokescreen" is a much more plausible explanation than "generosity".

https://twitter.com/midas79_/status/1197572823004467205 I don't think a conversion affects core capital levels. It just moves the junior pref amount into additional paid-in capital (the commons have no par value). I looked up how to account for this conversion a while back. You subtract (I never remember the whole debit or credit thing) the total amount of the juniors from the balance sheet, bringing them to zero, and add that amount to additional paid-in capital. If the commons had par value then that would be part of it, but they don't for FnF. No other balance sheet entries are affected. Since both the juniors and additional paid-in capital count as core capital, the process is core capital-neutral. I think ACG Analytics just plain got this one wrong. Unless they meant that a conversion allows more (or any) new non-cumulative prefs to be sold; that sale would accrete to core capital. I find it hard to imagine selling new non-cumulative prefs while the juniors still exist. $33B of prefs is already a good chunk of the post-recap equity; too much more puts a lot of dividends (in addition to the commitment fee) ahead of a potential common divided, which I think needs to be offered to sell commons more easily.

while I fully agree, I haven't see this reported Luke. links? Glen tweeted a link to the transcript a little while ago. https://twitter.com/DoNotLose/status/1197974087349473281

Yup. When Sullivan sold his commons to buy prefs, he gave a conversion to common as a primary reason. There's also the chance that the prefs are converted at more than par. FHFA has no reason to care if the prefs get a boatload of commons, and Treasury might not either depending on when in the process the conversion is offered vis a vis when the warrants are exercised.

I'm just wondering if I should sell of my shares at some point to have the cash to participate in this offering without having to come up with outside money. If there is no conversion then it sounds like this shouldn't affect holders of the juniors, and if there is I would hope that the imminence of a rights offering would be communicated to them first.

What exactly would a rights offering entail? Would it require the recipients of the offering to put up more money?

I'm still scared of election risk, especially since a new president would be able to replace Calabria. I think it was one of the IMF pieces that said there is no such thing as a permanent consent decree. The FHFA director and Treasury Secretary, together, have a ton of power. I don't know if it's even possible for Calabria and Mnuchin to do anything that their replacements can't undo, other than release with the consent decree. Even then, FnF will remain under pretty tight regulatory control until they meet FHFA's capital requirements in full. A new director could just increase the requirements so much that FnF remain in limbo indefinitely.

Has FHFA hired its financial advisor yet?

More delays. Anything that pushes the timeline beyond the election introduces a ton of risk. Josh Rosner thinks that the rule is actually ready to go, which would be fine with me.

I agree with cherzeca, there have been many other great quality posts recently. Thank you to everyone for those.