FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[BeerBBQ]

What is the amount of time a judge/judges can take to make a ruling? Is there a point when a ruling has been delayed so long that a party can claim that due process is being denied? Is there any remedy for a situation where a ruling is being sat on?

[merkhet]

What is the amount of time a judge/judges can take to make a ruling? Is there a point when a ruling has been delayed so long that a party can claim that due process is being denied? Is there any remedy for a situation where a ruling is being sat on?

 

I don't know that there is a outer bound, but maybe someone else has knowledge on this.

[Guest cherzeca]

What is the amount of time a judge/judges can take to make a ruling? Is there a point when a ruling has been delayed so long that a party can claim that due process is being denied? Is there any remedy for a situation where a ruling is being sat on?

 

I don't know that there is a outer bound, but maybe someone else has knowledge on this.

 

i think you can talk about delay in a criminal trial presenting a due process issue, but not a civil case

[Eye4Valu]

What is the amount of time a judge/judges can take to make a ruling? Is there a point when a ruling has been delayed so long that a party can claim that due process is being denied? Is there any remedy for a situation where a ruling is being sat on?

 

I don't know that there is a outer bound, but maybe someone else has knowledge on this.

 

i think you can talk about delay in a criminal trial presenting a due process issue, but not a civil case

 

Moreover, I agree with Hamish Hume that the longer the judges spend on this case, the more they may realize that what Treasury/FHFA have done here needs to be remedied. In other words, I think it is to the plaintiff's benefit for the judges to examine this case in depth. I don't think we should be hoping for an expedient ruling.

[Guest cherzeca]

What is the amount of time a judge/judges can take to make a ruling? Is there a point when a ruling has been delayed so long that a party can claim that due process is being denied? Is there any remedy for a situation where a ruling is being sat on?

 

I don't know that there is a outer bound, but maybe someone else has knowledge on this.

 

i think you can talk about delay in a criminal trial presenting a due process issue, but not a civil case

 

Moreover, I agree with Hamish Hume that the longer the judges spend on this case, the more they may realize that what Treasury/FHFA have done here needs to be remedied. In other words, I think it is to the plaintiff's benefit for the judges to examine this case in depth. I don't think we should be hoping for an expedient ruling.

 

agreed. govt wants judges to read one section of HERA, anti-injunction provision...which worked with lamberth.  assuming the app ct judges get beyond that, the more they read the better it is for Ps

[muscleman]

judge sleet (hindes/jacobs) awakes:

 

ORDER

Civil Action No. 15-708-GMS

CLASS ACTION

IT IS HEREBY ORDERED THAT the Stay

imposed on March 29, 2016 (D.I. 44) is LIFTED

 

next time i have insomnia, i want to take what sleet takes

 

Did he really wake up or was he reluctant to work on this case?

It has been two weeks since he "woke up" but still no more updates? :(

[Luke 532]

I'm including the entire article here (I usually don't like it when people do that, so forgive me for doing so) because it was originally posted, then removed from Forbes.com, then re-posted.

 

http://www.forbes.com/sites/katinastefanova/2016/07/26/will-fnma-and-fmcc-bring-extraordinary-returns-to-investors-this-summer/#563ee8721b1a

 

Will FNMA And FNCC Bring Extraordinary Returns To Investors This Summer? Katina Stefanova, Contributor

 

The failure of legislative reform of the housing market and the potential windfall that investors stand to gain should a favorable decision be made on the plaintiffs’ case make Fannie Mae (FNMA) and Freddie Mac (FMCC) the most divisive stocks currently trading. This summer, the issue comes to a head with greater urgency and more at stake than ever before. The timing of key financial, legal and legislative factors are converging spelling volatility for the GSEs stocks in the months to come...

 

 

[doughishere]

Im just worried that there is an AIG type win...where technically they side with the shareholders and courts award nothing.

 

 

This one has been so frustrating....but hey waht do you expect.

[muscleman]

It seems hard to be an AIG type of win. We have discussed that here a few times before.

[Luke 532]

Im just worried that there is an AIG type win...where technically they side with the shareholders and courts award nothing.

 

 

This one has been so frustrating....but hey waht do you expect.

 

I don't expect to be awarded anything.  Only thing I'm looking for is stopping the sweep from here forward.  That's it.  And that will be awesome when it happens.  I only own prefs (no common).

[doughishere]

Luke, I guess i was going for a more pyrrhic victory. At least from Pref and/or common holders.

[rros]

Luke, I guess i was going for a more pyrrhic victory. At least from Pref and/or common holders.

Stopping the sweep won't be a complete victory. Even the best case scenario of re-categorizing the excess funds as redemption of Sr. Shares will leave the conservatorship intact, the companies severely undercapitalized and the full Treasury commitment in place. Plus a 10% dividend on the balance of the commitment and most likely a new compensation fee on the balance that has not been drawn.

 

It will still be a sea change for shareholders in that they will have a small seat at the table. But then, Treasury can exercise the warrants, pursue a double dip for recap and leave shareholders with less than 10% ownership while Treasury could become the controlling shareholder and name a few new Board directors.

 

So while our situation may improve drastically, dangers will still be present. And Congress could still have a shot at dismantling the companies or HRC at merging both institutions. Many things can still happen if and even after the sweep is reversed.

[Luke 532]

Luke, I guess i was going for a more pyrrhic victory. At least from Pref and/or common holders.

Stopping the sweep won't be a complete victory. Even the best case scenario of re-categorizing the excess funds as redemption of Sr. Shares will leave the conservatorship intact, the companies severely undercapitalized and the full Treasury commitment in place. Plus a 10% dividend on the balance of the commitment and most likely a new compensation fee on the balance that has not been drawn.

 

It will still be a sea change for shareholders in that they will have a small seat at the table. But then, Treasury can exercise the warrants, pursue a double dip for recap and leave shareholders with less than 10% ownership while Treasury could become the controlling shareholder and name a few new Board directors.

 

So while our situation may improve drastically, dangers will still be present. And Congress could still have a shot at dismantling the companies or HRC at merging both institutions. Many things can still happen if and even after the sweep is reversed.

 

Good point, rros.  Thank you.

[merkhet]

We should prefer to be paid out based on the liquidation preference via the breach of K claim.

[Guest cherzeca]

Im just worried that there is an AIG type win...where technically they side with the shareholders and courts award nothing.

 

 

This one has been so frustrating....but hey waht do you expect.

 

I don't expect to be awarded anything.  Only thing I'm looking for is stopping the sweep from here forward.  That's it.  And that will be awesome when it happens.  I only own prefs (no common).

 

@luke, i can't imagine a scenario where the NWS is voided, but on a prospective basis only.  if it is voided, it will be voided ab initio (from the get go).

 

rule of law guy has written extensively on SA as to economic effect of a NWS voiding.  while conservatorship would still be in effect, as you say, rros, the values of the junior pref and common will go up appreciably (given GSEs cash flow and reduced senior pref amount), and all of the TBTF-sponsored private capital reform ideas premised on a costless transition to the proposals will go by the wayside, because it will cost too much to implement the schemes.  the remaining senior pref will become much more easily refinanced, assuming excess divs are recharacterized as principal repayment, and there will be calls for the conservator to recap and release.  not feasible now, but eliminate >$130B of senior pref and it becomes feasible.

 

even if relief is from breach of K/fid duty, per merkhet, much of the excess dividends will be recharacterized in favor or payments to junior pref, and perhaps common...this scenario is not as clean as the NWS invalidation scenario, in terms of the calculation of damages.

[merkhet]

A breach of the liquidation preference for preferreds should result in damages for the par amount. That's, IMO, much cleaner.

[Luke 532]

A breach of the liquidation preference for preferreds should result in damages for the par amount. That's, IMO, much cleaner.

 

That would be ideal.

[doughishere]

A breach of the liquidation preference for preferreds should result in damages for the par amount. That's, IMO, much cleaner.

 

That would be ideal.

 

 

Liquidation $130B of government preferred?

[merkhet]

No, I mean the breach of K on the private preferreds should result in payments to holders of the private preferred shareholders of the par amount.

 

The moment that the government implemented the Net Worth Sweep, they breached the K for the private preferred shareholders with respect to their liquidation preference. That should come immediately due. It is irrespective of the fact that there is $117 billion of government preferred in Fannie Mae that sits ahead of the private preferred and/or the logistics of the 10% government preferred yield.

 

Imagine if you have $100,000 in the bank, you make $50,000 a year and you spend all of your after-tax income. If you get into a car wreck, and there's a judgment against you, you don't get to just not pay it. Recall that the government has spent some not inconsiderable amount of time arguing that they are not insolvent because of the fact that they have a line of credit from Treasury that they can draw on for losses. Well, that's great. They can draw on that line of credit to pay out the private preferred for their par.

[Steve_Berk]

Forgive my ignorance on this, but perhaps merkhet or chezerca or really anyone else can help answer this -- if the NWS is deemed illegal, and Congress either dismantles or merges the two institutions, what happens to the common shares?

[merkhet]

Forgive my ignorance on this, but perhaps merkhet or chezerca or really anyone else can help answer this -- if the NWS is deemed illegal, and Congress either dismantles or merges the two institutions, what happens to the common shares?

 

I have no clue what happens to the common shares. That's why I own the preferred shares.

[SharperDingaan]

You may want to rethink this entirely ...

 

It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation.

 

So ... we are ultimately really looking at an eventual federally guaranteed perpetual.

 

Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond.

The big difference is just a dividend guaranteed by a much better creditor.

 

SD

 

 

     

 

[rros]

You may want to rethink this entirely ...

 

It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation.

 

So ... we are ultimately really looking at an eventual federally guaranteed perpetual.

 

Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond.

The big difference is just a dividend guaranteed by a much better creditor.

 

SD 

 

 

What does this have to do with any ruling by any court?

[Guest cherzeca]

A breach of the liquidation preference for preferreds should result in damages for the par amount. That's, IMO, much cleaner.

 

@merkhet  what liq pref breach?  common can argue that there was no liquidation, just illegal dividends. oh, and by the way, junior pref divs are noncumulative.  so all dividends should go to common.

 

my point is that damages award on a breach of K/fid duty claim require characterization of what the extra $130B of distributions really are (just like if NWS voided).  no a priori reason for the junior pref to get liquidation pref at par under any scenario.

 

EDIT: rethinking for a moment, even though junior pref is noncum, if there were $130B of "extra" dividends, common couldnt get anything if junior pref didnt get dividends (ie not legal to not declare junior pref divs and then pay common divs).  but my point remains, @merkhet, you seem to argue that the extra $130B of distributions must be recharacterized as a liquidation under which, i would agree, junior pref gets paid out completely. but common can claim that this never was a liquidation, and so junior pref just gets dividends (assuming the noncum provision doesnt defeat this), and all of the rest of the divs go to common.

 

this is a highly unusual circumstance, but i dont believe that constructing a solution for where the $130B should go is "clean" under either a NWS voidance or a breach of cov/fid duty

 

SECOND EDIT: the flaw in my thinking would be if, but only if, there is a provision in the junior pref that prohibits common dividends while junior pref is outstanding, and as i recall there is no such provision.

 

THIRD EDIT:  section 2 c of cert of desig for series s makes clear that divs can be declared on common only if the then period's pref divs (ie not prior divs) are paid.  there is no provision for payment of preference before dividends on common (though there is such a preference in liquidation).

 

so if the distrib of the "excess" dividends of senior pref are not recharacterized as a liquidation (and the GSEs are not being liquidated), it seems to me that junior pref can claim only the dividends for the periods in which the dividends were distributed, and common gets the rest

 

"© No dividend (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, the common stock of Fannie Mae or any other stock of Fannie Mae ranking, as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of Fannie Mae, junior to the Series S Preferred Stock) may be declared or paid or set apart for payment on Fannie Mae’s common stock (or on any other stock of Fannie Mae ranking, as to the payment of dividends, junior to the Series S Preferred Stock) unless dividends have been declared and paid or set apart (or ordered to be set apart) on the Series S Preferred Stock for the then-current quarterly Dividend Period; provided, however, that the foregoing dividend preference shall not be cumulative and shall not in any way create any claim or right in favor of the Holders of Series S Preferred Stock in the event that dividends have not been declared or paid or set apart (or ordered to be set apart) on the Series S Preferred Stock in respect of any prior Dividend Period. If the full dividend on the Series S Preferred Stock is not paid for any quarterly Dividend Period (including a dividend that is not paid because regulatory approval is not granted), the Holders of Series S Preferred Stock will have no claim in respect of the unpaid amount so long as no dividend (other than those referred to above) is paid on Fannie Mae’s common stock (or any other stock of Fannie Mae ranking, as to the payment of dividends, junior to the Series S Preferred Stock) for such Dividend Period."

 

https://www.sec.gov/Archives/edgar/data/310522/000031052213000065/fanniemae201210kex415certo.htm

[SharperDingaan]

You may want to rethink this entirely ...

 

It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation.

 

So ... we are ultimately really looking at an eventual federally guaranteed perpetual.

 

Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond.

The big difference is just a dividend guaranteed by a much better creditor.

 

SD 

 

 

What does this have to do with any ruling by any court?

 

Even if you win, you just get paper - not cash.

And if you can actually sell it - its at cents on the $

 

SD