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

[investorG]

@investorG

 

yes, i think the jumpstart language by its terms doesn't prohibit amendments to the senior preferred security.  why it was written the way it was is beyond me.  but as a legal matter i think treasury counsel could easily advise mnuchin that he has amendment power.

 

i very much hope you're right but a 4th amendment that reduces the 187bn before jan2018 seems difficult based on the headline language at least.  and if he adjusts the dividend retroactively to a fixed % instead of all profits, but keeps the 187bn steady, then he'd have to send $ back to the company, which might be a home run as a down payment on capital build but politically difficult.  i fear when he said they can do this quickly on nov30 he meant with congress' (or the courts) help.

 

still, any supportive language and a stop of the NWS forward looking could be material from these price levels.

[Desert_Rat]

Thinking about this more and rewatching the Fox tape from November Mnunchins mind has been made up on this for some time, ie 4 months ago.  This optically could hurt those negotiating with him but I doubt the threshold will be lowered much. If I can imagine he has been hard working on the GSE's as Cohn said he was, this will have caused him to divert his attention briefly but the entire housing situation and its future is no different now after this remand then it was yesterday.

 

i think this decision will hasten a settlement.  certainly the Ps are ready to come to table with a more humble ask; Ps dont get much by waiting if mnuchin is ready to talk.

 

but as you say, i think this decision hasnt changed the framework of a resolution that i think mnuchin will pursue. 

 

many have been very critical of treasury's warrant position.  assuming mnuchin wants to maximize the economics of this position, within an acceptable political framework, we should all be very thankful that treasury got these warrants in 2008!

 

Understand your point. Another point that I would like to make or bring up is that in effect both Mnuchin and the Ps are on the same team. What do I mean by that? We have been conditioned to believe that its Ps vs Treasury and the Gov. That was true for years, but that all changed when Trump won and Mnuchin became treasury secretary. If you remember correctly it was Mnuchin himself that brought up FnF getting out of govt control and restructured back just after the election on Fox. Where did this idea and thinking come from? He feels this strongly all by his lonesome? You cant tell me Mnucnhin thought this up all alone without other heavily incentivized people. If he does even better! Not going as far as saying that Mnuchin was planted for Treasury Secretary....but had anyone heard of him before Trump won?

 

I know I beat this horse before but how much more of a perfect Treasury Secretary for Ps is there? He  took a bank in distress due to bad mortgages and turned it around making millions with Pauslon as a partner. Came out on TV 2 months before being confirmed saying exactly what Ps wanted to hear. Did he really work as Trumps campaign finance manager and never talk to Paulson, Berkowitz, Icahn, Kushner etc about FnF?

 

Just refreshing the memory for what he said unabated on Nov 30th.

 

President-elect Trump’s choice for Treasury Secretary, Steve Mnuchin, said he believes it’s ABSOLUTELY time to privatize mortgage lenders Fannie Mae and Freddie Mac.

 

“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have,”

 

He added, “In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe. So let me just be clear— we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.”

 

Mnuchin promised that he’ll execute the separation “reasonably fast”.

 

Watch this....http://www.foxbusiness.com/politics/2016/11/30/steve-mnuchin-time-to-jettison-fannie-mae-freddie-mac.html  Listen to what the freaking man is saying!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

No mention of this court case, the Sweeney court case, the Delaware court case etc. He doesnt give 2 shits about them in my opinion. The guy just got done dealing with people protesting in front of his house due to fourclosures and lawsuits for robosigning. He is going o stay as far away from this court shit as he can.  These are holdovers from an Obama administration. These court cases only exists because of the previous administrations unwillingness to find a solution.

 

Everyone has said he is working hard on the GSEs. Anyone stop to think who he is working with? Himself? Unilaterally devising a plan to screw the shareholders but then look for private capital?

 

I could go on and on.

 

Like rros said before, don't lose sight of true North.

 

http://gif-finder.com/wp-content/uploads/2016/03/Leonardo-DiCaprio-Clap.gif

[rros]

@investorG

 

yes, i think the jumpstart language by its terms doesn't prohibit amendments to the senior preferred security.  why it was written the way it was is beyond me.  but as a legal matter i think treasury counsel could easily advise mnuchin that he has amendment power.

 

i very much hope you're right but a 4th amendment that reduces the 187bn before jan2018 seems difficult based on the headline language at least.  and if he adjusts the dividend retroactively to a fixed % instead of all profits, but keeps the 187bn steady, then he'd have to send $ back to the company, which might be a home run as a down payment on capital build but politically difficult.  i fear when he said they can do this quickly on nov30 he meant with congress' (or the courts) help.

 

still, any supportive language and a stop of the NWS forward looking could be material from these price levels.

This.

 

If you all want quick, here is quick.

 

Mnuchin and Watt remove -by a 4th A- the dwindling positive net worth clause effectively removing the block on recap. A one liner. Then, Watt orders Fannie and Freddie to work on a recapitalization program as per HERA. No explanations or if need be, protection of taxpayer. Our shares become good.

 

And that is that. End of story. No more doubts, no more court anxiety and the hell with Congress. Details on recap may be worked up later by each company throughout 2017. Meanwhile, companies could continue to transfer funds to Treasury until the last December 2017 transfer (Feb 2018). By then, Srs. simply disappear by an EO. And the commitment is replaced by the capitalization programs for each company.

[Steve_Berk]

Most of my work on this investment was on Perry. I was pretty confident that there would be at least a remand for a full record but I was never able to shake the nagging feeling that Ginsburg had more on his mind since he kept asking those jurisdictional questions. This was nearly a worst case scenario. BTW do the contract claims have any potential benefit to the common? I thought Hume at one point said potentially yes but o don't recall the details

 

Since I haven't been studying the takings claim, chezerca or merket or others can you summarize our likelihood of success and potential barriers. My guess without doing any research is that it's going to be very tough to establish.

[merkhet]

I think the allowed Perry claims largely only benefit the preferred. @cherzeca, correct me if I'm wrong.

 

The Takings claims, however, benefit both preferred and common. Considering that Ginsburg flipped a way I wasn't expecting, though, I think Bayes Theorem indicates that my analysis of the likelihood of success in the Takings case is probably worth bupkis.

 

I really don't 100% understand the reaction in the preferreds. Perhaps it's because many news articles indicate that the legal avenue is foreclosed, but that oddly leaves out the fact that the Perry case said both the breach of implied covenant & breach of contract cases can go forward.

[Seahug]

So the other shoe dropped. Hope you guys, especially those who can make sense of the legal stuff, can clarify some things...

 

1) In a settlement negotiation, what's the remaining leverage of each of pref holders and common? Is it just continuing litigation or is there something else?

 

2) The remand for breach of contract, damages and dividends, applies to both common (depending when you bought it) and the prefs? Does the date of purchase also apply to the preferred? Does it imply a liquidation preference vs common  (as expected) which is why the common traded down a bit more? Why does it benefit the pref more than the common?

 

3) If something comes out of the 11,000 documents does the Perry judgement render that irrelevant or can fairholme bring another case with a higher chance of success?

 

Well (for now) I am glad i didn't bump my holding from 11% to 15% or 20% of portfolio. I was hoping for a more neutral remand to increase the chances of a settlement.

 

Given significantly lower leverage for P's, I believe we need to recalculate recovery values for common and prefs assuming harsher terms.

 

Thanks!

[deadspace]

I think the allowed Perry claims largely only benefit the preferred. @cherzeca, correct me if I'm wrong.

 

The Takings claims, however, benefit both preferred and common. Considering that Ginsburg flipped a way I wasn't expecting, though, I think Bayes Theorem indicates that my analysis of the likelihood of success in the Takings case is probably worth bupkis.

 

I really don't 100% understand the reaction in the preferreds. Perhaps it's because many news articles indicate that the legal avenue is foreclosed, but that oddly leaves out the fact that the Perry case said both the breach of implied covenant & breach of contract cases can go forward.

 

I think the scary issue for the preferred shareholders is that the judges are giving specific direction to Lamberth to consider shareholders who purchased shares BEFORE 2008 and those claims as perhaps having more Merritt than those purchased after the conservatorship was announced - thats likely why the price dropped in the preferred -- this flies in the face of all legal precedence on transfer of full rights with shares but we are in a whole new world here

[randallchsu]

I think the allowed Perry claims largely only benefit the preferred. @cherzeca, correct me if I'm wrong.

 

The Takings claims, however, benefit both preferred and common. Considering that Ginsburg flipped a way I wasn't expecting, though, I think Bayes Theorem indicates that my analysis of the likelihood of success in the Takings case is probably worth bupkis.

 

I really don't 100% understand the reaction in the preferreds. Perhaps it's because many news articles indicate that the legal avenue is foreclosed, but that oddly leaves out the fact that the Perry case said both the breach of implied covenant & breach of contract cases can go forward.

 

Could it be because people are unsure how the class plaintiffs could be subdivided and lengthen the process that could take on?

 

From the opinion

 

"For those who purchased their shares after the enactment of the Recovery Act and the FHFA’s appointment as conservator, the analysis should consider, inter alia, (1) Section 4617(b)(2)(J)(ii) (authorizing the FHFA to act “in the best interests of the [Companies] or the Agency”), (2) Provision 5.1 of the Stock Agreements, J.A. 2451, 2465 (permitting the Companies to declare dividends and make other distributions only with Treasury’s consent), and (3) pertinent statements by the FHFA, e.g., J.A. 217 ¶8, referencing Statement of FHFA Director James B. Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (Sept. 7, 2008) (The “FHFA has placed Fannie Mae and Freddie Mac into conservatorship. That is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized.”)."

[merkhet]

I think the allowed Perry claims largely only benefit the preferred. @cherzeca, correct me if I'm wrong.

 

The Takings claims, however, benefit both preferred and common. Considering that Ginsburg flipped a way I wasn't expecting, though, I think Bayes Theorem indicates that my analysis of the likelihood of success in the Takings case is probably worth bupkis.

 

I really don't 100% understand the reaction in the preferreds. Perhaps it's because many news articles indicate that the legal avenue is foreclosed, but that oddly leaves out the fact that the Perry case said both the breach of implied covenant & breach of contract cases can go forward.

 

I think the scary issue for the preferred shareholders is that the judges are giving specific direction to Lamberth to consider shareholders who purchased shares BEFORE 2008 and those claims as perhaps having more Merritt than those purchased after the conservatorship was announced - thats likely why the price dropped in the preferred -- this flies in the face of all legal precedence on transfer of full rights with shares but we are in a whole new world here

 

Except if you read the opinion carefully, the application of reasonable expectations (and therefore the possible subdivision of classes) applies only to the idea of a breach of implied covenant regarding dividends. It has no application to the breach of implied covenant and breach of contract regarding liquidation preference.

[Guest cherzeca]

I think the allowed Perry claims largely only benefit the preferred. @cherzeca, correct me if I'm wrong.

 

The Takings claims, however, benefit both preferred and common. Considering that Ginsburg flipped a way I wasn't expecting, though, I think Bayes Theorem indicates that my analysis of the likelihood of success in the Takings case is probably worth bupkis.

 

I really don't 100% understand the reaction in the preferreds. Perhaps it's because many news articles indicate that the legal avenue is foreclosed, but that oddly leaves out the fact that the Perry case said both the breach of implied covenant & breach of contract cases can go forward.

 

i agree that perry allows only preferred contract claims, and that takings claim are intact for both pref and common in ct of claims.  indeed, the common claim is set up for takings claim since perry said that HERA transferred all shareholder rights, leaving common with nothing...a prototypical taking.  of course, relying on a takings remedy may not be a big payday for commons.

 

thinking things through, which may just be an exercise in confirmation bias, i acknowledge, i sense that mncuhin's announced desire to get gses out of govt ownership and conservatorship relatively fast was based on notion that as a successful investor and financier, he understood that there was a financial deal with Ps that was feasible that did not depend on a successful legal outcome for Ps (since he stated his intention before knowing any legal result and said in hearing that he had not focused on the legal merits), and that did not require congressional approval.

 

he can take position that nws was fine insofar as it required accelerated payments to govt, but mandating that all those payments were just dividends, and not 10% dividends and principal repayments, while legal in the view of dc circuit, is not sensible from a point of view of accomplishing this desire...which requires substantial additional permanent capital.

 

 

[Sunrider]

Ignoring politics for a moment (remember until the Trump / Munchkin surprise we all assumed that eventually the law would take its course), I have two questions for the legal brain trust here:

 

(1) Philosophical: As a layman this judgement basically reads as though the judges confirmed that congress can make laws that are not subject to judicial review, or that give government actors the power to do things that are beyond judicial review. Am I missing something? This seem inimical to the fundamental tenets of a constitutional democracy with a separation of powers?

 

(2) Practical: Chris notes that the order confirms indirectly that a taking and breach of contract has taken place. Does this benefit the Fairholme case, which I believe basically ask for compensation for a takings and a breach of contract?

 

Chris - incidentally, you thought that a remand (well, different kind of remand) would benefit common, which is why you were leaning that way - are you now switching to preferred?

 

Thank you.

C.

[DocSnowball]

Ignoring politics for a moment (remember until the Trump / Munchkin surprise we all assumed that eventually the law would take its course), I have two questions for the legal brain trust here:

 

(1) Philosophical: As a layman this judgement basically reads as though the judges confirmed that congress can make laws that are not subject to judicial review, or that give government actors the power to do things that are beyond judicial review. Am I missing something? This seem inimical to the fundamental tenets of a constitutional democracy with a separation of powers?

 

 

+1

Bizarre.

[SnarkyPuppy]

Ignoring politics for a moment (remember until the Trump / Munchkin surprise we all assumed that eventually the law would take its course), I have two questions for the legal brain trust here:

 

(1) Philosophical: As a layman this judgement basically reads as though the judges confirmed that congress can make laws that are not subject to judicial review, or that give government actors the power to do things that are beyond judicial review. Am I missing something? This seem inimical to the fundamental tenets of a constitutional democracy with a separation of powers?

 

 

+1

Bizarre.

 

+1.  Seems simply antithetical to the concept of checks and balances from which our founding fathers placed emphasis.  I'm assuming that my layman view took too simplistic of an approach here, but why not just challenge the constitutionality of HERA in court?

[JRH]

+1.  Seems simply antithetical to the concept of checks and balances from which our founding fathers placed emphasis.  I'm assuming that my layman view took too simplistic of an approach here, but why not just challenge the constitutionality of HERA in court?

 

Berkowitz has said previously (and I paraphrase), "It's pretty simple. Either HERA doesn't grant them the power to do whatever they want unchecked, or HERA is unconstitutional."

 

So, I'd have to assume the next step is to challenge the constitutionality of HERA.

[investorG]

Dear Mr Mnuchin,

 

When interviewed, please ask everyone to stop vilifying the GSEs.  As you know better than everyone, these are amazing companies providing crucial benefits to America, now and in 2008. 

 

In addition, please acknowledge that in the real USA, shareholders have rights that should be balanced with customers, employees, and in this rare instance the taxpayer --- even if prior administrations, congresses, and the courts hide behind some technicalities.

 

Thank you and good luck to you!

[Sunrider]

That may be so - with my limited understanding of the US legal system, my worry is that this is up to the Supreme Court, which chooses what to get involved with and doesn't. Is there another mechanism to get a decision on the constitutionality of a law?

 

Thank you.

C.

 

+1.  Seems simply antithetical to the concept of checks and balances from which our founding fathers placed emphasis.  I'm assuming that my layman view took too simplistic of an approach here, but why not just challenge the constitutionality of HERA in court?

 

Berkowitz has said previously (and I paraphrase), "It's pretty simple. Either HERA doesn't grant them the power to do whatever they want unchecked, or HERA is unconstitutional."

 

So, I'd have to assume the next step is to challenge the constitutionality of HERA.

[Flynnstone5]

As another non-lawyer, I am just stunned that there's no order to produce a full admin record. How can they just say that the govs intent simply doesn't matter, i.e told the truth to lower ct or lied - doesn't matter, no one cares.

 

What does Lamberth look at to make a determination? Any odds regarding the likelihood of an en banc?

 

Re: HERA - can it even be challenged at this point?

 

I wonder given the breach of implied covenant and the breach of contract cases still being alive, if that provides enough cover for Mnuchin to make a decent deal with prfds?

[TonyG]

mnuchin is going to be on cnbc tm at 7am for what its worth

[Guest cherzeca]

Ignoring politics for a moment (remember until the Trump / Munchkin surprise we all assumed that eventually the law would take its course), I have two questions for the legal brain trust here:

 

(1) Philosophical: As a layman this judgement basically reads as though the judges confirmed that congress can make laws that are not subject to judicial review, or that give government actors the power to do things that are beyond judicial review. Am I missing something? This seem inimical to the fundamental tenets of a constitutional democracy with a separation of powers?

 

(2) Practical: Chris notes that the order confirms indirectly that a taking and breach of contract has taken place. Does this benefit the Fairholme case, which I believe basically ask for compensation for a takings and a breach of contract?

 

Chris - incidentally, you thought that a remand (well, different kind of remand) would benefit common, which is why you were leaning that way - are you now switching to preferred?

 

Thank you.

C.

 

congress can dispossess federal courts of judicial review. usually has to be done by clear statement. here the question whether fhfa had authority to do something was still subject to judicial review in view of judge brown (and me). of course, congress cant dispossess courts from review that constitution has been violated.

 

i had gotten more balanced between pref and common before this decision, and i did rebalance further yesterday.

[rros]

Dear Mr Mnuchin,

 

When interviewed, please ask everyone to stop vilifying the GSEs.  As you know better than everyone, these are amazing companies providing crucial benefits to America, now and in 2008. 

 

In addition, please acknowledge that in the real USA, shareholders have rights that should be balanced with customers, employees, and in this rare instance the taxpayer --- even if prior administrations, congresses, and the courts hide behind some technicalities.

 

Thank you and good luck to you!

Best will be to avoid using the word "shareholders" completely. As well as the subject of lawsuits. If he continues on his common sense path of protecting taxpayers by making the companies have sufficient capital all pieces will fall into place.

 

Re: dividend expectations for post 08' buyers according to Millet/Ginsburg guidelines. Investors who did their homework absolutely had such expectation. After all, Lockhart said companies would leave conservatorships (return to normal business operations) after they are stabilized. Many papers circulated in 2009 and 2010 showing the path to profitability and the activation of the DTAs. This natural process was arrested by the 3rd amendment. Not by the creation of FHFA or by establishing a conservatorship. Although this is easy to prove, we have to contend with Lamberth :(

[merkhet]

mnuchin is going to be on cnbc tm at 7am for what its worth

 

And apparently Trump is meeting with Mnuchin, Cohn, and Mulvaney today.

 

Where are you guys getting this information?

[Steve_Berk]

aren't there still other court cases that are similar to perry that have been brought in other jurisdictions? Yes, most district court judges are going to follow the DC circuit, but I still am holding out hope that someone will draw a judge that will be persuaded by Brown's biting dissent. If we can get a split in the circuits then you'd get Supreme Court review (although given the current composition of the Court, I am doubting that the DC Circuit opinion would be overruled. People get confused between judicial conservatism and political conservatism. I think that Ginsburg is a judicial conservative.

 

So from the perspective of the APA claim, the remaining avenues are

1) other district court cases

2) en banc in DC circuit

3) Supreme Court

 

I know, not good at all, but please correct me if I'm wrong. I haven't read the whole opinion but it was just about as much of a smackdown as I could have imagined. Clearly my legal expertise did me no good here.

[Luke 532]

mnuchin is going to be on cnbc tm at 7am for what its worth

 

And apparently Trump is meeting with Mnuchin, Cohn, and Mulvaney today.

 

Where are you guys getting this information?

 

Jennifer Jacobs twitter feed.  She's a White House reporter for Bloomberg.

 

Who's Trump discussing federal budget with at lunch? Priebus, Bannon, Kushner, Cohn, Mnuchin, Mulvaney, Russ Vought, Emma Doyle.

 

 

[Spekulatius]

I am just wondering, why do folks here think that recapitalizing FNM or FRE means that existing shareholders or preferred shareholders will get anything?

I am also not sure that Mnuchin get's to decide what is going to happen with FNM/FRE. He may just get the guidelines from Trump and if that is the case, and Trump want the best deal to pay for projects, well that could mean that the current shareholders get screwed over.

 

how is trump going to find new shareholders to put up serious capital if the old shareholders are screwed?

 

Same as with any other recapitalization or bankruptcy.

[merkhet]

mnuchin is going to be on cnbc tm at 7am for what its worth

 

And apparently Trump is meeting with Mnuchin, Cohn, and Mulvaney today.

 

Where are you guys getting this information?

 

Jennifer Jacobs twitter feed.  She's a White House reporter for Bloomberg.

 

Who's Trump discussing federal budget with at lunch? Priebus, Bannon, Kushner, Cohn, Mnuchin, Mulvaney, Russ Vought, Emma Doyle.

 

Thanks. And the CNBC appearance?