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

[PLynchJr]

It's been advertised on CNBC this morning.  Mnuchin will be on at 7AM tomorrow.

[merkhet]

I've thought about both the Greece and GM comparisons, but IMO it seems different because when you're insolvent, then sure it makes sense that you can find new people to take the risk of a recapitalized entity while shafting the previous holders. (Even though I think GM holders were shafted unnecessarily due to political considerations.)

 

It seems different when you are shafting the owners of a company that is neither insolvent nor facing a liquidity issue.

 

It's been advertised on CNBC this morning.  Mnuchin will be on at 7AM tomorrow.

 

Cool. Thanks for the response. I'm traveling at the moment so I'm not plugged in.

[hardincap]

would a positive ruling in lower ct on breach of k wrt liquidation prefs likely involve awarding damages based on the share price at the time? how else would damages be calculated?

[TwoCitiesCapital]

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

[Guest cherzeca]

would a positive ruling in lower ct on breach of k wrt liquidation prefs likely involve awarding damages based on the share price at the time? how else would damages be calculated?

 

Ps would argue for expectancy (and use the way gse recovery played out as the best measure of that expectation) but court could agree with price at time as best indicator of value.  question is what would a govt doj led by jeff sessions be arguing for?

[Flynnstone5]

Seeing some big block purchases on FNMAS this morning

[Luke 532]

It's been advertised on CNBC this morning.  Mnuchin will be on at 7AM tomorrow.

 

This is incredibly interesting given that he's meeting with Trump today.  I'm not anticipating any announcement regarding NWS or heavy hints at what he'll do, but I also wouldn't be surprised if he gives us more info than expected (like he did a few months back during a TV interview).

 

Language change regarding NWS in Fannie and Freddie's financials, possibility for direct contact with Berkowitz (both SHLD board members) past few months, Mnuchin's quotes that he respects contractual rights (was in regard to something else during confirmation hearings and not GSE's directly), Mnuchin's quotes wanting to recapitalize, Mnuchin's quotes wanting to get it done relatively fast, etc.

[morningstar]

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

 

I think the bulk of the global investor community would offer a very different account of events. The prevailing view, I think, is:

 

FNMA/FMCC failed in about the most catastrophic way possible and were bailed out by the government (consistent with expectations that the government effectively guaranteed GSE debt). Economically, the equity and prefs were zeros. Had they simply been written off at the time, nobody would have blinked an eye (despite, according to your view, that being an even greater miscarriage of justice). But they weren't and a few hedge funds continue to fight a legal battle to recover a windfall gain.

 

Should the GSEs get restructured into clean start capital structuers, there will be plenty of investors, same as there are in banks, insurance companies and so on - all of which exist with the understanding that the government has wide power to protect its guarantees. The risk of failing during a downturn widely applies to financial companies, and is accounted for in the required return on equity capital.

 

EDIT: In my view, the much bigger challenge to finding new investors is the unsettled future of the company - I don't think new equity investors will be easy to find without either (1) successful GSE reform passed by Congress or (2) some tacit acknowledgement from Congress that there will be no substantial reform.

[onyx1]

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

 

This precedent will bring instability to the banking system, and any other federally regulated industry.

 

In a future economic downturn, capital will flee at the first hint of distress if the regulator has the unilateral power to nationalize for flimsy reasons.

 

The concept of a conservator was created to be a cushion against a hard landing during inevitable economic cycles.  It worked well for generations.  Take it away and markets will tailspin when they would otherwise be calm.

 

I can't imagine an administration of businessmen will allow this precedent to stand.

[TwoCitiesCapital]

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

 

I think the bulk of the global investor community would offer a very different account of events. The prevailing view, I think, is:

 

FNMA/FMCC failed in about the most catastrophic way possible and were bailed out by the government (consistent with expectations that the government effectively guaranteed GSE debt). Economically, the equity and prefs were zeros. Had they simply been written off at the time, nobody would have blinked an eye (despite, according to your view, that being an even greater miscarriage of justice). But they weren't and a few hedge funds continue to fight a legal battle to recover a windfall gain.

Should the GSEs get restructured into clean start capital structuers, there will be plenty of investors, same as there are in banks, insurance companies and so on - all of which exist with the understanding that the government has wide power to protect its guarantees. The risk of failing during a downturn widely applies to financial companies, and is accounted for in the required return on equity capital.

 

...except that isn't what happened.

 

I also think your assumption that everyone would have bee ok had they wiped the equity out then isn't the case. I didn't start following until 2012, so I can't say for certain, BUT I imagine there would've been a MUCH higher bar needed for the gov't to actually wipe out 100% of equity interest than was needed for conservatorship.

 

It's one thing to say "something really bad appears to be happening and we're going to take the reigns temporarily to ensure the companies survive" than it is to say "something really bad appears to be happening and we're going to wipe out your interest in the company based on assumptions we're making that we're not going to let play out."

[SnarkyPuppy]

My concern and what is tempting me to sizably reduce my position is my inability to calibrate the odds of a nonsensical decision/action occurring going forward.  On the surface, yesterday's opinion was nonsensical and went against the general arguments of US chrcks/balances and blatant theft by the government if viewed by any honest observer.  But it happened, and we all have lost a lot for it. 

 

I agree the rational/sensical approach is consistent with shareholders doing well, but it's become very clear that rationality and common sense may not dictate the final outcome. 

 

Before yesterday, I didn't reduce my position after the run up because 100% loss of investment seemed off the table.  If there was a bad legal case, we still had Mnuchin.  If Mnuchin did a 180, we still had the legal cases.  This "margin of safety" or "floor" on the shares has been eroded.

[rros]

My concern and what is tempting me to sizably reduce my position is my inability to calibrate the odds of a nonsensical decision/action occurring going forward.  On the surface, yesterday's opinion was nonsensical and went against the general arguments of US chrcks/balances and blatant theft by the government if viewed by any honest observer.  But it happened, and we all have lost a lot for it. 

 

I agree the rational/sensical approach is consistent with shareholders doing well, but it's become very clear that rationality and common sense may not dictate the final outcome. 

 

Before yesterday, I didn't reduce my position after the run up because 100% loss of investment seemed off the table.  If there was a bad legal case, we still had Mnuchin.  If Mnuchin did a 180, we still had the legal cases.  This "margin of safety" or "floor" on the shares has been eroded.

Not trying to add kool-aid but it is not just Mnuchin who has to do a 180. It is also Mulvaney, Cohn, Ross and a few others. It is unlikely that businessmen coming from the private world would all do such a turn at the same time and for the same reasons.

 

Unhappy as I am with this last ruling I try to put it into perspective. It may just be the last vestige of Obama's era -the non-sensical era- with the majority of the ruling having been written while he was President and by a judge appointed by him (Ginsburg may have just wanted to bury Fannie and Freddie and saw an opportunity).

 

The wind of change is already being felt. Just not strong enough, yet.

 

We are in the transition period, with many hiccups, from the non-sensical to the most sensical and realize you are all analyzing facts through your gloomy glasses after yesterday's ruling. Give yourself a day or two.

[SnarkyPuppy]

Are there really no scenarios where Mnuchin can be consistent with his wording (get out of government control, Fannie/Freddie important, well capitalized) but also wipe out existing shareholders?  I have to think that this is a non zero event that I'm not smart enough to figure out.

[TonyG]

if he wipes existing shareholders doesn't he wipe out warrants? unless he just dilutes commons a lot (which isn't beneficial to the warrants). So in a way he needs us and we definitely need him no?

[SnarkyPuppy]

I agree it would be irrational for him to wipe out the warrants he holds.  But why not just continue the net worth sweep and take in those profits entirely for himself?  If we are talking incentives, why is his largest incentive not to continue safely taking in billions of dollars a quarter? 

[hardincap]

"Ginsburg may have just wanted to bury Fannie and Freddie and saw an opportunity"

 

there are judicial conservatives and judicial activists. the former is likely to side with a narrow reading of hera text. latter is likely to interpret hera more widely. neither approach is perfect and both have blindspots; no need to accuse of malintent

[Flynnstone5]

Lamberth will take some time or maybe we get an en banc.

 

Either way, it would seem now is the prime time for Mnuchin and P's to hammer out a settlement before any additional rulings. I think he has enough cover to work out something that's favorable to prfds all Trump friendly.

 

I can see commons having to fall on the sword here - not all hf benefited at "taxpayers expense", gov can make more $, all of those close to Trump make out plus cover of prfds having greater rights as business media would attest.

 

Ackman wasn't exactly a pro Trump guy although the other key is does Icahn still own. I could also see Mnuchin/Trump protecting common as it is the right thing to do given all that has taken place. I'm just not willing to make the common bet anymore.

[TonyG]

snarky, you could say they won't do that because 1) taxpayers are exposed, and 2) mnuchin and trump aren't going to be around forever. 4 maybe 8 years. in 4 years he can collect 10-15B a year. with the swipe of his pen he can collect many multiples of that in one day. but i don't know if he will. he did, though, write the GSE's need to be capitalized in the senate letter so i don't think one ruling will really affect his thinking (I'm hoping)

[Guest cherzeca]

if he wipes existing shareholders doesn't he wipe out warrants? unless he just dilutes commons a lot (which isn't beneficial to the warrants). So in a way he needs us and we definitely need him no?

 

kool aid or echo chamber, my sense is that the perry decision likely changed the economic details of where mnuchin wants to go but not the pathway.

 

for example, mnuchin might have felt that the junior pref should get par if perry decision was adverse to govt. now, he may insist that junior pref gets 50% and some warrants in any recap.  something along those lines. 

 

again, i am just speculating, but it seems to me that mnuchin likely did not have alternate pathways depending on legal result, but rather a pathway that makes sense to him with variable shareholder results depending on various factors.

[Sunrider]

...except that isn't what happened.

 

 

Haha - but we're now in Trump times where alt-facts rule (and that holds not only for those alt facts you agree with!)

 

;)

 

The one thing I do want to throw into the debate: If there is one thing that seems to have always happened is that one can find investors in pretty much anything, depending on price. You kind of have to assume a global market strike of the vast majority of capital if you assume that the government can't wipe out common and junior and turn around and say 'Dear market, here is this great insurance business and I'm going to sell you new equity at a price that allows you to make 20% for the next x years with comparatively little risk'.

 

The fact that the risk is that the government does again what it did in the past will be ignored. Just as people keep investing in debt of countries that default and in equity of companies run by people previously convicted of fraud or associated with it.

 

I think we should not take too much comfort from the idea of what a rational person should do - investors en masse just aren't made that way.

 

[SnarkyPuppy]

I guess I might just trying to take a fresh look at what "could" happen, not what he said will happen or what rationality dictates will happen. 

 

 

[investorG]

unless you owned pre-08 and if you are comfortable with the liquidity difference, does it make sense to switch from the high yielding (in theory) preferreds to the cheapest ones under the thought that preferred holders' bargaining power is lowered, raising the odds of a conversion to common in a potential plan rather than restarting dividends?

 

thank you

[Guest Schwab711]

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

 

I think the bulk of the global investor community would offer a very different account of events. The prevailing view, I think, is:

 

FNMA/FMCC failed in about the most catastrophic way possible and were bailed out by the government (consistent with expectations that the government effectively guaranteed GSE debt). Economically, the equity and prefs were zeros. Had they simply been written off at the time, nobody would have blinked an eye (despite, according to your view, that being an even greater miscarriage of justice). But they weren't and a few hedge funds continue to fight a legal battle to recover a windfall gain.

Should the GSEs get restructured into clean start capital structuers, there will be plenty of investors, same as there are in banks, insurance companies and so on - all of which exist with the understanding that the government has wide power to protect its guarantees. The risk of failing during a downturn widely applies to financial companies, and is accounted for in the required return on equity capital.

 

...except that isn't what happened.

 

I also think your assumption that everyone would have bee ok had they wiped the equity out then isn't the case. I didn't start following until 2012, so I can't say for certain, BUT I imagine there would've been a MUCH higher bar needed for the gov't to actually wipe out 100% of equity interest than was needed for conservatorship.

 

It's one thing to say "something really bad appears to be happening and we're going to take the reigns temporarily to ensure the companies survive" than it is to say "something really bad appears to be happening and we're going to wipe out your interest in the company based on assumptions we're making that we're not going to let play out."

 

FNMA/FMCC were put into conservatorship when they failed to raise short-term funding necessary to continue operations from the private markets in 2008. They were temporarily illquid, which is the same as insolvent. Simple as that. At that point, the equity should have been worth $0 unless there were excess funds in bankruptcy. The government was the only willing lender to save FNMA/FMCC from default. Considering the likely effects on the MBS market if FNMA and/or FMCC defaulted, I sincerely doubt there would have been any residual value for the common, at that time. I don't think it's fair to expect the benefits of a GSE while decrying any and all consequences. That goes against the foundations of capitalism, which is the risk/reward trade-off. Any other companies, at any other time, would have failed.

 

There's articles surrounding the DTA write-off and write-up, that make it look like government theft. Those DTAs truly were worthless when written off. Maybe you could argue they were quick on the draw to write them down, but it was a reasonable decision. Without the explicit government funding starting in late-2008, they never would have been able to make it through the illquid period (to return to solvency) and the DTAs would have remained worthless. The government funding almost certainly improved the stability of the mortgage market, accounting changes allowed FNMA/FMCC to avoid MTM, FNMA/FMCC returned to some profitability, and the DTAs regained their value. Temporary illquidity is insolvency. No one complains about the accounting change to provide relief from MTM accounting when talking about FNMA/FMCC.

 

The NWS is a whole other can of worms, but the common should have been a $0 in 2008. In my opinion, the circumstances of the times forced the government to save the equity as a consequence of saving the MBS market for the greater good (or as a favor to bankers and pension funds, or all of the above). I think the tax payers deserve FNMA/FMCC and all creditors should be made whole. Whether they legally deserve this is another question for smarter folks than myself. Most creditors helped contribute to the recovery and thus deserve the benefits of waiting out the illquid period. No one below the preferreds deserves a dime in my opinion. This is obviously a very simplistic view but I think FNMA/FMCC investors ignore all of the government actions that benefited them over the last 10 years and just focus on a few actions and call them theft. No one wants to repay the benefits but they demand restitution for any and all the negative actions. The government's actions have delivered fantastic underlying returns for most creditors, relative to the alternatives that almost certainly would have resulted in significant haircuts if FNMA/FMCC were immediately wound down.

 

I actually think the government handled the FnF issue extremely well, considering the restrictions and criteria placed on them. Bush/Obama admins both did very well imo. The US should have had bread lines in 2008 and 2009. We should have had a severe depression. I think the prolonged low growth period was a consequence of absorbing those losses over a prolonged period.

[sampr01]

Same applies to AIG and all banks... ;D

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.

 

I think that's a much harder sell. This isn't a typical bankruptcy/insolvency where shareholders hold responsibility for the management they put in place.

 

This is instance where the government, in a crisis, took over control of the company under false pretenses and then unilaterally re-wrote the terms of the agreement of ceding control to screw the shareholders to the maximum amount possible even though hindsight showed shareholders never needed the government to step in to begin with.

 

If the gov't can simply take a company into conservatorship based on concerns of what COULD happen, and then unilaterally turn that conservatorship into a liquidation when that company is still solvent and incredibly profitable, and then keep all those proceeds for itself without ever compensating shareholders, then you have a recipe for there never being a private solution to a crisis/potential crisis again. 

 

What shareholder is ever going to take the risk if the government can simply step in and renegotiate terms to sweep all profits to itself with no legal review whatsoever? What shareholder would step into such a politically polarizing company with the knowledge that the administration could simply steal it back at the next hint of any problems whatsoever.

 

This really concerns me as a precedent for any future crisis, nationwide or company specific, where the gov't can simply absorb a company based on assumptions that never play out and never owe shareholders anything for it.

 

I think the bulk of the global investor community would offer a very different account of events. The prevailing view, I think, is:

 

FNMA/FMCC failed in about the most catastrophic way possible and were bailed out by the government (consistent with expectations that the government effectively guaranteed GSE debt). Economically, the equity and prefs were zeros. Had they simply been written off at the time, nobody would have blinked an eye (despite, according to your view, that being an even greater miscarriage of justice). But they weren't and a few hedge funds continue to fight a legal battle to recover a windfall gain.

Should the GSEs get restructured into clean start capital structuers, there will be plenty of investors, same as there are in banks, insurance companies and so on - all of which exist with the understanding that the government has wide power to protect its guarantees. The risk of failing during a downturn widely applies to financial companies, and is accounted for in the required return on equity capital.

 

...except that isn't what happened.

 

I also think your assumption that everyone would have bee ok had they wiped the equity out then isn't the case. I didn't start following until 2012, so I can't say for certain, BUT I imagine there would've been a MUCH higher bar needed for the gov't to actually wipe out 100% of equity interest than was needed for conservatorship.

 

It's one thing to say "something really bad appears to be happening and we're going to take the reigns temporarily to ensure the companies survive" than it is to say "something really bad appears to be happening and we're going to wipe out your interest in the company based on assumptions we're making that we're not going to let play out."

 

FNMA/FMCC were put into conservatorship when they failed to raise short-term funding necessary to continue operations from the private markets in 2008. They were temporarily illquid, which is the same as insolvent. Simple as that. At that point, the equity should have been worth $0 unless there were excess funds in bankruptcy. The government was the only willing lender to save FNMA/FMCC from default. Considering the likely effects on the MBS market if FNMA and/or FMCC defaulted, I sincerely doubt there would have been any residual value for the common, at that time. I don't think it's fair to expect the benefits of a GSE while decrying any and all consequences. That goes against the foundations of capitalism, which is the risk/reward trade-off. Any other companies, at any other time, would have failed.

 

There's articles surrounding the DTA write-off and write-up, that make it look like government theft. Those DTAs truly were worthless when written off. Maybe you could argue they were quick on the draw to write them down, but it was a reasonable decision. Without the explicit government funding starting in late-2008, they never would have been able to make it through the illquid period (to return to solvency) and the DTAs would have remained worthless. The government funding almost certainly improved the stability of the mortgage market, accounting changes allowed FNMA/FMCC to avoid MTM, FNMA/FMCC returned to some profitability, and the DTAs regained their value. Temporary illquidity is insolvency. No one complains about the accounting change to provide relief from MTM accounting when talking about FNMA/FMCC.

 

The NWS is a whole other can of worms, but the common should have been a $0 in 2008. In my opinion, the circumstances of the times forced the government to save the equity as a consequence of saving the MBS market for the greater good (or as a favor to bankers and pension funds, or all of the above). I think the tax payers deserve FNMA/FMCC and all creditors should be made whole. Whether they legally deserve this is another question for smarter folks than myself. Most creditors helped contribute to the recovery and thus deserve the benefits of waiting out the illquid period. No one below the preferreds deserves a dime in my opinion. This is obviously a very simplistic view but I think FNMA/FMCC investors ignore all of the government actions that benefited them over the last 10 years and just focus on a few actions and call them theft. No one wants to repay the benefits but they demand restitution for any and all the negative actions. The government's actions have delivered fantastic underlying returns for most creditors, relative to the alternatives that almost certainly would have resulted in significant haircuts if FNMA/FMCC were immediately wound down.

 

I actually think the government handled the FnF issue extremely well, considering the restrictions and criteria placed on them. Bush/Obama admins both did very well imo. The US should have had bread lines in 2008 and 2009. We should have had a severe depression. I think the prolonged low growth period was a consequence of absorbing those losses over a prolonged period.

[investorG]

FNMA/FMCC were put into conservatorship when they failed to raise short-term funding necessary to continue operations from the private markets in 2008. They were temporarily illquid, which is the same as insolvent. Simple as that. At that point, the equity should have been worth $0 unless there were excess funds in bankruptcy. The government was the only willing lender to save FNMA/FMCC from default. Considering the likely effects on the MBS market if FNMA and/or FMCC defaulted, I sincerely doubt there would have been any residual value for the common, at that time. I don't think it's fair to expect the benefits of a GSE while decrying any and all consequences. That goes against the foundations of capitalism, which is the risk/reward trade-off. Any other companies, at any other time, would have failed.

 

There's articles surrounding the DTA write-off and write-up, that make it look like government theft. Those DTAs truly were worthless when written off. Maybe you could argue they were quick on the draw to write them down, but it was a reasonable decision. Without the explicit government funding starting in late-2008, they never would have been able to make it through the illquid period (to return to solvency) and the DTAs would have remained worthless. The government funding almost certainly improved the stability of the mortgage market, accounting changes allowed FNMA/FMCC to avoid MTM, FNMA/FMCC returned to some profitability, and the DTAs regained their value. Temporary illquidity is insolvency. No one complains about the accounting change to provide relief from MTM accounting when talking about FNMA/FMCC.

 

The NWS is a whole other can of worms, but the common should have been a $0 in 2008. In my opinion, the circumstances of the times forced the government to save the equity as a consequence of saving the MBS market for the greater good (or as a favor to bankers and pension funds, or all of the above). I think the tax payers deserve FNMA/FMCC and all creditors should be made whole. Whether they legally deserve this is another question for smarter folks than myself. Most creditors helped contribute to the recovery and thus deserve the benefits of waiting out the illquid period. No one below the preferreds deserves a dime in my opinion. This is obviously a very simplistic view but I think FNMA/FMCC investors ignore all of the government actions that benefited them over the last 10 years and just focus on a few actions and call them theft. No one wants to repay the benefits but they demand restitution for any and all the negative actions. The government's actions have delivered fantastic underlying returns for most creditors, relative to the alternatives that almost certainly would have resulted in significant haircuts if FNMA/FMCC were immediately wound down.

 

I actually think the government handled the FnF issue extremely well, considering the restrictions and criteria placed on them. Bush/Obama admins both did very well imo. The US should have had bread lines in 2008 and 2009. We should have had a severe depression. I think the prolonged low growth period was a consequence of absorbing those losses over a prolonged period.

 

while you are likely right it would have been a 0, it's also likely that all the big banks would have gone to the same fate without the govt injections, mbs buys, etc, so it's unfair to cherry pick imo.  in addition to the dividends sent to the taxpayer, there's likely 200bn of equity value here ---- most reasonable investors would say divide it up fairly between the taxpayer and the shareholders, especially since they explicitly chose to keep it listed in 2008 rather than either liquidate or have govt take on 100pct (and add the debt to it's books).