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

[beaufort]

there seems to be posters who believe that if Collins is a win for Ps and remedy is to void SP, then this last letter agreement somehow revives the SP.  a collins win will result in the retirement of the SP so that, imo, this letter agt will relate to a security that no longer exists.  all of this language will become as void as the security that it relates to will have become

 

That's now how I understood it.

 

[*]FnF never had (and currently does not have) the ability to pay down the seniors voluntarily because the funding commitment still exists: this is in Section 4(a) of the original contract that is not being contested. More technically, they can't pay down liquidation preference increases due to draws, which have been the source of all such increases. Thus the proposed remedy that pays down the seniors violates the original contract, while the other remedy (UST keeps the seniors but sends back $125B) respects it. Why would the Fifth Circuit choose the former over the latter in that light?

[*]The funding commitment, whose removal could very well collapse the housing market, is tied to the existence of the seniors. Extinguishing the seniors entirely would alter large parts of the original contract, and I would imagine even the plaintiffs don't want this. Writing the liquidation preference down to its original value of $1B helps, but then the 1:1 increases in last week's letter agreement as FnF retain capital would stay in force.

[*]My interpretation of the questions before SCOTUS is that they won't be determining the form of backward relief on the constitutional claim anyway, only if it should be available; the form would be remanded back down to the Fifth Circuit. Is this correct?

[*]The same reasoning applies to the APA claims. On that front SCOTUS is only being asked if the APA claims should be dismissed due to either 4617(f) or the succession clause. A victory for the plaintiffs there merely means upholding the Fifth Circuit's ruling on that front, remanding the case back down the Judge Atlas, right?

 

There are no facts in evidence to support the payments, unless there is an admission I am not aware of.  I doubt it, given the litigation has been handled so far.  In addition, the payments will be subject to expert opinion, which won't be served yet.  A win at SCOTUS is a remand to the lower court for fact finding. 

 

On the other hand, this newest letter agreement will be brought to the attention of the court.  SCOTUS will see how vile it is and would hopefully grant the remedy and consequences that @cherzeca references above. 

[james22]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

[investorG]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

 

I am aligned with him position-wise but despite his knowledge his predictions are rarely reliable.    This instance should be no different.  I see low odds of an equity raise in 2021 because most or all of this year will be filled with debate over the preferred GSE structure going forward.  Surely Yellen will give Sherrod and Toomey a chance first.  Likely going to be a long year with no visible potential catalysts until June-Sep. 

[COBFInfinity]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

 

I disagree that the NWS has been ended. I know, even Calabria has claimed that. But as long as the Sr Pfd balance increases right along with retained earnings, the GSEs are only building fictional capital. The NWS is not really ended as long as this continues.

[Midas79]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

 

I disagree that the NWS has been ended. I know, even Calabria has claimed that. But as long as the Sr Pfd balance increases right along with retained earnings, the GSEs are only building fictional capital. The NWS is not really ended as long as this continues.

 

One thing that has been lost along the way is what exactly is meant by "capital". I'm seeing similar problems in my discussion with Tim Howard on his blog. I can see five different ways to define capital:

 

[*]Total stockholder equity on the balance sheet

[*]Amount of liquidation preference owed to shareholders upon liquidation

[*]Core capital: stockholder equity minus cumulative prefs and AOCI

[*]Tier 1 capital: core capital minus DTAs

[*]CET1 capital: Tier 1 capital minus non-cumulative prefs

 

When you say that only "fictional" capital is being built, that tells me you are using #2 as your definition, or perhaps something not on the list. All other entries on the list will go up with FnF's retained earnings because they are balance sheet calculations: the earnings go on there but the senior pref liquidation preference increases don't.

 

The key is that core capital is defined under HERA, and FnF's post-release capital classifications are defined by HERA. Thus increasing core capital, which retained earnings now do, is important even if the senior pref liquidation preference increases along with it. This is real capital being built in the eyes of the law.

 

The letter agreement might have been thin gruel, but it wasn't a complete nothingburger. The date at which the true NWS would have turned back on has been pushed from around now to 2044 or so. While not being nearly enough to accomplish recap and release, it's a significant step.

[TwoCitiesCapital]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

 

I disagree that the NWS has been ended. I know, even Calabria has claimed that. But as long as the Sr Pfd balance increases right along with retained earnings, the GSEs are only building fictional capital. The NWS is not really ended as long as this continues.

 

One thing that has been lost along the way is what exactly is meant by "capital". I'm seeing similar problems in my discussion with Tim Howard on his blog. I can see five different ways to define capital:

 

[*]Total stockholder equity on the balance sheet

[*]Amount of liquidation preference owed to shareholders upon liquidation

[*]Core capital: stockholder equity minus cumulative prefs and AOCI

[*]Tier 1 capital: core capital minus DTAs

[*]CET1 capital: Tier 1 capital minus non-cumulative prefs

 

When you say that only "fictional" capital is being built, that tells me you are using #2 as your definition, or perhaps something not on the list. All other entries on the list will go up with FnF's retained earnings because they are balance sheet calculations: the earnings go on there but the senior pref liquidation preference increases don't.

 

The key is that core capital is defined under HERA, and FnF's post-release capital classifications are defined by HERA. Thus increasing core capital, which retained earnings now do, is important even if the senior pref liquidation preference increases along with it. This is real capital being built in the eyes of the law.

 

The letter agreement might have been thin gruel, but it wasn't a complete nothingburger. The date at which the true NWS would have turned back on has been pushed from around now to 2044 or so. While not being nearly enough to accomplish recap and release, it's a significant step.

 

+1

 

I think the angst around the "not getting rid of the NWS sweep" is due to shareholders' positioning and situation not improving much. We went from subsidizing 100% of the sweeps to the Treasury with nothing left over for us to subsidizing capital retention and a 10% divvy with nothing left over for us. And the longer that continues, without an equity offering, the less will be left over for us in the future even with profit growth and etc.

 

As of this point in time, a massive equity offering I the near term is the only way to capitalize the companies to prevent the 10% divvy/liquidation preference from absorbing 100% of the economic profit of the entities. This means that there needs to be a settlement of the legal rulings or a fairly quick judgment.

 

Hard to know if it will be positive for us - a quick settlement might be on unfavorable terms as the Treasury is essentially getting paid to wait (via increased preference and compounding divvy) while we're paying to wait, but this does likely mean we're not going to be struggling with this for another 3 years without progress.

 

I think we're going to have events in the near term that prove this a dud or a reward for our patience.

 

[COBFInfinity]

Glen is always optimistic, but this seems a good take:

 

https://seekingalpha.com/article/4399735-gses-net-worth-keep-agreement-means-major-equity-offerings

 

I disagree that the NWS has been ended. I know, even Calabria has claimed that. But as long as the Sr Pfd balance increases right along with retained earnings, the GSEs are only building fictional capital. The NWS is not really ended as long as this continues.

 

One thing that has been lost along the way is what exactly is meant by "capital". I'm seeing similar problems in my discussion with Tim Howard on his blog. I can see five different ways to define capital:

 

[*]Total stockholder equity on the balance sheet

[*]Amount of liquidation preference owed to shareholders upon liquidation

[*]Core capital: stockholder equity minus cumulative prefs and AOCI

[*]Tier 1 capital: core capital minus DTAs

[*]CET1 capital: Tier 1 capital minus non-cumulative prefs

 

When you say that only "fictional" capital is being built, that tells me you are using #2 as your definition, or perhaps something not on the list. All other entries on the list will go up with FnF's retained earnings because they are balance sheet calculations: the earnings go on there but the senior pref liquidation preference increases don't.

 

The key is that core capital is defined under HERA, and FnF's post-release capital classifications are defined by HERA. Thus increasing core capital, which retained earnings now do, is important even if the senior pref liquidation preference increases along with it. This is real capital being built in the eyes of the law.

 

The letter agreement might have been thin gruel, but it wasn't a complete nothingburger. The date at which the true NWS would have turned back on has been pushed from around now to 2044 or so. While not being nearly enough to accomplish recap and release, it's a significant step.

 

Yes, I'm not using the balance sheet calculations, because they ignore that a real liability is being kept off balance sheet as the Sr Pfd balance increases. Now, you might argue that the next agreement (hopefully pushed by a settlement) will finally take care of this, but as of now, it hasn't done anything for us other than create a fictional balance sheet entry that can eventually be relied on to reach capital levels and theoretically allow for paydown of the very real liability of the Sr Pfd. All retained earnings "capital" built under the current agreement is bogus.

[DocSnowball]

I'm still absorbing what happened, and why the agreement was as such to be punitive to litigating shareholders. One thing to consider is that Paulson and co/Moelis sponsors were non-litigating shareholders, and perhaps the litigating shareholders and Treasury just could not come to a settlement between Nov 18th and Dec 9th, after which things went downhill. The new agreement leaves Treasury in a strong position as others have noted, and intends to bring litigating shareholders to their knees to settle. Perhaps they will throw the dice once again with SCOTUS, after which there will be little choice but to throw in the towel. I ended up cutting down my position in half, where I can live with it going close to zero slowly or overnight, because the new agreement made it a binary investment yet again. Neither liquidation (and taking), nor restructuring, rather the threat of an endless status quo which still leaves everyone except shareholders happy.

[WB_fan82]

A couple observations...

 

First on the capital.. the reason it's an economic fiction is to consider how the exact same economic scenario has different results on capital.  Scenario 1:  status quo.  Fannie earns  $5B.  Retained earnings up by $5B, sr liq pref up by $5B but no adjustment for that on the balance sheet.  Under HERA, capital is up by $5B.  Scenario 2:  Fannie sells $5B of sr pfd.  It gets the $5B but now there is a $5B higher liquidation preference on the balance sheet.  Under HERA, zero capital improvement.  Same $5B into the company.  Same $5B higher liquidation preference.  But only one form is counted as capital under HERA.  That's why it's something of a fiction.

 

Second on the point of exit under this current PSPA... The whole exercise is HIGHLY dependent on the capital requirements for these entities.  As they build capital, a change in the capital rule could dramatically change the equation in terms of overcapitalization.  For example, imagine Calabria's 4% goes to Wachter's 2-3%.  Or, imagine that we move away from CET1 bank regulatory concept and redefine capital to include ALL preferred (i.e. everything subordinated to creditors), or even the government's commitment to purchase preferred under the PSPA.  You could have lower capital requirements, the sr pfd counting as capital, even unfunded commitments counted as capital.  Any single one of those things could result in a lot of resources freed up that could pay down the senior preferred balance to the point where the 10% coupon is manageable. 

 

This is not a near-term thing, and likely wouldn't happen under Calabria (though I think there is a very good case to make to Calabria that the govt commitment to purchase capital stock should be counted as capital).  But in time, someone else with a different vision of capital could make a huge difference here.

 

[investorG]

I'm still absorbing what happened, and why the agreement was as such to be punitive to litigating shareholders. One thing to consider is that Paulson and co/Moelis sponsors were non-litigating shareholders, and perhaps the litigating shareholders and Treasury just could not come to a settlement between Nov 18th and Dec 9th, after which things went downhill. The new agreement leaves Treasury in a strong position as others have noted, and intends to bring litigating shareholders to their knees to settle. Perhaps they will throw the dice once again with SCOTUS, after which there will be little choice but to throw in the towel. I ended up cutting down my position in half, where I can live with it going close to zero slowly or overnight, because the new agreement made it a binary investment yet again. Neither liquidation (and taking), nor restructuring, rather the threat of an endless status quo which still leaves everyone except shareholders happy.

 

I agree Doc, we could be misaligned with the litigants.  Unless we win constitutional at the SC, which is unlikely, I wonder if Berkowitz holds out for the Lamberth trial (perhaps ~ $40 potential) or if he'd go ahead and settle in 2h 2021 for either a decent deal (if we get APA remand) or any deal (if we lose collins outright).  I suspect it will leak out at some point the reason for the prior admin's crunch time collapse.

[investorG]

A couple observations...

 

First on the capital.. the reason it's an economic fiction is to consider how the exact same economic scenario has different results on capital.  Scenario 1:  status quo.  Fannie earns  $5B.  Retained earnings up by $5B, sr liq pref up by $5B but no adjustment for that on the balance sheet.  Under HERA, capital is up by $5B.  Scenario 2:  Fannie sells $5B of sr pfd.  It gets the $5B but now there is a $5B higher liquidation preference on the balance sheet.  Under HERA, zero capital improvement.  Same $5B into the company.  Same $5B higher liquidation preference.  But only one form is counted as capital under HERA.  That's why it's something of a fiction.

 

Second on the point of exit under this current PSPA... The whole exercise is HIGHLY dependent on the capital requirements for these entities.  As they build capital, a change in the capital rule could dramatically change the equation in terms of overcapitalization.  For example, imagine Calabria's 4% goes to Wachter's 2-3%.  Or, imagine that we move away from CET1 bank regulatory concept and redefine capital to include ALL preferred (i.e. everything subordinated to creditors), or even the government's commitment to purchase preferred under the PSPA.  You could have lower capital requirements, the sr pfd counting as capital, even unfunded commitments counted as capital.  Any single one of those things could result in a lot of resources freed up that could pay down the senior preferred balance to the point where the 10% coupon is manageable. 

 

This is not a near-term thing, and likely wouldn't happen under Calabria (though I think there is a very good case to make to Calabria that the govt commitment to purchase capital stock should be counted as capital).  But in time, someone else with a different vision of capital could make a huge difference here.

 

I wouldn't count on this.  What Tsy scty is going to drop the equity capital requirement below 3%.  This letter agreement took the capital rules out of FHFA head's sole hands.

[WB_fan82]

I'll tell you who... Yellen, if Wachter is the FHFA appointee.  Read her paper.

 

If you are the TSY secretary, it's far easier to engineer a change in the capital definitions and requirements of the GSEs than it is to lower dividends, forgive principal, or otherwise transfer economic value out of Treasury's sr pfd to GSE shareholders.  Especially when those shareholders are hedge funds.

 

One of the biggest issues with this trade is the " branding" problem.  The press loves to mention hedge fund speculators, which is partly true.  If this was the Ohio or Florida pension system suing, it would be looked at far differently.  It shouldn't matter, but it really does.  Detroit pensioners did better than "hedge fund vulture" muni bond holders in municipal BK.  GM union/pension creditors did far better than other creditors in that BK despite similar priority.  Just how the world works.

 

This note is about 10 years too early, but if nothing happens and we have a decade of retention then an additional road to recap is a change in the capital requirements.  Currently the GSEs are too far away for this to matter today, however.

 

 

[investorG]

I'll tell you who... Yellen, if Wachter is the FHFA appointee.  Read her paper.

 

If you are the TSY secretary, it's far easier to engineer a change in the capital definitions and requirements of the GSEs than it is to lower dividends, forgive principal, or otherwise transfer economic value out of Treasury's sr pfd to GSE shareholders.  Especially when those shareholders are hedge funds.

 

One of the biggest issues with this trade is the " branding" problem.  The press loves to mention hedge fund speculators, which is partly true.  If this was the Ohio or Florida pension system suing, it would be looked at far differently.  It shouldn't matter, but it really does.  Detroit pensioners did better than "hedge fund vulture" muni bond holders in municipal BK.  GM union/pension creditors did far better than other creditors in that BK despite similar priority.  Just how the world works.

 

This note is about 10 years too early, but if nothing happens and we have a decade of retention then an additional road to recap is a change in the capital requirements.  Currently the GSEs are too far away for this to matter today, however.

 

I agree there is a branding problem.  That's why a potential write-down needs to be accompanied in conjunction with a large capital raise.  Yellen can truthfully say we couldn't have gotten this equity that you see right now in the door without a write down.  And this equity can provide a) taxpayer protection, b) actual cash (via warrant monetization and/or some partial sr pref conversion) rather than mark to market gains that Midas says could take 20 years to tap, and c) no material lawsuit liability.    The Trump admin was too lazy to move in this manner.    So they bunted us to first base rather than hit the home run.

[WB_fan82]

The problem with that is it's a big fat lie.  They can convert the entire preference into common shares.  No writedown necessary.

 

I think TH is correct, however, that conversion means a ton of lawsuits.  Until we have clarity on Collins, at least.

 

I disagree with Midas that the liability is capped at $5B on a conversion and therefore the lawsuits won't be a roadblock.  The stocks are priced at < 1x PE b/c of the NWS.  Winning the lawsuits means at least $30B back to the companies, which is 6x the current market caps alone.  Bare minimum.

 

The more promising route might be the carrot (affordable housing) instead of the stick (lawsuits).  Calabria can offer a 20 bps reduction in affordable housing G-fees, which mostly flows to cheaper mortgages.  That's got to be worth something to Democrats.  Just exercise the warrant and drop the lawsuit caps (which seem totally irrelevant... the market will make up its own mind and what do the caps have to do with anything over at TSY?!).

 

Jr prefs don't really care about a modest diminution in GSE earnings power, and I don't think Calabria does either.  55 bps G-fees are way too high.

 

 

[investorG]

The problem with that is it's a big fat lie.  They can convert the entire preference into common shares.  No writedown necessary.

 

I think TH is correct, however, that conversion means a ton of lawsuits.  Until we have clarity on Collins, at least.

 

I disagree with Midas that the liability is capped at $5B on a conversion and therefore the lawsuits won't be a roadblock.  The stocks are priced at < 1x PE b/c of the NWS.  Winning the lawsuits means at least $30B back to the companies, which is 6x the current market caps alone.  Bare minimum.

 

The more promising route might be the carrot (affordable housing) instead of the stick (lawsuits).  Calabria can offer a 20 bps reduction in affordable housing G-fees, which mostly flows to cheaper mortgages.  That's got to be worth something to Democrats.  Just exercise the warrant and drop the lawsuit caps (which seem totally irrelevant... the market will make up its own mind and what do the caps have to do with anything over at TSY?!).

 

Jr prefs don't really care about a modest diminution in GSE earnings power, and I don't think Calabria does either.  55 bps G-fees are way too high.

 

Apart from lawsuits, converting the whole sr pref to common is a circular disaster, not really workable due to low current mkt caps of jr pref and public common to squeeze value from combined with the relative ownership demands from fresh money investors potentially putting in well over $100bn.

 

edit:  Doubt the 30bn gets returned in any scenario.  Govt can keep the $190bn sr pref and just send back the $125bn.  Investors don't want this and so if we won Collins we'd negotiate to write down the sr pref instead and would have to give up something.

 

edit 2:  The odds of Calabria working out a deal pre-collins are low.  why are they going to give up the house in april when they can wait 3 months and get most of what they want with a new fhfa head.

[Midas79]

The problem with that is it's a big fat lie.  They can convert the entire preference into common shares.  No writedown necessary.

 

I think TH is correct, however, that conversion means a ton of lawsuits.  Until we have clarity on Collins, at least.

 

I disagree with Midas that the liability is capped at $5B on a conversion and therefore the lawsuits won't be a roadblock.  The stocks are priced at < 1x PE b/c of the NWS.  Winning the lawsuits means at least $30B back to the companies, which is 6x the current market caps alone.  Bare minimum.

 

I stand by the <$5B of liability to Treasury on any lawsuit involving a senior pref conversion or warrant exercise. Judge Wheeler, when he awarded zero damages in the Starr/AIG case, extensively cited SCOTUS in saying that in a takings or illegal exaction case the only thing that matters when calculating damages is what the property owner lost, not what the government gained. So whatever market or economic value Treasury's common shares later have means nothing in this context. For citations see the first paragraph on page 35.

http://online.wsj.com/public/resources/documents/StarrvUS06152015.pdf

 

The only thing that common shareholders could prove that they lost is the drop in market price per share between when the conversion/warrant exercise happened and the date of the lawsuit. Unless the commons spike dramatically before one of those events, UST faces a maximum liability of 1.8B times the common share price of $2 or so, or less than $4B.

 

And the whole reason to do a senior pref conversion is to attract private capital, with the intent of the capital raises happening well in advance of any final ruling in Collins, which is 1-3 years away because SCOTUS is only going to remand the case at best (from the plaintiffs' point of view). So the idea that the commons will rise to much higher levels before the senior pref conversion happens is, in my mind, just wishful thinking. If I had a nickel for every time someone incorrectly overestimated a short to medium term price target on the commons I could recap FnF myself.

 

Even if such a price appreciation were plausible, UST would just convert the seniors to common sooner to prevent that extra liability.

 

If you are the TSY secretary, it's far easier to engineer a change in the capital definitions and requirements of the GSEs than it is to lower dividends, forgive principal, or otherwise transfer economic value out of Treasury's sr pfd to GSE shareholders.  Especially when those shareholders are hedge funds.

 

Changing capital definitions and requirements is in the purview of the FHFA director, not the UST Secretary. Also, there is no way the seniors can count towards core capital in their current form. HERA is explicit in saying that the only kind of preferred shares that count towards core capital are non-cumulative ones, which the seniors aren't. See (7) in https://www.law.cornell.edu/uscode/text/12/4502. Core capital is what determines FnF's capital classifications, so FnF won't be anything other than "critically undercapitalized" until and unless the seniors are written down or converted to commons.

 

Making the seniors non-cumulative alleviates the core capital problem but leaves CET1 capital unchanged and doesn't allow for outside capital raises of new common shares when those new shares would be buried behind a mountain of seniors. The seniors being cancelled or converted to common allows outside common share investors to at least rank on par with UST.

 

The whole point of private capital raises, and recap/release in general, is to place private capital in front of UST's backstop. Handwaving the seniors into compliance with capital definitions doesn't accomplish that goal at all. One problem Calabria had with Watt's rule is that it allowed too many prefs to count towards capital (which is why Calabria put in CET1 requirements), and Susan Wachter, a candidate to replace Calabria once Biden can fire him, said "While the GSEs are now less risky, the lack of equity capital to absorb losses leaves taxpayers still exposed to credit risk." in her June 2019 written testimony to the Senate Banking Committee. I can't see her doing this handwave, and if Zandi is the next FHFA director all GSE shareholders are basically screwed anyway.

https://www.banking.senate.gov/imo/media/doc/Wachter%20Testimony%206-25-19.%20PDF.pdf

 

First on the capital.. the reason it's an economic fiction is to consider how the exact same economic scenario has different results on capital.  Scenario 1:  status quo.  Fannie earns  $5B.  Retained earnings up by $5B, sr liq pref up by $5B but no adjustment for that on the balance sheet.  Under HERA, capital is up by $5B.  Scenario 2:  Fannie sells $5B of sr pfd.  It gets the $5B but now there is a $5B higher liquidation preference on the balance sheet.  Under HERA, zero capital improvement.  Same $5B into the company.  Same $5B higher liquidation preference.  But only one form is counted as capital under HERA.  That's why it's something of a fiction.

 

I don't understand Scenario 2 here. How can Fannie sell more senior pref shares?

[WB_fan82]

On Scenario 2:  It doesn't matter whether they can't or don't.  The point is to show how two economically equivalent things are accounted for differently.

 

On the takings liability:  Imagine sr pfd conversion is done pre Collins.  Public shareholders go from 20% to 1% ownership.  And then Collins APA is a win.  $100B++ back into the companies.  Instant lawsuit, because the common holder share of that went from 20% to 1%.  The govt basically took the fruit of the lawsuit away.  You are limiting your analysis of damages to some assumption of the change in stock price, but that is not correct.  Value is not confined to stock prices, and the courts are well aware of that.  Look at how the DE courts have awarded damages in excess of merger prices during appraisal proceedings, for example.  It's complicated and messy.

 

I'd say the whole point of private capital raises isn't to protect the taxpayer but rather to exit from c-ship.  That's all Calabria cares about.  He doesn't care about "protecting the taxpayer", or minimizing dilution, or maximizing GSE earnings power or really anything except insofar as it's a box to check to accomplish his primary objective of exiting c-ship.  Because he's the rare person who has strong conviction in following the statute.

 

 

 

 

 

[COBFInfinity]

On Scenario 2:  It doesn't matter whether they can't or don't.  The point is to show how two economically equivalent things are accounted for differently.

 

On the takings liability:  Imagine sr pfd conversion is done pre Collins.  Public shareholders go from 20% to 1% ownership.  And then Collins APA is a win.  $100B++ back into the companies.  Instant lawsuit, because the common holder share of that went from 20% to 1%.  The govt basically took the fruit of the lawsuit away.  You are limiting your analysis of damages to some assumption of the change in stock price, but that is not correct.  Value is not confined to stock prices, and the courts are well aware of that.  Look at how the DE courts have awarded damages in excess of merger prices during appraisal proceedings, for example.  It's complicated and messy.

 

I'd say the whole point of private capital raises isn't to protect the taxpayer but rather to exit from c-ship.  That's all Calabria cares about.  He doesn't care about "protecting the taxpayer", or minimizing dilution, or maximizing GSE earnings power or really anything except insofar as it's a box to check to accomplish his primary objective of exiting c-ship.  Because he's the rare person who has strong conviction in following the statute.

 

Simple: Sr Pfd can't be converted to common (if that's even being considered) unless all litigation is resolved. End of litigation is the first step in all of this.

[Midas79]

On Scenario 2:  It doesn't matter whether they can't or don't.  The point is to show how two economically equivalent things are accounted for differently.

 

On the takings liability:  Imagine sr pfd conversion is done pre Collins.  Public shareholders go from 20% to 1% ownership.  And then Collins APA is a win.  $100B++ back into the companies.  Instant lawsuit, because the common holder share of that went from 20% to 1%.  The govt basically took the fruit of the lawsuit away.  You are limiting your analysis of damages to some assumption of the change in stock price, but that is not correct.  Value is not confined to stock prices, and the courts are well aware of that.  Look at how the DE courts have awarded damages in excess of merger prices during appraisal proceedings, for example.  It's complicated and messy.

 

I'd say the whole point of private capital raises isn't to protect the taxpayer but rather to exit from c-ship.  That's all Calabria cares about.  He doesn't care about "protecting the taxpayer", or minimizing dilution, or maximizing GSE earnings power or really anything except insofar as it's a box to check to accomplish his primary objective of exiting c-ship.  Because he's the rare person who has strong conviction in following the statute.

 

[*]All Scenario 2 does is show that the seniors don't count towards core capital. So I suppose I just disagree with your overall point that the earnings FnF retain from here are fictional capital.

[*]The purpose of converting the seniors is as part of a settlement for all >$5B lawsuits; converting rather than cancelling the seniors allows UST to get something in return for them. In fact, I don't think UST is allowed to just give up the seniors voluntarily for no return consideration; when the September 2019 letter agreement had the 1:1 senior pref liquidation preference increase Calabria said that things had to be done that way. In that case this hypothetical $125B payment would never happen, meaning no later increase in value upon which to base the takings claim.

[*]Tying the senior pref conversion with lawsuit settlement also prevents claims of higher values in the counterfactual universe because without lawsuit settlement the prices can easily be argued to have been around what they are now.

[*]A final Collins APA win is years and years away anyway. If SCOTUS upholds the Fifth Circuit's ruling that Atlas erred in dismissing the case based on 4617(f) then the case goes back to Judge Atlas's court, where she would do discovery, depositions, conduct a trial, and render a verdict. Then that verdict would be appealed, en banc panel requested, petition for cert to SCOTUS, the whole works. I think that's around a 3-year process, and there is no guarantee at any point that UST would actually have to send back that money. Just getting the SCOTUS remand should motivate UST to settle anyway because they clearly want to settle/kill all cases with a contingent liability >$5B.

[*]Any lawsuit over a senior pref conversion would be a Fifth Amendment takings case in the USCFC, and the citations Judge Wheeler gave specifically cover takings cases. Do you think these DE cases you refer to would have precedential power over the cases in those citations? Personally, I doubt it.

[*]If your reasoning of "instant lawsuit" was correct then there would also be instant lawsuits when the warrants are exercised. Going from 100% to 20% is more than 4 times the amount of damages of going from 20% to 1% after all. But if UST feared any lawsuit over the warrants they certainly wouldn't have insisted on exercising the warrants in full before any outside capital can be raised. Yet another reason I think UST has nothing to fear from lawsuits over a senior pref conversion.

[*]UST still (unfortunately) has veto power over just about everything regarding exit from cship, and they are the ones who care about protecting the taxpayer. Calabria just waving his hands and saying that the seniors now count towards core capital doesn't fulfill the 3% CET1 exit requirement that he himself agreed to and now can't undo without Yellen's help. Wachter can't change that unilaterally, and evidenced by her testimony she wouldn't do it anyway.

[Guest cherzeca]

"A final Collins APA win is years and years away anyway. If SCOTUS upholds the Fifth Circuit's ruling that Atlas erred in dismissing the case based on 4617(f) then the case goes back to Judge Atlas's court, where she would do discovery, depositions, conduct a trial, and render a verdict. Then that verdict would be appealed, en banc panel requested, petition for cert to SCOTUS, the whole works. I think that's around a 3-year process, and there is no guarantee at any point that UST would actually have to send back that money. Just getting the SCOTUS remand should motivate UST to settle anyway because they clearly want to settle/kill all cases with a contingent liability >$5B."

 

disagree with your assessment of timing.  discovery already done in Fairholme, and it is available to Ps in Collins. could be trial, could be summary judgment motion which is quicker than trial, but it should be able to be done by end of 2021. now, the fed district court judge (could be atlas, but may be reassigned) could go rogue, but if the law is confirmed by scotus as imposing on conservator a duty to make GSEs safe and sound, hard to see how the NWS could be approved given the testimony elicited in Fairholme discovery. applying facts to law is reviewable, but any appeal could be relatively simply decided, since the law will have been decided by scotus.

 

and it is hard for me to see how the const claim is not decided by scotus in favor of Ps, notwithstanding the hypothetical posed re acting D in oral arg. this would speed things up as compared to APA claim.

[WB_fan82]

There are several ways Ps lose const case...

 

1.  SC takes the "Significant executive power" aspect of Seila and reads HERA and realizes that FHFA doesn't really have much executive power.  It can't bring cases against individuals or private entities.  As such, the removal restrictions would be ok in this case and the agency is constitutional.

 

2.  SC admits FHFA wields significant executive power, but then defines "for cause" as broadly, i.e. any cause.  As you probably know, that hasn't really been ever defined.  A broad definition could include "b/c of policy disagreements w/ the President", in which case the removal restriction isn't very restrictive.  In contrast to Seila, where the removal was limited to specific causes.

 

3.  SC admits FHFA is unconst and the removal restrictions are too broad, but rules that the acting director was removeable and therefore deny retroactive relief.  This would have the benefit of clarifying how to read statutes without specificity on removals, which will be a recurring problem (see what just happened with the NLRB gen counsel)

 

Seila was 5-4.  All 3 of the above offer a form of "middle road" approach to this very big issue, and 2 of the 6 wanting to take any of those options means Collins loses.

 

[investorG]

There are several ways Ps lose const case...

 

1.  SC takes the "Significant executive power" aspect of Seila and reads HERA and realizes that FHFA doesn't really have much executive power.  It can't bring cases against individuals or private entities.  As such, the removal restrictions would be ok in this case and the agency is constitutional.

 

2.  SC admits FHFA wields significant executive power, but then defines "for cause" as broadly, i.e. any cause.  As you probably know, that hasn't really been ever defined.  A broad definition could include "b/c of policy disagreements w/ the President", in which case the removal restriction isn't very restrictive.  In contrast to Seila, where the removal was limited to specific causes.

 

3.  SC admits FHFA is unconst and the removal restrictions are too broad, but rules that the acting director was removeable and therefore deny retroactive relief.  This would have the benefit of clarifying how to read statutes without specificity on removals, which will be a recurring problem (see what just happened with the NLRB gen counsel)

 

Seila was 5-4.  All 3 of the above offer a form of "middle road" approach to this very big issue, and 2 of the 6 wanting to take any of those options means Collins loses.

 

2 would be a logistical disaster, doubt they go this route.

 

agree on 1 and 3.  most people assume 3 but I wonder if 1 isn't rising in odds (despite the oral arguments) after the SC sees the election / letter agreement.

 

I asked this before but what are you rooting for, 1 or 3, as it relates to our prospects?

[typicalvalue]

Calabria speaks today if i'm not confused right?

[Guest cherzeca]

Seila was 5-4 with RBG. having ACB instead alters the numbers if you are counting numbers.

FHFA can bring enforcement actions, just like CFPB. only Sotomayer raised what she thought was a relevant distinction between FHFA and CFPB for purposes of removal standard, and Alito very convincingly shot her down when it was his turn to talk.

the acting D is a relevant distinction between Seila and Collins. however, there is no statutory language in HERA that would indicate that an acting D of FHFA was removable at will. 

the other relevant distinction between Seila and Collins is that Seila concerned a stupid civil investigated demand for a one man law firm, and Collins involves billions of dollars...but even this distinction, which likely gives justices pause, was clarified by ACB' questioning, getting Thompson to point out that not money would change hands with respect to P's prayer for relief.

[typicalvalue]

Capwelth Tim Pagliara GSE update