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

[doughishere]

I think another question that we need to start discussing is what happens if there are losses and FNMA and FHLMC have to take on more loans from the gov't to support themselves? What if GAAP losses, instead of cash losses, force the gov't to infuse an even greater amount of money that subsequently can't be repaid?

 

I can understand that if the takings moves in our favor that there will be some sort of calculation as to what is owed and there are some that believe that the profits currently swept will be considered repayment of the senior preferred shares and their dividend, but what happens if we have to start drawing again. It's not immediately clear to me how that would be handled and considered by the court - because it would be the inevitable result of government action, but I don't think the court is in the business if saying "if not for the sweep, the firms would have been sufficiently capitalized" after saying that the sweep was used to repay the preferred.

 

Is anyone considering how that may change the calculation of the residual economic value or have any thoughts on that?

 

I really think that the money that has been swept past what the government has been owed past the original 2008 arrangement should be left on Fannie and Freddies balance sheets...If this happened I doubt we'd be having the same conversation.

[doughishere]

 

3:04 PMChris Herzeca

http://www.wsj.com/articles/why-fannie-mae-revival-hopes-are-withering-on-capitol-hill-1450384375?mod=djemheard_t

 

carney argues that jumpstart shows that congress agrees with treasury/fhfa that 3rd A is legal, and that is a big development, with negative portent for plaintiffs.

 

i think that is ludicrous.  plaintiffs claims in all cases does not involve the argument that congress disagrees with executive branch.  as if that was necessary for a court to find a violation of statute

 

argument is that 3rd A violates statute, and this is a decision made by courts. congress does not exercise judicial power.

 

3:19 PMChris Herzeca

my comment on WSJ:

 

This is, quite possibly, the stupidest article ever to grace the space of the WSJ.

 

 

 

With respect to all GSE litigation, the plaintiffs' claims are that the United States Treasury has improperly and illegally obtained a windfall of over $130 billion. 

 

 

 

Is it going to affect the outcome of these cases that a rider has been attached to a omnibus spending bill that implies that at least the proponents of that rider in Congress do not object to this United States Treasury theft, where the proceeds of this theft can be applied to pay for the Congressional spending pork contained in that very same omnibus bill?

 

 

 

carney is a fool.

 

 

Posted over on the Google boards

[Guest cherzeca]

I think another question that we need to start discussing is what happens if there are losses and FNMA and FHLMC have to take on more loans from the gov't to support themselves? What if GAAP losses, instead of cash losses, force the gov't to infuse an even greater amount of money that subsequently can't be repaid?

 

I can understand that if the takings moves in our favor that there will be some sort of calculation as to what is owed and there are some that believe that the profits currently swept will be considered repayment of the senior preferred shares and their dividend, but what happens if we have to start drawing again. It's not immediately clear to me how that would be handled and considered by the court - because it would be the inevitable result of government action, but I don't think the court is in the business if saying "if not for the sweep, the firms would have been sufficiently capitalized" after saying that the sweep was used to repay the preferred.

 

Is anyone considering how that may change the calculation of the residual economic value or have any thoughts on that?

 

@2cities

 

so let's say Plaintiffs win and senior pref recharacterized down about $130B, lets say to $50B.  now if treasury lends another $5B, then that post-verdict principal amount would be $55B. seems to me it's as simple as that.

 

but treasury looks at GSEs as a one way ATM, and with the credit line intact, isn't there credit support for continued GSE borrowing in the market to fund operations?  and in any event, the legal merits do not depend upon whether the GSEs needed, need or will need funding help.  am i addressing your issue?

[merkhet]

The passage of the omnibus bill (and part of Jump Start as a rider) makes it harder to recapitalize the GSEs... now we are waiting for news from the courts.

[merkhet]

http://valueplays.net/wp-content/uploads/Screen-Shot-2015-12-16-at-11.46.43-AM.png

 

Oddly enough, the bill says that "the Secretary may not sell, transfer, relinquish, liquidate, divest or otherwise dispose of any outstanding shares of senior preferred stock acquired pursuant to the Senior Preferred Stock Purchase agreement," but it says nothing about conversion? Is a conversion of the Government Preferred to common shares equivalent to "otherwise disposing" of the preferreds? Unclear. What if the government holds on to the converted shares until January 1, 2018?

 

//

 

In any case, my sense is that our best outcomes now are as follows:

 

(1) A win in the Court of Federal Claims (Sweeney's court)

 

If we win this case, the payment would be par ($25 or $50, depending on Series) with the possibility of some interest on top of the par amount. This is preferable now over the other situations because of the Jump Start provisions that might hamper a recap.

 

(2) A win in the Delaware court

 

If we win this case, there are two possibilities. (A) The amount that the GSEs have overpaid past the original 10% amount gets deposited into the GSEs or (B) the amount that the GSEs have overpaid past the original 10% amount gets applied to redemption of the Government Preferreds. While either situation is preferable to the current situation, it's difficult to tell what happens next. It's like the cookies are in the jar, but we can't really open it?

 

In situation (A), the GSEs will be well capitalized, but they will still have the Government Preferred sitting on the top of the cap structure taking a combined $18 billion off earnings. In situation (B), the GSEs will have very little capitalization but the amount that the Government Preferred takes off the top is significantly lower than before.

 

The main issue is that the Government Preferred was a good way to recapitalize the entities so that they could then be released. The Jump Start provision nixes that opportunity. I suppose in situation (B), they could find a way to recapitalize the company through the exercise of the 79.9% warrants they hold -- so situation (B) is probably preferable to situation (A). [The warrants would still exist in situation (A), but there's no point in using them to raise capital because then it would just sit there underneath the full amount of the Government Preferred.]

 

(3) A win in the Perry Appeal

 

Same as (2), but with the errant possibility that we might end up getting punted back to Lamberth's court for a re-ruling rather than getting a straight up answer from the appeals court.

[morningstar]

(1) A win in the Court of Federal Claims (Sweeney's court)

 

If we win this case, the payment would be par ($25 or $50, depending on Series) with the possibility of some interest on top of the par amount. This is preferable now over the other situations because of the Jump Start provisions that might hamper a recap.

 

 

You seem very confident in par as the outcome here - do you not worry at all about a Starr type outcome? i.e. judgement for the plaintiffs but determination that the amount of just compensation is far less than one might have desired. It's an appealing outcome for the judiciary b/c it avoids a huge and highly unpopular negative windfall for taxpayers while upholding all the basic principles at stake. I think its also easy enough to defend from a financial perspective. After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

[Luke 532]

After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

 

What was the meaningful carrot in the Third Amendment?

[merkhet]

(1) A win in the Court of Federal Claims (Sweeney's court)

 

If we win this case, the payment would be par ($25 or $50, depending on Series) with the possibility of some interest on top of the par amount. This is preferable now over the other situations because of the Jump Start provisions that might hamper a recap.

 

 

You seem very confident in par as the outcome here - do you not worry at all about a Starr type outcome? i.e. judgement for the plaintiffs but determination that the amount of just compensation is far less than one might have desired. It's an appealing outcome for the judiciary b/c it avoids a huge and highly unpopular negative windfall for taxpayers while upholding all the basic principles at stake. I think its also easy enough to defend from a financial perspective. After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

 

A little.

 

My understanding of the Starr case is that the decision was written this way because "but for" the government's money, AIG would have been a zero.

 

In this particular case, the argument seems to be that but for the change from 10% to all of the earnings, then Fannie & Freddie would have been a zero. However, the evidence doesn't prove that out. It shows instead that but for the change in terms, Fannie & Freddie would have been very profitable.

 

So I worry a little about that outcome but not a lot.

[Guest cherzeca]

good discussion.

 

@merkhet, you have summarized the lay of the land well.  clearly, a win in perry/hindes-jacobs is preferable than a win in ct/claims, but interestingly, there is a synergistic effect whereby discovery in fairholme is going to be incorporated into the appeal briefs in perry. so they are not entirely separate tracks for the moment.  discovery in fairholme is very pertinent to one of the bases of perry appeal, that govt produced an inadequate record which lamberth relied upon.

 

the give up in the NWS is no longer being able to charge a commitment fee, which treasury never actually did charge in the 4 or so years before NWS.  that commitment fee would have to be fair market value, so 40 or so bps on the unused portion of the commitment (might be why treasury increased commitment to $300B, anticipating this challenge to increase the amount of the give up).  sweeney might very well get into this analysis as morningstar points out, but then there is going to have to be a lot of discovery about how treasury/fhfa was motivated at the time of the NWS, and one wonders whether that discovery would prove treasury's point.  btw, starr's appeal brief is pretty impressive; i believe govt has until early february to respond.

 

@merkhet  i dont worry too much about what happens to GSEs after any victory in perry/hindes-jacobs, mainly because it is too difficult to predict, and because it seems to me that any ultimate path leads to a stock price very much above current price (and even my basis...:>)

[morningstar]

After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

 

What was the meaningful carrot in the Third Amendment?

 

The Periodic Commitment Fee was set at zero, basically for as long as the structure set up by the Third Amendment is in effect. Since the economic value of Treasury's commitment is extremely hard to measure, being so unlike any liquidity facility existing in the private market, you could have a huge range of views about what that is worth.

[Guest cherzeca]

After all the government did include a very meaningful carrot for the GSEs in the Third Amendment, and I don't see why a judge couldn't say that fair value was exchanged and therefore just compensation for the taking is a negligible amount.

 

What was the meaningful carrot in the Third Amendment?

 

The Periodic Commitment Fee was set at zero, basically for as long as the structure set up by the Third Amendment is in effect. Since the economic value of Treasury's commitment is extremely hard to measure, being so unlike any liquidity facility existing in the private market, you could have a huge range of views about what that is worth.

 

@morningstar

agreed. but remember that at the time of 3rd A, GSEs had turned profitable.  value of commitment fee at that time would have to take into account need for further capital.

 

as well, you omit to mention that the commitment fee was set at zero for the 4 years prior to 3rd A.  one argument that could be made was that the 10% rate was so high (>2x TARP rates to banks) that the value of the unused commitment was subsumed into rate.

 

lots of arguments can be made.  which is why, to my mind, the prospects for reversal in perry and judgment in hindes/jacobs are more interesting

[stevevri]

Here's a question... Couldn't Fannie and Freddie redeem the Senior preferred themselves? Obviously the sweep stops them from being able to do so but if that was stopped or reversed by a court or they won a settlement.

 

The jumpstart specifically says "Notwithstanding any other provision of law or any provision of the Senior Preferred Stock Purchase Agreement".

 

The Senior Preferred Stock Purchase Agreement obviously indicates they could pay the government back.

[hardincap]

What happens if every court decision turns against shareholders? Is it game over, a zero for the stock?

 

 

[Guest cherzeca]

What happens if every court decision turns against shareholders? Is it game over, a zero for the stock?

 

wallpaper

[merkhet]

Here's a question... Couldn't Fannie and Freddie redeem the Senior preferred themselves? Obviously the sweep stops them from being able to do so but if that was stopped or reversed by a court or they won a settlement.

 

The jumpstart specifically says "Notwithstanding any other provision of law or any provision of the Senior Preferred Stock Purchase Agreement".

 

The Senior Preferred Stock Purchase Agreement obviously indicates they could pay the government back.

 

It has been a while since I've checked the documents, but I'm pretty sure they didn't have provisions for repayment.

[merkhet]

Here's a collection of dates to watching in the three big cases.

 

Fairholme v. United States - Court of Federal Claims:

 

January 21, 2016 - Joint status report suggesting future proceedings

http://gselinks.com/Court_Filings/Fairholme/13-465-0240.pdf

 

Jacobs v. FHFA - District Court for the District of Delaware:

 

January 16, 2016 - Plaintiff's Response Brief

February 16, 2016 - Defendant's Motions to Dismiss will be fully briefed

http://gselinks.com/Court_Filings/Jacobs_Hindes/15-00708-0022.pdf

 

Perry v. Lew - Court of Appeals for the District Court of Columbia Circuit:

 

December 21, 2015 - Appellees' Brief(s)

February 2, 2016 - Appellants' Reply Brief(s)

February 16, 2016 - Deferred Appendix

March 8, 2016 - Final Briefs

http://gselinks.com/Court_Filings/Perry/14-5243-1583683.pdf

[Luke 532]

Sweeney granting Plaintiffs in Robinson (Kentucky) case access to Protected Information: http://gselinks.com/Court_Filings/Fairholme/13-465-0279.pdf

[twacowfca]

The Jumpstart GSE Act that's part of the omnibus spending agreement recently agreed between Democrats and Republicans in congress looks like the nail in the coffin that will keep the corpse of  F&F from rising from the dead to benefit private shareholders.

 

The key provision prohibits the administration from selling its preferred shares before 2018. Selling or exchanging the preferred shares would be a necessary part of a recapitalization that could benefit other shareholders.

 

But, that's not the worst of it.

 

The fact that congress now in the Jumpstart GSE Act specifically refers to the Government's 2012 amendment to the preferred stock agreements that swept all the profits of F&F to the US Treasury without the new act's reversing the sweep, is a huge negative for other shareholders.  That's because that new law about to be passed by congress is now interpreted to passively acquiesce to the sweep of the profits into the US Treasury.  That's a huge strike against the one remaining lawsuit by F&F shareholders still remaining before a court.

 

I hate to say it after my initial enthusiasm as the original poster that stimulated all the interest in F&F preferred, but chance of substantial recovery now seems to be a long shot, a very long shot, at least until 2018.

[Luke 532]

Merkhet, thanks for posting all those court dates.

 

Jacobs v. FHFA - District Court for the District of Delaware:

 

February 16, 2016 - Defendant's Motions to Dismiss will be fully briefed

http://gselinks.com/Court_Filings/Jacobs_Hindes/15-00708-0022.pdf

 

I'm also looking forward to Steele's written reply to each government argument (due January 16th) in the Delaware case.  Quotes from Steele on his conference call regarding his upcoming response:

 

“Let me ease any concerns… nothing in any of the briefs by the government could be considered a surprise or unexpected.  The arguments were very predictable.  Nothing we’ll have a hard time responding to.”

 

“The government set up a standard they must comply with and then they violate their own standard.  You’ll see this clearly in our response briefs.”

 

“We will dispute each and every claim the government made, there are no concessions to be made.”

 

[Luke 532]

Regarding the Jumpstart GSE Act, couldn't another law work around that just as quickly if the Administration realizes things aren't going their way in court (for example, jurisdiction granted by both Sweeney and Sleet) and they decide to settle?

[merkhet]

The Jumpstart GSE Act that's part of the omnibus spending agreement recently agreed between Democrats and Republicans in congress looks like the nail in the coffin that will keep the corpse of  F&F from rising from the dead to benefit private shareholders.

 

The key provision prohibits the administration from selling its preferred shares before 2018. Selling or exchanging the preferred shares would be a necessary part of a recapitalization that could benefit other shareholders.

 

But, that's not the worst of it.

 

The fact that congress now in the Jumpstart GSE Act specifically refers to the Government's 2012 amendment to the preferred stock agreements that swept all the profits of F&F to the US Treasury without the new act's reversing the sweep, is a huge negative for other shareholders.  That's because that new law about to be passed by congress is now interpreted to passively acquiesce to the sweep of the profits into the US Treasury.  That's a huge strike against the one remaining lawsuit by F&F shareholders still remaining before a court.

 

I hate to say it after my initial enthusiasm as the original poster that stimulated all the interest in F&F preferred, but chance of substantial recovery now seems to be a long shot, a very long shot, at least until 2018.

 

The inclusion of Jump Start language in the omnibus bill is definitely a negative, though I don't think that it goes as far as passive acquiescence to the NWS by Congress given that it was passed as a rider on a must-pass spending bill. Even assuming that it is passive acquiescence, that doesn't seem to affect the analysis of a Takings claim (Sweeney case) or the analysis of whether HERA has the power to rewrite parts of Delaware corporate law (Delaware case).

 

Also, what do you mean by one case? There are multiple cases before various courts right now.

[merkhet]

Merkhet, thanks for posting all those court dates.

 

Jacobs v. FHFA - District Court for the District of Delaware:

 

February 16, 2016 - Defendant's Motions to Dismiss will be fully briefed

http://gselinks.com/Court_Filings/Jacobs_Hindes/15-00708-0022.pdf

 

I'm also looking forward to Steele's written reply to each government argument (due January 16th) in the Delaware case.  Quotes from Steele on his conference call regarding his upcoming response:

 

“Let me ease any concerns… nothing in any of the briefs by the government could be considered a surprise or unexpected.  The arguments were very predictable.  Nothing we’ll have a hard time responding to.”

 

“The government set up a standard they must comply with and then they violate their own standard.  You’ll see this clearly in our response briefs.”

 

“We will dispute each and every claim the government made, there are no concessions to be made.”

 

Same. I think this is the easiest case for us to win.

 

It would set a particularly poor precedent for a senior preferred shareholder to be able to create an effectively "second tier of common stock" on top of the rest of the capital structure.

 

Edited my prior post to include the January date.

[Luke 532]

but chance of substantial recovery now seems to be a long shot, a very long shot, at least until 2018.

 

I understand your skepticism, but I believe the risk/reward of a substantial recovery is still heavily skewed towards preferred shareholders.  Take the upcoming court decisions, for example...

 

I dare to say that jurisdiction being granted is a very, very high likelihood in both Sweeney's court and Sleet's court.  In Sleet's case, I can't imagine the former Chief Justice of the Delaware Supreme Court (Steele) so grossly miscalculating a case in his own state to not warrant jurisdiction.  In Sweeney's case, she has said as much: "But I want the Plaintiffs to have — I mean, their day in court..."

 

I'm curious where the prefs would logically trade assuming jurisdiction is granted in both cases.  Certainly much higher than $3.40-ish on FNMAS, no?

 

Further, it seems like a high probability that Steele will win the Delaware case.

 

I wonder what a logical price for the prefs would be in the event we win jurisdiction in both cases and win a "NWS is illegal" verdict in Delaware.

[Eye4Valu]

It ain't over until it's over

[merkhet]

but chance of substantial recovery now seems to be a long shot, a very long shot, at least until 2018.

 

I understand your skepticism, but I believe the risk/reward of a substantial recovery is still heavily skewed towards preferred shareholders.  Take the upcoming court decisions, for example...

 

I dare to say that jurisdiction being granted is a very, very high likelihood in both Sweeney's court and Sleet's court.  In Sleet's case, I can't imagine the former Chief Justice of the Delaware Supreme Court (Steele) so grossly miscalculating a case in his own state to not warrant jurisdiction.  In Sweeney's case, she has said as much: "But I want the Plaintiffs to have — I mean, their day in court..."

 

I'm curious where the prefs would logically trade assuming jurisdiction is granted in both cases.  Certainly much higher than $3.40-ish on FNMAS, no?

 

Further, it seems like a high probability that Steele will win the Delaware case.

 

I wonder what a logical price for the prefs would be in the event we win jurisdiction in both cases and win a "NWS is illegal" verdict in Delaware.

 

As much as I agree with you on the prospects of the Delaware case, I'd be a little hesitant to use the highlighted reasoning. Never ask your barber whether you need a haircut. :)