I'm posting this comment (below) from a poster on Tim Howards message board. I have great respect for Tim Howard. I'm not sure if Tim is in common or preferred, but what I want to say is if you are in common and are ready to just accept the Moelis plan you should have been in preferred to begin with. We have taken on a tremendous amount of risk owning common. For years Gov "had" been trying to kill us. We now have a new administration and things are looking better. I'm not here touting AJP or $1000 share price. There are more ways than 2 (Moelis or AJP) to skin a cat. I feel that I am owed a fair price for my stock. Whether it be $20 $40 or $80 or somewhere in between so be it. But $9 ain't going to cut it for me and many more like me. If they execute the warrants they will see plenty of lawsuits.
Dear Mr. Howard:
I so appreciate your writings on Fannie Mae, Freddie Mac, their conservatorships, and the ongoing mortgage finance reform efforts by government officials and industry operatives. Each time I come away from one of your articles, I have a better understanding of the competing forces involved in the future outcome of these two shareholder-owned enterprises.
As you and the rest of us like-minded folks know by now, the conservatorships of Fannie Mae and Freddie Mac were a convenient fraud perpetrated by the Washington-Wall Street elite using the 2008 financial crisis as the perfect curtain for their Wizard-of-Oz illusion. Neither company was undercapitalized at the time their boards were coerced into agreeing to the conservatorships. And, when the companies were finally placed into conservatorship in September 2008, not one single criterion required under the Housing and Economic Recovery Act of 2008 (“HERA”) that authorized the appointment of a conservator, was met – not one!
Moreover, the companies were forced by government officials to record unsupportable loan loss reserves (which, as expected, never materialized) that required Fannie Mae and Freddie Mac to borrow large and contractually unrepayable sums of money from the U.S. Treasury. This ultimately required them to borrow additional and unnecessary funds just to pay the egregious 10%/annum interest payments required under the original Senior Preferred Stock Purchase Agreements (“SPSPA”). Incredibly, they had to pay interest on money borrowed to pay interest – until the third amendment to the SPSPA changed all that. Now they hand over nearly all their earnings to the government – UNABATED.
According to everything I’ve read, the companies “borrowed” approximately $187.5 billion but have returned in excess of approximately $265 billion – a 77.5 billion-dollar undeserved windfall for the government, over and above the money received through the U.S. Treasury’s interest payment shenanigans.
Now, almost ten years later, we have the Moelis plan. I must confess that I haven’t read the details of the plan, but I am aware from reading the opening bullet points and executive summary that it not only permits the U.S. Treasury to keep ALL its ill-gotten gains obtained through these illegal quarterly earnings transfers, but it goes on to unbelievably encourage (NOT DISCOURAGE) the U.S. Treasury from exercising its warrants in order to seize another $75 to $100 billion dollars of shareholder money. If the Moelis plan is operationalized and the government is allowed to walk away with and/or squander (and I’ll be kind because I know it’s a lot more) approximately $177.5 billion (excess repayments + warrants) of shareholder equity, without regard to the common and preferred shareholders (the true owners of the two companies), then it’s going to be yet another FIFTH AMENDMENT TAKING – and make no mistake. It. Will. Be. Challenged.
But, setting aside the unconstitutional and grovel-like aspects of the Moelis plan for a moment (and I say “grovel-like” because this plan is the perfect and bigger-than-life example of the schoolboy having to hand over his lunch money to the bully, just so the bully will relinquish the schoolboy’s things) their blueprint calls for the two companies to build a combined core capital balance of approximately $155 billion, which will help to qualify the firms for release from conservatorship under HERA. For arguments sake, I’ll assume that figure is appropriate. But I see a better way of accomplishing this goal without infringing any further upon the constitutional rights of the shareholders – including (if not particularly) the current shareholders that purchased and, thus, assumed the rights, risks, and rewards of the common and preferred shares of Fannie Mae and Freddie Mac from willing and able sellers of the companies’ shares.
First, forensic accountants need to unwind the history of the borrowings and payments made between the companies and the U.S. Treasury since September 2008, in order to eliminate the payments of interest that included borrowings based on past borrowings of interest (since in-kind payments were allowed) and not principal borrowings (even though those are based on fraudulent loan loss reserves). I suspect this will produce approximately $30 billion in overpayments to be returned to the companies. Second, FHFA needs to declare the U.S. Treasury repaid at $157.5 billion (or less, if the Honorable Director Watt is truly honorable) and, thus, the senior preferred stock fully redeemed. Third, the $77.5 billion of obvious overpayments is to be returned to the companies. And fourth, the warrants are to be extinguished, since they are no longer needed for repayment of the debt owed to the U.S. Treasury and, more importantly, the American taxpayer.
If my math is correct, that leaves approximately $47.5 billion needed to complete the “capital build.” However, the companies need to include approximately $33.3 billion in the capital build figure to retire the preferred shares at full redemption value. That brings our remaining total needed for full recapitalization to $80.8 billion. So, how do we fill our 80.8 billion-dollar hole? Through retained earnings and the issuance of new preferred shares.
According to the Moelis posse, the companies will earn approximately $15 billion per year. By the end of fiscal 2020, they will have retained approximately $60 billion. Also, Moelis & Friends estimate that the two firms can raise $25 billion through a public offering of non-cumulative preferred stock. So, where does that leave us? With a cool $4.2 billion of extra capital and no need to issue any additional common shares beyond the original, undiluted amount displayed on their balance sheets.
Surprise, surprise, surprise. The preferred shareholders rightly receive full redemption value for their stock, and the common shareholders won’t have to share the future earnings of their two companies with any new owners. It’s rather amazing what can be accomplished when one points out that the king is not wearing any clothes.
A few additional thoughts. No plan will succeed to garner the support of private equity, like me, if the government continues to behave in such a flagrantly, mean-spirited manner as it has over the last ten years towards the loyal and steadfast shareholders of America’s mortgage finance giants, Fannie Mae and Freddie Mac. Moreover, the government is NOT in the business of business because of its overwhelming advantage (e.g., endless resources, perpetual existence, etc.) in the marketplace, and they have NO business trying to make a profit for the taxpayers. They need only recoup the costs of their public-interest efforts on behalf of the American taxpayers (of which I am one) – PERIOD!
Thank you for allowing me the opportunity to contribute to the discussion on The Economics of Reform, and thank you for everything you’re doing to save those companies.
Best regards,
Bryndon Fisher
AI
