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Treasury is the de facto owner of the companies, having rights to (more than) all of FnF's net worth and income due to the liquidation and dividend preference of the senior preferred shares.
FHFA has total control over the companies as conservator.
Existing common shareholders do not own the companies at all. They have no economic rights and no voting rights. Nothing.
What they do own is the very bottom of the capital stack of companies that are in conservatorship and are hundreds of billions of dollars below their regulatory capital requirements. That does not at all entitle them to any specific percentage (let alone 100%) of the companies once they reach their capital requirements and exit conservatorship.
Under the terms of the ERCF, FnF will have to meet their full regulatory capital requirements (minimum and risk-based) plus have at least 25% of the applicable buffer to pay a dividend.
Page 47 of Fannie Mae's 2024 Q1 10-Q form shows that they have a shortfall of $156B to the Adjusted Total Capital requirement of $106B. 25% of the $82B buffer adds another $21B to give the total shortfall to being able to pay dividends: $177B.
$121B of that could be made up in an instant if Treasury decides to cancel the seniors or convert them to commons, but the rest would have to be made up with some form of de-risking, retaining more earnings, or a capital raise.
Fannie's shortfall to the Tier 1 leverage capital standard is $164B. Adding in 25% of the $24B buffer brings that shortfall to $170B. Again, Treasury can wipe out $121B of that shortfall in an instant but the other $49B would have to come from some combination of retained earnings and a capital raise. Those are the only two options given the definition of Tier 1 capital used in the ERCF.
1) There is a $110B deficit to the base Adjusted Total Capital requirement. Add on 25% of the $51B buffer and the total shortfall to paying dividends is $123B. $72B of that can be wiped out by Treasury but the other $51B shortfall would remain. 2) There is a $124B deficit to the base Tier 1 leverage capital requirement. Add 25% of the $11B buffer and the total shortfall to paying dividends is $127B. Once the $72B of balance sheet senior prefs are taken care of (by cancellation or conversion to common), Freddie would still have to retain and/or raise $55B more in order to start paying dividends.
FnF are not sending any cash to Treasury right now, and haven't in almost 5 years. They create net worth by retaining their earnings.
What Treasury gets in return is a dollar-for-dollar increase to the liquidation preference of the senior prefs, but that increase is off balance sheet. Net worth is a balance sheet calculation, so FnF retaining earnings (on balance sheet) while increasing the off balance sheet LP really does add to net worth.
Exactly. If he was ever going to file a lawsuit using his theories he would have done so by now.
If anyone else was ever going to, they would have too. There is nothing to be gained by waiting.
Talk is cheap. Inactions speak louder than words.
In a broader sense, the Litigation End Date in the January 2021 letter agreement is much closer than many realize. Every single case has so far been a total loss other than the implied covenant jury trial. Once all the appeals run out then the legal avenue to forcing Treasury to work towards FnF exiting conservatorship will be closed off, meaning the only way FnF will ever exit is when Treasury chooses to allow them to. As such, the disposition of the senior prefs would be done on Treasury's terms, which doesn't bode well at all for the legacy common.
The only claim that was at issue in the trial was the implied covenant of good faith and fair dealing, which only applies to the companies and the shareholders. The only reason FHFA was even involved in the case at all is because it made the decision to sign the NWS on behalf of the companies as conservator. That's also why Treasury was not a defendant and was not found to have done anything wrong.
No. The Supreme Court's Collins ruling in 2021 was specifically not allowed to be introduced into evidence. The only things the jury were allowed to see occurred up to and including the date of the signing of the NWS: August 17 2012.
They have those things even if they don't get the jury decision nullified.
Then he is still right because your reasoning in prior posts is flawed.
Wrong. The original NWS prevented FnF from building capital. The new agreements with the LP ratchet allow them to build capital. There is an enormous difference between the two regimes, which is why the Supreme Court denied prospective relief in the Collins case.
Wrong. The jury found that the Third Amendment to the SPSPAs violated the implied covenant of good faith and fair dealing. Not the entire SPSPAs.
That makes no sense. All injunctive relief cases have failed and no new ones have been filed. The implied covenant case sought no injunctive relief, so why would it read through to any future case that does? Injunctive relief is a very different ask than monetary relief, and injunctive relief would apply to Treasury who has successfully gotten every case against it dismissed so far.
The only way to make sure one a new case gets brought is to file it yourself. When are you going to do so? Bueller?
Which makes your continued discussion of possible future lawsuits that much more hypocritical. Are you really basing part of your common investment thesis on the idea that someone, someday, might bring a lawsuit and that said lawsuit would succeed in such a way as to make the common shares worth appreciably more? That is a very hard needle to thread with many potential points of failure, especially in light of the long string of court losses in the cases against Treasury.
No, this is wrong. The companies really are building capital. The LP ratchet is not a continuation of the 2012 NWS; this is exactly why the Supreme Court denied prospective relief in the Collins case.
The 2012 NWS already removed all shareholder economic rights in the future by making it impossible for FnF to ever build capital. Any amendment to that agreement which extends that extinguishment of value is not cause for future legal action because the extinguishment was already challenged in court. Suing specifically over the LP ratchet in the 2019 and 2021 letter agreements would amount to double jeopardy.
That makes no sense: the LP is not and never was repayable.
Sovereign immunity hasn't been the problem in the court cases so far. FHFA and Treasury have tried to get the NWS cases thrown out on those grounds and have failed. The cases ended up being dismissed for other reasons.
You're confusing simplicity with logical correctness. The only result of this shining of light was that the companies have to pay the shareholders a relatively small amount of money. FHFA was not successfully sued because FHFA itself faces no liability at all.
Interesting. Does that mean if a senior-to-common exchange happens you think it will be too late for anything to be done about it? The same logic would apply to warrant exercise.
If what you said is true, common shareholders should have filed a lawsuit seeking proactive injuctive relief against Treasury exercising the warrants a long time ago. What could they possibly be waiting for, given that that particular axe could fall at any moment?
The amount of money Treasury has already received in the past means nothing to them. They publicly value the senior prefs at around $220B as of the most recent Financial Report of the US Government (page 95), and that valuation only takes into account future cash flows, not the past (page 97).
The difference to Treasury between taking a 99.9/92/79.9/22/2% stake in FnF commons is the amount of writedown they would have to take on the books as a result. If they can only sell their stake for say $20B, they would have to take a $200B writedown of asset value, thereby increasing the national debt by that amount. It isn't a small number.
In my opinion it was an utterly stupid an incomprehensible opinion. But the Supreme Court denied cert so this opinion stands. It's a bitter pill to swallow but it's reality.
This was a shorter post so let's get back to what's important: estimating the future common share price. What is your expected value calculation? You said that you have run many scenarios so it shouldn't be difficult to post their output.
1) You are the hypocrite here because you are only calling me out. If you want to appear unbiased you would also call out the people with unbacked price targets. You clearly missed the implication of me pointing out the "$60 before conservatorship" thing; the fallacy there is acting as if that fact means anything at all. 2) Once again, my opinions are backed by far more facts and logic than others here. If you were even remotely capable of logically arguing against what I say then you would do so, rather than resorting to ad hominems and dodging the relevant questions. 3) It's funny that you bring up Treasury fearing lawsuits, because it's writing off the seniors that Treasury thought was illegal a few years ago. That's one of many things that have to go right in order for the commons to make appreciable money from here, let alone outperform the juniors.
For the umpteenth time you act as if you know what I am thinking or what my motivations are. Stop it. You're wrong on both counts and are not capable of being right, unless you're a mind reader yourself.
What I want are reasonable and detailed arguments as to why the commons could possibly go beyond $10 or so in the future even if FnF are recapped and released. I have yet to see one.
And you are incapable of answering basic questions about future lawsuits, even when prompted. It appears that my prediction of "For the record, I am expecting you to dodge these questions like you have every other time I asked." came true.
At least when I call others hypocrites it's actually correct.
A while back I decided to just check the board every few days, craft all the responses that I wanted, and then post them all at once. You trying to read something into that is strange, but you're heading down a blind alley.
This is rather amusing: it is a tacit admission on your part that you don't think I'm a paid basher.
Still, you seem utterly incapable of refuting or even addressing my arguments, instead resorting almost exclusively to passive-aggressive ad hominems. Climb the pyramid. We will all be better for it.
This "panel" idea leads me to believe that you have been reading ano's nonsense. The best advice I can give you with regards to ano is to not assume that anything he says is correct. I proved him wrong on so many things that he left this board and blocked me on Twitter.
FHFA and all of HERA exist exactly as they did before the ruling except that now the President can remove the FHFA director at will.
Yes. Turning the junior pref dividends back on would bring the trading prices of most of the series pretty close to stated value, usually called par.
Come again? Where on earth are these numbers coming from?
The two major signals from turning on the junior pref dividends would be that FHFA/Treasury are serious about getting FnF out of conservatorship and that the juniors wouldn't be exchanged for commons. The seniors could still be converted to commons and the warrants would still exist, so I don't see why the commons would run higher than maybe $6-7 on such news.
Correct. The Seeking Alpha article says "Recall too that John Paulson, whose fund holds Fannie common is a part of Trump's transition team" but that is not anything even approaching proof. Instead it is a misconception, likely based on the idea that Seeking Alpha sometimes auto-inserts the ticker FNMA when it detects the first instance of "Fannie Mae" in an article, similarly with FMCC and "Freddie Mac".
In the past some posters here have made erroneous claims that big investors owned commons when in fact it wasn't true. Even Seeking Alpha gets this wrong sometimes so it can't be used as proof.
That's only for Freddie. Fannie can hit the base leverage capital requirement in 2026 if the seniors are cancelled or converted to common.
It can be ignored until either company exits conservatorship. FHFA has decided not to classify FnF using any of HERA's required capital classifications while conservatorship lasts.
Regulations and law go hand in hand. Stop trying to act as if they are two entirely separate things.
The FHFA director, by regulation, can set a minimum capital requirement higher than what is mandated by 12 USC 4612(a). This is exactly what Calabria did when his ERCF made the base minimum capital requirement 2.5% of adjusted total assets rather than balance sheet assets. Thompson has kept this part of the ERCF in place.
The law, namely 12 USC 4614(a)(3)(A)(ii), requires that FHFA classify FnF as "significantly undercapitalized" if they do not meet the minimum capital requirement.
This is why I only talked about the minimum capital requirement. The FHFA director has more leeway by HERA to set the risk-based requirement, but the minimum requirement is more restrictive when it comes to FnF's capital classifications outside of conservatorship.
A risk-based capital requirement of 2.6% would be based on risk-adjusted assets, which is a far lesser number than balance sheet assets or adjusted total assets. The only thing setting the risk-based capital requirement this low would accomplish would be to make the minimum capital requirement always control because it would always be higher. In order for FnF to be classified as "adequately capitalized" outside of conservatorship, they must meet both the risk-based and minimum requirements.
Only with respect to the risk-based capital requirement, and since both the risk-based and minimum capital requirements need to be met, it wouldn't help.
The utter lack of any details as to what you would be suing over (you have said in the past that you think the LP ratchet itself is a cause for action), or where, or in what court, or what remedy you would seek, leads me to believe that you aren't serious about filing your own lawsuit.
You seem to be far more concerned with winning an argument on a technicality ("see, future lawsuits are possible!") than taking any action to back up your words, let alone go into detail on your estimates for the future common share price.
FHFA was not successfully sued. The companies were the defendants; FHFA was only brought it because it is the one who made the decision to sign the NWS. FHFA was not held financially liable for anything; it's the companies that will pay the damages.
Thus far, even including the implied covenant trial, nobody has successfully sued FHFA or Treasury with respect to the conservatorships or NWS.
You mean the companies will be sued again? Because that's the precedent.
But this is the most important part. Handicapping the probability of success and the timeline is a critical part of estimating the future price of the common shares, which is the primary purpose of this message board.
Quite the opposite: if FHFA can sign the NWS, a horrendously bad agreement that mocks attempts to think of something worse, and have the only outcome be that the companies pay less than $1B to shareholders, why would they ever fear the courts again?
Bad logic. The only "notice" that FHFA has been put on is that the companies will be slapped on the wrist. I can't rule out contract damages in the future, but I can certainly place a very low probability on them given what has already happened.
Here, I will put it bluntly: do you think a senior-to-common exchange negotiated by FHFA and Treasury would be challenged in court? What court, and what would the requested remedy be?
What I meant by "what need do they have for capital beyond the regulatory requirements" was to look at that from the perspective of the government as financial regulator, not from the perspective of the companies.
The very purpose of FnF having sufficient capital, as defined by law and regulation, is to prevent them from being a danger to the financial system. This is true of other financial institutions as well. From the government's point of view, if FnF have enough capital, where "enough" is defined by law and regulation, what purpose would there be for the companies to have more?
I think that's the justification for the past-full-capitalization cash sweep.
That doesn't mean that you can't provide any details at all regarding your hypothetical scenarios. It's that vagueness that hurts their credibility.
You're acting like the fact that you cannot give all the details means that you cannot give any of them. Pure logical fallacy.
I will again ask you directly: what are your answers to these five questions specifically regarding a claim over the LP ratchet, which you have repeatedly claimed could be a cause for action?
For the record, I am expecting you to dodge these questions like you have every other time I asked.
Wrong. You still seem to be operating under the idiotic idea that all predictions are equally useless.
Predictions made using facts and sound reasoning are good, even if they're not always right. Predictions made using fallacies and wishful thinking are bad, even if they're not always wrong. Gamblers and casinos provide a clear example. There is a reason the house always wins in the long run, even if they don't win every single bet.
My predictions are made based on the law, facts, mathematics, and logical reasoning. On the other hand you get posters here that throw out common share price targets based on either fallacies ("it traded at $60 before the conservatorships started!") or nothing at all, but you don't call them out on it. Why?
Don't fall for the false dichotomy logical fallacy here. If Treasury isn't trying to maximize its profit, that does not mean that they will necessarily write off the senior prefs.
True maximization of Treasury's profit would be a restart of the cash NWS plus exchanging all but $1B of the liquidation preference of the seniors for 99.99999% of FnF's commons. Even I don't think that's going to happen.
Treasury writing off the seniors would be a minimization of their profits from this point forward. Instead of asking if Treasury is in the business of maximizing its profits, we should ask whether they are in the business of minimizing their profits. I think the answer to that is a clear "no".
Once again AIG provides a good comparison. Treasury did not act in such a way as to maximize its profits (because it only took a 92% stake in the common), but that didn't stop them from exchanging their AIG preferred shares for commons rather than write those shares off.
The 79.9% thing has nothing to do with FHFA's control of Fannie and Freddie. That control is granted by HERA as conservator. FHFA would still have control even if Treasury had a 0% or 99.9% stake in FnF commons. Note also that Treasury currently does not own any common shares at all.
No. FHFA doesn't have any authority to write legislation, for example. FHFA's powers are limited to what Congress delegated to FHFA in HERA.
FHFA's authority as conservator is limited to what HERA allows.
The shocking decision from the Supreme Court was that HERA authorized FHFA to sign the NWS. But that doesn't make FHFA's authority "nearly unlimited", but instead "expansive" (the Court's own word, see page 13).
What you think needs to be done is merely your opinion. Since the government has not seen fit to do so before now, it is pretty unreasonable to expect them to do this in the future. In fact, the government specifically refuses to consolidate FnF's balance sheets onto the government's because conservatorship is temporary and not permanent control.
A totally baseless and illogical statement. FHFA's power is purely executive. The Supreme Court said "For these reasons, the FHFA clearly exercises executive power.", see page 30 of the opinion, and "No party contends the office of the FHFA Director is a nonexecutive office", see page 6 of Justice Thomas's dissent.
This isn't possible. The base minimum (leverage) capital requirement in the ERCF is 2.5% of adjusted total assets, which is about 105% of balance sheet assets for Fannie and 116% for Freddie, but the lowest possible minimum capital requirement in 12 USC 4612(a) is 2.5% of balance sheet assets.
Outside of conservatorship, i.e. once FHFA is forced to give FnF capital classifications as required by HERA, FnF will have to be classified as "significantly undercapitalized" by 12 USC 4614(a)(3)(A)(ii) if they don't meet the minimum capital requirement. That in turn gives FHFA many authorities over FnF outside of conservatorship that they wouldn't have if FnF had enough core capital, like hand-picking the boards of directors and dictating the amount and form of capital raises.
Note that none of this has anything to do with the DFAST stress test numbers.
While a sensible capital requirement for FnF is far lower than what HERA demands, the law is the law.
Leaving too much LP in place diminishes the economic value of the juniors and commons. Treasury will want their own common shares to have value. I think the LP will be reset to $1B, the original amount in the SPSPAs, after conversion or cancellation of the rest. There's a clause in the original SPSPAs that increases the LP dollar for dollar for every draw FnF take; that's what got the LP from $1B up to $193B. I expect that clause to stay, and it shouldn't spook new investors because the only way FnF will take a draw in the future is if all other shareholders get wiped out first.
Yes. What Treasury does with the seniors and warrants has to be decided before FnF can exit conservatorship. Not least because Treasury will need buyers for their common shares, however Treasury acquires them, and those buyers won't want either the warrants or more than $1B of the LP in front of them.
I don't see the need for this before conservatorship ends, and it will be moot afterwards.
I agree. Three judges have already said that FHFA has no fiduciary duty to shareholders, and no judge has said that they do.
Kind of. It's the companies that breached the implied covenant. FHFA was only pulled in as a defendant because it was FHFA that made the decision on behalf of the companies to sign the NWS.
What similar lawsuits? Give a specific example of something FHFA and Treasury might do in the future, what the claim(s) would be, who would be sued (if it's an implied covenant claim then it would only be the companies and FHFA, not Treasury), and what the plaintiffs would expect to recover. Be detailed.
Without such detail, there is no reason to believe that any vague threat of lawsuits should be taken seriously, either by FHFA and Treasury, or by any current/potential investor in FnF shares.
I wouldn't go that far. Fannie Mae is more than $100B below its regulatory capital requirements. Do you think Fannie Mae alone will get more than $100B in cash from the settlement?
Wrong. Each series of the junior preferred shares have a stated liquidation preference and that liquidation preference was spelled out when the shares were issued, which was before conservatorship started. Liquidation preference and bankruptcy are entirely separate things.
Even then, one of the writers of HERA said that FnF's conservatorships are administrative bankruptcies and the FHFA director plays the role of the administrative judge.
You are completely missing the point. The bankruptcy-equivalent event, i.e. conservatorship, already happened. Those of us who draw parallels between conservatorship and bankruptcy are not trying to warn or scare people about a future event. We are drawing an analogy to an event that happened 15+ years ago.
People who own or have bought FnF common shares after conservatorship started are just like people who bought post-bankruptcy shares of companies like JC Penney (JCPNQ) or Sears (SHLDQ). The stock symbols FNMA and FMCC are basically FNMQ and FREQ.
It's not the entry into bankruptcy that should be the concern because that already happened. It's the restructuring that is required for FnF to exit that should be the focus for FnF common shareholders.
It is absolutely the point. Treasury faces no liability from the implied covenant lawsuit over the NWS, and would face no liability from any future implied covenant lawsuit because Treasury is not a party to the shareholder contracts.
Notice that FHFA, even as a defendant in the implied covenant case, faces no liability at all. The entire jury award will be paid by the companies.
Now that the President has at-will authority to fire the FHFA director, this is far less relevant than it used to be.
But Treasury is not a party to the shareholder contracts, and therefore cannot violate the implied covenant.
You are mischaracterizing what I am arguing. The second sentence I wrote at the beginning of this post is my point. No implied covenant lawsuit in the future will ever get a single penny out of Treasury.
Look. All of the takings and APA claims cases have been dismissed. The government robbed the bank and got away with it. We live in a banana republic blah blah blah.
The only thing you can control here is how you invest your money. The sooner you start seeing things as they are, and not as you wish them to be, the sooner you will make better decisions.
If the new suit is an implied covenant suit, any damages will be paid by the companies, not FHFA or Treasury. And if it isn't, then the jury verdict has no precedential power at all.
Fannie and Freddie, the companies, have contracts with their shareholders. Inherent in these contracts is the implied covenant of good faith and fair dealing, which boiled down says that each side can expect the other to deal with them honestly and fairly.
The plaintiffs alleged that Fannie and Freddie, as directed by FHFA as their conservator, violated this implied covenant when they signed the NWS in August 2012.
The jury found in favor of the plaintiffs and ordered the companies to pay damages, a total of around $800M.
I haven't included every detail here, but my assertion that the entire trial and verdict had nothing to do with Treasury is still correct. The jury did not determine that Treasury did anything wrong at all. Treasury was not a defendant in the case.
Anyone who is saying that Treasury will be forced to do anything at all as a result of the jury verdict, including things like writing down the LP in full or in part, is just plain wrong.
That's a pretty enormous difference. The ability to capitalize is what the companies got in exchange for the LP ratchet.
But it doesn't spray poop on the companies' sidewalks at the same time the way the original NWS did. That's the fundamental difference between the original NWS and the LP ratchet: the former was horrible for both the companies and shareholders, while the latter is neutral to the companies (what need do they have for capital beyond the regulatory requirements?) while still being horrible for shareholders.
That's why I don't think any derivative suit regarding the LP ratchet has any chance of success.
You keep demanding facts but your own answers are very light on the details. You keep claiming that the LP ratchet is a cause for action, so answer the questions in light of that specific claim. The fact that your answers to #1-3 are so vague means the answers to #4-5 are meaningless.
Still, it's possible to rebut a few of them right off the bat.
3) "Damages from the profit sweep" are limited to the drop in share price; no other amount of damage to the shareholders can be quantified and the LP ratchet causes no harm to the companies. 4) The suit that succeeded was filed against the companies. The only reason FHFA was brought in as a defendant was that they are the ones who signed the NWS on behalf of the companies. No lawsuit against Treasury has succeeded so far. 5) That "first win" took about 10 years: the original suit was filed in 2013.
1) The only possible answer to this question is a prediction. How useful it is depends on the opinion of the reader. I expect the senior-to-common conversion to happen in conjunction or just prior to release from conservatorship. Under the current agreements, the numbers would make sense for Fannie in late 2025 or so (only a small capital raise needed), and maybe 2027 for Freddie. 2) The plan would be made by FHFA and Treasury. Who else would do it? Mark Calabria's book shows that a senior-to-common conversion was being considered, and that's what happened with AIG. Calabria also said recently that he thinks a cramdown is the best option, and there is a decent chance he becomes FHFA director again if Trump wins the election this fall. 3) When did I say anything about the juniors accepting a 40-50% haircut? They already turned down a 70% haircut in late 2020. 4) Treasury does not have a fiduciary duty to taxpayers. That should make their actions with AIG even more of a concern to FnF legacy common holders because that lack of duty didn't stop Treasury from maximizing the value of its equity position via a cramdown. 5) Obviously there can be no proof of that, only logical reasoning. FHFA and/or Treasury can get sued at any time and for any reason. But given the track record of the current lawsuits and the fact that the NWS was much more egregiously harmful to the companies than a cramdown would be, I don't see any reason for FHFA or Treasury to fear such lawsuits. When it specifically comes to a senior-to-common cramdown, Treasury clearly didn't fear lawsuits enough in late 2020 to avoid moving forward with that discussion, and if Calabria thought lawsuits were a problem he wouldn't have advocated for that not once (late 2020) but twice (last month's article linked to above).
Wrong. FHFA existed before the conservatorships started, and HERA gave FHFA the authority to be FnF's regulator outside of conservatorship.
But I have said that a few times already and it has turned into semantics. You clearly care far less about being factually correct than just ranting about FHFA, so you do you I guess.
You don't have to prophesize, but you do have to estimate. At least, if you want actionable numbers to see if owning the common at current prices is worthwhile.
Only a violation by the companies, and by extension FHFA who signed the NWS on the companies' behalf. Treasury never violated the implied covenant because they couldn't; the implied covenant is only between the companies and the shareholders.
Again, the jury verdict had NOTHING to do with Treasury. Treasury is neither a defendant in the case nor a party to the shareholder contracts whose implied covenant was found to have been violated.
I sure hope you don't allow this opinion to be an input in your scenarios that you run. It has no bearing at all on what will actually happen.