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A question for you rek:
You have said in the past that Trump must like the NWS payments because he keeps accepting them and hasn't instructed Mnuchin to stop them. Then you conclude that Trump will never stop the payments.
However, Trump just stopped the ACA payments even though he could have done so at any time from January until now. Before he stopped the payments your argument could have applied to Trump's stance on those, perhaps even stronger because a court actually had ruled that the payments stop. And yet Trump stopped those payments anyway.
What is the difference between the ACA and NWS payments in this regard?
I have a feeling that the conservatorship and NWS were at least in part retaliation for FnF throwing their weight around (through aggressive lobbying) leading up to 2008. With the lack of term limits in Congress we still have many of those who are dyed-in-the-wool anti-FnF to the bone, RNC resolutions (where applicable) be damned.
This is basically the board for all Fannie and Freddie common and preferreds. It would be silly to have a separate board for each preferred series and generally what's good for one is good for the other anyway.
I think most of those recent huge block trades in FMCKM were likely Fairholme downsizing due to redemptions. Fairholme had a little under 6M shares. I wouldn't assume that all the redemption-led selling is in the future.
I can't see any settlement happening that does not extinguish the senior preferreds, and those can't be dealt with until Jan 1. The earliest feasible settlement date is Jan 2 imo.
What we could (and hopefully do) see is an agreement between Mnuchin and Watt to suspend the 12/30/17 NWS payment that would then never be paid due to the settlement ending the NWS.
Of course some people are. They don't just want to make money, they want to be right, i.e. their class of investment has to outperform the other classes.
The purpose of the warrants was to drive the stock price down and make it look like the GSEs were in more financial trouble than they actually were.
As for the legality of exercising the warrants:
1) The government successfully exercised the AIG warrants and sold the shares, so there is precedent.
2) Any lawsuits would happen well after the government has already taken the money and spent it. Someone bringing a lawsuit would have to determine exactly what law was broken and be sure that the potential damages outweigh the time and money cost of litigation.
I don't like the warrants any more than anyone else on this board, but you can't invest based on what you think should happen, you invest based on what you think will happen. For me that means assuming a very high chance of the warrants being exercised.
This assumes that there is no conversion option offered. Moelis proposes 3 common shares for each $25 in stated value on the prefs. Right now they trade just under 2x on average (from 1.7x on the really illiquid ones to 2.2x on the liquid ones).
If the 3x conversion is offered, or even anything above 2x, the prefs are a better bet right now. This is also independent of whether the warrants get exercised.
Thank you for the discussion, the back and forth has helped.
I had brought this up in an older post but now it is buried.
I agree that all Watt can do on his own is run/reform the GSEs as he has been doing, and hold back some or all of a NWS dividend at the cost of increasing the senior preferred liquidation preference.
But why does he keep having FHFA defend the lawsuits? If he truly thinks the NWS is dangerous to the GSEs and wants it to end he could at least not fight to keep it in place.
I don't think that's true. Treasury uses DOJ lawyers, but as far as I can tell FHFA uses other firms.
Howard Cayne (FHFA's main lawyer in the Perry case) works for Arnold & Porter Kaye Scholer. So does Dirk Phillips in the Saxton case.
Whether the third amendment should stand is the questions before the courts right now. Until and unless they declare it illegal, or Mnuchin and Watt agree to undo the third amendment (or add a fourth), Watt has to abide by the terms of the NWS.
My question was more aimed at rek, who claims that Watt is doing everything that he legally can and doesn't deserve the criticism he is getting. I get that Watt can't just rip up the NWS and has to stick to its terms for now, but why does he keep defending the lawsuits?
So when you call on Watt to "end the NWS," what exactly do you mean? Just withhold payments and increase the senior preferred's liquidation preference, abiding by the terms of the third amendment? Or try to revert back to the terms of the original agreement?
Wrong. He can suspend the payments and increase Treasury's liquidation preference. He cannot just rip up the third amendment and refuse to abide by it, acting as if it doesn't exist.
Mel Watt can't end the NWS by himself, but why does he have FHFA's lawyers continue to defend the lawsuits if he hates it so much?
It appears that the dividend being paid was fully priced in.
One possibility is that there were some investors who expected the payment to go through and were hoping that the share price would drop. When it didn't they bought in as planned, just at a higher price than they wanted.
I wonder if part of the reason for the continued conservatorship is that the fines and damages from these lawsuits currently go to Treasury via the NWS, and nobody in government wants private shareholders to lay their hands on that money? The government has been getting much more than just FnF's profits via the NWS after all.
Mnuchin didn't demand payment, he said that he expects it. And why wouldn't he, given that payments have been made every quarter until now?
But it wasn't any sort of line-in-the-sand statement.