Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
When I heard Thompson speculate on the reason for increasing the liquidation preference on the SPS (for leverage and/or further diluting commons greater than 79.9%), it was like he was reading my mind. I’m sure you got a kick out of it too.
To respond to someone else’s previous comment about us all be being in the same boat…we aren’t. As Thompson said, conversion of the SPS dilutes commons, not JPS.
We are in 3 boats. The lead boat is Treasury and it’s the only boat with a steering wheel. The second boat in line are the JPS. If Treasury converts, then JPS is the lead boat. The commons are dragging up the rear in the third boat. 79.9% of their boat is occupied by Treasury and if Treasury so decides, they may take up more room up to 99+%.
The hearing is over…still no comments about Thompson talking about the increase in liquidation preference could mean more than 79.9% dilution. And Thompson talking about JPS not being diluted. IIRC, there are 3-4 posters that echo Thompson’s argument.
It’s the increase in liquidation preference of the SPS
Realistically they may convert at 500 commons for 1 $25 JPS. JPS’s contracts are their friends.
Wow! You think the UST would go that far?
There's nothing wrong with referencing the footnote. Just remember, Treasury may (with FHFA's consent) and can convert some of the SPS to common. And the $14B you point out is $14B they can take 99% of if the numbers work in their favor....especially given the mandatory liquidation preference pay down provision in the SPS contract. EV matters.
Yes, I really believe this, because the CBO believes this. Check the paper. Any scenario where capital threshold can be reached has JPS at $35B.
But if you really wanted to go there, yes, the government can do whatever it wants. They can take your house and your dog if they want. They just have to provide just compensation as per the fifth amendment.
If Treasury and FHFA conspire to liquidate the JPS, all they're doing is making our contract claims ripe by making an anticipatory beach an actual breach, and they'll pay us for takings in court.
the reason would be because it maximizes the government's valuation of its equity.
Just speculating, but I think Treasury wants a perpetual dividend in exchange for an explicit backstop agreement. And Treasury holds all the cards....if they don't agree to write down the liquidation preference then I doubt there would be much left in terms of value for JPS or Commons.....and the litigation can't be mooted....thus, no exit.
Any explicit backstop would require legislation.
You're going to be in for quite a surprise.
Not as far fetched as most believe.
Treasury listed multiple options, not just one: Quote:
- Eliminating all of seniors
- Eliminating a portion of seniors
- Exchanging all of seniors for commons
- Exchanging a portion of seniors for commons
- OR exchanging for OTHER interests
The other interests is what intrigues me.
https://home.treasury.gov/system/files/136/BlueprintonNextStepsforGSEReform.pdf
Set Commitment Fee for Ongoing Government Support: Treasury supports legislative
reform that authorizes an explicit, full faith and credit federal guarantee for the GSEs’
mortgage-backed securities. Taxpayers should be compensated for this support consistent
with the pricing for guarantees of similar risk. Today, taxpayers support the GSEs through
$254 billion of remaining funding commitments under the PSPAs. Under the PSPA changes
announced today, to compensate taxpayers for this support, Treasury and FHFA will
determine and impose a periodic commitment fee once the GSEs have retained capital up to
their regulatory capital requirements under FHFA’s new framework.
Fundamentally... the PSPAs are a line of credit. Its not the same as how the JPS functions.
Here they are hinting at what treasury WANTS. They want a periodic committment fee for an explicit guarantee. Just to remind everyone of historical context. There has always been an implicit not explicit guarantee.
- If the PSPAs are vanquished from options 1 through 4 from above, there would be no periodic commitment fee.
- The periodic commitment fee comes as an exchange for the undrawn remaining funding commitment of $254B from the PSPAs.
If all of the PSPAs are converted to commons, the funding commitment would disappear.
The same is true if the PSPAs are simply just 'eliminated'.
Treasury will want to maintain that funding commitment in exchange for a periodic quarterly fee. That is where I'll be placing my chips.
Hey FFFiction, go waste someone else's time.
This all started with your proclamation that the warrants were SENIOR to the JPS. Which is just ignorant.
Then you double-downed with bankruptcy references...the crown jewel being that judges appoint creditor's committees.
Which of course they don't. That function is within the jurisdiction of the US Trustee.
So go marvel someone else with your lack of knowledge of priority schemes and bankruptcy.
I am not digging myself out of anything. I don't need to know about your lack of expertise in bankruptcies. You said "EVERYBODY challenges a violation of the APR if it is not by agreement." That is plain false and I provided an example already.
Since you believe you are an expert in bankruptcies show me an example of instances in which warrant agreements for common were in the same class as actual common in a reorg or liquidation. Show me the confirmation plan and validate that a warrant agreement must always be on equal footing as actual common stock.
Are warrants really "pari-passu" with common stock?
The warrants are an agreement between treasury and the gses but they have not been exercised. So in a bankruptcy is it really true that an agreement that has not been exercised ranks on the same footing as established common shares?
I don't know but I would say the warrants would be in a different liquidation class than the common shares.
But I do know that you are wrong that a US trustee is required to be a party in a bankruptcy proceeding.
You've already proved to everyone you don't even know the basics of the capital structure so no need to make the point twice.
That's not quite right...
JPS are under governments seniors AND warrants.
I'm very well versed between commons and prefs. I've been in this closer to 15 years and have heard it all, alot of doom and gloom - yet, here we are. Prefs currently sit at the bottom of the barrel with commons, so no one has any point.
My assumptions are based on conservatorship definition, while others here point to chapter 11 reorg. Which it is not. A reorg can happen under both terminologies to facilitate different outcomes. Neither dictates or has to even resemble the other if you look at the differences between conservatorship or a chapter 11. Those here saying the same are risking their own money thankfully. Lol
The warrants must be challenged BEFORE the government exercises them. Otherwise, the holders of commons are only entitled to damages corresponding to the resulting loss in share price. And if the commons should rise in blind euphoria afterwards, there will be no compensation at all - even if the rally is a dead cat bounce and commons are significantly lower two weeks later.
That's true, but if your legacy commons are worth 10 cents, a 2X upside doesn't really mean much.
1. Enterprise Value. 2. Priority. 3 Contracts. 4. Ability to moot $33B liability with recap & release.
Gary Hindes only referenced the government being entitled to the 79.9% via the warrants, nothing re: the senior pfds. Although in the past (before the SCOTUS ruling), he argued to write it down.
Sounds like an intelligent guy.
So what you are saying is that some government swamp rats said the elections were A-okay...and you took what they said as gospel.
Yet you disagree with the same type of swamp rats when it comes to the GSEs.
Maybe you ought to use some common sense. Big leads at midnight...shut down for the night...magically behind at 6 in the morning. No need to dive into this...sheep gonna sheep.
I can not agree
Those who monitor - the DJT DOJ - BARR ... the DJT Head of Vote protection on the web ... 60 courts ... tell us there was not a one direction spoil of the vote at any size near large enough to change outcome
DJT did not attend the innaugaration of the new PRES - first in my life time
Did he leave - of course he did -- but he repeats the BIG LIE
re math - it tells us there must be errors in a process (just about any process) as huge as a national election
But that is true of every election and no other loser has done what DJ has done
Think how close Nixon V Kennedy was and Nixon yielded (even if he really had a chance to challenge the late Chicago vote)
Think Gore v Bush - came down to can votes continue to be counted or need to be stopped as less than 1,000 votes separated the winner and loser of the whole shooting match and Gore yielded
Both conceeded defeat and said their opponent won
DJT left the building but has NEVER said he lost and has never congratulated the winner ---- which IMO is insanely ugly and cuts the roots of a popular vote democracy
Just because you don't like my answer doesn't mean you get to twist and put words in my mouth.
You asked why an organic re-cap is a fairy tale and I explained. Then you reply like were weren't talking about an organic re-cap. If you want to do this (create your own answer), then don't ask questions.
75 million capital raise is not enough to meet the capital buffer. So all your mathematical scenarios are void ab initio. No need to 'walk through' another fairy tale.
As I clearly stated, my take on the government's liability is tied to a release and re-cap. If they don't release, then that's a different answer. But as far as takings on commons, the answer is the same. $2B or less, of which the lawyers will get 35-40%. Do the math on that one.
Occam's Razor still applies. Dilution.
Furthermore, do you really think new money will invest in this at the percentages you stated if treasury is taking 25% of the profits? That's like having a perpetual 1/4 NWS. Not happening.
As to #3, because core capital is negative it's a fairy tale to think they can organically recap with retained earnings. Kthomp19 put together a nifty spreadsheet on this...because core capital is negative and the assets keep growing, and the regulatory requirement is a % of assets, it's damn near impossible to close the gap.
See:https://investorshub.advfn.com/boards/read_msg.aspx?message_id=166950648
I made one minor change in the spreadsheet: changing the cap req from 2.5% to 3%, leaving everything else the same.
Guess when FnF hit that cap req? The answer might surprise you: it's never.
You can play around with the assumptions, like a higher earnings base, higher earnings growth rate, lower asset base growth rate, etc. But the above chart shows how precarious it all is.
Hitting any reasonable regulatory capital requirement (whether it's 2.5% or 3%) means the seniors must go, whether it's via cancellation, conversion to common, or some combination of those.
I sort of seeing it like they have a pie of ~$100b to play with, whether it all comes from warrants, senior pfds, or combo of the 2 what's it matter for them?
Pretty damn simple. The company issues and sells new stock via a pre-arranged backstop to the banks and brokers leading the recap. Treasury receives cash instead of shares but new shares take the place of the SPS.
This is a conversion of the SPS to new shares....diluting legacy shareholders. Just because Treasury isn't getting the shares doesn't mean new shares can't be issued and a conversion can't take place.
And anything can be done with an amendment if they don't want to be cashed out.
You have more rights in bankruptcy. Honestly.
Let me help you with your next book. When this is all said and done, it will look very much like a common bankruptcy re-org. Time after time, common shareholders believe their shares hold value (and some do) only to be crushed at the very end and receive nothing. Reason being is because common shareholders have virtually no power in bankruptcies. Here, common shareholders have zero power, as those rights have been transferred to the government.
With every bankruptcy, there are always senior creditors or senior debt holders who are angling for newco debt and equity...and they get it with a conversion via the bankruptcy plan. So it benefits them to estimate the Enterprise Value of the newco at a lower value than it actually is. Since this is subjective and prone to fluctuation, judges presiding over bankruptcy plans tend to rule on the conservative side. From my experience, the true value of the average newco is usually around 20% higher than what the conversion is based upon. In other words, senior creditors/debt holders take value from those lower in priority (like common holders) and effectively eliminate the perceived (or real) equity. Of course commons may not be in the money at all but seniors will then just take value from juniors.
This is how it works in the real world. It all boils down to the estimated Enterprise Value of the newco.
So how will the government proceed?
If you are the government would you just deem your SPS paid in full, which would make JPS senior to the government's warrants(commons)? No, you wouldn't because leaving JPS in place reduces the value of the government's commons and increases the amount of new capital to be raised.
If you are the government with a liquidation preference that increases dollar for dollar with net worth, wouldn't you use that as leverage in an equity conversion? At the very least, wouldn't you use the full amount owed in a conversion to equity to maximize your profits thus squeezing legacy common holders (or JPS just as bondholders do in bankruptcy re-orgs)?
At the end of the day I expect the government to do whatever it takes to maximize their profits...through some crafty accounting, paperwork, and assignment of warrants with triggers tied to effective dates. In doing so, they will end up with around 90% of the newco value, with the other 10% going to JPS. Could be more than 90%, could be less, just depends on what Enterprise Value is concocted by Goldman Sachs/JP Morgan or whoever they use to backstop the recapitalization. I fully expect the government will craft this in such a manner that legacy shareholders remain intact, but that's not to say they won't have much value.
Just recently, Latam Airline's shares were trading around a dollar. When the bankruptcy plan was filed, shareholders were to be diluted 99.9%, yet remain intact. Same thing can happen here. Doesn't matter if it's right or wrong...it's just the way it is. Commons have no rights whatsoever.
Maybe the government is feeling generous and all-of-a-sudden found a conscience. I doubt it. But if they did...or better yet...someone on the inside stands to make a lot of money insider trading...then commons could be worth a few bucks.
But they didn't have a conscience when they implemented the NWS nor did they when they swapped the NWS for the liquidation preference 1 for 1 increase. They did that for a reason, imo. Leverage with conversion and valuation. Who's 'in the money' and who's not. This circles back to Enterprise Value, which is tied to cap buffer.
Some are optimists, some are pessimists, and some realists...I'm a realist.
Furthermore, all this talk of 'organically recapping' is a fairy tale. It would take 30 years (likely more) of retained capital since their portfolios keep growing. 5 bucks in 30 years probably won't be worth a dollar, assuming you haven't died of old age (for a lot of you).
Occam's razor = dilution ahead.
This being done wouldn’t cause any more lawsuits or strengthen the takings cases would it?
You lost a long time ago. Equity holders, i.e. common and preferred shareholders ARE NOT CREDITORS
There are 2 types of committees in bankruptcies. One, the creditor's committee which is mandatory by statute and created by the US Trustee (not the judge as you said). And two, an official equity committee which includes all preferred shareholders as well as common shareholders (not mandatory; by discretion only).
Class dismissed.
You contradicted yourself once again.
Then you go on to quote an actual law which is counter to your squabble.
There is a difference between "is always" and "may"
you can talk to members of this board til you are red in the face trying to educate them surrounding the facts of what is about to happen and --- you're just wasting your time.
that said i agree with you. i've come around to the spspa equitization scenario... recap/release ==> something like 95-99% dilution. you end up with commons at like $0.50, but to your point, in that scenario they could drive commons lower if they wanted to.
anyway; this is more of just a boilerplate restructuring than i originally thought.. bummer. i just don't think you put the nws back in the bag so to speak.
Totally FALSE. Are you not aware of a creditors committee? The Judge determines which classes get to be on a committee. Many times lower ranking shareholders will not get a seat at the table. APR is NOT always challenged but even if it is it is up to the Judges discretion. I refer you to the CBL case in which lower ranking preferred shareholders attempted to get on a committee but the judge declined the request. The APR was NOT challenged and the judge DENIED the creditors committee for preferreds BUT did allow commons to form a committee. How do you think commons which were lower ranked were able to get the same stake in newco as the preferred on an even split basis?
I am VERY aware of the absolute priority rule. I have been through many reorgs so don't tell me shit about that. You should know that in practice the absolute priority rule is not always used because nobody challenges it or there is an agreement within the senior parties.
Some stakeholders get NO say in the matter. Often times it is up to a creditors committee to determine the agreement. Sure there is a vote among classes.
You just said this is a conservatorship not a bankruptcy. So why would seniors have the authority to give anyone anything? They don't.
So now you admit that it is possible for senior securities to get a haircut while commons still have some value.
By the way it is NOT federal law. They senior holders don't want to go through the hassle of litigation and formal processes.
You are wrong. I have been through several reorgs. Commons in many cases get paid even though higher ranked securitiies such as preferred, capital trusts, unsecured bonds, secured bonds get a haircut.
Used it for toilet paper instead
Nobody said bankruptcy and conservatorship are the same, what was said is that recapitalizations for them are virtually the same.
The government can do virtually whatever they want to do with a stroke of the pen since on paper not only are they owed the full amount of the SPS, they own 79.9% of the commons.
Did anyone read the warrant agreement? The government can assign some or all of the warrants...to new investors via a re-ipo for example. Therefore the government can assign all or part of them AND convert all or part of the SPS into commons and still maintain less than 79.9% ownership (or any percentage they need for a re-cap to make sense for new investors).
While we can all speculate what a re-cap will entail, you can bet a conversion will be offered to JPS so that amount won't have to be raised to meet capital requirements and certainly some new PS will be issued.
It's a very real danger that 79.9% dilution could turn into 95%. This is just reality.
Says who? You? Legacy shareholders have no leverage. If the powers that be offered warrants, they would be so far out of the money they'd be worthless. NO new money will agree to be potentially diluted by old common holders. There will be a newco Enterprise Value marketed by Goldman Sachs and investors will demand a certain amount of equity for their investment.
Commons are at the bottom of the 'waterfall'. If JPS aren't made whole (or if they don't agree to take less than make whole), then commons won't get a damn thing.
The government has the seniors AND the warrants to just about make the numbers work out however in the hell they please. The JPS have contracts...commons don't. They must deal with JPS, commons not so much if any at all.