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Corporations pay estimated tax on a quarterly basis. If these estimated payments are in excess of what they owed at the end of the year, the difference between what they paid and what is owed becomes an asset. When tax policy changes, so does the value of these accounts. Because the GSE's are in conservatorship, the tax benefit that is owed to them won't be recognized until they are released. Currently, they have a deferred tax asset available to them of $33.5b. That amount was calculated based on a 32.8% effective tax rate. The book/cash difference is calculated as $33.5b divided by 32.8% = $102.13b.
If corporate taxes go to 15%, the new deferred tax asset will be $102.13b * 15% = $15.32b. The difference between the old asset value and the new produces an impairment charge of $18.18b. That means equity value will decrease by that amount.
Why this is bad for the GSE's is because an $18b write down on $6b of equity produces a deficit. Under the SPSPA agreement, any deficit has the potential of receivership, as well as a Treasury draw.
As the Bloomberg article mentions, Congress has a habit of not addressing issues until a catastrophic event occurs. It seems to be part of the remedy to releasing the GSE's involves them becoming insolvent, unfortunately.
https://www.bloomberg.com/news/articles/2017-04-21/fannie-freddie-overhaul-is-very-important-goal-mnuchin-says
"Previous legislative efforts have been difficult, in part because any changes could have large ramifications on mortgage rates and home ownership, and in part because there’s no immediate catalyst to make lawmakers focus on the issue."
The assets, and debt, you are referring to have always been carried as off-balance sheet accounts until FHFA changed the recognition rule. They are now stated on the books with the exception that they are labeled as "consolidated trust accounts". The footnotes further defines these assets and liabilities as owned by the mortgage originators. In bankruptcy, they are not the contractual obligation of the GSE's. These are simply the assets that allow g-fees to be raised, and it's debts are the instruments by which they raise them. The GSE's do not have an ownership claim to these underlying assets (mortgages), nor a contractual obligation to these debts (MBS). In the 10-k, Fannie Mae also provides their unconsolidated accounts which do not include those holdings. They make the distinction - on purpose. Unfortunately, and I see this time and time again, most investors do not read the 10-k. Hence, they are left to guessing based on one page articles they've read rather than reading 300 pages of financial data they don't understand.
As I've mentioned before, I invested because the tangible equity is worth more than the preferreds are selling as a whole, and because of the priority rule towards those claims.
My 15 post limit has been reached. Have a good day.
I haven't looked. I'm not a fan of Ackman. His return is sub-par and the only reason it's been sustained is because he created an offshore public company that provided him with a large amount of capital which offset the majority of his losses. Other than that, I don't follow him, and nearly didn't invest in the GSE's when I found out he was an investor. But, changed my mind when I realized he was in it for much different reasons than I was.
Watch the interview where those articles quote came from, and you'll know.
As of Dec. 31, 2016 the fair value of his common holdings was $272.16 mil., and $10.49 mil. for preferreds. Previous to Dec. 31, he held no preferreds. He also owns swaps with a fair value of $86.63 mil.
That hasn't been determined yet. Mulvaney advocates $75b. Tim Howard advocates a weighted amount based on FICO credit worthiness with a minimum of at least $60b. Fannie Mae is worth $160b on earnings power so $100b seems quite high to me.
I don't care. Isn't nearly as arrogant to me as someone giving bad information.
Most intelligent investors factor in the downside into their analysis before investing. Talking about the accountancy of a liquidation scenario isn't being an advocate for a liquidation. It's intelligently weighing the downside. Now, you've learned something today. Furthermore, basic math says the commons won't reach $20 if recap of $80b is required; which is the amount several professionals have been talking about for several years.
Nearly all of the true assets of Fannie are cash and cash equivalents, with the exception of their PPE which is de minimus in relation to their total value. Because it's being newly constructed, book value hasn't been impaired through depreciation to a significant extent. The primary components comprising equity is cash, tradable securities, and DTA. In liquidation, cash and equivalents are recovered 100%. Depending on several factors, property could be 100% but most often is less. In valuation, most analysts account for 80% of total property value.
I have no idea how they'll approach a wind down, if that's their intent. I don't see anything that leads me to believe a wind down would be the best route to take.
To answer your question about equity value, I've determined that current equity is $8.3b after accounting for consolidated trusts and restricted cash which is already committed towards the consolidated trusts. Removing a billion for Sr. Pfd priority leaves $7b for junior preferreds and nothing for the commons in a liquidation scenario. Preferreds as a whole are currently trading for much less than that right now. That's the attractiveness of them.
The current market price of Fannie Preferreds is $4.02b.
No, I haven't stated that nor alluded to that. You came up with that on your own.
Recievership is spun to the courts. No different than a chapter 7. And yes, warrants have a valid contract until the termination date which for the GSE's is several years out.
The big difference between GM, KMart and the GSE's (Fannie Mae primarily) is that GM & KMart were insolvent. They had no equity value. It's been years since I looked at them (I was invested in KMart at one time), but I believe they both had negative equity value.
If you remove the assets and liabilities that are held in trust, and prior to 2012 were off-balance sheet accounts, Fannie Mae's equity is in excess of $40b. Nobody seems to be talking about this, my guess is that very few understand it. But the reality is, the trust assets, in bankruptcy, are not Fannie Mae's obligations. That's specifically why the preferreds have an asset backing whereas the commons is much smaller. It takes $19 billion to make the preferreds whole. In a liquidation scenario, $40+ billion of equity will more than satisfy that for the preferreds. It won't for commons.
With that said, the forthcoming DTA impairment charge will decrease the true equity value of Fannie to around $20b. When/if that happens, there'll be no equity value left for the commons. Again, most don't and won't understand this but it's the #1 reason why preferred holders are holding preferreds.
Yeah, I know all those basic things. I wasn't talking about any of that. The gentleman stated 4 million shares were moved on Friday. I commented that it must be preferreds because only 2.8 million commons exchanged hands on Friday.
They were buying preferreds. I highly doubt commons will be more than $8 pps.
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Warrants can be issued at any price chosen. Options, which is similar to a warrant, are issued at drastically lower prices than the share price of stock. That's the entire point of them. Not sure where you're receiving your information, but it's most definitely incorrect.
I agree their accounting employed craftiness, but it wasn't illegal. The main component was a deferred tax asset impairment. The GAAP rule for a DTA impairment is very oblique.
From Fannie Mae's 10-K:
It is completely up to the company to determine their own reasonability standards. Because of that vague GAAP accounting rule, the government did not incriminate themselves by finding a crafty accounting mechanism to make the GSE's appear insolvent, regardless of how wrong you and I believe that was to do.
I can only speak for myself. It makes sense to me. The laws you live under, assuming you're a U.S. citizen, are granted to you by your government. I've seen the government do and get away with many things. I put nothing past them. In any event, I'm not invested in the GSE's because of the court cases. I'm invested in them for the same reasons John Paulson is. Read his annual shareholders letter and you'll see the court cases are the least of his concerns.
They've been pretty darn successful at doing precisely that for the last 4+ years. So far, I'd say it's obvious that they can.
Well, the obvious answer is: if a bill doesn't have a sponsor, it dies. If chaffetz leaves Congress in the next month, the bill won't have a sponsor because he's listed as the only one.
That's great, and been passed around a dozen times in the last 24 hours. One problem however, Chaffetz just announced that he's not running for re-election and could possibly step down this year after his well publicized town hall meeting in his home state a few days ago. Good possibility this bill that could have helped us is now dead.
https://www.usatoday.com/story/news/politics/onpolitics/2017/04/19/utahs-jason-chaffetz-wont-seek-re-election-2018/100645434/
And 100 other newspapers available online.
Warrants are a premium the Treasury paid $5.4b in excess of the $187.5b bailout. Can't think of a logical reason why they wouldn't want that money back.
I will a little later after work dies down.
You could be right.
If you review the unconsolidated section of the 10-k, you should probably get to an real equity value of about $45b.
My belief is that it would be a disruption to the capital markets and require a long term recovery.
Capital surplus isn't accounted towards shareholder equity. The liquidation value is typically discounted by 20% of shareholder equity in many cases. Because their assets are comprised mostly of tangible assets, the discount would probably be much less. To be safe, I'd calculate the LTV ratio of their assets as the bottom and give 100% value to their bonds. You can also completely discount the consolidated trust assets and debt as those are consolidated amounts that Fannie benefits from but is not obligated by.
Similar to glass-steagall?
I don't know whether he'll rewrite the section or abolish it. Will be interesting to see later today.
MBA Paper? Have no idea what you're talking about
It won't today. Trump's meeting has nothing to do with the GSE's.
Yes. It's in regards to the Orderly Liquidation Authority of the Dodd-Frank bill. It's been printed in every news paper I can think of for the last 18 hours.
Currently, yes. Even its capital requirement is defined by Basel III.