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The only advantage JPS shares have over commons is if the GSEs are liquidated and that's not happening. JPS shares are limited at their PAR value and at this point are are 2.5xs under value. Commons really only have to hit 5 bucks to hit 2.5xs their value and most likely will be at $20 in the not too distant future.... JPS shares will be outperformed by commons by multiples in every scenario except liquidation
60 Days
Since HERA requires GSEs to submit a capital restoration plan 30 days after the Capital rule is finalized, and it also gives FHFA 30 days to act on or respond to those plans, it would seem that they would want The Capital Ryle to be submitted at least 60 days before January 20th, which would be next Friday, November 20th. That would start the ball rolling for the CRPs.
This assumes that they want this to all take place by January 20th.
Calabria also said he shareholders "won't get too much of a windfall."
Good Point
I was trying to keep is as simple and straightforward as possible, without getting too lost in the weeds. I did, however, attach the Collins Brief, which references those in more detail. Feel free to add those points if you utilize the letter. They certainly have merit.
If the GSEs are put back on the exchange, PSPAs released and cap rule done before any conversion done commons value will have dramatically risen while you are sitting and praying for a conversion
Congressional Letter
I finally had time to complete a template for a letter to my congressman. I post it here for any of you to use as you see fit. Feel free to modify and edit it to reflect your sentiments, and excuse any typos. I will be sending this via email to my congressman today, along with 1) Calabria's 2015 paper, 2) Tim Howard's Amicus Brief and 3) the Collins SCOTUS brief.
I will probably post this 2 more times today to make sure that those who check the board later get an opportunity to see it
Here is the Letter:
(Date)
The Honorable (Full Name)
(Room #) (Name) (Senate or House) Office Building
United States (Senate or House of Representatives)
Washington, DC (20510 for Senate; 20515 for House)
Congratulations for your recent re-election as representative for the _____ district of _______. My wife and I were happy to support you both during the primary and in the general election and we are grateful for your continued leadership in congress.
I write to you both as a citizen concerned about increasing government agency over-reach and also a shareholder of Fannie Mae. I am writing to ask that you encourage the FHFA and United States Treasury Department to quickly finalize their plans to release Fannie Mae and Freddie Mac from conservatorship. Some in the media have presented the issue of ending the Conservatorship of Fannie and Freddie as if it would result in big windfall profits for Hedge Funds and Wall street. This is a gross misrepresentation of facts. Even in my small circle of friends, I know at least 12 other shareholders who live in this district who share the same concerns I have.
• The Conservatorship of the Government Sponsored Enterprises (GSEs) was an example of unnecessary government agency over-reach
• The 2012 Amendment (3rd Amendment) to the Senior Preferred Stock Purchase (PSPA) violated the statutory role of FHFA as Conservator
• Courts are recognizing that the 3rd Amendment established a Net Worth Sweep (NWS) that is a violation of Constitutional protections against government seizure of private property with just compensation.
• Both the Director of FHFA and Secretary Mnuchin have called for an end to the NWS. Ending the NWS provides the most simple, just and practical way to finalize the FHFA’s plan to recapitalize and release the GSEs.
The Conservatorship of the Government Sponsored Enterprises (GSEs) was an example of unnecessary government agency over-reach
As you know, Fannie Mae and Freddie Mac were placed into conservatorship in 2008 for what was supposed to be a relatively short process of recapitalizing and rehabilitating these two important institutions. This Conservatorship has now extended over the past 12 years, inflicting billions of dollars of harm to the GSE’s and to their shareholders, not to mention leaving the American taxpayer in an extended position of credit risk as the primary backstop for the Enterprises in their critically undercapitalized state.
This Conservatorship was unnecessary to begin with, and it is an egregious example of unnecessary government over-reach. While the GSE’s fell below certain statutory capital standards during the 2008 financial crisis, they were not insolvent and could have paid their obligations (see attached Amicus Brief by Tim Howard). The GSE’s were considered to have reached a negative net worth due to accounting write downs, not shortfalls in actual cashflow. The Enterprises never reached a point where they could not pay their monthly obligations.
The government’s interest is understandable in wanting to shore up the economy by keeping the GSE’s above statutory capital levels. However, to then use that as an excuse for seizure of private property is the kind of big government overreach that our founding fathers were trying to prevent when they penned the 5th amendment. To allow this kind of seizure of private property based on arbitrary accounting judgments sets a very, very dangerous precedent that empowers Big government and undermines property rights for all of us.
The 2012 Amendment (3rd Amendment) to the Senior Preferred Stock Purchase (PSPA) violated the statutory role of FHFA as Conservator
While Conservatorship was unnecessary, the 3rd Amendment instituted by the Obama administration was illegal. Before he became Director of FHFA, Dr. Mark Calabria published a white paper in 2015 through the CATO institute in which he describes his role in helping craft the 2008 HERA law (see attachment). Based on his understanding of the statutory language of HERA, Dr. Calabria declares that this third amendment was an illegal act by the Obama administration. Dr. Calabria’s conclusion is that, while the Treasury is entitled to some reasonable return on their capital for the support that they provided, this NWS violated the statutory authority of FHFA as Conservator and exceeded all precedent in previous government conservatorships. It is an abuse of power.
Courts are recognizing that the 3rd Amendment established a Net Worth Sweep (NWS) that is a violation of Constitutional protections against government seizure of private property with just compensation.
This NWS has been challenged in the appellate court system on numerous grounds, but the most serious is that it is a violation of the 5th Amendment of our Constitution, which prohibits the government from taking private property for public use, “without just compensation.” The lower courts have sided with shareholders in their complaint about this government “taking.” In addition, the NWS has been challenged on the basis that it violates the Administrative Procedures Act (APA), and last year the 5th Circuit court of appeals agreed with shareholders in that claim. That case has now been taken up by the United States Supreme Court, which will hear oral arguments on December 9th. In all of these cases, inexplicably the Treasury continues to defend the NWS. They are doing this in spite of the fact that Dr. Calabria has claimed it is illegal and Treasury Secretary Stephen Mnuchin has called for an end to the conservatorship (which by extension would end the NWS). Their legal defense is a massive waste to tax-payer dollars and a continued abuse of shareholders.
The Treasury has tried to defend this NWS on the basis that FHFA, as Conservator, “succeeds to the (1) rights, titles, powers, and privileges of the Company, and any stockholder, officer, or director of such the Company with respect to the Company and its assets,” according to HERA. But HERA clearly conferred those rights to FHFA as Conservatorship for the purpose of “preserving and conserving” the assets to the Enterprises, not to wind down its assets. In its role, FHFA was given statutory authority to serve EITHER as Conservator OR Receiver, but not as both as the same time. Hence, to claim to operate as Conservator, while actually winding down the assets of the Enterprises by sweeping all profits to the Treasury is a violation of the statutory role of Conservator defined by HERA. Thus, courts are recognizing this statutory violation as a violation of the APA and an abuse of the company and its shareholders. The constitutional rights of private citizens have been trampled for the past 8 years by this Big Government over-reach.
Ending the NWS provides the most simple, just and practical way to finalize the FHFA’s plan to recapitalize and release the GSEs.
The NWS has resulted in the GSEs paying the Treasury $304 Billion dollars after borrowing only $191 Billion through the SPSA. The terms of the 3rd Amendment have prevented the GSEs from paying back any of the principle of the original SPSA and has prevented them from building enough capital to be released from Conservatorship. Thankfully, in 2019, FHFA and Treasury struck an agreement to allow the GSEs to build up $45 Billion in capital before any more profits are swept to the Treasury. In addition, to this excessive government seizure of profits, the Treasury continues to hold warrants for 79.9% of the common stock. By setting the threshold of warrants below 80%, Treasury was able to keep the 6 Trillion dollars of GSE debt off of the government’s balance sheet and thereby damage the credit rating of the US. The warrants also provided downside protection in case the initial investment by the government soured. The government has benefited from the protections provided by the warrants, but it is now obvious that to move forward in exercising these warrants would simply extend the government’s abuse of private citizens and property owners. The time has come to bring the NWS and other government property seizures to an end.
Both the Director of FHFA and Secretary Mnuchin have called for an end to the NWS. Ending the NWS provides the most simple, just and practical way to finalize the FHFA’s plan to recapitalize and release the GSEs.
There is a reasonable remedy to these unjust actions by the FHFA and Treasury. 1) The SPSA between FHFA and Treasury should be immediately amended, eliminating the Treasury’s liquidation preference in light of the profits it has already taken from the Enterprises, 2) The Treasury should return any profits it has taken over and above its original agreement of a 10% dividend. This would have the effect of immediately allowing the GSEs to reach their statutory minimum capital requirements for exit from Conservatorship. 3) The Treasury should make an offer to the Enterprises to repurchase the Treasury’s warrants at a nominal price. 4) With the current capital of the GSEs ($31 Billion as of Q3 2020) and the returned excess profits from the Treasury (estimated at $30 Billion by Plaintiffs), the GSE’s should have the statutory minimum capital to be immediately released from Conservatorship under a consent decree. Releasing the GSEs under consent decrees would allow the Enterprises to continue building capital until they are in compliance with the FHFA Capital Rule.
These solutions are simple, just and constructive pathway to ending illegal actions of FHFA and Treasury through the NWS. In light of that, I am asking you to ask Director Calabria and Secretary Mnuchin the following questions and let me know the answers you receive:
1. Do you believe that the NWS fell within the duties and obligations of FHFA as conservator as defined by HERA?
2. Do you believe that NWS was a legal action by FHFA and Treasury based on statutory requirements spelled out in HERA?
3. If you do believe the NWS was illegal, what do you believe is a reasonable remedy?
4. Why is Treasury continuing to spend money defending the NWS?
5. Have you made reasonable efforts to settle these lawsuits with plaintiffs in a way that would benefit the Treasury, the shareholders and GSE’s?
6. Why have you not drafted and signed a 4th amendment eliminating the SPSA liquidation preference and permanently eliminating the NWS?
The Government has a right to a reasonable return on its capital for the support it provided to the GSE’s in a time of stress. What began, however, with a sincere effort to support the economy has morphed into the most extensive, unnecessary seizure of private property in US history. I want to believe that you, my congressman, will represent me in standing up to Big government. I trust you will fully support the efforts of FHFA and the Treasury to amend the SPSA and return these companies to their rightful owners.
Thank you for your consideration, and please feel free to contact me if you would like to discuss this issue further.
Sincerely,
(your name)
(your title)
GUIDO, thanks. This is helpful as I craft a letter
Do you have a copy of the email you sent? Do you mind sharing?
If I get some time in the next day or two, I might try to draft a letter to my congressman who sits on the House Financial Services Committee, and I'll post the letter here for others to use as a template.
Perhaps the most meaningful thing we can do is to write a thoughtful and respectful email to our congressman or senator, particularly if they sit on line of the committees overseeing FHFA and treasury. Make sure they understand the history of the NWS, the SCOTUS case, and the fact that this is not simply about hedge funds. Provide a list of 8-10 questions that you would like them to ask FHFA and Mnuchin. If we all did that over the next two weeks, it might make a little noise. It probably won't do much to change Calabria's plans, but it could dampen some of the political headwinds for FHFA and treasury
Didn't Moelis suggest turning off the NWS back in 2018 and retain earnings until regulated minimum first-loss equity is built. Isn't this basically what has been happening over the past 12 months? I think Moelis calculated that at $67B back then.
My guess is that the capital plans will follow a similar kind of pathway. Grow equity to regulated minimum first-loss capital ($70B), then at that time partially equitize the JPS, then do a capital raise. All of this will be laid out in the consent decree. It could be accelerated by a return of $30B from a settlement. That would give FnF:
NW at the end of Q4 - $40B
Settlement $30B
Total $70B
Assuming the SPS is considered repaid (per comments like Craig Philips), then then the common would rise to a level of $14 (20% of $70B).
Quote: "Calabria said that conservatorship is essentially administrative bankruptcy, with him as the administrative bankruptcy judge. Therefore FnF being in conservatorship is the same as being in bankruptcy"
As I read the Collins Plaintiff brief, one of the central points of their argument is that FHFA cannot be BOTH conservator and receiver at the same time. According to HERA, the agency must formally notify congress if it takes on the role of Receiver. Therefore, to take actions as a receiver (liquidation) while only claiming the title of Conservator is a violation of APA.
My bad. But I still don't see the problem, since this will be above $4 post PSPA amendment.
Get your facts straight, mate:
"NYSE stocks must maintain a minimum price of $1 per share."
https://finance.zacks.com/minimum-stock-price-nyse-5116.html
They need to uplist. This is, I believe, one of the primary things keeping the GSE's trading at such a low volume and keeping the price as low as it is. One day on NYSE and this thing would be at $5
They earned $16B last year as well
From the FNMA 10Q
"Capital buffers. The FSOC encouraged FHFA to consider the relative merits of alternative approaches for more dynamically calibrating the capital buffers....
•Total capital sufficiency. The FSOC noted that FHFA’s proposed capital rule requires a meaningful amount of capital for the GSEs, and is a significant step towards ensuring that the GSEs would be able to provide liquidity to the secondary mortgage market and satisfy their obligations during and after a period of severe stress. However, the FSOC also noted that its analysis using benchmark comparisons suggests that risk-based capital requirements and leverage ratio requirements that are materially less than those contemplated by FHFA’s proposed capital rule would likely not adequately mitigate the potential stability risk posed by the GSE"
My interpretation is: "FHFA my need to lower the Capital requirement, but but as much as some groups are suggesting"
Wow. $18B in revenue thru first 9 months
As I suspected, the shorts were reloading for a final push before the election.
https://otcshortreport.com/company/FNMA
Fairholme is the fund that Berkowitz runs. They are the top plaintiff in the Sweeney court
Sorry, $500 million is what he spent on his 180 million shares
"Pershing Square disclosed that it held 115,569,796 shares of Fannie and 63,505,693 shares of Freddie. Pershing Square began building its positions in October 2013 with an average cost of $2.29 for Fannie Mae and $2.14 for Freddie Mac."
https://finance.yahoo.com/amphtml/news/bill-ackman-has-made-close-to-400-million-on-fannie-and-freddie-152842382.html
Ackman owns 500 million shares, roughly 1/4 of all commons. He also owns some JPS. He recently submitted a comment letter on the Capital Rule to FHFA in August, stating that he is an owner of both common and JPS.
I'm not aware of any lawsuits where Ackman is a plaintiff. But he is good friends with Berkowitz in the Fairholme case.
If Ackman is involved with any case, it would take I would guess that it would take well north of 50 billion to make Ackman settle out of court. It would make more sense for them to spend that money recapitalizing FnF and not giving it directly to a hedge fund.
"Yet another Data Point proving that GSE's assets have far less risk than bank portfolio and PLS, and thus the GSE's should require less capital"
Yet another Data Point proving that GSE's assets have far less risk than bank portfolio and PLS, and thus the GSE's should require less capital. #GSE #GSEs #FNMA@MarkCalabria@MariaBartiromohttps://t.co/6ImdscfGoJ
— Jarndyce Jarndyce (@JarndyceJ) October 27, 2020
You're talking about the same guy who said that the Capital Rule would be done by first quarter 2020?
Quote: "Calabria, as a financial safety and soundness regulator, has no incentive to not have the recap go as fast as possible."
The evidence from the last year and a half is that he is in no rush.
Process dependent, not calendar dependent
NWS kicks in again above $45B based on last year's 4th amendment
It looks like that might be true for FNMAS
I think that is the total number for the day, not total number outstanding.
Still, Days to Cover is at 1
Notice the trend since 10/16
Oct 23 - 76,499
Oct 22 - 306,466
Oct 21 - 437,213
Oct 20 - 927,952
Oct 19 - 1,128,950
Oct 16 - 1,526,411
Maybe Capital Rule on Monday? It would be perfect timing if Calabria wanted to drown the complaints against the rule by the noise of the election
When I saw the recent plummet in short volume, I had a hunch they were reloading for one last hoorah before the election
https://otcshortreport.com/company/FNMA
Correct, the Treasury does not dispute the constitutional power to remove the director, only arguing against the 3rd amendment, NWS. They have conceded the first point
From ROLG:
"Warrants have obvious economic value, but they also have strategic value if Treasury wants to entice some whale to invest. because they have no real exercise price, they do not contribute to raising capital through exercise. but if some whale wants to buy alot of common stock in the offerings (creating capital) but wants a sweetener, Treasury might wish to sell the whale a slug of its warrants in connection with the offering at an attractive price. If this were to occur, it would most likely occur in connection with a pre-public offering private placement."
Interesting concept. I'm not sure I know of an example where this has happened in the past.
From Tim Howard:
"Favorable resolution or settlement of the lawsuits is an absolute prerequisite for Fannie and Freddie’s release from conservatorship under a consent decree and subsequent recapitalization, but I don’t know why the parties would feel they have to have a capital plan in place before settlement could occur. Settlement of the suits is a matter between Treasury–which is both the instigator and the beneficiary of the net worth sweep–and the plaintiffs, while the recapitalization plan as a matter between the companies and FHHA. I would be surprised if Treasury has been holding up settlement negotiations pending promulgation of a final capital rule and the development (with advisor input) and approval (by FHFA) of the companies’ recapitalization plans"
If you are talking about dividends to JPS, I would say: they are called Non-Cumulative for a reason
or they could offer warrants to the JPS
Quote: "Looks like SCOTUS is Commons last hope."
In terms of the legal matters, I'm comfortable with that position.
The legal matters still have 1-2 years to resolve themselves, so it is the administrative matters that are preeminent
Yesterday was the first time I've seen an inverse movement in short selling
https://otcshortreport.com/company/FNMA
This process is going to move as slowly in the next 1.5 years as it has over the past 1.5 years. And all along the way, retained earnings will build