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Hi No Name,
Why does UST have any claim beyond the original $ 1 bn of SPS under the original deal.
There was no consideration given for the 3rd Amendment and if you look at the 2011 and 2012 10Ks the investors disclosures made it clear that the SPSA advances would be paid down to the $ 1bn level until the UST Funding Commitments ended. All the UST was entitled to was the $ 1 bn and interest at 10%. They could have asked for a Commitment Fee but they waived that.
I know you are an experienced bankruptcy court lawyer so the principles of equity seem clear whereby the 3rd Amendment would be set aside as a fraudulent conveyance or preference. I know this is not a bankruptcy estate but the principles of equity hold.
The summary judgement decision from Lamberth will determine if the implied covenants survive the Collins decisions but the SPSA contract terms were clear and investors relied on the 34 Act disclosures.
Regarding the cramdown - are you saying that new Housing Legislation will enforce a cramdown? It is not clear to me who you think will effect this cramdown?
They should have also told the story how the failure of the First Bank of Oak Park destroyed access to housing and credit for the minority communities in the South Side of Chicago. The failure of the Community Bank of Lemont is directly attributable to the Nationalization of FNMA and FMCC when the JPS shareholders were "wiped" by Hank's plan. Michael Kelly probably did more good for minority communities than most financial concerns and look what they did to him - one billion dollars and 14 years later.
Thanks Action - why Now? Maybe they should have distributed the insider trading rules to UST and NEC in 2008? Interesting.
Hi Glen,
What are your thoughts on the Appointments Clause and whether the 3rd Amendment was valid because it was after the two year period for the validity of action by an Interim appointment? Isnt this the Ropp case?
Can they cram down on the increase Liquidation Preference that was added with the 3rd Amendment if the two year period holds?
It is interesting to think that Sandra Thompson only has 18 months more to take substantive administrative action unless she gets confirmed. With Lujan from NM out she needs at least one Republican vote right now.
Hi Guido,
Here is an interesting article discussing some of the players in the BO White House during and after the NWS
https://www.reuters.com/article/us-usa-obama-salaries-idUSBRE95R15X20130628
Yes - He was the Head of the NEC for DJT. Same group that wrote the "For Your Eyes Only" Nationalization Memo. Makes you wonder if the NEC under Cohn was the resistance to move forward on the Exit? Did he know about the role of the NEC in sending the Memo to Barron's in March 2008 advocating for the "wipe" of shareholders and the Nationalization of the GSEs.
Here is an interesting article:
https://dealbreaker.com/2018/09/gary-cohn-the-unreconstructed-rebel-of-wall-street
Yes - we agree 10cents - LOL!!
DAMN RIGHT!!!
Hi Navy,
This is an interesting Visitor's log that ties into some of the 2011 discussions with UST. Check out who is visiting the UST on 2/24/11 regarding the GSEs.
JP and his current partner and maybe the reason why the GSE Conservator Exit did not go anywhere the first two years of DJT. Familiar names.
https://www.treasury.gov/initiatives/wsr/Pages/dfa2_11.aspx
Question is whether JP knew of the "For Your Eyes Only" Nationalization Member that was planted by his predecessor at Barron's. Wonder if BO knew about the Nationalization plans dating back to 2008? Did Bernsteing know - he was not there during the NWS but JP was at the NEC - right?
Maybe the reason they wanted to liquidate the GSEs during the BO regime was to cover up what they started with the Barron's Memo? The NEC probably did not want that Memo to be public - would have the NWS happened if the FCIC had released the "For Your Eyes Only " Nationalization Memo before the NWS?
Question is whether JP knew of the "For Your Eyes Only" Nationalization Member that was planted by his predecessor at Barron's. Wonder if BO knew about the Nationalization plans dating back to 2008? Did Bernsteing know - he was not there during the NWS but JP was at the NEC - right?
Maybe the reason they wanted to liquidate the GSEs during the BO regime was to cover up what they started with the Barron's Memo? The NEC probably did not want that Memo to be public - would have the NWS happened if the FCIC had released the "For Your Eyes Only " Nationalization Memo before the NWS?
Hi Donotunderstand - Do you know this based off of personal contacts or just speculation. You are from the Windy City right?
Yes - $ 3 on the low side and $ 15 on the high side just from the Lamberth suit . 3rd Amendment declared void and the increase in Liquid Preference or whole SPSA face value written down as part of a Lamberth judgement some time in 2022. There is definitely no consideration given for any increase in liquidation preference for SPSA.
Assuming FMCC is worth $ 150 bn and $ 40 bn of new capital needs to be raised as of the end of 2022:
Net equity value for FMCC equals $ 150 - 71 -40 x .20 = $ 12 plus $ 3 to $ 15. This assumes UST gets to claim the $ 71 bn liquidation preference before the 3rd Amendment.
Otherwise FMCC was trading about $ 20 before the UST violated the UST Ethics handbook and did not get UST Counsel approval to plant the Barrons story. Total value should be $ 20 plus unpaid divs said 2008 which would mean a $ 20 to $ 30 value for FMCC. At $30 it is only $ 18 bn out of a $ 150bn Equity Value
This is going to get real political one any plan is released - DJT has no incentive to let the little guy get screwed by a JB Administration.
The math is there for a $ 20 to $ 30 value for FMCC
Thanks for the reply Glen
I am sure you have spent more time reading the outstanding litigation but the Lamberth case may be the beginning of the end for the SPSA since invalidating the 3rd Amendment to the SPSA is central to the Lamberth case. Also the claim for past dividends is also material for FMCC in particular because there are only 650 million shares of public common outstanding.
FMCC did not draw on the SPSA line after the first quarter of 2012 yet paid $ 119 bn in payments against cumulative draws of $ 71 bn. Accrued interest at 10% is in the $ 30 bn range leaving $ 18 bn in overpayments. JPS could make a claim of $ 8bn leaving $ 10 bn to common. Even if the UST claims 80% of that it is still $ 2 bn for FMCC legacy common or about $ 3 per share for FMCC.
As you probably know the Net Worth Sweep is broadly declined as the 3rd Amendment in its entirety which increased the liquidation preference for no consideration.
I have cited Paragraph 117 of the Amended Complaint and included the cite for the Complaint itself
https://gselinks.com/wp-content/uploads/2018/10/13-465-0422-2nd-Amendment-Complaint-Redacted-10-3-18.pdf
117. First, the Net Worth Sweep eliminated entirely the economic interests in Fannie and Freddie held by the Companies’ private shareholders. The quarterly sweep of the Companies’ net worth ensures that there never will be sufficient funds for the Companies to pay a dividend to private shareholders. It also ensures that private shareholders will receive nothing in the event of liquidation, as Treasury’s Government Stock entitles it to an additional dividend payment plus its liquidation preference in the event of liquidation. Government Stock Certificate § 8. The dividend payment will leave Fannie and Freddie with negligible capital well shy of the Government’s nearly $200 billion liquidation preference, guaranteeing that there will be nothing left for private shareholders. In light of this reality, it is not surprising that, as FHFA’s Mr. Ugoletti observed, “the preferred stock got hammered the day the Net Worth Sweep was announced.” Similarly, after the imposition of the Net Worth Sweep, Mr. Lockhart—FHFA’s former Director—told a reporter that the Companies’ privately-owned stock “is worthless and should be worthless.
Thanks again for all your efforts on behalf of GSE public shareholders
Hi Glenn,
What do you think the Fairholme Case is about before Lamberth? Perhaps I am wrong but isnt the NWS defined as all of the 3rd Amendment?
Regarding Collins - what is the USD amount they are seeking in damages - you dont think this would be more worth more than $ 2 for FMCC?
Thanks Tutt
I am surprised they did not include the Nationalization plan from March of 2008 - AOC would have been very proud of GWB if she only knew.
https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Thanks Robert - Bernstein of the NEC had a blog for several years before joining the Administration as part of the NEC
https://jaredbernsteinblog.com/
In 2015 he wrote an article criticizing Gretchen Morgenson for writing about the role of some former officials in the BO administration:
https://jaredbernsteinblog.com/not-every-door-is-a-revolving-door-housing-finance-gse-reform-and-the-nyt/
I wonder what he thinks about the actions of the NEC in the GWB Administration planting an article with the press advocating the Nationalization of the GSEs and accusing the CEO of FNMA of fraud. This article was planted in the midst of negotiations between the UST and Congress to provide stability capital for the GSEs and while the CEO for FNMA was on a capital raising trip to Asia.
https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Bernstein seems to be in the same mold as Michael Calhoun in that they seem to be passionate about what they believe and seem to operate above board. The question to Bernstein is whether he believes the NEC and the UST acted legally or ethically before the GSEs were placed in Conservatorship. Over $ 7 bn of FNMA common and JPS were sold to the public just 2 months after the NEC Special Assistant to the President for Domestic Finance sent the "For Your Eyes Only" Memo. I wonder what Greta Morgenson would have wrote if she had access to the FCIC emails that were released in 2016 - one year after the NYT article.
Hi Guido,
Here is a video of one of your favorite people with Jared Epstein. One correction I need to make is that Jim Millstein who worked at UST treasury at the same time as Bernstein worked at the NEC owned the JPS not Bernstein. Both seemed to leave the same time as Larry Summers left the Obama Administration in 2011 so they were not involved in the NWS
Talk about the NWS - here is Bernstein and his good friend:
https://leaders.economicblogs.org/video/jared-bernstein-and-jim-parrott-discuss-housing-economic-recovery/
Bernstein advocating for full Nationalization in 2011
https://newrepublic.com/article/96284/fannie-mae-freddie-mac-foreclosure-crisis
Bernstein in 2013 commenting on BO's Pheonix Housing Speech. I wonder which Jim made " great points" in the comment section.
https://jaredbernsteinblog.com/the-president-and-housing-finance-part-1/
Bernstein probably knew the truth in 2008
https://www.cnbc.com/id/25640022
Will follow up. Have a good weekend Guido.
Although I think you will regret the 10 cent call - I want to thank you for the 7 years of effort.
Bradford has reason to pay attention what Jared Bernstein says. I think he actually owned JPS in 2013 and advised some of the early hedge fund activist when the JPS rallied in 2013. I think he also sold out but not sure. Bradford could check with the Perry crowd to get the scoop.
Thanks for the reply No Name. Although I have very little in common I believe that the JPS and Common have the same interest in a fair resolution. I would guess you have never seen such a security as the SPS which can doubles the amount paid to a lender, gives the lender a priority equity position and never can be repaid without consent of the lender either. This is securities fraud and corporate fraud in the Chancery Court of Delaware so you only would have seen it if you were involved in a bankruptcy case by a lender back by organized crime.
If the SPS are written off for zero - wouldnt the retained earnings account be increased by the amount of the write off and flow the shareholders equity? I believe you said your were a bankruptcy expert so how would the write off of the SPS to zero be treated? I am not a bankruptcy expert but I thought it would be akin to voiding a fraudulent conveyance or preference and therefore the SPS equity would be returned as retained earnings?
Another question - doesnt Bhatti just increase the option value of FMCC and FNMA equity since this probably takes any conversion off the table for 1 to 2 years while this case is resolved. Only a settlement would make the time to resolution shorter and no one is settling for 10 cents.
Thoughts No Name?
If the Plaintiffs are asking for an Injunction, wouldnt they have cause to ask for a TRO for any crampdown/conversion by the UST and FHFA? Doesn't Bhatta now make any move to cramdown and conversion off the table until this case is resolved? A SPS conversion would definitely inflict irrepable harm as you have made clear so unless this case is dismissed isnt any move toward a conversion not possible especially by a regulatory agency. Sandra Thompson does not strike me as a rogue regulator.
Thoughts No Name?
Hi Navy -is Sandra Thompson speaking today at a conference? I am not on twitter but looked at some twitter postings and saw something from a guy named Shaun Dona..?
Hi Ano - thanks again for your analysis. A couple of questions if you have time
1. Are we still waiting for the motion for summary judgement in Fairholme?
2. Is there still a derivative claim on behalf of FNMA in Fairholme?
3. What are we waiting for in the COFC and potential timing?
4. Are we waiting for the appealate panel to be chosen in Ropp?
5. What is going on in Bhatti?
Just realized the complaint that was cited by tutt was from 2013. The OIG Report is still relevant but the other points that I was going to make may not still be relevant. Dont know how to delete a post so I am stating this.
The NEC started the Nationalization process as early as March 2008. Jason Thomas who sent the "For Your Eyes Only " Nationalization Memo which was planted with Barron's was also part of the NEC and was Special Assistant to the President working under the NEC Director. It would be great to get Daniel Mudd and Dick Syron on the Stand in the COFC suits where the Conservatorship is being challenged. That Memo actually accused Daniel Mudd of fraud while the UST Undersecretary was using words like "no problemo" regarding ongoing negotiations with Senate Banking Committee and capital raising efforts. If it gets to trial there should be some great depositions.
Thanks for the cite tutt126! Interesting read - A March 15, 2013 OIG Report is cited in Paragraph 19 because the OIG mentioned that the NWS could result in an "extraordinary payment to Treasury". Here is another quote from the top of Page 15 of the OIG Report.
"Absent the buffer, the net payment to Treasury would be greater if positive net worth is above what the 10% dividend would have been; otherwise the net payment would be the same. 18 Recent experience indicates that quarterly positive net worth greater than the dividend under the old system is possible. In fact, Fannie Mae and Freddie Mac were able to pay to Treasury their dividends for the second and third quarters of 2012 (and Freddie Mac was able to pay its dividend for the fourth quarter of 2012) without any draws under the PSPAs. As a result, over the long run, the new system could result in larger net payments to Treasury."
Here is the cite to the OIG Report:
WPR-2013-002_2_0.pdf (fhfaoig.gov)
GSE Nationalization Playbook for Nationalization of the Farm Credit System
From CBO Publication 5611 - last paragraph
"In addition, changing the federal government’s relationship with Fannie Mae and Freddie Mac might prompt an assessment of the government’s relationship with other government-sponsored enterprises that support mortgage lending. Those other GSEs include the Federal Home Loan Banks, which make low-cost loans to their member institutions (such as commercial banks, credit unions, and insurance companies), and the Farm Credit System, which provides financial assistance for rural mortgages and other loans guaranteed by the Department of Agriculture."
Every Farm State Congressperson has a stake in how the Nationalization of the GSEs are resolved.
The CBO Paper has one Scenario which is closest to the current regulatory capital requirements at 3 % where the Legacy Common is worth $14bn ( Table 2 Scenario 1) for in IPO starting in 2023 and $ 27 bn (Table 3 Scenario 1) For an IPO starting in 2025. The Equity Value for the GSEs is $ 402 bn.
Assuming FMCC is $ 150bn of the $ 400 bn - FMCC implied values are $8.07 and $15.77.
https://www.cbo.gov/publication/56511
Just do the math for Scenario 1 for both Tables and you will see there is a residual value that is not broken out but equates to a 21.1./79.9 pct ownership upon which the UST Warrants are valued.
The last paragraph of the CBO Paper is also interesting because it mentions Farmer Mac and the Farm Credit System as being impacted by the restructuring of the GSEs. The Farm lobby and Rural Members of Congress should be very concerned about the Nationalization of the GSEs because the Farm Credit System could be next
Thanks for the reply Kthomp. The six CBO scenarios which are two sets of three for different IPO dates vary based off of cap requirements and required investor rate of return. This report was done before the cap rule was finalized so the only issue is the assumed equity value.
If you assume $ 100bn - current common value for FMCC is $8.35 if the SPS is written down and the warrants are fully exercised. You are assuming that the FHFA and/or Congress will cramdown legacy common would lead to takings litigation as you mentioned. It will be some interesting depositions - it will further the degrade the confidence in the Federal Govt - not sure it will be worth it.
Also it sets a terrible precedent and roadmap for future Nationalizations. Maybe you are right - I think the current Treasury has more integrity than the 2008 and 2012 gang.
You are right - should have said Equity Value. This is based on the CBO valuations - the CBO has over $ 400 bn in Equity Value. I think I am conservative in assuming $ 150bn Equity Value for FMCC. No need for a reply I think you are comfortable with your 10 cent target.
The math comes up with a price of about $ 24 for FMCC if the warrants stand and a write down of the SPSA assuming an Enterprise Value of $ 150bn for FMCC. Value will increase about $ 3 per share for every $ 10 bn of retained earnings assuming 3.23 billion fully diluted shares. Please let me know what I got wrong on the following assumptions:
Assumed Enterprise Value $ 150
Total Cap Requirement $ 112 bn
Net Worth (25 bn)
JPS (14 bn)
Cap Deficit Jan 22 $ 73 bn
Net Enterprise Value $ 150 bn- $73 bn = $ 77bn
$77bn/3.23bn = $ 23.84 per share as of 1/1/22 This will increase $ 2 to $ 3 per share until new cap starts to dilute future earnings.
As of 1/1/22 UST stake would be worth $ 61 bn and would increase $ 8 bn for each $ 10bn of retained earnings.
Do you think this is wrong? The big assumption is the Enterprise Value for FMCC and the CBO had an Enterprise Value of something like $ 400 bn.
Mabe this is all wrong but I do think you need to start with an EV for both FNMA and FMCC and go from there. The Cap Requirements seem set now so it really is a function of how much CRT and balance sheet growth happens in the future and changes in EV.
Please let me know where you disagree. I agree with you that the JPS is the most conservative risk vs reward but I dont see any reason to assume that this is worth 10 cents. Worse case the option value of common needs to be valued like a perpetual option on a speculative litigation outcome. Just on the time value of money implicit in the Black Scholes model the value is probably greater than current prices much less 10 cents.
Thoughts? This may be totally wrong so no one should rely on this in any way but I thought I would ask Glen for his thoughts about the value of FMCC equity
Hi Glen, I really appreciate all of your work on behalf of shareholders but I think you really wrong on the 10 cents chatter regarding legacy common. I think the facts are just too stinky to mistreat legacy common investors.
Do you know who was the recipient of the US Treasury Department Exceptional Service Award in 2008? He is the 14th President of a Christian College in Holland Michigan.
https://hope.edu/news/2018/campus-life/matthew-a-scogin-named-14th-president-of-hope-college.html
He is one of the cc's on the FCIC memos - wonder if he thought to bring UST Counsel in before the Barron's "For Your Eyes Only" memo was planted with the press? Looks like he did very well for himself and is probably a great guy but the Fannie/Freddie fact pattern during 2008 really stinks.
If they convert the SPS it probably is a taking and it is ripe for a cause of action. They will have to work within the confines of CFR Title 31 902.2 as pointed out in Footnote 30 of the CBO report. Their best strategy is to settle with derivative damages and bring the equity back to the GSEs so they can participate 79.9/20.1.
Flying Pigs
https://sites.google.com/site/turkmenistaniflyingpigs/home
Maybe about as probable as the 10 cent FNMA?