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ALERT: More JPS conversion fantasy.
I'm not denying that they will convert JPS. But the fanciful and fantasy scenarios of most JPS holders will prove to be false. The conversion will be timed in such a way as the minimize (to the extent possible) the dilution of commons, per fiduciary responsibilities.
The point is not where they are trading now, but how they will be dealt with in the capital plan submitted by FnF. They will receive par value, but their interests will not, in any way, be placed ahead of the best interests of commons. That is fundamental to the structure of fiduciary responsibility.
False. The BOD will NEVER owe fiduciary responsibility to preferreds.
"the Delaware Chancery Court held that where the interests of the common stockholders diverge from those of the preferred stockholders, a board of directors member may be held liable for breach of fiduciary duty if he favors the interests of the preferred over the interests of the common"
https://www.lewis-roberts.com/sites/default/files/LR057507_0.pdf
This is just more JPS fantasy. The BOD has NO fiduciary responsibility to Pfd shareholders. It's fiduciary responsibility is to the common shareholders. And, as long as the government is the primary shareholder (in FHFA) or the largest shareholder (under the 79% warrants), we can expect the decisions that are made to be made in the best interest of the Common Shareholder
Jarndyce does it again:
Your Daily GSE Brief:
— Jarndyce Jarndyce (@JarndyceJ) September 24, 2020
US Gov claims that only the Government can question the Government's actions #GSE #GSEs #FNMA #FMCC #fanniegate https://t.co/57JLIm2Smx pic.twitter.com/iiHzdAlsnh
HaHa!
Great Question
Sept 28 - Finalize Capital Rule
Nov 6 - Settle Lawsuits?
Nov 13 - Amend PSPA
Nov 16 - Relist on NYSE
Nov 20 - Approve GSE capital plans
Jan 08 - Convert Pfds
Jan 11 - Release (under consent decree, depending on election outcome)
My updated timeline
I think that is very plausible
I also agree with Todd that Amy Coney Barrett is not the MOST friendly judge in terms of the GSE cause. I'm not saying she would rule against Collins. I'm just saying that she has less predictable on corporate matters (even as she is more predictable on social matters).
Allison Jones Rushing might be a better choice as far at the GSE's go (although her record is limited). I wish Willett was getting more consideration.
I think many people are misunderstanding Todd's point. He is saying that the underlying risk is not a legal matter, nor a equity matter, it is a time matter. He simply believes that (given what is currently known), that when the cases are won, it will take another 2-3 years for them to be remanded back to the lower courts in order to have some monetary compensation to be awarded. I agree with Todd on the legal front. IF IT WAS ONLY up to the court system, it could be a long road.
Where I disagree with him is that I believe Mnuchin will not want the GSE's to languish that long. Mnuchin and Calabria will want to do something to expedite their recap and release. The primary thing preventing them from doing something thus far is the election.
Both Mnuchin and Calabria have stated that they want to get the GSE's out of conservatorship. Both have stated that they want to do it sooner rather than later. Both will not want a long, protracted legal battle to hinder that. Thus, after the election, they will want to clear the court cases (i.e. settle) quickly.
This may be why they left the NWS in place with the 4th amendment (after they hit 45B). It gives them some leverage in negotiating a settlement.
2-3 years in the court system really does not materially affect commons, because we are expecting 4-5 years of retained earnings in order to raise capital anyway. The only ones who are hurt when this is remanded to the lower courts are the JPS.
I'm pretty sure if the info in Tim Howard's brief were not germane to the case, the attorneys would not have spent the time and money having him put it together. It directly relates to the second of the two questions posed by SCOTUS
Powerful and Clear Amicus brief by Tim Howard explaining the takeover of GSE's.
— Jarndyce Jarndyce (@JarndyceJ) September 22, 2020
This is socialism, and if it stands, the government will be empowered to take any company they wish by simply using accounting tricks to declare them insolvent.https://t.co/WDuFc0d8an
It is STUNNING to read the history in plain language, as Tim Howard writes it. If the government is allowed to get away with this, what will prevent them from taking any company they want in the future, then giving the appearance of a bailout by means of accounting tricks.
Excellent Post, Yanks
I didn't post the document because it directly governs FnF. This is a document that governed TARP. However, it has language that explains the original motivation behind the government warrants during that "bailout era", and it can provide some insight into their motivation for the FnF warrants.
Much of this discussion of the government cancelling the warrants is grounded in a sense of "fairness." I agree, it would be "fair" for the government to cancel the warrants, since they have been more than repaid. However, it is not fairness that governs the warrants, but legal language of the PSPA's. So, even as a holder of commons, I do not hold out much hope that the warrants will be cancelled.
While I believe the original purpose of the warrants was to add insurance or leverage so that the government could recoup their investment in time, I think it would be very difficult politically for the government to not exercise the warrants now that they have them. There were major questions and concerns from Government Oversight groups about how the Treasury was disposing of warrants back in 2010 (https://www.reuters.com/article/financial-warrants-audit/update-1-us-audit-urges-controls-on-treasury-warrant-deals-idUSN1014485520100511?type=marketsNews)
There is a much, much higher probability that SCOTUS will rule FHFA unconstitutional, and either SCOTUS or Judge Atlas will award FnF a significant sum of money.
CONGRESSIONAL OVERSIGHT REPORT - REPURCHASE OF STOCK WARRANTS
"The statute sets no terms for the price Treasury must
obtain for the preferred shares it holds, other than the general
statutory injunction that it should administer the Act in a manner
that will ‘‘minimize any potential long-term negative impact on the
taxpayer.’’ The contractual provisions governing the preferred
shares provide that they are to be redeemed at ‘‘liquidation preference,’’ essentially the principal amount of the debt" (P. 9)
CONGRESSIONAL OVERSIGHT PANEL OVERSIGHT REPORT
TARP REPAYMENTS, INCLUDING THE REPURCHASE OF STOCK WARRANTS
https://fraser.stlouisfed.org/files/docs/historical/fct/cop_report_20090710.pdf
"The Emergency Economic Stabilization Act of 2008 (EESA) authorizes Treasury to purchase financial instruments.13 Through the
CPP and Targeted Investment Program (TIP), Treasury bought
$203.2 billion and $40 billion, respectively, of preferred shares from
financial institutions. Preferred shares entitle the holder to a fixed
rate of dividend, and in that respect function somewhat like a loan
to the institution. EESA also requires that any such purchase of financial instruments from financial institutions must be accompanied by the issuance to Treasury of warrants to purchase common shares of the institution, so that taxpayers can benefit from a rise in the price of the institution’s shares, PRESUMABLY REFLECTING THE VALUE OF THE ASSISTANCE TREASURY HAS PROVIDED" (P. 7)
I agree. That is a great question.
It appears that they contemplated scenarios where they chose not to exercise the warrants.
It appears to be a new article.
COLLINS CASE INVOLVING FANNIE MAE, FREDDIE MAC GOES BEFORE SUPREME COURT
https://www.valuewalk.com/2020/09/collins-case-fannie-mae-supreme-court/
I've been waiting for someone to write this article.
The question is why wouldn't they relist? What company WANTS to be listed on the pink sheets?
I've wondered if this is Paulson who is selling his Pfd's. He took his fund private in August, which, if I'm not mistaken, exempts him from having to file a form 13F.
Let me be clear, I have no evidence that he is selling. This is only my curiosity. The only thing that is clear is that he took his fund private.
Clear explanation from Tim Howard:
It would not be a “hollow victory.” On the constitutional claim, the Director of FHFA would be held to be unconstitutional–meaning that Calabria could be removed by the president at will–and plaintiffs would be denied the backward-looking relief they seek: the invalidation of the net worth sweep. But plaintiffs would prevail on their APA claim, meaning that they would be allowed to challenge the legality of the sweep, and the case would be remanded to Judge Atlas in the Southern District of Texas for trial on the facts, which plaintiffs almost certainly will win (although that will take some time).
Including the 5th circuit decision to provide no remedy or damages?
I've been curious about the issue of "remedy" in a potential 4-4 decision. Do you have a link to any articles that discuss this, particularly explaining Judge Atlas' "direction from en banc to provide compensation"?
I may be mistaken about Calabria's view of the constitutionality of the FHFA.
FHFA reverses position (again) on its constitutionality
https://www.consumerfinancemonitor.com/2019/07/11/fhfa-reverses-position-again-on-its-constitutionality/
I thought I had read somewhere that Calabria agreed with the argument that FHFA was unconstitutional, but I may have mistaken that with Otting, when as the Director, he said the agency was unconstitional.
Tim Howard Amicus Curiae
"I’m just finishing up (with the excellent help of a third-party law firm) the amicus curiae brief on behalf of the petitioners I’ll be submitting to the Court next Wednesday. Things are moving forward."
Quote:
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The answer lies in Calabria's testimony before the House Financial Services Committee when he told Congresswoman Maloney that any release of FnF from conservatorship in calendar 2020 would be inconceivable.
Judge Sweeney putting a stay on ALL appeal briefs might have been the icing on the cake.
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I totally agree with this. While I believe that Calabria's statements don't necessarily conflict with a speedy capital plan in line with the election (and using consent decrees), I believe they were interpreted by the average, and largely uninformed, observer as meaning that he will not be able to protect these entities from a Biden administration.
5:1 Ratio
Did I hear MC correctly at about 2:04 on the video, he said he believes that FnF should be capitalized at a 5:1 Ratio?
It doesn't really matter how they want to split it, if Commons have 40B of value, they have 40B of value.
Do I think it is possible? Well certainly it is. AIG did it, with SIX public offerings. And when they made their first public offering, it did trade at a discount to the final market price price ($32 vs. $65), but it did not trade at the OTC price ($7). Subsequent offerings came in, I believe, at $45.
And, AIG did not convert their preferred stock until the stock reached market price. Pfds were converted at par value ($45)
http://www.timelessinvestor.com/2019/01/10/history-of-aigs-recapitalization-and-stock-price/
Calabria's words, Same Gasparino interview to which you refer, starting at 15:11
(15:11) "A public offering of this size would be feasible, but I do want to EMPHASIZE that ultimately, that's really going to be on Fannie and Freddie's job to do"
(15:28) "Again, I forget how many times AIG went to market, for instance - but you know, this doesn't have to be done at once. The GSE's don't need to leave at the same time, there's multiple way to take a bite at these [apples]"
So much for an October 2nd Recess clearing the way for MC!!!
https://thehill.com/homenews/house/516464-pelosi-house-will-stay-in-session-until-agreement-is-reached-on-coronavirus
Excellent point Robert
Thanks Kthomp. I always appreciate your comments.
The Capital Rule has already given the greenlight to a deferral period.
"The final capital framework should incorporate an appropriate phase-in period, beyond the effective date of any final rule, given the projections in the Proposal that the Enterprises would need to substantially increase our capital and provide acceptable returns in the form of distributions to investors." (p. 65)
"As currently proposed, FHFA has provided TWO OPTIONS for compliance with the Proposal’s capital requirements. First, the compliance date could occur automatically as the later of one year from publication of the final rule or the date of an Enterprise’s exit from conservatorship. At that point, full compliance with the minimum and buffer requirements would be expected. Alternatively, the Proposal would grant FHFA the discretion to create a “deferral period” for compliance with the capital requirements.... While this approach would effectively waive the capital requirements during the deferral period, an Enterprise still would be subject to restrictions on dividend distributions and executive compensation if the Enterprise has only achieved actual capital amounts within the buffer at the time of the deferral order" (p. 66)
"Graduated phase-ins have been a significant feature of all material rulemakings by the banking agencies in relation to capital and the Basel framework. The U.S. banking agencies implemented transition periods for each of the capital requirements in their final rule implementing the Basel Committee’s Basel III reforms in 2013 over a period of five years.... [The] Basel Committee introduced a five-year transition period to phase in requirements of Basel IV beginning in 2022. Our recommended five-year phase-in period is similar to phase-in periods for complex capital requirements and would provide the Enterprises a suitable amount of time to reach full capitalization from private sources of capital without having to navigate either compliance failures or buffer restrictions."
The financial advisors may make more with a higher SPO, but then they are not doing their job is they are only focused on maximizing their own profitablity. I suspect that these BOD's would see through such a thinly veiled profit grab. These are huge SPO's, so these guys are going to make a killing regardless.
From MC's testimony today (9/15), it certainly seems that he is sticking to his 4% capital rule. That probably means four years of retained earnings plus another 100B in a series of SPO's over that same period. Somewhere along the way, they will convert Pfds, but there is no rush.
Don't be worried about low volume moves:
Volume Weighted Moving Average (20): 2.1996
Well said TRCPA.
Even the word "urgent" is a relative word. Calabria has repeatedly said: "It is ultimately up to the GSE's how they raise capital." So, while he may use the word urgent, he will still granting latitude to the GSE's in how they schedule that out. His main point is that he wants it done by the time his term is over in 2024.
It is because of their oversight responsibilities that Calabria is not going to do anything before this Congressional Session closes up shop on October 2nd. He doesn't want to be dragged back for another hearing before the election. He would rather all these congress members to be out of town and back in their districts, distracted by the election, while he unfolds his Recap plan.