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.
I think the real concern derives from the EBIT line and the huge degradation over the past 3 FY's. The gravity of the situation is partially obscured by the fortuitous decline in Interest expense as rates have declined (notably those tied to LIBOR). The trend is not your friend.
Fannie Mae's metrics have become a shell game of DTAs and derivative hedging gambits. In 2013 they portrayed a $45 B gain for negative income tax expenses that carried no reflection of operating line results. It's very reminiscent of putting lipstick on a pig.
JMHO.
Fannie Mae makes $10 B per year. Of that, $7 B comes from application of DTAs that could be largely going away under tax code revisions. Then another $1 B comes from stiffing junior preferred shareholders on dividends for the last 8 years. Then another $1 B comes from stiffing common shareholders on dividends for 8 years. All up that means Fannie's huge income from which recapitalization must be funded is $1 B per year at the present pace of income generation.
NICE!
$1.8 B net worth and a HUGE $1 B per year to recover in what hear? 2117?
LOL.
The S/P had degraded from around $60 throughout late 2007 and 2008 and was $18/sh in July and $7/sh at the point of conservatorship. Fannie Mae recorded the value of the warrants for 79.9% of common equity @ $4.5 B in September, 2008. That would be on like 4.4 B common shares after warrant exercise. All up, that accounts for around a $1/share equivalent, diluted share price. If the warrants are taken out of the equation, the non-diluted share value would be around $5/share, not $12.
I respect your positive attitude. If you are a long term buy-and-holder with considerable patience, that over time could pay off handsomely. However, in that mode, you also need to prepare for the inevitable next step which will be a reverse split, likely a 1-for-10 as transpired with AIG whereby you will also have 1/10th the number of shares you now have. The reverse split is required to attain the third "R" which is relisting to the Big Board. Fannie must get off the OTC to be eligible for institutional purchase with many major funds and retirement advisors.
What that erodes is not so much the value of your investment as it is the erosion of future common dividend income which is given on a per share basis. Thus the pre-conservatorship common divvy of around $2/share becomes the equivalent of $.20/share.
The only thing you need to focus on is that the warrants, if exercised by the government (or any other party), will dilute the common share market cap (measured by common shares outstanding times share price) by 79.9%.
Simply put, if your share price today is $3.00, your common share price after dilution sinks to $.60.
The warrants are a crucial element in any eventual common share price achieved if Fannie Mae goes through the release and recapitalize event sought by stockholders. Warrants do not effect preferred shareholders.
Hope that answers your question.
Please read the section beginning on page F-52 in Fannie Mae's 2015 From 10-K filing with the SEC. This is the audited Annual Report. It explains the warrants in detail. The warrants were an initial commitment fee as part of the SPSPA. Your assumptions are clearly mistaken on this contracted agreement.
I don't disagree on Amendment 3. It was an overreach. But it has no disqualifying effect on the initial conservatorship or the warrants.
JMHO.
Fannie Mae closed out the 2015 FY with around $35 B in DTAs on the books. They wrote down about $7 B from PY in those totals.
Source: FNMA 2015 10-K filed in February, 2016.
The warrants are accounted for on Fannie's books at a value of $4.5 B, recorded on September 7, 2008. That represents the value of 79.9% of Fannie Mae's common share market capitalization at that time. Recovery of any amount above that total would carry deeply erosive tax consequences without some massive Trump business tax cut in place, and simple cancellation of the warrants would entail a $4.5 B asset impairment charge.
The government is not going to cede the warrants. They received them in exchange for initial backstops afforded Fannie Mae at the time conservatorship was set in place. The warrants only go away if Fannie Mae is released from conservatorship and the initial contracted agreements are cancelled, absolving UST of any further draw obligations to the enterprise.
In such case, FHFA would dissolve and the prevailing statute would revert to the GSE Act's provisions and those preceding that law.
JMHO.
About half of the insurance outstanding covering Fannie Mae for <80% loan qualifications reposes in 3 insurance carriers that are in questionable financial health and may be unable to pay claims.
None of them were in conservatorship or bailed out under the provisions of HERA. TARP and HERA are two entirely different matters.
But, not to worry. Watt will release Fannie and Freddie come January as he crosses of his FHFA anniversary which was, I believe effective January 3, 2014. Then it's retirement time for this 71 year old, hard-working, diligent public servant. Good luck and a heartfelt thank you to a fine gentleman who contributed greatly to saving the GSEs.
JMHO.
Actually, the truth is quite supportive of actions taken that led up to the conservatorships of Fannie & Freddie. Here's the part that conveniently gets swept under the rug by the "My Fannie was stolen" gang:
http://www.nytimes.com/video/business/1194817110047/lockhart-on-fannie-and-freddie.html
This video is the announcement by Paulson and Lockhart of the conservatorship of the GSEs and explains the rationale in all its detail on September 7, 2008. If you listen to the content, you will understand why me and many others believe the contents of the unreleased documents do not really matter much. There is nothing lurking there that will overturn the conservatorship, the warrants or the original contracts imposing 10% SPD's.
Amendment 3 is a different story,as I have said, all along.
The government didn't refuse document release because of any smoking gun contents. They simply wanted to prolong the NWS gravy train for as long as possible, and show some deference to the deliberative process and protect the advisors and consultants contributing to policy decisions from public and press criticism.
JMHO.
I view the Ross choice as potentially lethal for the GSEs. I wasn't going to post on this holiday until I saw this announcement. This is he same Ross that founded W.L. Ross's financial empire and chose James B. Lockhart III to be his #2 man. Lockhart may be well remembered by longterm Fannie followers as one of the loudest voices attempting to rein in and shrink the portfolios of Fannie and Freddie in the period leading up to the conservatorship.
JMHO.
HAPPY THANKSGIVING everyone.
Long or short, buying, selling or holding Fannie Mae... may all enjoy a fine day of turkey, football and good fortune tomorrow.
Yank
Mel Watt, a lifelong Democrat, turned 71 in August of this year. He now confronts an incoming administration that has repeatedly stated a desire to have no Democrats onboard their bus. Mel Watt will release Fannie Mae and Freddie Mac in January and then retire, leaving office before the inauguration.
Then the chaos begins.
JMHO.
I have suggested on several occasions that maybe Mr. Sammons is just exactly what he stated. An aggrieved shareholder that is fed up with endless legal delays that are threatening his substantial investment. He is endeavoring to get the case sent to a lower circuit where someone may cut through the crap and actually get something conclusive done.
The money runs out in about 12 months. The legal circus is now playing brinksmanship with liquidation or a "forced" Congressional reform measure driven by further Fannie or Freddie draws from UST.
JMHO.
Government has filed a brief in support of Judge Sweeney's ruling to toss Mr. Sammon's intervention request. So much for all the horseshit spread about Sammons being a government mole. The government is squarely opposed to his actions.
Interesting to note that Fairholme's legal team remains mute on Sammons filing. Who's delaying the verdict now? "Fellow Travelers" is just another farcical load of crap.
JMHO.
If further junior preferred shares are offered before existing issues resume paying dividends, you can add me to the list. I'll sue, too.
Nobody is going to pay crap for any pfd. stock that has no deliverable benefit except a liquidation preference in case of insolvency and liquidation. This is a total non-starter for raising capital.
JMHO.
Interesting question. First off, I have always said Amendment 3 was an overreach and would be overturned or seriously modified. But the sweep has nothing to do with the warrants. So let's go back to the warrant discussion.
There was huge evidence in financial circles that the GSEs were in deep shit in 2008. Barron's ran a very condemning article espousing that claim, along with much supportive content that reached the same conclusion. A renowned housing expert, Professor Anthony Sanders wrote extensively about an insolvency risk at the GSEs. There is going to be no document produced from any further discovery release that proves no bailout was needed. There could be dissenting views uncovered. But, at the end of the day, the government is not going to admit they just made everything up to steal anyone's Fannie.
Now, for part 2... could any scenario develop where government might simply concede the warrants? Sure, I suppose that is possible. But I think any settlement has been rendered a near impossibility because the litigation playing field has become so engorged with so many plaintiffs and legal teams with conflicting agenda's that they will never agree on a lone "deal" for everyone. So I think this was possible awhile back, but now is just a pipe dream.
JMHO.
I actually tend to take Bill Ackman at his word. I took a huge position in Valeant based on a belief in his long term goals for their beleaguered common shares. So I offer that thought merely as rebuttal that I have some retaliatory bias against against Pershing as has been suggested here, previously.
Ackman has been quite forthcoming in acknowledging two basic premises on Fannie Mae commons. He bought shares opportunistically because he thought they were hugely undervalued. And, he bought shares because he believed the GSEs were strong, long term investments. That is a sound investment thesis for someone with the nerve, patience and capital resources to navigate the very evident risk profile AND the likely multi-year rebuilding threshold necessary to hit pay dirt.
Commons traded in the $60 range, just a few years prior to the 2008 crisis. I think this is what Ackman views in a long term hold. He talks about $20 commons as a near term prospect which would deliver very solid returns for his shareholders in Pershing Square. But I believe his eventual target is a LOT closed to that $60 target. When you buy shares for <$1 you can afford to wait things out, even if it takes 15 years.
Preferred shares are capped at par value and may pay out some nice divvies once the GSEs get recapitalized. My FNMAS willnever see a S/P above $25. That is why Ackman prefers common stock.
The part about all the hedgies I dislike is what I view as disingenuous posturing amounting to trying to game the court system to bleed $bazillions from the government for wounds and damages that inevitably are based on coulda/woulda/shoulda-been enrichment. "We caught you doing something illegal, so we are going to bleed you dry in a multi-front legal assault for everything and anything including the kitchen sink." The garbage about "Saving Fannie" and the importance of affordable housing as a motivation to sue is self-serving, sanctimonious bullshit. That's the part I find offensive.
JMHO.
Kudos. Very well stated. I have stated for years, here, that unless Fannie and Freddie helped relieve the toxic loan inventory from mortgage banks, the housing market (and broad economy) would have frozen and ignited a depression. The GSEs in such a doomsday scenario would then serve no useful purpose and would simply wind down on their own. There is a section in Paulson's "On the Brink" that spells this out quite well, from my recollection.
It is also "way too easy" to look at how much of that burden was later relieved by the Fed during Quantitative Easing I & II so that the GSEs were not hung out to dry and be unable to recover with the market... which is exactly what took place.
No, I do not see further challenges to either conservatorship or the warrants as possible since the statute of limitations is 7 years and these actions took place in 2008.
Dissenting views welcome. Anyone?
There is obvious duress for a board of directors that has witnessed the company to which they owe fiduciary responsibility collapse from around $60/share in 2007 to $18/share in July, 2008 to $7/share in early September, 2008. That duress needs no explanation, their resignation needs no explanation and the government didn't need to pressure anyone against the backdrop of visible market factors that are indisputable.
JMHO.
Fannie Mae's share price sank from around $20.00/share in July, 2008 to $7.08 on September 5, 2008... immediately prior to the conservatorship being announced which included the warrants. Fannie Mae had 1.1 B shares outstanding, yielding a market cap of $7B.
The Fannie Mae board voted to exchange 79.9% of equity, valid for 20 years, and a 10% SPD on any funds drawn from U.S. Treasury in exchange for a bailout backstop of as much as $100 billion. There was NOTHING inherent in this transaction that violated any aspect of constitutional law. It is a pure and simple contract transferring property between two parties, with each receiving valuable consideration. In fact, a substantial case could be made that the government got badly cheated by getting warrants worth only 4/5th of Fannie's market cap or around $6.2 B in exchange for a $100 B financial backstop arrangement.
Now if you want to argue about subsequent dealings in the Amendment 3 imposition, that would potentially be a different matter altogether. But that has nothing to do with the warrants.
JMHO.
Here's a clue for you on warrants and constitutional protection. Go back to August of 2008. Look @ Fannie Mae's market cap. Fannie exchanged 79.9% of common equity for $100 B in bailouts from U.S.Treasury.
Looks to me like Fannie got a hell of a deal. And it looks to me like Fannie common investors got a hell of a deal by getting to keep ANYTHING at all, let alone 20.1% of the entity as it survived and recovered under conservatorship.
JMHO.
AIG was not restructured under HERA. Powers granted to government under HERA were extra-ordinary.
My S/P prediction was very simply derived by comparing the S/P today with what I see if conservatorship ends and the basic changes I believe would transpire.
1. The sweep and SPD cease.
2. Income formerly routed to Treasury would be re-allocated to restore capital buffers.
3. Payment to junior preferred shareholders would have to re-commence after the hiatus since Q2/2008.
Obviously the big "what if" is some possible, large legal settlement that might be allocated to the GSEs and be used as a quick fix for recapitalization. But the lawsuits pending seem centered more on recovery for plaintiffs, not for the enterprises, themselves so I did not factor anything in for this.
JMHO.
Thanks for clarifying. Hope the "clue" was helpful.
The reference is, I believe, to an amendment inserted by Senator Corker to the 2016 spending bill passed last December to avoid another government shutdown. By recollection it banned any action being taken by government until 2018. I have a link for it on my other computer which is not with me at the moment.
Glen Bradford and I had an extensive discussion on the warrants and how they are considered. The net of it is that all the Yahoo Finance metrics assume the warrants are valid and are, thus, factored into their per share metrics. Those metrics are based on Market IQ Analysts and are the same content used by many investment analysts in their projections. So, the short answer is that the market presumes the warrants are legal and will dilute.
If the government keeps the warrants but releases Fannie, the common shares are worth $3. If the government gives up or is forced by the courts to cancel the warrants, the common shares are worth $15 until recapitalization can be effectualized... probably a 5 year process @ a $10 B income run rate, assuming it holds (which Fannie Mae, itself, says is unlikely).
The preferred shares in the latter scenario would immediately recover to about half of par in S/P but see divvies restored until some eventual point of redemption... likely on a scale starting @ 25% of prospectus payout rate and rising to 100% of coupon in year 4. Only at that point would common share dividends be anticipated, say in year 5 after release.
JMHO.
Nope. I disagree. The present valuation bakes in the premise that the bailout money has been paid back and the SPSA is an improper double dip.
To generate $100 B in recapitalization, the 4 B shares from converted warrants would have to sell for $25 after dilution. They sell for $3 today, before dilution. That makes the expected proceeds $.60/share for a net intake of $2.4 B with which to fund recapitalization after dilution.
Sorry, but the mathematics are a non-starter. That strategy is a death sentence.
JMHO.
Re-read my post. I clearly stated that NO court has ruled to invalidate the warrants. I never stated that any court affirmed them. Patswil stated that the warrants were invalid which was the starting point for the conversation. He is the one expressing an opinion.
When I post no IMHO in my comments, there is NO OPINION offered in my message. PERIOD.
The warrants are valid through September 7, 2028 and are clearly stated and recognized in FNMA's 10-K report. The legality of the warrants has been challenged in court and has never received a favorable ruling. The warrants will only become invalid if some subsequent court ruling so states this, or if the government simply retires them by voiding the initial contract signed by Fannie Mae's board of directors.
Facts are just that. FACTS. Fear of dilution via the warrants has long been cited as the rationale for Fairholme's clear preference for preferred shares over common shares.
1.1581 million shares before dilution.
Yes and no. The original commitment amount was $200 B which was from where the $189 B was drawn. The early agreement was then subsequently amended to the $400 B amount which remains untapped, at present.
No, that is totally incorrect. The warrants exist as collateral for the $400 B in possible draws afforded Fannie & Freddie by the U.S. Department of the Treasury.
If the sweep ends and the $15 B projected annual income holds, ZERO capital needs to be raised unless new regulations are imposed by the incoming legislature whose new leadership ran on the premise of repealing Dodd-Frank and ridding businesses of regulatory controls.
No problem
"Home free all."
Jonathan Gray in the running for Secretary of the Treasury?
B L A C K S T O N E.
What could be better than that for Fannie and Freddie?
It all is starting to fit together. RRR before 1/20/17? You betcha.
JMHO.
They are banned under current Federal law to sell warrants until 2018.
Sorry.
Non-starter.
But they are safe and sound and never needed a bailout in the first place. Remember? It was later proven by forensic accounting and confirmed by numerous experts that you and many others routinely cited as credible. Remember? These are two of the world's most profitable enterprises, generating over $15 B in annual income. Remember?
Watt needs no rationale to release. He is bulletproof under HERA. If he determines that Obama saved the Twins, he releases, resigns and leaves the details and follow-up to his successor appointed by Trump after Inauguration Day.
Simple. Straight-forward. It ends the saga. It then transfers the burden of affordable housing back onto the legislature and off the backs of Fannie, Freddie, FHFA, Treasury or the career civil servants that tried to make housing affordable for everyone.
No problem. You reap what you sow. ENJOY!
JMHO.