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I think that there is more to Watt than the "tip of the iceberg" you are reading into it.
Underneath, he will clean the books of the banks holding second liens. Which will enable the "great start". That is, jump-starting the lending cycle again. Which means a move from refi to 1st home purchases. Which means good, solid business for Fannie and Freddie and a great outcome for the economy. If so, it is difficult to see how these two will be wound down in 5 years. The tip of the iceberg we see might only be his public persona.
Russia trading at 5 PE forward earnings. Good 2014.
"We can turn them into two companies, or five, or as many as the government feels is necessary to have a competitive marketplace."
Here goes his public response to the government's rebuttal to his proposal.
Thank you for the link, Letgo.
Discooooovery coming!
The Srs. have a liquidation preference over the Jrs. If they remain in existence there will always be a chance that the Jrs. will never trade at full redemption value because of the associated risk. We should never count on the GSEs making large profits for eternity. Needless to say, if future problems arise the price will again plummet for this very reason (liq preference of the Srs.)
Can you try again, 20c? It's a pretty large file of 169 pages. Working on this end...
Thank you Obit for always taking the time to comment. Your feedback is so valuable.
Perhaps the only value of these documents is to better assess possible witness cross- examinations. Which may not go well for the government. Unless, as you say, there's privileged information still to be released or expert witnesses waiting in the shadows.
5bagger, here is the written testimony fwiw. Yes, it is open to interpretation what exactly he meant. Sure could be read as "it just happened, we weren't planning on that".
19. These changes in structure [enactment of the 3rd Amendment] did not change the underlying economics of the PSPAs. It was my belief at this time, given the size and importance of the Treasury commitment, that through the liquidation preference, fixed dividends, and the market value of the PCF, Treasury would receive as much from the Enterprises under the Second Amendment as it would under the Third Amendment. Thus, the intention of the Third Amendment was not to increase compensation to the Treasury -- the Amendment would not do that -- but to protect the Enterprises from the erosion of the Treasury commitment that was threatened by the fixed dividend. The Third Amendment was therefore consistent with the intent of the original PSPAs to (1) fully compensate Treasury for the value of its financial support, without which the Enterprises would have been forced into receivership and (2) protect the Enterprises and the national housing market.
No problem Demar, bmp152 and Obit.
Obit, by this you mean that his declaration is useless?
bmp152, although I agree with your points it is difficult to comprehend that the possibility of returning to profitability had existed back then (unkown still leaves the possibility intact) -therefore setting things up for activation of DTAs- and not once a provision to limit the transfer of wealth was included in the last amendment. If indeed the intention was not to increase compensation to Treasury. Who were the actors here? Were they not well-seasoned professionals, politicians, accountants, lawyers with commensurate experience in the legalities of it all? This looks more like an omission.
The surest, most practical and safest way of planning for future events is answering all the "what if" scenarios. They haven't done that?
Thank you for spending time on this. And looking forward to your comments on the other filing.
Of special interest, 27.2 Mr. Ugoletti's role in defining the 3rd amendment and his own declaration with special emphasis on the intent of the 3rd amendment "not to increase compensation to the Treasury". His words.
Letgo, more importantly, Ugoletti's declaration states that the 3rd amendment never meant to increase compensation to the Treasury (his own words). That means that by omitting discussing the DTAs activation the latest version of the PSPAs achieved just that: they unexpectedly increased compensation.
No problem. A judge should see the fault thus correcting the issue and aligning events with the intention. So any excess to the compensation should be returned as it was never meant to be.
This is a blatant lie.
Had that been their intent they should have added a provision in the PSPAs setting a cap to the transfer. They cannot claim they didn't know as he himself in the testimony declared that they knew about the DTAs except that they didn't know if/whether or when. The sneakiness is revealed in his own declaration.
He declares the intention was not to increase compensation to the Treasury yet this intention never made it to the black and white document? Was never translated into writing, into words? So by omission, the agreement achieved just that. It achieved what was not intended.
No problem, the judge can correct that and align things with the intention of the document.
Thank you, Mr. Ugoletti!
The only shareholder was/is the conservator. We and others do not really exist within the HERA frame, except that we are owners of legal certificates that trade in the market and give us a share to the company and its profits. Too bad DeMarco and Treasury allowed the certificates to survive. Big mistake, big disconnect.
This guy is important. He was partly in charge of creating the PSPAs so his declaration is relevant.
All exhibits are here. This one belongs to 27.2. Read his introduction.
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=95082211
Mario Ugoletti declaration on 12/17
As part of the recent filings (there were two), this one pertains to DeMarco's compilation of documents (18 exhibits).
Advisor to FHFA, served as primary liason with the Treasury regarding the PSPAs.
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What this proves is that they were all aware of the DTAs, just did not know whether or if or when. No problemo, Señor! They should have included a provision setting a cap on the transfer to the Treasury whether/if/when.
Not doing so does not reflect incompetence or mishandling of the issue but complete irresponsibility borderline to sneakiness in the management of 10's of billions of dollar. They *knew* about them.
How funny. These poor fellows were caught by surprise by the "sudden and substantial increase in Fannie Mae's net worth".
Something doesn't add up... Were FHFA conservator not in direct communication with Fannie's CEO and was never a reference to a coming DTA activation? Or was it, therefore the full sweep.
Ok, Obit.
I am uploading the other filing, the compilation of documents by DeMarco.
Obit, please check.
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These are paid documents. There are probably restrictions to make them public? Just one of the exhibits is over 400 pages long.
Yes, there were two. Haven't downloaded them yet. Very long, both. Too many exhibits.
1) NOTICE OF FILING DOCUMENT COMPILATION REGARDING THIRD AMENDMENT TO SENIOR PREFERRED STOCK PURCHASE AGREEMENTS by EDWARD DEMARCO, FEDERAL HOUSING FINANCE AGENCY(Varma, Asim)
2) ADMINISTRATIVE RECORD by DEPARTMENT OF THE TREASURY, JACOB J. LEW.(McElvain, Joel)
Do you have an email address you could share?
Obit, I think you are right. We are dealing with something a lot more complex than simply reverting one aspect of the problem. Silly me.
In your view, what is the chance of Watt amending the PSPAs to eliminate the "wind down feature" of taking away 600 mill of their net worth each and every year till 2018, as a first corrective measure? After all, Watt sees the GSEs as vehicles through which to implement social programs/aid.
Why not use spreadsheets and look at the numbers straight? Numbers cannot lie. OldSchoolValue has a nice set of spreadsheets that can reveal important trends.
I have also been a common stock skeptic and have never owned any. But am thinking a Perry victory will solidify the common, the warrants may never be exercised and/or Watt may do something that will send a signal that common equity is here to stay. I agree that the warrants mishandling may create a new set of issues, including issues pertaining to changes to the capital structure.
Just a common sense thought although I might be off. Democrats will not risk to have those warrants live onto Republican hands. So the fate of those warrants is either to be dropped or to be exercised and sold into the market.
20c I am curious then... wouldn't shareholder's equity equal zero mean that the companies have been de facto nationalized? By receivership I mean the practical fact that they will be brought under the umbrella of the government 100%. That would mean that the wind down is simply wiping out shareholders, what is left of their equity. Today, it's a 20.1% of 3 billion. In five years it will be 20.1% of nothing.
Companies can't retain earnings. So they not only can't increase their net worth but instead are being artificially mandated to shrink it!
I understand that earnings, cash flows and market cap are all doing fine. It's just that in five years all of that will be theirs. It's like accounting magic. Black magic. I hope Mel Watt reverses the disconnect. PSPAs have determined certain values for the companies. The market doesn't want to hear it.
Gentlemen, there is an ongoing wind down here. It started with the 3rd amendment. But it is so slow that we don't realize it.
Thanks for your feedback.
The sure path to receivership is set by the reduction in net worth by the 3rd. On year #5 this is zero. In other words, the companies cease to exist. Will the doors be shut down or will the companies be absorbed by the government? Doesn't look like Mel Watt will be happy with any of those outcomes.
If there is a real interest in relief and other social programs the media could be right in that the "wind down" will decelerate. One way to do this will be by amending the PSPA once again and eliminate the 5 year plan to reduce their net worth to zero. That simple change will also align the conservatorship with its true mission.
I am thinking one reform they do want and will push is to break up the duopoly. That is probably more important than a real wind down. A break up could be achieved via the creation of a coop, a partial privatization a-la-Berkowitz or both.
The elimination of the wind down feature embedded in the 3rd will not really benefit us. It will deflate one or both of Fairholme lawsuits. At least the wind down VS preserve/conserve controversy will disappear. Perry is a different story, I think. Even without that feature the companies will remain in the c-ship limbo so not great impact on pps.
A constructive path would be:
1st. Kill the sure path to receivership now in place. (one aspect of the 3rd).
2nd. Aid in recap the companies by applying the DTAs and any excess to the 10% div to pay off Srs. Nullify the warrants.
3rd. Reform by splitting functions and by breaking up the companies into a multi competitive market.
4th. Explicit gov. guarantees and other reforms to be executed later.
We also got -worthless- shares or interest on the litigation trust. I have 900k of those sitting on my account. WMIH was supposed to continue litigating a long list of suspects.
JPM totally screwed equity, including preferred holders which got little.
He has a 5 year term?
I don't think that Fairholme is arguing there was a loss of share value or loss of dividends due to c-ship, so the "ripe" argument shouldn't apply. Even if it does, Epstein stated -from a legal point of view is my guess- that there is no need to wait for a damage to materialize to have a claim. Specially if the damage cannot be undone. I think Fairholme argues that the companies can't operate normally for restoration because of the sweep/net worth issue (3rd amendment). That is the takings. What was taken away was their ability to stand on their feet again.
They did go for the jugular.
Which denotes an all-out-defense/attack and a weak hand at the same time. If the government does not succeed in any of its points for dismissal there is not much left, my view.
Their strongest point appears to be the "ripe" issue. However, Richard Epstein has already counter-argued that the whole point of a lawsuit is to stop a negative consequence before it accomplishes its damage, which many times cannot be undone. This anticipatory attribute of a lawsuit claimed by Epstein could potentially undo the government's last point.
It's true that there's a prior ruling by which Treasury has been seen by courts acting in the interest of a shareholder, thus commercial relationship. But trying to transfer any fault to the FHFA is disingenuous. Imagine Buffett rescuing Goldman in exchange for a punitive dividend plus warrants (which he got and also stated for the record it's the way to go when helping firms in much trouble) and later on, Goldman of its own volition hands out to Buffett not just the mutually agreed dividend but all of its profits and then decides it's time to shut doors... all because Warren is so good.
Sure. It's just a commercial relationship. Happens every day!
Thank you for taking the time to answer with so much detail.
Obit, your thoughts please.
So if c-ship ends, does FHFA become the permanent regulator of the GSEs with just the mission to regulate the entities? Will parts of HERA continue after the conservatorship ends? What will be the power of the future head of FHFA over Fannie and Freddie post-conservatorship?
Say, Fannie and Freddie aren't in conservatorship anymore and Watt becomes the regulator. Then he has to deal with two private entities. Treasury exercises its warrants and the government becomes the majority stakeholder. But later on Treasury changes hand for Republicans. Being the largest shareholder with majority voting rights how much influence could Watt enforce unto a Rep. Treasury?
Something looks wrong in the above *politicized* picture (for democrats).
Assumptions...
The strong push to get Watt in there must be to make sure:
* conservatorship never ends (unless for a court order).
* warrants, if exercised, are fully sold within Obama's term. Tsy not a shareholder anymore. Alleviates risk of a Rep. Treasury influence.
* warrants not exercised and disposed to prevent a future scenario where Reps could have their say via a Treasury shareholder.
Obit, can you think of ways in which Perry's case succeeds yet shareholders will not benefit or at least not in the amount they (we) believe?
Vacating the 3rd may mean going back to the 10% and perhaps getting back the DTAs which -to some extent- will recapitalize the companies.
Could the conservator choose to use those funds to pay off the Srs.? I believe there is a way of doing this? Could the judge also rule in this respect as the current set up where the Srs. can't be repaid is totally weird?
There is also the original agreement by which shareholders' claims are second to Treasury's, therefore even if recapitalization occurs shareholders may have to wait several years until all Srs. are redeemed.
Why does the Fed need to be investigated? They create money out of thin air at -in normal times- snail pace. And this is a good thing. It creates a low inflationary environment where everything grows nominally. It's like a universe in expansion.
Attaching -continuously devalued- value to paper money is no more different than attaching value to a piece of rock that shines yellow, value that is then transferred to printed paper. Martians will think we are crazy!
Why is it attaching a relatively fixed value to a material in one case better than using constant devaluing by design? Two different systems. One does not work for the purpose of expansion. Unless you send mercenary expeditions to the Indies to steal gold from natives. But then, we would in 1492.
Beta... I do not know what country might be safer.
Uruguay's gov seems to have their feet on the ground. Nice beaches too. I do not know about the rest. Chile moving to the left.
I know these are the kind of replies that get me in trouble but it is my 2 cents.
my 2 poor cents regarding beating the gov...
A former boss who used to work with a federal prosecutor mentioned many times that it wasn't easy to defeat the government. His reasoning was based on the common fact that the government has "unlimited resources". According to him, only reason, as the government does not have the best and the brightest. So old and young attorneys will continue to pass on this "fact". The idea that deep pockets always win.
Yet, the notion of unlimited resources could also be just a myth. "Their" unlimited resources as for the most part taxpayers'. It won't take much to spark a media/public outcry if the government really decides to waste taxpayers' money in an unlimited fashion in a prolong legal fight against hedge funds.
So there goes their unlimited resources.
20c,
Richard Epstein's argument that the strength of a biding contract -essential building block of capitalism- relies on respect to the rule of Law is hard to beat. No respect to the rule of Law > failure of price discovery mechanism. The "system" seems to be above the government itself. Governments come and go. The system stays. The doctrine of sovereign power that allows the government to have some leeway with courts and in some cases override the Constitution may not be enough here. Overriding the Constitution and overriding the essence of how capital markets and capitalism works may not be the same thing.
I guess it will all depend on how the cases are presented to the court. A layman view.