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There isn't any value in exercising now and diluting a $0.70 stock. When the stock price increases, it would make more sense to Treasury. But I agree with you, they should not be exercised at all. The amount of money funneled out is staggering and the purpose of the warrants was collateral in case of receivership.
The GSEs can stand if we'd just cut the zip ties holding them to the chair and remove the gag.
1000% correct!
IMO - #1 perpetuates the fraud, the SPS gets paid twice because the language was never intended for release. Option #2 ends the fraud by rectifying the "impossible to repay" language in the contracts. (They should also remove the NWS language but probably won't)
Option #2 has the potential for everyone to have some but not all of the win - Treasury, FHFA, shareholders.
"Treasury would work with FHFA and the administration’s senior economic team to negotiate a recapitalization and release agreement that includes retroactive cancellation of the non-repayment provision of the senior preferred and a recasting of the companies’ remittances under the net worth sweep as repayments of the senior preferred stock (which would pay all of it off for both). Fannie and Freddie, in return, would agree to accept utility-like return targets on their credit guaranty business, benefitting homebuyers. Then, for its part, the administration would acknowledge the criticisms made by commenters on FHFA’s request for input on Fannie and Freddie’s capital and pricing, and strongly encourage (or require) FHFA to remove the excess and unwarranted conservatism in the ERCF, to have it more closely reflect the true risks of Fannie and Freddie’s business."
This is the exact scenario that I think is most likely - SPS & LP gone, warrants remain outstanding, and ERCF thresholds lowered. Stock value (both common & JPS) increases based on anticipation of release which would only be a few years max. I'd prefer that the warrants never get exercised, but as the value grows it would be hard for Treasury to not convert some if not all of them.
"The Supreme Court said that the NWS was a valid act of FHFA as conservator"
Yes, and maybe I'm not reading far enough into it? By law, FHFA was not restricted from implementing the 3rd Amendment agreement with Treasury. I see that the same as saying "the government has the legal ability to take your house." They didn't really get into the specifics of what happens when the government does what it was allowed to do via statute, just that it was allowed by statute.
Just because it is not illegal for the FHFA or any government agency to take a specific action does not mean there will be no remedies to any impacted parties. The recent jury verdict being the first example we've seen.
"Mark Calabria actually tried this, and he was shot down by Treasury and the DOJ. The DOJ told him that the government speaks with one voice and quashed his bid to argue against Treasury in the Collins case."
This is exactly the type of "bad faith" dealings I think will be less frequent. There can't be "one voice" for both sides of a two-party contract. The FHFA and the Treasury should be (and should have always been) negotiating at arm's length with the goal of fulfilling their duties under HERA (stabilize secondary market and mitigate taxpayer risk via temporary conservatorship to return GSEs to sound and solvent condition). Clearly they have not done this and much of the documentation that would prove this is still sealed and/or inadmissible in court.
The FHFA should not be a puppet for the Treasury, and there is now an example for calling out bad-faith negotiations where it's painfully obvious the FHFA is doing what is in the best interest of the Treasury, and not necessarily the regulated entities to emerge from conservatorship.
Yes, thanks ChessMaster for an important detail. We keep talking about the "loss" at the SC but that's just shorthand for not outright winning. It was partially denied (the exceeded authority claim), partially affirmed (unconstitutional removal of Director) and remanded to lower court for remedy for harm suffered on the removal issue.
At no point did they say the NWS was harmful or not harmful, valid or invalid, a taking or not a taking. They just said FHFA was within it's statutory authority when it implemented the 3rd Amendment.
"You appear to think that lower courts are free to ignore the Supreme Court's Collins ruling but that they will pay attention to the implied covenant breach jury verdict. The opposite is true. All lower courts are bound by Supreme Court decisions. The NWS was not an APA violation no matter what any other judge thinks."
The Supreme Court ruled that the shareholders were not entitled to bring their statutory claim because the FHFA was not in violation of HERA's anti-injunction clause "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver". They (incorrectly IMO) ruled that the FHFA did not exceed it's authority when it was acting in the best interests of the regulated entity or the Agency. They ignored the part about the conserve and preserve aspects. Old news.
The unconstitutional provision about removal of the Director was rectified, for better or worse, so that future administrations can put in whatever puppet they want to head FHFA. This means future Directors will have different outlooks based on political winds. Future Directors may want to unwind the mess that was created.
The SC decision is not an impenetrable barrier to any future judicial review of the FHFA/Treasury agreements. It's a point in time, single case denial. There may very well be a future FHFA action that is challenged for exceeding it's authority. Just because it didn't exceed in the last case doesn't mean anything FHFA does in the future is not excessive or beyond what it should do as a Conservator or Receiver. Additionally, the FHFA Director can allow or request a judicial review, challenge the legitimacy or legality of any of it's agreements or policies, something the shareholders were denied. The anti-injunction clause does not apply to the agency itself.
As for the remedy being cash and cash only. Sure, just peanuts. However, it sets the precedent that fair dealing breaches are not going to be under the radar any longer. While they still wield a lot of power, it shows that the FHFA & Treasury cannot operate with complete impunity.
"Oh really...and what domino will fall next? I'm all ears."
I don't know. And neither do you, you just pretend to know.
"It's possible Bradford will get a new wardrobe, but it's not probable."
It's probable his wardrobe will not last the rest of his life. Not to mention when his Preferred shares get redeemed, he may splurge.
Where's the face-palm icon... If you think the Supreme Court's decision is a mistake and "insane" why would you not think that lower courts or potential future jurors may not continue to rule in favor of plaintiffs? When the situation is properly described, the govt lies are pretty hard to ignore. Maybe I am overestimating the impact. Maybe you are underestimating the impact. But IMO this is just the first domino to fall.
Whatever, we shall soon see if FHFA walks back or takes any action based on the unfair dealing. Obviously they can't do this without Treasury.
I'll keep saying it - it's all possible. Continued NWS, SPS conversion, 10% divvy on huge LP, warrants exercised, receivership, SPO/IPO, higher/lower capital requirements, LP reduction, warrants expiring, Congressional act, Presidential direction, FHFA deemed unconstitutional, housing crash, housing boom.
If you are SO CONFIDENT your one scenario is the one true outcome, then good for you. I'm not going to convince you that there are any other variable apparently.
"They were agreed to by both sides, check the signature pages at the end. Treasury cannot revert the capital buffer (Reserve Amount), or make any other changes at all to the relevant contracts (SPSPAs, amendments, senior pref stock certificates), without FHFA's approval."
Yes, and FHFA just follows blindly, not acting properly as a Conservator representing the GSEs/Shareholders but instead a pawn of the Treasury (and supposedly taxpayer). Hence the legal win calling this out. There are limits to just how stupid one can be when agreeing to lopsided contracts that are not in the best interest of those you represent.
If you actually think there were two sides to the agreements and consideration was given and received, you are part of the problem.
"...Treasury had preferred equity in a company and chose to write it off for nothing in return"
As I tried to explain already, the reason is not "for nothing." It would be to correct an action that the courts have recognized as a breach of good faith and fair dealing. Should a breach of contract result in continued enforcement of that contract? To simply pay the judgement amount and not change their behavior risks being called out for new damages (much easier the second time around IMO).
But if you want to compare this unprecedented situation to anything else when it suits you and then claim I can't compare it to anything because there are no examples of this specific situation happening ever, just shows your hypocrisy.
Nothing could be unwound because there were no grounds to do so. All the agreements were previously valid until proven otherwise. "Otherwise" just happened in the last couple weeks. Anywhere there is a sweep in the agreements, we now know that was an underhanded self-serving deal, not negotiated in good faith between two arms-length parties.
"It's a completely separate amendment to the SPSPAs. You're right that the LP ratchet is unnecessary to build capital, but it's the return consideration Treasury wanted in return for amending the "Reserve Amount" definition in the SPSPAs to allow FnF to retain more than $3B each of net worth."
Return consideration that has no value is not consideration. The reserve amount can be changed with a pen swipe - it's a completely 1-sided agreement, there is no no tit-for-tat contractual negotiation. It's just a policy change as noted in the first paragraph of the Agreement: "Effective September 30, 2019, the Senior Preferred Stock shall have the following designation, powers, preferences, rights, privileges, qualifications, limitations, restrictions, terms and conditions:" It's just stated as a fact that the rights of the SPS are changing. This is not a negotiated contract. There is no mention of consideration anywhere.
Suppose hypothetically, Treasury decided it wanted the Capital buffers back to $3B. They could simply issue a 5th Amendment and make it so. The excess would go to Treasury because it has nowhere else to go and the SPS can't be paid down, dividends to shareholders can't happen, can't buy back stock, etc. All benefits go to 1 side with a pen swipe. That is not a contract, that's a policy.
Here's a thought experiment.
The GSEs are allowed to retain their earnings. What if they decide not to retain earnings for next quarter? Say they make $5B in profit. If they decide not to retain it, where does it go?
I think the only place it could legally go is to the Treasury as a dividend. It can't go to JPS as dividend, can't go to common dividend. Can't buy back shares. It can't be used to pay down the SPS, so it essentially highlights that the sweep is still there. Sweep in cash vs sweep in LP. A sweep is a sweep.
"Which of those involved Treasury having an equity position and straight up waiving it, rather than exchanging it for something else?"
When has the Treasury ever gotten it's equity position from an ill-conceived NWS that was deemed to be a breach of fair dealing? I'll wait.
"That's like saying that since the last hurricane barely missed you, future ones are less likely to happen. It makes no sense to me."
As opposed to your thinking: The last one almost hit me, so the next one will for sure hit me, or I calculate has a 75% chance hit me.
The truth: The next one is no more nor less likely to hit you that it was the first time.
"Wrong. Before the letter agreement in September 2019 that started the LP ratchet, the amount of capital that FnF were allowed to retain was only $3B per company. Anything above that would be swept to Treasury."
Which we now understand was an improper agreement. Every agreement that follows was based on this sweep.
"As a result of the letter agreements, FnF were allowed to retain more earnings than they would have under the terms of the Third Amendment. That is the consideration FnF received in return for the liquidation preference ratchet."
So... FNMA/FMCC can retain up to a higher capital amount, and in consideration for NOT sweeping your profits in cash, the Treasury will just increase the LP dollar-for-dollar. Again, this new consideration is is based on a sweep that was not a fair contractual obligation to begin with.
Hypothetically, if you remove the improper NWS (violation of fair dealing), then the 10% dividend would be in place. The profits after the 10% dividend would be in retained earnings up to whatever limit is set. The LP increase is clearly a variation of the NWS and totally unnecessary for the retention of capital.
In the 4th Amendment, the Treasury planned to continue the NWS after reaching the capital buffers by way of the "Lesser of 10% or company's net worth". That's still in place, so of course they want the LP to be enormous so even collection on 10% of the LP would mean giving all of the profits to the Treasury in perpetuity. This may have worked, except for the court win stating that a NWS is a violation of fair dealing. As they try new iterations of NWS, I expect them to be challenged.
Shout it from the rooftops! :)
We'll have to see what happens with current litigation. There is slight hope now that we have the 1st win to reference. The statute of limitations could hinder new efforts until the Treasury takes a new action like a new Amendment or new self-dealing agreement. That will set a new clock on a new harm. Or even just following what is already outlined in current agreements, such as expecting the GSEs to pay 10% on the ill-gotten LP once they reach capital threshold. I just don't see it never being challenged in court again.
"Treasury's preferred-to-common conversion of its AIG stock proves this wrong. They ended up with 92% of AIG's common stock.
Any time before that someone could have said what you did, so the fact that the AIG conversion happened anyway means your argument doesn't work."
This is horrible logic. Because it happened to AIG, it should apply everywhere? This one time, at band camp...neverrmind.
For every example of a bailout effort resulting in Govt owning common stock, there are considerably more where it doesn't happen.
"That makes no sense at all. The two things are opposites. Writing off the seniors is throwing an asset worth potentially hundreds of billions of dollars in the trash can for no reason. The dollar-for-dollar liqiudation preference makes Treasury's stake more valuable."
I don't know how you can't see the double standard here. The reason is because the increase in the LP was given for no consideration. It would be like me telling you "In consideration for you keeping your annual salary, you will owe me your entire annual salary." That equates to a NWS, the GSEs giving all of their profit away. Perhaps not for cash now, but for LP. If the NWS doesn't work for cash, how is it supposed to remain viable for future LP redemption? Delaying when you collect doesn't make it any more legitimate.
Returning/reducing the LP is NOT for nothing. It is to correct an action that the courts have recognized as a breach of good faith and fair dealing. Throwing hundreds of billions of dollars in value in the trash can is exactly how this whole thing started.
"No specific law was cited in Calabria's book, but that doesn't mean Treasury didn't have a specific one in mind."
There is no such law. And even if there were, there are millions of contracts that start with "In consideration for $1..." or fill in the blank.. We retire the SPS.
Agree it comes down to Seniors. The way in which the LP of the Seniors has increased for no consideration whatsoever (and based on the now successfully refuted NWS) tells me that it's more likely than not the the SPS LP will need to be adjusted down. By a lot.
Yes, and...
Your "75% chance of conversion" is no more valid than me giving it a 20% chance of fruition, using the same set of facts. Since it didn't happen in 2020, I can say it's less likely to happen while you can say it's more likely to happen. Only time will tell who is correct, not the number of posts we spew repetitively.
"My prediction is based on hard facts"
I'm not disputing your hard facts. There is a massive gap in the CET1 capital. I get it, we are all watching it grow slowly like some doomsday clock.
What I'm disputing is your prediction of the future based on those facts. You have no idea how the capital will get filled. You have no idea if the threshold will stay the same 3 months from now, 3 years from now, or by the time they are released. You don't know what the economy or housing market will do. You don't know if FHFA will offer Treasury a conversion. You don't know if Treasury will want it. You don't know who will head the Treasury 3 years from now. You don't know if the funding structure of FHFA is deemed unconstitutional. You don't know if any of the FHFA decisions made previously will get unwound. You don't know who the next President will be and what direction he/she wants to give on the GSE problem. You don't know if Congress will get off its ass and do something. You don't know if there will be additional legal wins for shareholders.
You have a math model based on current state that reaches 2040, without any variable inputs.
That being said, I do appreciate all your insights and thought process. What you outline is possible and you supply ample references, and it helps investors weigh the risks. I've been reading your posts for years even though I never posted until recently. Instead of disagreeing with you in my head, I get to type it out. It's actually exhausting, I don't know how you manage to articulate your position and respond very thoroughly to everything :)
1) Treasury needs an incentive to allow FnF to be released
2) Treasury believes just writing off the seniors is illegal
3) Treasury believes just writing off the seniors would cause undesirable political blowback
1.) The incentive will be to stay on the right side of the law, which they've been precariously over the line for a while now. There is no such thing as a permanent conservatorship and sweeping profits of a private company forever. That would be a Taking, and they would run the risk of having to pay a LOT more than the $600M chump change. There's momentum on pulling back on these Agencies acting like the 4th Branch and being isolated from accountability. Are they going to want to stay in the spotlight as it intensifies?
2.) Sounds like a red herring to me. Did anyone state a law that it violates? I don't think so... If they thought writing off the seniors was illegal, they'd probably think the dollar for dollar LP increase off the books is illegal also.
3.) Political blowback for sure, because what politician doesn't like a cash-cow? But the PEOPLE rule this country, and the laws should apply to everyone.
"Your logic applies equally to the warrants, by the way. Just replace 99.99% with 79.9%."
I agree. Which means something is giving the Feds pause on being official owners of 79.9%. If they wanted it done, it would be done. I think it's unlikely that they walk away from this entirely, but clearly this could have been exercised much easier when the perception of the GSEs in trouble was more palatable. It could be that the warrants are never exercised or only partially exercised because Treasury doesn't want to own commons or have to sell an obscene $ amount to investors over a very long time. Why are these still sitting in limbo? There is a reason that we are not privy to.
The AIG comparison is moot IMO. The GSEs are not and were not actually insolvent except when the govt uses accounting gymnastics.
"The justification they gave to the Supreme Court (the "death spiral" narrative) was bullshit but the Supreme Court bought it anyway."
This isn't quite right either. The Supreme Court said there's nothing unconstitutional to implement the NWS. Just like the govt can take your house away legally, they can also take a business or the assets of the business. There' nothing to legally prevent the NWS even if it's never been done before. That doesn't mean there doesn't need to be compensation for takings.
"Given that Treasury almost converted the seniors to commons in late 2020, despite all the threats levied by message board warriors, a conversion (rather than a writedown) should be viewed as the default case at this point."
Disagree with this as well. Basing a future expectation on something that did NOT happen? Lots of things ALMOST happen every day. Instead, we can and should base future expectations on what HAS happened. Namely, 8 jurors who said FHFA and Treasury acted improperly and breached the covenant of good faith and fair dealing with the SHAREHOLDERS. FHFA and Treasury will need to do a better job of arms-length negotiations and transactions, aligned with emerging from a TEMPORARY conservatorship (zero need for receivership), and conserving and preserving the assets. Which had they been doing all along, we would already be released.
That train is coming for all of us. It may knock me into the green, or into the red. Either way, this will be resolved one way or another.
"It's unlikely that the government will become more modest after the Lamberth debacle; rather, it will become even more encroaching."
Sure, I understand the apprehension. I disagree though. I think the more visibility this gets (and I think that's coming) the more handcuffed Treasury will be. $20B to them is not a lot of money, so they have to weigh risks vs reward. The optics of them taking ownership just to gain $20B is not good. Unless there is another 2008-type crisis to serve as a smokescreen.
Ripping ownership from private shareholders of a highly profitable company because the government wants an extra $20B? There's no good justification for that. Would require lots of govt spin and doublespeak to make it sound better than what you have outlined. With court win(s) spotlighting the existing malfeasance, this becomes a harder option to execute.
Also $150B needed for a secondary offering is really large. Would take a lot of time and effort.
YES! Exactly like the NWS. Highly improbably, unprecedented, and not a measure that any rational Conservator would have taken. Hence shareholders should NOT have know that was a risk that could happen, as proven in court.
Maybe there is a glimmer of hope for you to catch on. :)
I think if 99.99% government ownership was the goal, it would already be done. They kept the private shareholders for the illusion of ownership so they could steal the money and say it's not a takings because shareholders are still private. Now it's coming to bite them because it's hard to justify walking in and literally taking the company for nothing but the wave of a pen. It's possible. I just find it improbable.
Hmm, but I don't feel uneducated, illogical nor nonsensical. Shouldn't my posts be just as good any anyone else's?
If not, I'll just take your word for it.
Helpful if the goal is immediate release at shareholders expense. What if the goal was immediate release at Treasury's expense since they concocted this whole scheme to begin with?
This whole thing happened with backdoor agreements. The whole thing can end the same way. Write down the ill-gotten LP. Lower the capital requirements to risk-based, either exercise the warrants or don't. And set the twins free. I don't know why some people are stuck on the SPS conversion being necessary to unwind anything...
Whatever it is, Treasury clearly believes it can't trample over the rights of the junior pref shareholders.
Past performance is not a guarantee future results. Nor do you represent the Treasury's thoughts unless you work there?
Converting the seniors to commons is the only way for Treasury to monetize them before 2040. That's because converting them to anything else won't fix the giant CET1 capital hole FnF have.
This is like a climate model, time will prove/disprove your prediction. Your crystal ball must know about future housing crashes, booms, fee changes and revenue increases over nearly 2 decades. It must also know what will happen with the ERCF changes over that time.
Kindly share winning lottery ticket numbers while you are at it. Oh, nevermind - "all attempts at prediction are equally useless"
So why are you pretending your predictions are better than everyone else's?
If FHFA/Treasury dilutes you into oblivion, what do you think will happen?
The key word is "IF". If they do, then they will have successfully stolen more than they already have. Investment involves risk. However, I think any new examples of FHFA engaging in contracts with Treasury that are clearly harmful to the entity under Conservatorship, and clearly not arm's length negotiations (breach of good faith), are less likely in the future than in the past.
Back to you. What if they don't dilute to oblivion?
I think it's possible. I don't know that the single court win will move them to apply the ill-gotten dividends to retire some/all the SPS. But if accounting tricks got them into this mess, it can get them out especially if they decide to go the legal route.
How's this for a reason. The FHFA and/or Treasury is likely to do something backhanded and of questionable legality. It may not be any of the things we are thinking about. Behind closed doors they are probably crafting a net-new way to stick it to shareholders.
Unless you are willing to share your 100% accurate crystal ball with the rest of the class, you need to sit back down.
In the end, the truth comes out. The only thing I know with 100% certainty is that I'm not right on all of this, and neither is kthomp, Bradford or anyone else.
I get that we all want the lawsuits to go away so we can release, which leads to wishful thinking. SPS conversion did not happen in 2020 for a reason. Nobody knows the real reason. We can disagree on the likelihood of it happening in the near future. Just like watching the Climate Scientist predictions, we'll eventually know how accurate their modeling was.
If two or more departments under the Executive Branch are allowed to create rules and contracts that feel like laws, and pick and choose what and how they want to enforce those laws, and attempt to make them contractually beyond judicial review because the govt agreed with itself, that should tell you all you need to know.
If FHFA and Treasury are plotting behind closed doors, how would you even know to file the injunctive lawsuit? Challenging an SPS conversion today would not be ripe because there is no announced plan to do so. Should we also file injunctive suits against 1001 other underhanded things that FHFA and/or Treasury might do? Let's just give them a list of all the ways to screw over the shareholders.
kthomp - Treasury was ready to go forward with a lot of things. This was carefully plotted not happenstance. They weigh what they think they can get away with and execute where they find gray area and backhanded ways to steal and attempt to shut down the GSEs, while giving the appearance they are doing so above-board. The 11K sealed documents would prove this without a shadow of a doubt but they won't see the light of day for at least another 15 years. What they can't get away with they ignore or spin the narrative. The PCF that never happened for example, wasn't because they were feeling charitable, it is in direct violation of the Charter Act prohibition on government fees. That's a harder win for them. So instead they use the NWS which is much more vague in it's legality. It took years of effort and multiple failures to shed light on that.
FHFA will likely argue paying damages is a restricted distribution until GSEs are capitalized. In the meantime, Treasury can take distributions. Previously in cash, now LP adds to future distributions. After we reach recap levels they will inevitably revert to 10% or NWS. NWS will be a non-starter now. But that 10% on a HUGE LP amount is due to the dollar for dollar increase (sweep) in retained capital that is still going on. Therefore, this has a probability of going to court if the LP is not adjusted down.
Treasury exercising the warrants - I actually expect this to happen. Higher probability IMO than the SPS conversion and higher probability than letting them expire. So between the 3, it's the most likely option. Warrants are not the same as the SPS conversion. The SPS states it is not convertible. However, the government can re-negotiate with itself and make it so while the common voters are incapacitated. Just like the NWS, this would be another breach of FHFA's duty to remain at arm's length when dealing with Treasury.
Additionally, once warrants are exercised it will take a LONG while for Treasury to sell off all those shares to reap the rewards. Will they use some crooked accounting to make it appear the Govt isn't on the hook for ownership and therefore liabilities? Kind of like the SPS LP not on the balance sheet? Maybe, and if so there's probably some legal action there as well.
There's no telling what will happen but with all the crookedness that has happened, I'm expecting more of the same. The only way to shine the light on it is through public outcry/media which has been silent, or the courts. The first court win is the hardest.
Hilarious! If the protected government class of folks stealing from the public went to jail, we wouldn't need to have this discussion.
But whatever. Believe what you like. If you wanted to put money on whether or not a new lawsuit comes into play, you'd lose. Hopefully you wouldn't borrow money to make that bet. :)