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Trump Allies Are Working on Plans to Privatize Fannie and Freddie
A deal would call for the government to try to sell a chunk of its holdings in the mortgage giants to investors, including sovereign-wealth funds
By AnnaMaria Andriotis and Gina Heeb
Updated Sept. 13, 2024 12:02 am ET
Donald Trump’s allies want once again to try to untie the Gordian knot of the mortgage market: what to do with Fannie Mae and Freddie Mac.
Former Trump administration figures and bankers have been discussing plans on ending U.S. government control of the mortgage-finance giants should Trump win the presidential election, according to people familiar with the matter. The talks have been under way since at least this past spring and include reaching out to investment managers for advice on how to get the deal done.
Trump confidants including Larry Kudlow, former director of the National Economic Council, and John McEntee, former director of the White House presidential personnel office, are among those involved, the people said.
“The [former] president himself has never said anything about this throughout the campaign,” a Trump campaign spokeswoman said.
The government’s stakes in Fannie and Freddie could be valued at hundreds of billions of dollars, bankers estimate. That could allow the government to sell more than $100 billion of securities in one swoop, some bankers say. That would top the biggest stock and bond offerings in history and require interest from the largest investors, including sovereign-wealth funds.
Earlier efforts to free Fannie and Freddie from government control, including during Trump’s presidency, failed. Critics worried about the companies’ safety and the impact on the housing market, which relies on their backing. There were also doubts about whether bankers could actually drum up enough money.
A top focus of the talks is ensuring that the companies will be well capitalized so as to not pose a risk to the U.S. housing market. The role of Fannie and Freddie in funding 30-year mortgages, the foundation of the U.S. housing market, has hinged on the government’s full support.
The Trump allies have discussed having the Treasury Department partially back a certain amount of Fannie and Freddie loans through a so-called standby guarantee, the people said, similar to the way the Federal Deposit Insurance Corp. backs deposits below a certain threshold at banks.
Fannie and Freddie purchase and securitize a huge portion of loans in the U.S. residential and commercial mortgage markets. Nearly 40% of the $435 billion of residential loans originated in the second quarter were sold to Fannie or Freddie, according to Inside Mortgage Finance. The two firms owned or guaranteed roughly 40% of the $2.2 trillion in multifamily mortgage debt as of September 2023, according to estimates from their latest annual filings.
Fannie and Freddie operated with implicit government support when they were created but have been under full government control for 16 years. After a 2008 rescue, the Treasury Department took warrants to purchase about 80% of common stock at Fannie and Freddie, as well as senior preferred shares. Other investors can own junior preferred shares, which used to pay a dividend, or common stock.
Trump’s allies and other Republicans view privatizing the firms—or putting nongovernmental shareholders in control—as a way to reduce the country’s deficit and return money to taxpayers.
Opponents of privatization have said that it would decrease access to credit for home buyers and increase the risk for taxpayers.
Different paths being discussed
Trump’s allies are assessing different paths to privatization. One includes bypassing congressional approval and instead proceeding through the Federal Housing Finance Agency, which oversees Fannie and Freddie, and the Treasury Department, the people said.
The FHFA would be key to any plan. It sets the capital requirements and other standards for Fannie and Freddie.
The allies are discussing how to divide any newly found value between the government and other shareholders and avoid drawn-out legal battles.
The preferred and common shares had rallied after Trump’s 2016 election and his 2019 proposals to privatize the companies, only to fall during the Biden administration.
Big investors could profit
Some prominent hedge-fund investors, and Trump backers, have for years been pushing for Fannie and Freddie to be freed from government ownership. Depending on the plan, they could stand to profit handsomely.
Bill Ackman’s Pershing Square owns a roughly 10% stake in the common shares of both Fannie and Freddie.
John Paulson, who is viewed as a potential pick for Treasury secretary under Trump, owns a sizable investment in the preferred shares.
Both Paulson and Ackman have endorsed Trump for president.
“The conservatorship was always intended to be temporary so it makes sense that policymakers release them from conservatorship now that reforms are complete,” a Paulson spokesman said. “The government will be the biggest winner in a release of [Fannie and Freddie].”
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com and Gina Heeb at gina.heeb@wsj.com
After the debate, gse stocks crashed. Seem to be back to stabilizing and rising.
Hoping for a better next two months.
Largest dollar volume traded in jps today in some time— day before tomorrow, which is significant but we cant talk about it. Lol. I think that tomorrow even more trading happems. Huge week
Beekowitz has mostly sold out i think
I agree it is kind of a stretch, but what we do know is that she is referencing an old zandi/parrott plan that has been debunked that says it is too expensive to privatize fannie and freddie
not sure i agree, and i recommend reading mark calabria's book
Standing in your way:
1. Warrants
2. Spspa
3. Capital requirements
Agreed
The contract claims— lamberths court— two quarters on the $25 par value jps
The legal front is largely disappointing.
This is not a takings in the cofc. This is legal via apa. Sure so they breached our contracts, but the pending litigation screwed up the damages model which is — so my view is the lawsuits are a joke.
If you disagree post your thoughts in the article comments for other readers
Thanks though!
Just trying my best to explain the post election possibility of action here
i agree, the end of conservatorship is just a matter of when.
what do you think are the contributing factors for determining when?
thanks for sharing your thoughts
Future Of Fannie Mae And Freddie Mac Post-2024 Election
NEW ARTICLE
https://seekingalpha.com/article/4717498-future-of-fannie-mae-and-freddie-mac-post-2024-election
Summary
Fannie Mae and Freddie Mac have been trapped in conservatorship since 2008, with the government aggressively manipulating asset values to justify seizing control early in conservatorship.
The Trump administration began recapitalization efforts, and under Biden, earnings have continued to accumulate, positioning the GSEs for a potential exit from conservatorship.
Moelis' 2024 update suggests a new administration could quickly restructure Fannie and Freddie, with junior preferred shareholders likely to be made whole.
The legal system has largely abandoned GSE shareholders' rights but retained earnings and potential equity restructuring offer hope for junior preferred shareholders.
Secondly, BTIG's Isaac Boltansky points out that given the capital build, an incoming Democrat administration could also be supportive of recap and release:
DC Jury Decides GSE Shareholder Contracts Breached
Aug. 17, 2023 5:44 PM ETFederal Home Loan Mortgage Corporation PFD 8.375% NCM (FMCKJ) Stock, FNMAS StockFMCC, FMCCG, FMCCH, FMCCI, FMCCK, FMCCL, FMCCM, FMCCN, FMCCO, FMCCP, FMCCS, FMCCT, FMCKI, FMCKK, FMCKL, FMCKM, FMCKN, FMCKO, FMCKP, FNMA, FNMAG, FNMAH, FNMAJ, FNMAK, FNMAM, FNMAN, FNMAP, FNMAT, FNMFM, FNMFN, FNMFO, FREJP185 Comments
Glen Bradford profile picture
Glen Bradford
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Summary
Fannie Mae and Freddie Mac shareholders win legal victory as jury finds FHFA acted arbitrarily in entering into Net Worth Sweep.
Pending equity restructuring includes warrants, common shares, junior preferred shares, and senior preferred shares.
There are significant, follow on implications for other cases now that a jury has decided that the government breached the implied covenant of good faith.
Male Judge In A Courtroom Typing On Laptop
AndreyPopov/iStock via Getty Images
As of August 14, 2023, Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) shareholders have a new legal victory to celebrate. After a decade of uphill legal battles, shareholders have finally notched a win, but the potential impact to outcome is much more significant than the monetary damages awarded by the jury which decided:
FHFA, in its role as the Conservator of Fannie Mae and Freddie Mac, acted arbitrarily or unreasonably in entering into the Net Worth Sweep, thereby violating the reasonable expectations of holders of Fannie Mae junior preferred stock, Freddie Mac junior preferred stock, and/or Freddie Mac common stock
Question #1 Verdict
Question #1 Verdict (glenbradford.com)
Fannie and Freddie have been retaining earnings since 2019. Fannie and Freddie have more net worth than ever before in history since their guarantee fees have roughly doubled during conservatorship. There are four components to their pending equity restructuring:
Warrants (Government Owned).
Common Shares.
Junior Preferred Shares.
Senior Preferred Shares (Government Owned).
I only recommend owning junior preferred shares because they have dilution protection in an administrative reform outcome and the strongest legal claims in a court-led outcome.
Investment Thesis
This either gets resolved via administrative action or court action. This marks the first major FHFA loss in court where a jury unanimously decided that FHFA breached the implied covenant of good faith built into the contract rights of shareholders.
Outside of administrative reform, courts will resolve this. This jury awarded damages of $611M to shareholders. Judge Lamberth did not let plaintiffs present the expectancy reliance damage model which would have opened the door to damages closer to the outstanding par value of junior preferred, $34B+. Nearly every available damage model is designed to pay out face value to preferred shareholders, expectancy, restitution, reliance, etc. The damage model that went to trial is extremely controversial. FHFA has 60 days from the verdict to file notice of appeal. If I was Arnold and Porter I would be recommending to their client that if they wanted to proactively end the conservatorship now would be a good time to do so. Should they pursue appeal and go the court route, they risk facing a damage model that actually fits the breach of contract that a jury has decided they committed.
This court ruling in my view only helps the case for administrative reform. In an administrative solution, since the companies are retaining earnings --- receivership is off the table and junior preferred would be made whole in the process. The companies would likely turn on junior preferred dividends to settle the pending litigation while they move forward with recapitalization and release. Junior preferred would trade up to face value.
Fannie Mae Q2 2023
Fannie Mae made $5B in Q2 2023. The SPS liquidation preference was $185B and the net worth was $69B. Fannie Mae CEO Priscilla Almodovar declared Fannie Mae has been transformed on the quarterly call:
You know, this fall marks 15 years since Fannie Mae was placed in conservatorship. A lot has changed since that time. Today, Fannie Mae has been transformed. Fannie Mae is safer and stronger, thanks to years of work to improve the resiliency of our business and our steadfast focus on strong risk management. Because of this, we continue to be a stabilizing force in the market and to deliver on our mission, like we did through the COVID-19 pandemic, and how we're doing now through this challenging economic cycle. We are committed to being a reliable source of liquidity and stability to the housing finance system in the United States.
Fannie Mae has more money than they ever have had in history and the government still has them in conservatorship.
Freddie Mac Q2 2023
Freddie Mac made $2.9B in Q2 2023. The SPS liquidation preference was $111B and the net worth was $42B.
Freddie Mac has more money than they ever have had in history and the government still has them in conservatorship.
Shareholder Attorney Provides Context On Size of $611M Legal Win
The lead attorney for the shareholders compares the $611M legal victory to the $32B that shareholders invested as reported by National Mortgage Professional:
The government deserved and would have received, without the net worth sweep, a huge profit on its investment. But it was not entitled to 100% of all profits forever. That was not the deal made in September 2008. Private preferred shareholders invested over $32 billion, of which $20 billion was at the behest of government regulators during the housing crisis years of 2007 and 2008.
If FHFA allows this verdict to be appealed, it risks losing an upsized reliance damage model of $32B when it is in a position to resolve this now for much less. This puts FHFA is in a unique position to cap their litigation losses before they potentially balloon. They have about 60 days to appeal or pursue other options.
2023 Stress Tests
August 10th, FHFA released the 2023 Dodd-Frank Act Stress Test Results. The stress test results result in Fannie and Freddie making a combined $9.9B even if equity prices fall by 45% and home prices decline 38%. Under these conditions, FHFA does forecast that if they are able to use their discretionary accounting authority to write down Fannie and Freddie's assets like they did in 2008, the companies would lose $8.4B. Even with the loss the companies on a combined basis since they have been able to retain earnings since 2019 would have a net worth of $88.9B in this worst case scenario.
My perspective is that guarantee fees doubled during conservatorship and it is much harder to drain a bathtub when you pour in water as fast as it drains out, which is basically what happens to achieve these stress test results whereas in the past earnings were half what they were today and you could accumulate a few years of losses --- now even if the economy falls apart Fannie and Freddie stay afloat on earnings alone.
Meanwhile, FHFA currently has a Capital Framework which says they are undercapitalized and holds them hostage in conservatorship, but it looks like they are trying to do something about it.
FHFA put out an RFI and the intellectually honest submissions (I was able to find one exception by the guy who signed the net worth sweep that a jury ruled to be a breach of contract) all seem to call for a reworking of the ERCF which makes sense in the context of these stress test results. I walk through a handful of these submissions below and the growing chorus for admin reform now supported by this legal ruling.
FHFA's RFI On GSE Single Family Mortgage Pricing Framework
In May 2023, FHFA put out a request for input for Fannie Mae and Freddie Mac Single-Family Mortgage Pricing Framework. The basic purpose of this RFI is to solicit industry feedback on how it should match pricing up with the capital requirements imposed by the Enterprise Regulatory Capital Framework - ERCF. The industry has responded with comments and feedback. The overwhelming response to the FHFA RFI has been to streamline the capital rule and step aside.
Urban Institute
The most notable shift in my opinion coming from this RFI is the more administrative reform positioning coming from Urban Institute. Urban Institute has really evolved their perspective to be more supportive of a utility model and raising new third-party capital which is a positive shift in support of administrative reform. Urban Institute forecasts a need for Fannie and Freddie to raise private capital:
In either case, they will need to raise private capital, which will require a return attractive enough for whichever of the two models is chosen.
Urban Institute says that the ECRF needs to be revised lower:
The GSEs' approach to pricing strikes us as reasonable, but it suffers from a capital framework unnecessarily tethered to the Basel framework. The risk-invariant components and complexity of that framework are arguably appropriate for large banks, given the number and complexity of the risks they manage, but they make little sense for Fannie Mac and Freddie Mac. Applied to the GSEs, they exert unnecessary upward pressure on pricing, pressure that has been borne by the GSEs thus far but, at some point, will be passed along to the consumer. Before that happens, the FHFA should revise the requirements, removing a headwind to homeownership and better aligning the GSEs' pricing with their risk.
Lower capital requirements and raise new third-party capital is the path forward according to Urban Institute.
Community Home Lenders of America
The CHLA argues in its letter that the objective of the capital rule is for Fannie and Freddie to exit from conservatorship:
Second, while CHLA supports a key underlying objective of that capital rule - the exit of Fannie Mae and Freddie Mac from conservatorship - given the current political realities, such exit appears to be a remote, if not non-existent, possibility. In an ideal world, we would either roll back excessive fee hikes to raise capital or move forward to exit from conservatorship. Instead, arguably, we have the worst of both worlds.
The CHLA seems to think that the Biden administration is unwilling to let Fannie and Freddie recap and release and exit from conservatorship. Note that they may have submitted this letter before the legal ruling came out.
After the legal ruling came out, Rob Zimmer said that this legal ruling cements the future of Fannie and Freddie being recapped and released despite not knowing the exact timing of when:
Rob says this legal ruling cements R&R
Rob says this legal ruling cements R&R (Twitter)
Rob Zimmer seems to have reviewed the bulk of the responses to RFI etc. Rob's comments align with CHLA's Scott Olson's from last year too:
My personal opinion is that the best approach is for Fannie and Freddie to exit conservatorship under a true utility model using the housing mission tools of HERA, a vigilant FHFA that makes sure the GSEs do not take on dangerous levels of risk to maximize shareholder profit, and an explicit federal backstop to establish MBS investor confidence.
CHLA is very supportive of administrative recap and release and believes it is an eventuality --- just a matter of when.
Mortgage Bankers Association
The Mortgage Bankers Association is telling FHFA that the ERCF shouldn't be based on Basel III. Fannie and Freddie are not banks! They should have a simple capital requirement that is based on actual risk. This reads like a nudge to lower the capital requirements. Seems like there is consensus from most interested parties on this topic:
MBA RFI Feedback Ending
MBA RFI Feedback Ending (FHFA)
Prior CEO of MBA David H Stevens declares this court ruling a landmark win for GSE Shareholder interests and had this to say on HousingWire:
The victory in Berkley vs. FHFA is sweet for shareholders, notably in that it's their first one since the beginning of conservatorship, said David Stevens, a former Federal Housing Administration commissioner and Mortgage Bankers Association president.
"Whether this sets the tone for a new direction for the conservatorship is yet to be seen," Stevens said. "But without question, a political leadership that oversees these two companies in Washington will be likely focusing on options ahead. While the jury awarded less than what was asked for by the plaintiffs, it is without question victory for the shareholder interest. What happens next will be interesting."
David H Stevens has come full circle this year as he is advocating for administrative reform to end the conservatorships of Fannie and Freddie as a means of solving their political problem brought on by making the FHFA director a political appointee thanks to the SCOTUS ruling in Collins vs. Yellen.
Center for Responsible Lending
The CRL has replied, arguing that the ERCF needs to be considered and recalibrated to take into consideration the actual financial risks of Fannie and Freddie:
The case for reconsidering the Enterprise Regulatory Capital Framework ("ERCF") is clear and compelling.
...
Developments over the past two and a half years have made it even clearer that the ERCF is seriously flawed.
...
The ERCF stands as an obstacle to progress on these fronts. Given the stress test results, the developments since the adoption of the ERCF that have reduced the GSEs risks, and the multiple fallacies of the ERCF itself, FHFA should reconsider the amount of capital required by the ERCF and the ERCF's definition of what constitutes capital.
...
And, so long as the GSEs are expected to achieve a "reasonable rate of return" on an unreasonably large capital base-currently over $300 billion- it will be difficult, if not impossible, for the GSEs to pursue such initiatives at the scale needed to fulfill their mission.
Independent Community Bankers of America
The ICBA has replied calling for FHFA to work with the U.S. Treasury to restructure its ownership stake in Fannie and Freddie in order to attract:
ICBA therefore strongly urges the FHFA to establish a revised single-family pricing framework alongside a roadmap for the Enterprises to raise outside equity, eventually exit conservatorship, and to do so with a clear vision of their ongoing role in the secondary housing market.
...
Absent any changes to the preferred stock purchasing agreements (PSPAs), this means that they will then be required to resume sweeping any excess earnings to the Treasury, effectively making it impossible to exit conservatorship. ICBA has long argued that a perpetual conservatorship is unacceptable and unsustainable.
...
Without acknowledging that the GSEs need to prepare to exit conservatorship, there is little incentive to materially change to ROE to a rate that would make them competitive for investor funding as semi-private companies. This concern is exacerbated by the fact that the GSEs remain undercapitalized according to the existing ECRF and that the government's ownership of the Enterprises remains unresolved. As mandated by the Housing and Economic Recovery Act (HERA), FHFA must therefore collaborate with the U.S. Treasury to begin the process of resolving the government's ownership of Fannie Mae and Freddie Mac.
After nearly fifteen years of conservatorship, ICBA is greatly concerned that the lack of progress in resolving this issue by FHFA and the Treasury endangers the safety and soundness of both Enterprises and could pose a threat to the stability of the mortgage market.
The ICBA call for Treasury to work with FHFA to resolve its equity interests in Fannie and Freddie aligns with charting their path out of conservatorship.
NAFCU
NAFCU provided a comment letter which speaks for itself:
Until the FHFA can articulate its expectations for returns while supporting high capitalization and low rates, the FHFA should not control guarantee fees for the GSEs. NAFCU supports allowing the GSEs to ultimately be removed from their conservatorships and recognizes that goal would be delayed by substandard returns.
The GSEs need to make returns that support their capital requirements according to NAFCU in order to ultimately exit conservatorship.
National Association of Realtors
NAR targets ROE based on utilities:
Furthermore, the FHFA should formally adopt a return on equity (ROE) appropriate for market utilities, implement a cap and floor on ROE, explore an explicit government guarantee, and must establish a robust and durable process for establishing appropriate returns at the Enterprises during conservatorship and after.
NAR also focuses on life after conservatorship:
The FHFA should continue its important work to develop a process that sets a band of returns for the Enterprises' cost of capital to use in establishing their g-fees and pricing outside of conservatorship.
NAR also says that the capital required by the ECRF is excessive:
These implied ROEs are appropriate to the Enterprises but were achieved for the wrong reason; the level of capital in ECRF is excessive.
If the FHFA adjusts the ECRF so that the companies can hold less capital than their current ECRF, then NAR will be happy.
Housing Policy Council
This letter is signed by Ed Demarco, the guy who signed the net worth sweep that the jury just ruled to be a breach of contract and was submitted the same day the jury ruled that his actions breached the shareholder contracts.
Ed Demarco argues that the Basel III Proposal Conflicts with the FHFA ERCF. Further, he notably recommends increasing guarantee fees to support the ERCF. I couldn't find any other comment letter where someone else is arguing for increased fees like Ed Demarco of the Housing Policy Council appears to be:
The FHFA commentary on the recent pricing changes focus in part on the need to generate sufficient returns to satisfy the capital standards set forth in the Enterprise Regulatory Capital Framework (ERCF). HPC is on record supporting the ERCF, recognizing that small adjustments may be necessary. The current framework reflects the substantial research and analysis performed by FHFA and the Enterprises as well as extensive commentary from stakeholders. The existing ERCF was promulgated following a full comment period, which provided the opportunity for meaningful input from all sectors of the mortgage industry. No standard will ever fully satisfy every housing stakeholder, but this ERCF represents a well-developed compromise. We recommend that FHFA retain the ERCF and require pricing levels that will allow the Enterprises to earn FHFA's targeted rate of return in accordance with the ERCF, over a reasonable period of time.
Leave it to Ed Demarco to argue for additional increases to guarantee fees that completely ignore the recent stress test results and the doubling of guarantee fees during conservatorship. His perspective seems to have fallen out of step with Urban Institute.
Breach of Contract Damage Models
If you have not been closely following the developments, it is worth noting that Judge Lamberth rejected all four damage models presented by the plaintiffs - namely, expectancy, restitution, reliance, and the lost share alternative - prior to the trial. The plaintiffs are now seeking to appeal these decisions with the aim of obtaining a damage model that aligns more closely with their actual financial loss due to the net worth sweep.
During the trial, Judge Lamberth allowed one specific damage model to proceed, resulting in a relatively modest damages amount of $611 million. However, this outcome has stirred controversy due to the nature of breach of contract damages models, which are designed to restore the injured party to their pre-breach state. In the context of junior preferred shares, this would involve receiving a payout close to the face value. While the plaintiffs achieved a favorable outcome in the trial, the damages awarded were notably smaller than what one would anticipate in a breach of contract case, where the typical outcome is closer to a payout that would be closer to the original value of the contract, or "par." I've heard estimates anywhere between 8-18 months for the duration of such an appeal.
Expectancy
The concept of "Expectancy" entails restoring the non-breaching party to the state they would have been in had the breach not occurred. This involves considering the repayment of the liquidation preference that would have been received and factoring in the principal amount along with pre-judgment interest at a rate of 6%, approximately equaling 150% of the principal.
Restitution
"Restitution," on the other hand, centers around ensuring that the breaching party returns any net benefits acquired through the contract. This involves deducting any gains obtained by the non-breaching party as a result of the contract.
Reliance
The principle of "Reliance" seeks to reinstate the plaintiff parties to the position they were in prior to entering into the contract.
The reliance damages model were in my view incorrectly not addressed by this Jury because Lamberth prevented them from going to trial twice due to timing issues, not because they were not a valid damages model.
CapWealth's Pagliara on American Banker
In response to this ruling, some have speculated that FHFA will appeal, but FHFA said they will review and determine post-trial options according to American Banker:
"FHFA, Fannie Mae and Freddie Mac are disappointed in the verdict," an agency spokesman wrote in an email to American Banker. "FHFA will review the verdict and determine post-trial options."
In fact, GSE Shareholder Tim Pagliara says not so fast:
But a move to challenge the verdict would not be a risk-free proposition for the FHFA, Tim Pagliara, chief investment officer of the financial advisory firm CapWealth, said.
"If the government appeals the verdict, it could backfire and the $612 million verdict could balloon to over $30 billion because the government could be forced to pay 100% of the preferred stock that they breached the contract on," Pagliara, whose clients are GSE shareholders, said. "There is controversy surrounding the damage model that the jury was allowed to consider in the trial that was just completed."
I believe Tim Pagliara is referring to the reliance damages model that Lamberth prevented from going to trial twice which effectively equals par less cumulative dividends.
Tyler vs. Hennepin
GSE Shareholder Plaintiff Bryndon Fisher points to Tyler vs. Hennepin as a means to try and get his case heard in the federal circuit arguing that his case was wrongly decided and this new Supreme Court ruling changes everything.
I applaud Bryndon Fisher's legal efforts. Below is the overall most recent litigation calendar from the end of last month:
July Litigation Calendar
July Litigation Calendar (Twitter)
You will note that Oral arguments in Collins vs. Yellen are early next month.
Risks
Fannie and Freddie shareholders could continue to lose all the lawsuits and the government could keep them in conservatorship despite eventually retaining enough earnings to be adequately capitalized. The world could fall apart and become unrecognizable with more devastating economic consequences than outlined in the 2023 Stress Test and the companies could be placed into receivership where existing shareholders are zeroed out. Common shares could be diluted out of any material upside in any equity restructuring.
I think the biggest risk is really one of time. I've been in this trade since 2014. I thought that this would get resolved by the original Lamberth ruling that went completely opposite to my interpretation of the law. What is ironic is that the day before the 8 Jury members unanimously decided FHFA breached the contracts, they requested to have the law provided to them so they could read it for themselves. It is nice to see a panel of 8 Americans read the law and interpret it the same way I have in a world where no court seems to agree with prior FHFA director Mark Calabria's interpretation of the law.
Summary and Conclusion
The current Biden administration has been silent on the issue for restructuring its equity position in Fannie and Freddie but I suspect that will not be the case during the rest of the Biden admin and I believe that this jury verdict opens up a path for moving forward with an administrative initiative to release Fannie and Freddie from conservatorship. The overwhelming response to FHFA's RFI has been to set the ECRF to be more in line with current guarantee fees in a post-conservatorship environment and to solicit input from US Treasury. I found a family office note that summarizes the impact of this legal ruling nicely:
Family Office CIO Note
Family Office CIO Note (Twitter)
I recommend junior preferred shares because in any equity restructuring that happens outside of receivership they are made whole in addition to having strong enough legal claims now that they have won breach of contract to have a path forward of seeing par under a reliance damages model.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Glen Bradford profile picture
Glen Bradford
4.69K Followers
Glen Bradford MBA contributes to Seeking Alpha primarily to read people's negative feedback so that he can avoid generating unnecessary losses. "Uncertainty will certainly work for me." - Glen Bradford March 2009.Glen wishes you a bright sunny warm day filled with smiles, laughter, and love.The Supreme Court got it wrong, which is sad, but it's not over yet.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of FMCCG,FMCCI,FMCCJ,FMCCK,FMCCM,FMCCN,FMCCO,FMCCS,FNMAO,FNMAP,FNMFO,FREGP,FREJN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
looks like more red today for gse common and jps shareholders.
wonder how long this lasts, with the economy in recession and the stock market going down --- in theory that would drive support towards ending the conservatorship
Vix exploding. Black monday. Probably will disproportionately impact gse equity securities. Probably. And the spx is basically got a chart that looks like record highs. Tough crowd.
Probably going to create downward pressure and dry up the bid even more. Wow. Curious to see where this shakes out
Interesting chart on these common shares. $1.13. Feels like they are down about as much as the preferred shares this past month or two. $fnmas went from $4 to $6 to $4. $fnma went from $1 to $1.50 to $1 basically.
I think that this all seems to tie to which administration is expected to take action with ending the conservatorships. Frankly this seems to have impacted the total market, which is exacerbated in these securities because they are far less liquid, so— a bid that is drying up when you have regular selling taking profits turning to panic selling this past week or so —
Hard to imagine that people selling on friday are front running much— and that the real winners on friday were the buyers who were cleaning up at low risk prices. I think we bounce tomorrow.
Looking forward to continued retained earnings and the eventual end of the fraudulant conservatorship.
Given how the litigation has gone so far, good luck
Preferred
They said the nws was a breach of contract. Breaching contracts is not illegal
guess that depends on your own risk tolerance and perspective on mechanics and outcomes.
i actually think that this article was fairly well written
generally outlines a reasonable perspective
i owned commons many years ago, but my perspective evolved based on the legal rulings being overwhelmingly disappointing
you have so many shares that even if you take a 50% loss in a restructuring, you still have over a million dollars worth, you won't be in a ditch. you'll be fine. just my opinion, hard to see it being worse than that.
and in any event where the government moves to monetize the warrants, you stand to do very well by my analysis. retained earnings drives up the potential value there in that scenario and --- i think that there is going to be a growing enthusiasm towards getting these companies out of conservatorship the coming months.
Impressive. Convention this next week. Should be a strong week. That is a lot of shares. A few million dollars worth at mkt value. $3.5m usd
Probability is 100%
ride the wave, surfs up!
Because elections have consequences in terms of driving federal policy which in this case is what will end the conservatorships. I think this continues. Fnmas new 52 week high
I think the buying from friday continues — that debate was an awakening of animal spirits of buying we saw friday. Hard to imagine that buying spirit fading out of sight for very long
Would like to see this recentl price action post debate continue
nice day
Up 4.38%. Nice. A hedge fund trader i know bought recently on the decline. Fwiw
sure,
i haven't seen any of these potential legal filings/briefs yet so haven't posted any, shrug.
i usually get them in my email from someone who checks pacer.
josh angel just had his case dismissed --- his angle has always been a bit different.. he has had interesting arguments and i think he is a lawyer that represents himself which is pretty neat.
I try to post all the fanniegate legal filings from all angles. What else, I have been in this trade since about 2014 and have shifted in that time frame from owning commons to preferred.
You dont know nothin about me, sir.
My thought here is that the end result of this is that you will lose, if you have money, you will lose whatever that is to settle this or whatever. If you do not, you will have to file bankruptcy.
I will follow this pending litigation the best I can.
I do not think this is a mistake on the part of Pagliara and his law firm. I think this mistake belongs to you. That is my opinion.
Good luck, tough lesson. Would probably bankrupt me. Would wipe out 10 years of my hard work to get as many shares as possible.
That is a tough lesson. Ouch.
Smart. All pfds too!
sounds right to me
shrug, the litigation has kind of impacted this security, where there is now no dilution protection basically and a spspa that is pretty big
cannonball!
I do not understand why you are out attacking people. The people you are attacking with false statements are powerful. Unwise.
I like your screenshot of Pagliara taking time to talk to you. He was trying to be nice.
You should pay close attention to what he says as he has been involved for a long time in a big way.
Maybe you will get what you wish for
You are just making yourself liable to slander. Unwise.