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Treasury had (senior) preferred shares in AIG and converted them to enough commons to dilute the legacy common down to 8% ownership. Importantly, the only reason Treasury didn't dilute them further was that Treasury didn't want the process to be bogged down by shareholders suing AIG's board of directors.
That isn't a concern with FnF because, as the 10-Q and 10-K reports state, FnF's boards of directors owe no fiduciary duties to shareholders during conservatorship. The purpose of converting the seniors into commons would be to remove the huge regulatory capital hole that they represent, so the conversion would have to happen before exit from conservatorship.
Instead of assuming that FnF's legacy common shareholders will get at least 20% of the post-release equity, you should be assuming 8% at the most. That alone cuts any share price estimates you make by around 2/3, if not more.
If you're getting $100+ per share with the warrants not being exercised and the seniors written off, it would be $20 with the warrants exercised and $8 at most with the seniors converted, and that's only if Treasury chooses to treat FnF common shareholders as well as they did with AIG (which strains credulity to the extreme given how Treasury has treated FnF shareholders so far).
Both the juniors and commons have zero economic rights at the moment. No dividend rights and no liquidation preference, and no voting rights for the common.
They trade above zero in the market due to the possibility that they could regain some economic rights in the future. They trade like options with no set expiration date.
Shares in bankrupt companies continue to trade after bankruptcy is declared, even when it's clear that those shares are deeply underwater with very little prospect of recovery. Surely you have seen charts of series like SHLDQ, LEHNQ, JCPQ, etc.
In fact, the tickers FNMA and FMCC are highly misleading; they should respectively be called FNMQ and FREQ to accurately reflect their status.
The shares still exist, which allows the government to maintain the convenient fact (though it is a sham) that FnF are shareholder-"owned" companies.
When it comes to the implied covenant, reasonable investor expectations DO "take into account every minutia of what changes over time", as you put it.
This is correct. The NWS breached the implied covenant in August 2012 because it violated reasonable shareholder expectations given what the shareholders expected at the time, which includes all amendments and changes in law up to that point.
Reasonable shareholder expectations for any implied covenant claim over an action after the NWS has to take into account that the NWS itself was in place.
The LP ratchet isn't a breach because it didn't violate reasonable expectations relative to what was already in place at the time, which was the cash NWS.
That's true, but it is you who fails to understand. You really need to read and understand Section B ("Plaintiffs State a Claim for Breach of the Implied Covenant of Good Faith and Fair Dealing") from Lamberth's ruling before going any further on this topic.
Under the NWS it didn't matter if the commitment fee was zero and the NWS dividend was all of FnF's net worth, or if the commitment fee was X and the NWS dividend was FnF's net worth minus X. It's the same amount of money either way.
As to why the commitment fee wasn't charged between the start of conservatorship and the NWS, I don't know. FnF had zero or negative net worth in that period, which means they couldn't afford the fee anyway. I have seen a couple of calculations in the past saying that the commitment fee would be somewhere around 50 bps of the funding commitment, which would be at most about $2B per year (on a $400B funding commitment). Treasury was getting an order of magnitude more than that cash via the 10% dividends.
Not really. The difference between charging a relatively small commitment fee from 2008 to 2012 and not charging it was at most $2B per year, while the difference between writing down and converting the SPS is around 20% of the total value of FnF's post-exit common equity, which could easily exceed $40B.
Then you have misunderstood my point. Calabria's words are not evidence that a SPS writedown is illegal. They are evidence that at the time Treasury thought that it would be illegal.
A very important part of a EV calculation of the future common share price is estimating the probability that Treasury writes down the SPS. The only evidence we have is that Treasury thinks it is illegal. Why would you expect Treasury to do something they think is illegal?
Could they change their mind? Sure. But you have to put a number on that probability, not just say it's a possibility. Lists of possibilities without attached probabilities are useless in a EV calculation. If you have some method other than EV of calculating the common share price I would love to see it.
1) It was not a non sequitur. My quote ("Your unwillingness to take Treasury's words at face value doesn't extend to him.") was completely relevant to my argument (that there is far more reason to believe Calabria accurately reported what Treasury told him than not). 2) It was not a false attribution, unless you have evidence that Calabria was in fact lying about what Treasury told him. 3) It was not an argument from authority. My assigning credibility to Calabria's reporting has nothing to do with his (then) position of authority, but instead him being a party to the negotiations and having no reason to lie.
Three strikes and you're out. Clearly giving you the list of logical fallacies wasn't enough because you don't seem to understand what any of them actually mean.
You are quoting just the sarcastic part of your quote and acting as if my response only applied to that part. You're better than that.
The question in your quote reads like it's serious, and it can't happen because the law that allowed the NWS (the GSE Act amended by HERA) is unique to FnF.
That would be a classic example of a taking. All of the NWS takings cases are completely dead, so your example contradicts the point you're trying to make rather than confirming it.
For reasons entirely unrelated to takings.
(from another post)
The Collins opinion has already had an effect on potential future lawsuit wins: it has prevented at least two major lawsuits (which would have been funded by major junior pref shareholders) from even being filed due to how difficult it is now perceived to get a win against Treasury.
If the NWS, which directly contradicted FHFA's duty to preserve and conserve assets and maintaining adequate capital, was not ultra vires it's hard to imagine something they could realistically do in the future that is. Certainly not something as simple (and helpful to the companies!) as the LP ratchet.
I think you are underestimating the value that being able to keep their earnings has to FnF. It drastically reduces (or even virtually eliminates, according to the stress tests) the possibility that FnF will have to draw on Treasury's funding commitment and potentially exhaust it, triggering mandatory receivership.
No, because the cash NWS removed all economic value from the junior pref and common shares. It isn't possible for any future deal to remove more value than that, therefore a further breach isn't really possible.
The companies have already been found to have violated the implied covenant by signing an agreement (the NWS) that removed all economic value from the privately held shares. That breach was fully compensated for by the jury's verdict. Ordering the companies to pay even more for (at worst!) merely continuing that same breach sounds AWFULLY like double jeopardy.
Wrong. Investor expectations as of the day before the NWS only included the original SPSPAs and the first two amendments (which only increased the funding commitment size). Before the cash NWS, FnF had a clear path to building capital: earn more per year than the 10% cash dividend on the LP. The timing of the cash NWS was in response to this very thing being about to occur in 2012.
Investor expectations as of the day before the LP ratchet included the NWS itself as the then-status quo. That's a world of difference. The cash NWS made it impossible for FnF to ever build capital and escape conservatorship; this was one of the purposes behind it.
Lamberth said that investor expectations are not set at the time of original contracting but instead are updated with every relevant updates, which he specifically said includes the SPSPAs and amendments to them. An investor who held shares just before any the LP ratchet letter agreement had their expectations in part informed by the existence of the cash NWS.
From 2008 to 2012 FnF were paying 10% cash dividends, and from 2012 to 2019 they were paying total net worth cash dividends. There was no need for a commitment fee because FnF were already forking over boatloads of cash.
This is a direct reference to Barron's legal analysis. He has already refused to file his own lawsuit (evidence of his own hypocrisy) and nobody else has chosen to file one on this basis either, so I see no reason to continue arguing over how many angels fit on the head of that particular pin. If FHFA really did violate the terms of the Charter Act with the original SPSPAs and/or NWS, but nobody ever challenges it in court, then it's legal by your own admission.
Again this is about probabilities, not possibilities. Given all the evidence we have, including the reporting we have from Calabria, what are the chances Treasury converts the SPS compared to a writedown?
All you are arguing is that Calabria's reporting can't lead to a 100% chance on a conversion. I agree there. Our disagreement comes from the weight we put on Calabria's reporting. I think it is highly credible and relevant while you refuse to believe that it is either of those.
And the evidentiary standard you are applying here is ridiculous when extended to everything else. For example, do you demand official word from every source that is ever mentioned in a news article before believing it? If so, how are you able to stay informed at all? If not, why apply this standard to Treasury and not everyone?
Since you claim to "know" this, you shouldn't have a hard time picking it out from this list.
Indirectly I suppose, because they denied cert on the CAFC's dismissal of all NWS takings claims.
Maybe if it gets appealed all the way to the Supreme Court. They have already made one incomprehensible ruling (that the NWS was not ultra vires) and declined to review another (by the CAFC, that FnF have no right to exclude the government from their net worth and thus the NWS wasn't a taking) so the range of possibility is uncomfortably wide.
Lamberth already specifically ruled that the Collins opinion wouldn't stop the implied covenant claim from going forward. The defendants have tried that argument at least three times and have lost every time, though they recently tried it yet again.
Redemption of the LP can only happen upon liquidation, so discounting that value is difficult because you have to take probability of redemption (liquidation), timing, and discount rate into account.
Liquidation preference absolutely has value (to the market) outside of liquidation, as evidenced by Treasury's own valuation of the LP and the fact that different div rates did not totally determine the prices of the juniors before conservatorship.
You said "Trust us - we're from the Government... We'll let you keep a dollar if you owe us a dollar in the future. Brilliant! Let's just do that with every American company and watch our National Debt melt away like magic!" as if it would be possible for the government to do what they did to FnF to any other company. That isn't possible because the conservatorships and "self-dealing" SPSPAs/amendments were only allowed by the GSE Act and HERA, which only apply to FnF.
While the specific situation FnF are in is unique, the resolution of it doesn't have to be. That's the difference. Citi and AIG went through restructurings, and a restructuring of the SPS is necessary for FnF to hit their regulatory capital requirements before roughly 2040.
Why would that help you? I'm still bearish in the long term on the commons versus the juniors at these prices. The only purpose of rotating some juniors into commons would be to rotate back once the FNMAS:FNMA ratio goes back under its normal average of around 3.5:1.
I would hold them for the same reason, though I would take some off the table for diversification purposes. My cash-on-cash dividend yield would be somewhat higher (around 15%) but that's more a reflection of my cost basis.
Your goals are far more reasonable and pragmatic than just about any common (and several preferred) shareholder I have seen on this board. Kudos.
I have found that there is a lot of overlap between the common shareholder base on this board and other classic bagholder traps like MMTLP and LEHNQ. I'm glad I never got caught in those.
You managed to avoid two of the three big legal landmines that have cratered the stock prices: Lamberth's original dismissal in October 2014, the appeals court upholding nearly every part of that dismissal in February 2017, and the Supreme Court's Collins opinion in June 2021.
SPS-to-common conversion enriches Treasury and does not enrich legacy common holders.
That's the weak link in Ackman's common investment thesis. The only possibility he saw was Treasury exercising the warrants which would align Treasury's interests with those of the legacy common. An SPS conversion puts those interests in opposition, and guess who would win that fight?
If the shares really do go to a penny, Treasury would have a lot more than 100B shares. Treasury's stake will be proportional to earnings, P/E, and what percentage of the commons Treasury ends up with. The market price will be a function of those, not a determinant.
Because Treasury wins even more by converting the SPS.
They've held shareholders hostage for almost 2 decades there is no reason to do anything different now
Why on this green earth would Treasury choose to do this? It would run counter to everything they have done before. The LP ratchet itself is in place as a return consideration to Treasury for allowing FnF to keep their net worth.
At the very, very least Treasury would do what you say but exercise the warrants instead of canceling them.
Is this possible? Technically yes. But given all the evidence we have there is no reason to assign more than a token probability to it. What matters are numerical probability estimates, not just possibilities. Hope is not a strategy.
Another big flaw in this plan is that FnF would still need until 2040 to reach their required regulatory capital levels for release. With a 0% div rate Treasury would presumably be okay with the SPS reclassified to non-cumulative, which would fix the core and Tier 1 capital holes, but no form of preferred shares (either cumulative or non-cumulative) count towards CET1 capital, which is one of the capital requirements FnF must meet to be classified as "adequately capitalized" by HERA and is the requirement for exit set in the January 2021 letter agreement.
For FnF to meet the CET1 requirement before 2040, the SPS must be written down, converted to common, or some combination of both.
In the eyes of the politicians that Layton referred to, when the money goes to Treasury it isn't a windfall because Treasury is the one who bailed FnF out.
The "windfall" thing is not a legal issue, it's a moral/political issue. The argument goes like this: the vast majority of FnF's shareholder base has turned over since the conservatorships started, so why would vulture investors who bought at distressed prices be entitled to a windfall? All politics is envy, FnF's release from conservatorship is a highly political process, and many politicians feel that shareholders who bought in after the conservatorships started deserve nothing.
This is exactly the sort of political fallout that a senior pref writedown could trigger, as Mnuchin told Calabria.
The thing is, one result of the jury verdict is that FnF have now been essentially indemnified from any further frustrations of shareholders' ability to profit from their investment. The NWS already extinguished all economic rights of the common and junior pref shareholders; any further action by the government cannot make things any worse.
You keep thinking that the jury verdict is somehow potentially the start of shareholder-friendly rulings when in fact it is much more likely to be the end.
I totally agree. The Supreme Court's rulings that the NWS was legal (not ultra vires) and also was not a takings (by denying cert on the takings cases that were dismissed) plus the Litigation End Date language in the January 2021 letter agreement should make it obvious that court cases are not going to factor into FnF's eventual release from conservatorship.
The best thing that all plaintiffs (other than the Lamberth class action) could do now to streamline the process is to just drop their cases. The chances of winning are so slim that it isn't worth holding out for some Hail Mary.
It's rather funny that some people here contort themselves into knots trying to distinguish the conservatorships from Chapter 11 bankruptcy, not realizing that the only ways in which they differ are bad for existing common shareholders.
They have a stated value, a redemption value, and a liquidation preference. They are all the same except that the stated value doesn't include accrued dividends (which I don't expect to ever matter). The FnF investor community calls this "par" even though it's a misnomer. I also call it "par" because it's much easier to type and effectively communicates what I mean.
When I said that I expect the senior prefs to remain in existence I meant at a LP of $1B, not the >$300B LP they have today. The reduction in LP would happen alongside the conversion or writedown.
This is an opinion being presented as a fact. I highly doubt the lawyers who drafted the original SPSPAs would have included a commitment fee on the funding commitment if it were so obviously illegal. I trust their judgment far more than the armchair lawyers on this board.
I think he would say that he already answered your question in his book. Your unwillingness to take Treasury's words at face value doesn't extend to him.
You expect Calabria to agree with your interpretation that something that was told directly to him doesn't count as evidence? I can't agree with that.
Maybe, but I doubt it. He wouldn't have any reason to believe that he was being lied to.
Maybe. With you up in his grill he might be less than inclined to answer your questions. He is active on Twitter, though; perhaps he would answer you if you asked him there.
Yes. The Supreme Court ruled that the NWS was not ultra vires, and thus not a violation of the APA. It said that FHFA can use its power to act in its own interest to override other duties HERA imposes on FHFA, like their obligation to conserve and preserve FnF's assets. A true "elephant in a mousehole" ruling that made no sense, but there is no higher court to appeal to.
"Stealing" is just your word, not FHFA's or Treasury's. How does one "steal" equity anyway?
You seem to get the point, though. Treasury and legacy common shareholders are fighting over the same pot of money. One side has all the power and the other has none. I would buy the SPS myself if I could, but I'm sure as hell not going to count on the side with no power coming out with any more than they are allowed to.
I do think it is absurd that Treasury got away with it, but given their actions all along I am not all that surprised that they tried it.
Classic strawman. FnF are a very special case: when the LP ratchet started, Treasury already had the rights to every penny of profit FnF would ever make. They took a downgrade in that deal because $1 of LP is worth less than $1 of cash, even if you don't take the time value of money into account.
The FnF situation does not even come close to applying to any other company out there. Stop acting as if it does.
I think that's less likely than the possibility that they were just telling the truth. Especially in the light of incentives: converting the SPS gives Treasury far more of what they want than writing them down does.
Once again you are demanding an extremely stringent standard of evidence from Calabria and Treasury while out of the other side of your mouth are giving blanket agreement to other posters without questioning them.
It is obvious by now that you just don't want to admit to the real evidence that is right in front of you: Treasury is far more likely to convert the SPS than write them down.
We have been over this already. It isn't about what really is legal or not, it's about what Treasury thinks is legal or not. Treasury will act based on what it believes is true.
Calabria's account IS evidence. Not in a court of law sense, but this is not a court of law. What Calabria said directly pertains to the possibility of a SPS writedown and shows what Treasury's thoughts were on the matter at the time. In the absence of any further evidence, there is no reason to believe that it is likely that they have changed their mind.
1) Meaningless semantics. 2) Nonsense. What Mnuchin thought was highly relevant. If he thought writing down the SPS was legal then he could have easily done so at any time. There would have been no need to make the equal conversion offer to the junior pref holders. 3) It's not nearly that cut and dried. Laws have interpretations: that's why courts exist. Just about every FnF investor ever thought the NWS was illegal but the Supreme Court disagreed.
The difference is that some people, like me, actually put forth a number for things like the chances that Treasury converts (75%) or writes down (25%) the SPS. Most others just list possibilities without assigning numbers to them, which is completely useless when deciding whether to buy, sell, or hold at current prices.
That's just the endowment effect, a well-documented phenomenon.
Even I would sell some juniors to buy commons if the prices diverged enough. The FNMAS:FNMA ratio hit 4.0 today; if it goes much higher I probably will do just that.
The 6.8% figure depends pretty heavily on if you're buying the most liquid series (FNMAS, FMCKJ), the least liquid (usually the 5-letter ones starting with FMCC), or somewhere in between. They have all done well recently though.
You can only position yourself one way. It will be a function of the different possibilities and probabilities you assign to those variations.
I suppose that depends on what you define "winning" to be. If the juniors outperform the common you would lose relative to owning only juniors and no commons. But differences of opinion are what make a market.
I don't think either class gets totally wiped, but a SPS conversion would cause there to be little upside, and perhaps substantial downside, from current prices.
Calabria's reporting of this IS EVIDENCE. If you're going to drag dictionary definitions of "hearsay" into the conversation, why not the dictionary definition of evidence?
This is not a court of law. Reporting from a primary source (not third-hand as you have claimed) absolutely gives reason to believe that it is true.
The only way you can deny this as evidence is if you think Calabria or the DOJ lied. Is that really the road you're going to go down?
That's because the only evidence you are willing to accept is a direct, detailed statement straight from Treasury.
Waiting for such certainty makes rational investing impossible. You have to be able to make decisions on less than perfect information.
If you don't want to be a hypocrite you must either accept Calabria's words at face value or start demanding similar certainty from all other sources, not just the ones that are inconvenient for your narratives and assumptions.
This is correct, though it's really just semantics. The juniors have no par value, but when people talk about their par value they really mean the stated value.
I don't expect the senior preferred shares themselves to ever go away. Their existence is tied to the existence of the funding commitment, and having the funding commitment continue post-conservatorship would be good for everyone involved: MBS investors, FnF themselves, FHFA, and Treasury.
Your mistake here is to act like eliminating the LP would have no consequences at all. Senator Warner in particular expressed concerns to Calabria about a LP writedown, i.e. the prospect of Treasury losing the LP for nothing in return. That's political fallout right there.
More importantly, the LP ratchet is not "magic" at all. Calabria explained it in this podcast from Monday:
The LP ratchet was given to Treasury in exchange for FnF being allowed to keep their own earnings. The NWS was given to Treasury in exchange for FnF never being in danger of exhausting the funding commitment (yes this is extremely flimsy but the Supreme Court bought it). The senior prefs (and warrants and commitment fee) were given to Treasury in exchange for the funding commitment, which kept FnF out of mandatory receivership.
Every transaction had a give and take. Thinking that Treasury will just write down the LP for nothing in return flies in the face of everything we have seen so far.
Even if a LP writedown is possible, the argument that it is likely isn't possible to defend given evidence and precedent.
Calabria did say he doesn't expect the warrants to be exercised because if Treasury wants commons that much they will exchange the seniors for commons, rendering the warrants useless.
Your conclusion is incorrect. Common shareholders have no voting rights during conservatorship, and the purpose of a recap would be to allow FnF to exit conservatorship, meaning recap would precede release. Legacy common, i.e. those who own the current 1.8B outstanding shares, will never get to vote on anything before the dilution happens.
As long as the vote happens during conservatorship the answer should be "everyone" because that's exactly one of the powers FHFA has as conservator.
Wrong. He finally published an actual capital rule (something Lockhart, DeMarco, and Watt all failed to do) that is far more feasible than most give it credit for. He also laid several other important pieces of groundwork for an exit such as stopping the cash NWS, which really does allow FnF to build regulatory capital, and things like the liquidity and resolution rules.
Wrong again. If Trump wins, there is a decent chance that Calabria will play an important part in the resolution of the conservatorships, whether he is FHFA director again or takes a temporary post at Treasury like Craig Phillips did. Ignore what he says at your peril.
Given that you are talking about Calabria yourself, evidently you are included in this group of fools.
Smart man. He has far better things to be doing that listening to "old man yells at conservatorships" for the thousandth time.
If you can't see that blocking as evidence that your continued ranting on social media is at best ineffective and at worst counterproductive, god help you.
Therein lies the problem. The Supreme Court said that, in agreeing to the NWS, FHFA was allowed to ignore its conserve and preserve mandate due to the incidental powers clause that allows FHFA to act in its own interests. FHFA telling FnF to pay cash dividends during conservatorship is a part of the NWS.
Since the premise is invalid, any conclusions based on it are also invalid.
If Trump wins the election I expect FNMAS to trade in the $10-12 range immediately after the election, probably even higher. All sources I have seen (though they are admittedly third-hand) say that Trump is 100% committed to getting FnF out of conservatorship if he wins.
Since his letter to Rand Paul mentioned selling the government's FnF common stock at a huge profit, I wouldn't count on any senior pref writedown or warrant cancellation.
As such, given polling data and betting odds, owning FNMAS at 5.20 or so makes perfect sense.
Before the election I expect the juniors and commons to generally both rise together, though the commons will probably be more volatile. FNMA 1.99 was a perfect time to rotate that into FNMAS because the ratio dropped to 2.2:1.
Watch the ratios. Historically, FNMAS usually trades at somewhere around 3.5 times FNMA and FNMA usually trades at around 1.06 times FMCC. From that perspective, FNMAS is about an equivalent buy to FNMA right now, and FMCC is a slightly better buy than FNMA.