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Unfortunately, you bought too early. The date of final judgment is probably 12-18 months away if the plaintiffs choose to appeal. And even if they don't, the final judgment wouldn't happen until 31 days after Lamberth enters judgment (the point at which the appeal window closes).
A settlement, however, could technically happen at any time and would instantly lock in who gets the award from the settlement. Holding the shares is not a bad idea in that light.
You have said over and over again that nothing in the future can be predicted, none of us has a crystal ball, etc. You making any sort of predictions about the future is therefore utterly hypocritical.
FnF's regulatory capital requirements have nothing to do with the stress tests. By law, FnF are undercapitalized by hundreds of billions of dollars right now.
Your Dear Santa wish list is even worse than Bryndon Fisher's because at least he gave some actual numbers.
There are two types of Reporting Entities in Appendix A of the Financial Report of the US Government (page 212): Consolidation Entities (those whose balance sheets are consolidated onto the government's) and Disclosure Entities (whose balance sheets are not consolidated).
Fannie and Freddie are listed as Disclosure Entities because of SFFAS No. 47, item 42 on page 15:
Since Treasury does not expect the conservatorships to be permanent, they can avoid consolidating FnF's balance sheets onto the government's. This has absolutely nothing to do with how many common shares Treasury owns. FnF have been under government control since 2008 so the control aspect by itself does not trigger consolidation.
In addition, Treasury owned 92% of AIG common stock at one point and never included AIG as a Consolidation Entity in their 2009, 2010, 2011, or 2012 reports. You can check past reports on this page.
Each report is as of September 30, and according to Treasury's history of AIG common stock ownership and sales they still held 1.45B of its original 1.65B common shares (about an 81% stake when prorated) on September 30 2011. That means even the 79.9% threshold was meaningless when it comes to consolidation.
Those who think the SPS writedown is coming and Treasury will give up equity they value at $220B for nothing in return - why? Other than it fits the Common fantasy....
1) Treasury certainly can do this. 2) Of course. His own letter said his Treasury Department would have "sold the government's common stock in these companies at a huge profit", and Treasury makes more profit from selling common shares by converting the seniors compared to writing the seniors down and exercising the warrants. 3) I'm not so sure about this, but if a senior-to-common conversion does happen the common price will quickly and violently re-rate anyway. 4) I don't see how this is relevant. It's an opinion anyway. 5) Correct. The January 2021 letter agreement says that FnF cannot be released unless all litigation outstanding can only result in a combined liability of less than $5B to FHFA, UST, and the companies, and also that FnF cannot issue any new stock (pursuant to Paragraph 4(a) at the top of page 5) unless Treasury exercises the warrants in full. Those two things combined mean Treasury doesn't think they face more than $5B of liability by exercising the warrants, and a senior-to-common conversion gives Treasury at most 1.2 times as many shares as exercising the warrants (99.9% / 79.9% = 1.2), meaning they don't see their liability in a senior-to-common scenario as exceeding $6B. That's around $3.33 per share at an absolute maximum, and far less than the profit Treasury would realize.
So what? If I agreed with Mr. Market I would only own the S&P 500. The entire purpose of picking individual stocks is because one thinks they are either undervalued (in which case one buys) or overvalued (sells or shorts) by the market.
There are equally relentless posts saying the commons are worth things like $38 or $190 or even higher. Why not call those out too?
That's only if you assume that the market is correctly pricing both the commons and juniors. And if you truly believed that you really shouldn't own either one; it would be extra risk with no extra return.
The AIG resolution refutes both of your points. Treasury did execute a preferred-to-common "cramdown" that resulted in them owning 92% of the common shares, and outside investors did later buy those shares from Treasury.
The most that legacy shareholders could obtain in a lawsuit is the drop in share price. They won't be able to undo the dilution; any injunctive relief request will run smack into the anti-injunction clause 4617(f).
Why on earth would new shareholders push back against this? If they have such a problem with the cramdown they wouldn't buy shares and thus wouldn't be shareholders at all.
Do you have an example of an institution with such a clause in its bylaws? I could see something like this being an internal company policy (though not at enough places to prevent Treasury from selling its converted shares), but that would be difficult to impossible to prove.
I never said there needs to be a senior-to-common conversion. I just see it as far more likely than a writedown. If neither happens, then both the juniors and legacy common will be worth next to nothing as they are now.
That point is at least 13 years away. It's true that Treasury has been okay not getting any cash from FnF for the last 4+ years so maybe they would wait another 13+, but maybe they wouldn't want to.
Some administration might think it's better to get the cash now and spend it rather than let someone 2-3 presidential terms ahead do it.
Only FHFA has been thus "called out". Not Treasury, who wasn't a party to the case. My assertion stands.
The language that breached the implied covenant was already overwritten by the September 2019 and January 2021 letter agreements. And any agreement or amendment that helps the companies cannot be horrible for them.
Again, the violation of the implied covenant does not actually change any terms of the agreement. Nothing needs to be "fixed" as a result of the verdict.
I guess you are still refusing to show the math behind your $38 share price estimate if the warrants are exercised but no other dilution takes place.
I don't. I am currently putting a 75% probability on the seniors being eventually exchanged for commons. AIG and Calabria's book show that not only should that probability not be zero, it should exceed 50% (using Bayesian priors) given the lack of contrary data points.
A pretty vague statement. There is a lot of room between "exactly like AIG" and "not at all like AIG", and everything but the most extreme end of the latter can truthfully be called "uncharted territory".
Naturally.
I'm not trying to convince you of anything, in case you were wondering. I continue this discussion for my benefit and for that of those who have thanked me in the past for my posts.
This is exactly the flaw in your logic. The jury's verdict only results in cash being paid from FnF to shareholders. Nothing else. No striking of clauses, not a single alteration to a single letter of any agreements (including the NWS) either retrospectively or prospectively, nothing.
Personally, I put a probability of at most 0.1% on this scenario, and any probability that small just rounds to zero to avoid edge case variance dominating the model. Under the current agreements FnF have to hit full with-buffers capitalization before the cash NWS restarts and that point is over a decade away.
You never did answer my question: What is your estimate of the probability that Treasury will change its mind as to its opinion of the illegality of writing off the seniors? All you have said on this front is that it's non-zero, but the difference between, say, 5% and 95% is massive. And trying to weasel out with "I don't know" only means that you really shouldn't own any FnF shares at all right now due to the lack of rational basis on which to do so.
These are not balance sheets. They are part of Bryndon Fisher's "Dear Santa" letter where he made several assumptions that amount to pure wishful thinking, and then ran the numbers assuming those wishes came true.
The haircut on both the juniors and seniors is decreasing over time right now because as FnF retain earnings, the gap between their current regulatory capital and the requirements in the ERCF shrinks. That means hitting the requirements would require less of an equity raise, and the equity raise is what would dilute both the converted juniors and converted seniors.
There is a limit to this, though. At some point FnF will have enough capital to where they don't need a capital raise to hit the capital requirement (though the seniors still need to be converted). After that, the point at which FnF's entire equity will be owned by Treasury/converted juniors/legacy common, everything Treasury gains comes from the other two groups.
This assumption is correct, and is precisely why the haircut on the seniors (and thus the juniors) will start to increase again after 2026.
I do understand the difference. The juniors' combined total book value is $33B no matter what the market price is.
You are the one who clearly doesn't understand the difference. The market price of the juniors has absolutely nothing to do with FnF's capital levels or the book value of any equity, including the juniors themselves.
You said "Show us current accounting that proves 33B is part of the current capital quoted (the 110B retained)." and I did, complete with links and references to FnF's SEC filings. The book value of the juniors is exactly the amount at which they are carried on the balance sheet: $33B for FnF combined.
Yes, I have become quite the expert in refuting bullshit here over the years. Thank you for the compliment and also for providing a large quantity of said bullshit.
I don't see how this could be directly true, but if Treasury decides to go through with a senior-to-common conversion (FHFA would have no reason to say no) and it occurs at the then-prevailing market price (which doesn't have to happen), then a low price would be good for Treasury.
Some people, like Ackman, bought FnF commons because they believed Treasury would try to prop up the price of the commons to make the warrants more valuable; they would be on the same side. A senior-to-common conversion turns that prospect on its head because it would pit Treasury against current common shareholders. And we all know who would win that power struggle.
Thank you for these answers. You are explaining things far better than I could.
One thing I would add to your answer for #1 is that a senior-to-common cramdown would have nothing to do with the conservator's "preserve and conserve" mandate because that mandate only pertains to assets, while the cramdown would not affect FnF's assets at all (only their equity).
The numbers in Fannie's 10-Q were as of September 30 2023. That is 11 years and 44 days after the date at which interest started accruing (August 17 2012).
Interest of $192M on a judgment of $299.4M is 64.13%. Divide that by 11.12 (11 + 44/365.25) and that gives a simple interest rate of 5.767%.
The Fed's historical discount rate chart shows a value of 0.75% in August 2012. That would make the pre-judgment interest rate 5.75%. This is close enough to the number I calculated above that 5.75% is likely what Fannie Mae used.
This is pretty disappointing, even considering your dismal track record on the facts.
FnF must have enough core capital to meet their regulatory capital standards in order to be classified as "adequately capitalized" by 12 USC 4614(a)(1)(B).
The definition of core capital in 12 USC 4502(7) does not include cumulative preferred shares.
The seniors are an equity investment, but they are not core capital because they are cumulative preferred shares.
Therefore you are, for the millionth time, absolutely wrong.
At the moment I think there is a 75% chance that Treasury will convert the seniors to commons and a 25% chance that they write them down to zero.
Yes. In the conversion scenario, Treasury would have to take a haircut on the full value of the liquidation preference because the companies themselves are worth less than the liquidation preference. In late 2020, Mnuchin said Treasury would not be willing to take an equity position that ranked below the existing junior prefs and so he insisted that any haircut taken by Treasury be shared by the juniors. Back then it would have been a 70% haircut for both Treasury and the juniors, right now it would be somewhere around 55%, and in 2026 (at least for Fannie Mae) it will bottom out at 30-35%.
In the writedown scenario the juniors will go to around full stated (what most of us call par) value.
Don't get me wrong, I would very much prefer Treasury to write down the seniors instead of converting them. But I try not to make the mistake of allowing what I want to happen to affect what I think will happen.
Yes. I expect the funding commitment in the SPSPAs to continue after conservatorship ends, and that commitment is tied to the existence of the seniors so the seniors themselves cannot completely disappear. They had a liquidation preference of $1B per company when they were issued and I use that as my baseline assumption for what the liquidation preference will be after either a conversion or writedown.
Check page 63 of Fannie Mae's Q3 2023 10-Q form released today. It shows $19.130B in the "Preferred Stock" line of the stockholders' equity section. And that isn't the seniors because the seniors have their own line above it.
You can find Freddie's numbers on page 48 of their Q2 2023 10-Q form (Q3 hasn't been released yet). Freddie's juniors have a book value of $14.109B.
Add the book values of the two companies' junior preferred shares and you get $33.239B, which usually gets rounded to $33B in conversation.
I just did.
Wrong. The book value of the junior prefs' equity is $33B no matter what the current market prices are.
Wait, so now you can predict the future? I thought that nobody could say anything about the future because none of us knows what is going to happen? Hypocrite.
They are effectively nationalized right now. No private shareholder can ever derive any benefit from the current situation unless for some reason Treasury allows FnF to pay dividends to private shareholders once FnF are fully capitalized.
We will certainly get nothing as long as the status quo persists. Owning FnF shares right now is a lot like placing a bet. The juniors trade like an OTM call spread and the commons trade like an OTM call at the higher strike.
You are conflating FHFA and Treasury here. What you said was "The probably that the LP gets adjusted to zero is much greater today than it was prior to this year."
A senior pref writedown is an action that only Treasury can take, while the jury verdict only pertained to FHFA. There is no connection between the two. That means your statement about the probability of a writedown makes no logical sense; the conclusion has nothing to do with the premise.
The current arrangement is far, far more helpful to the companies than the original NWS was. It is equally bad for the shareholders, but neither FHFA nor Treasury have shown any inclination to do any more for shareholders than they are absolutely forced to and I don't expect that to change.
This is completely wrong. The share price estimates for each scenario are independent of the assigned probability for each one. The $38 and $190 numbers are purely yours.
Neither I nor any outside reader can distinguish between your estimates and numbers pulled from your rear end if you don't show the work. Whether or not you care about the credibility of your estimates is up to you.
I balk at even the 1%. I cannot see any reason for Treasury to cancel both the seniors and the warrants, thereby just tossing their entire equity stake (currently valued by Treasury at $220B) in the trash can for nothing in return. Conversely I can think of at least two powerful reasons (political fallout and precedent) that they would not do so.
Putting a 1% probability on a "well you just never know" scenario might sound low, but using your numbers it skews the results heavily. Reducing that to zero knocks your hypothetical 1200% return down by several hundred basis points.
That does not change that fact that Treasury claimed a writedown would be illegal. Your stance that since no more detail was given therefore the claim is invalid makes no sense. That isn't logic, it's a refusal to accept the evidence.
The discussions were about resolving Treasury's senior preferred shares, and Calabria used Mnuchin's name so he was certainly involved, as he would have to be since he would need to sign Treasury's side of any agreement.
It isn't a stretch at all. Especially compared to your argument which boils down to "Treasury didn't say which law a writedown would break therefore they were actually lying."
No. A lie is possible to disprove factually. You keep saying that it's possible for Treasury to change its mind.
One key reason that the NWS was a breach of the implied covenant of good faith and fair dealing is that it violated reasonable shareholder expectations. There was no reason for shareholders to expect that something like the NWS would ever happen given what was publicly known the day before it was signed.
A senior-to-common conversion, by contrast, is definitely a reasonable expectation given the public contents of Calabria's book and that it already happened with AIG.
This is wrong. The jury found that FnF (at the behest of FHFA as conservator) violated the implied covenant when they signed the NWS, but the NWS has not been rendered moot. It continues to this day.
Once again you are conflating bad faith actions with a breach of the implied covenant of good faith and fair dealing. Those are not at all the same thing, as you recently acknowledged.
That doesn't mean they can't try to turn a profit ever. Why else would they keep bragging about the profit they made on other bailouts?
Wrong. What you posted is not a definition, it is a list of considerations. As long as the warrants check all the boxes they are perfectly fine according to that part of the charter.
It hasn't been adjudicated because nobody has brought that claim in court. Calling something illegal without filing your own lawsuit is just empty words. I would tell you to file your own lawsuit or shut up, but I already know that you will do neither of those. Hypocrite.
What is your estimate of the probability that Treasury will change its mind on this front? Personally I think it's quite low given that Treasury has defended the NWS tooth and nail throughout the Obama, Trump, and Biden administrations.
Calabria's account is hard evidence. It is a direct account from one of two parties that were negotiating. I suspect that you keep trying to downplay it (using terms like "recollection" and "thought process") because you don't like what it said. Especially when you claim that the jury's verdict (which had absolutely nothing to do with Treasury, the senior preferred shares, or the liquidation preference) is a stronger indicator of what Treasury will do with the seniors than Calabria's direct account.
You have really strayed down the wrong path here, hate to tell you.
The argument that the jury-mandated payment of around $800M ($612M jury award plus pre-judgment interest on the Fannie juniors) is a capital distribution is false.
The term "capital distribution" occurs five times in HERA, but as a result of this first one the rest are moot.
This is HERA's definition of "capital distribution". Note that FnF making a payment to shareholders as a result of the jury verdict does not fit any of these three definitions and thus is not a capital distribution at all.
It is not a dividend, it is not a payment to acquire shares, and it is not a transaction (a transaction would involve FnF getting something in return for their money, which they won't with respect to the jury-mandated payment).
Notwithstanding the fact that FnF's payment due to the jury verdict is not a capital distribution as defined by HERA, these three do not apply anyway because FHFA has never given FnF one of HERA's capital classifications (adequately capitalized, undercapitalized, significantly undercapitalized, critically undercapitalized) during conservatorship.
I only mention this one for the sake of completeness. It is also irrelevant with respect to the jury's verdict.
As a result, every argument that followed from the false premise (that FnF's jury-mandated payment is a disallowed capital distribution) is also false.
Yes. If I thought the market was right, I wouldn't own the juniors. Or anything else for that matter. Buying names that one thinks are undervalued is the very essence of stock picking.
If you think the market is right about everything just buy some SPY and some bonds and close your eyes.
If that happens then the commons stay well under $1 because they won't get any dividends either.
Stepping up your logical fallacy game, I see. Now you have graduated to the false choice fallacy.
The government is under no obligation to do what is, in your opinion, "the right thing".
What is "this"? What case do you think will be heard by the Supreme Court or a jury?
As I pointed out before, the jury verdict (indeed, the entire case) had nothing at all to do with the senior preferred shares or the liquidation preference or the Treasury Department at all. If you're using the jury verdict as your basis for this increased probability you really should reconsider.
I truly cannot wrap my mind around the idea that a jury verdict in a case that found no wrongdoing at all by Treasury (they weren't even a party to the case!) could lead to Treasury taking an action they otherwise wouldn't have.
Washington Federal challenged the warrants and Judge Sweeney dismissed the entire case. She must have thought the issue was ripe enough to rule on.
And once the warrants are exercised it will be too late to undo the 5x dilution. The most you could hope for is a court award, and good luck with seeing much money given how the Lamberth trial went.
If the Supreme Court bought it then its veracity is moot.
The cash NWS ended with the 4th amendment, and it was the cash drain and forever preventing FnF from building capital that was hurting the companies and by extension the shareholders. The liquidation preference ratchet, by contrast, doesn't harm the companies at all even though it does continue to harm the shareholders.
But at that point FnF will be fully capitalized, and the new dividend formula means FnF would never be forced by the (four times amended) SPSPAs to go below full regulatory capitalization, including full buffers (PLBA and PCCBA). Part of the injury that the NWS represented to the companies was the prevention of them ever being able to build any capital at all. The 4th amendment really did cure that injury.
You or I or anyone else here can scream until we're blue in the face that the Supreme Court got their ruling wrong. It won't matter.
It was implicit when you acted as if a no-seniors-no-warrants common share price of $60 was ridiculously low. Enough dilution from outside investors and/or a junior-to-common conversion can bring the number down considerably; this is why I linked my framework post which shows exactly such an outcome.
I think the chance of this happening is close enough to zero that rounding it to zero doesn't affect the calculations.
I have receivership and Treasury choosing to cancel both the seniors and warrants in the same category.
Without some sort of mathematical model, how can you possibly compare the merits of an investment in FNMA or FMCC to the juniors or any other possible investment out there?
The NWS was not an apocalyptic event to share prices. The Supreme Court's Collins ruling was far worse. If the end of conservatorship is as positive as the NWS was negative, it will hardly bump the share prices at all.
This sounds like weaseling to me. Show your work.
And in and case you already did give me numbers: $38 per share with warrants and $190 without. I just want to know more details about how you got them. You said that you're constantly making adjustments so I won't hold you to whatever number you happen to quote forever into the future, but as of now I do have something to anchor on.
Smart. Effective portfolio management doesn't depend only on expected value but also variance of returns. Since so much of the common expected value in your model hinges on something you think has a 1% chance of happening (seniors and warrants both cancelled), slight deviations to that 1% would have a huge effect on your distribution of potential returns.
Expected value, discounted to the present, is an actual value number today. Comparing that to the prevailing market price allows one to decide if an investment is worthwhile. That means the two things you mentioned are actually one and the same.
As long as the chuckle was a result of you laughing at how wrong Rodney was, I can understand.
I never said it can't happen. Remember, I put a 25% chance on it happening. What I did say was that I see no reason to put a greater than 50% probability on a scenario that Treasury claimed is illegal.
My point was that Treasury doesn't need to come up with convoluted calculations if they really want to write the seniors down.
Read that last part several times so it sinks in. The jury DID NOT find that FHFA or FnF acted in bad faith, because the plaintiffs never accused them of it! Acting in bad faith and violating the implied covenant of good faith and fair dealing are NOT the same thing.
Steven Mnuchin. Calabria used "Mnuchin" and "Treasury" interchangably in that part of his book, making it clear that Mnuchin was the one he was negotiating with.
Now Treasury has to be an author for you to accept what they said? That's a stretch, even for you. Treasury was a source.
Here's the quote from the book:
Your persistent refusal to accept the clear evidence might very well prove disastrous.
Treasury said a writedown was illegal. You refuse to believe that claim for whatever reason. Your belief, or lack thereof, will have no bearing on what Treasury actually does with the seniors.
For the sake of argument let's say you're actually right and that a writedown really is legal. If Treasury disagrees and insists on converting the seniors to commons anyway (because from their perspective writing them down would be illegal), how does that help you? It would be quite the Pyrrhic victory on your part.
All you are really arguing here is that if the cash NWS starts again in the future then shareholders could be owed money damages. You don't seem to grasp the fact that the jury verdict did not alter a single letter of any contract or agreement, either retrospectively or prospectively. In addition neither the trial nor the verdict had anything at all to do with the senior prefs or their liquidation preference, so your theory that Treasury could use the verdict as cover to write down the seniors is full of holes. The reason that the NWS breached the implied covenant of good faith and fair dealing was that it lay outside of investors' reasonable expectations. A senior-to-common conversion, on the other hand, is a perfectly reasonable expectation now because Calabria's book is publicly available, it was discussed in the CBO report, and it happened with AIG.
Color me shocked. One of the biggest common nonsense talking points is that the warrants were collateral.
This would be a good time to channel DaJester and ask: was Werfel part of the Treasury Department at the time? How did he have the authority to speak for them?
By this token, the only way for Treasury to fulfill the purpose of the warrants is actually to cancel them and convert the seniors to commons instead. That would drive the stock price much further down than writing off the seniors and exercising the warrants.
Also, even if Treasury's intent in October 2008 really was to never exercise the warrants, that clearly changed by the time this report was released at which point Treasury said "The value of the warrants issued to the government under the terms of the PSPAs could potentially increase, thereby providing enhanced value to the taxpayers."
The discussion in that thread was only about Fannie.
That's a separate issue, but it would be very easy to offer the juniors a conversion that looks like a haircut on paper in terms of discount to stated value, but could be at full stated value or even a premium to it if the exchange price is set appropriately. This is what happened with Citi: the preferred-to-common conversion was painted as a haircut but it was executed at a pref:common ratio 3x that of the previous day's close.