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If I understand correctly, Fairholme will receive 48 of the 56 documents in Sweeney's ruling, i.e. all but the eight listed in the mandamus ruling.
I wonder how this affects the rest of the 11,000; it likely will depend on which privileges were asserted on them. The mandamus ruling denied disclosure for documents with the presidential communications privilege so I wouldn't expect any of those to be released.
The Court of Appeals allowed disclosure for all documents with the bank examination privilege. If Sweeney's intent was to have all documents released (given her 1.000 batting average in favor of release), I think that she will order the release of all documents with the bank examination privilege, essentially having been given carte blanche to do so.
As for the documents with the deliberative process privilege, the mandamus ruling seems to protect those that do not pertain to the NWS and allow the release of those that do. I'm not sure how many of the 11,000 documents have the deliberative process privilege and specifically have to do with the NWS; given today's ruling I expect Sweeney to release those with both information the plaintiffs can't get any other way and that directly pertain to the NWS.
Those are my immediate opinions on the matter.
If the appeals court really was waiting on these documents, presumably they would need time to obtain, read, and understand them, in addition to more time to write or revise an opinion to incorporate the contents of those documents. I wouldn't expect anything soon.
I thought Pershing already owned 9.9% of the FNMA, FMCC commons, meaning they can't buy any more without triggering a poison pill or something.
The letter also mentions that the government can exercise the warrant to get even more money as a positive (a reason for reform to get done).
These two things lead me to speculate that Pershing actually recently built a position in the preferreds. Likely the more liquid, higher dividend versions like FNMAT, FNMAS, FNMAJ, FMCKJ because those seem to be preferred (ha!) by the institutional investors involved here.
I would argue that Congress could influence any of these, but it would take a broad consensus that has until now been missing. Corker's amendment that (supposedly) stops Treasury from selling any FnF-related securities for another year is an example, though that particular one is poorly worded and could be circumvented while sticking to the letter of the law.
Still, I think this process has many moving pieces and even with a cooperative Watt I can't see Mnuchin taking too many unilateral actions, even if he has the proper authority. With the right legislation Congress can undo much of what Mnuchin does, so he can't piss them off too much.
Trump is the true trump card here. If he agrees with Mnuchin (and Paulson, Icahn, Berkowitz, Ackman, etc.) on a purely executive endgame, he can veto any true anti-GSE legislation; I can't see 2/3 of each chamber agreeing to kill off the GSEs.
Thank you for the link. I only listened for a few minutes, stopping after Sen. Warner seemed to be done asking about FnF.
Mulvaney and Mnuchin agree with Corker, Warner, Crapo, etc. in that a legislative solution is necessary to finally get housing finance resolved. Neither nominee has said or even intimated (to my knowledge) any plan that would try to resolve the situation entirely via executive actions.
However these Senators want the status quo to continue, i.e. their desired solution can be only legislative. Basically "don't do anything until we do." Obama, Lew, Watt, and the other players in the previous administration went along with this.
But Mulvaney responded to Corker by only saying "the law needs to change," so he didn't rule out the possibility of some executive action. This is similar to Mnuchin denying having said the words "recap and release;" taken at face value it is a statement of fact.
Given that Mulvaney has been shown to (at least recently, with the introduction of his bill) be in favor of recap and release, the fact that he evaded the Senators' questions with vague promises to work with Congress is heartening to me as a FnF investor. As with Mnuchin, this is not the time for Mulvaney to show his cards. They need to get confirmed, in place, and have some time with their new authorities to piece together what they actually want to do.
I wish one of Mnuchin or Mulvaney had responded to Sen. Warner with a statement that they are agnostic to hedge funds; they won't specifically try to help or hurt them when making decisions. But what they actually did, giving non-answers, is fine with me.
I hope FnF don't come up at all. It will be easier for Mnuchin and Watt (assuming he's willing) to take action behind the scenes and only announce something after it's done. Increased publicity will only mean increased backlash.
Dear Senator Hatch,
It's not pronounced "Munchin."
Thank you.
We could do the math to see how much the overage would be from FnF's payments, i.e. total of dividends paid after these "loans" are paid off.
However, the bill doesn't appear to address what is done with those overages or the fate of the senior preferreds. If the government returns all money in excess of what is calculated ("loan" overpayment) and cancels the senior preferreds, we could well have a nearly instant recapitalization. But since those are not addressed, I doubt the intent of the bill is to recap the companies.
So you wouldn't consider purchasing a series like FMCCH? 5.1% dividend rate, $50 par, ask price $12.48 right now.
And it doesn't matter what your cost basis is, FMCCH at par represents a 300% gain from today's price, FNMA at $10 represents a 150% gain from today's price.
I have both as well, though I'm more tilted to the preferreds. Partially for "safety" (a tighter range of outcomes) and partially because of Glen Bradford's reason: the big boys bringing the lawsuits are in the preferreds for the most part, so I want to be aligned with their interests.
If you expect a $10 PPS for the commons (150% potential gain), shouldn't you be in the junior preferreds? (300% potential gain on the $50-par shares if they return to par)
I think the discussion is important, but it's a selfish reason: I own some of each. For example, if someone truly believes that $10 per share for the commons is a best-case scenario, that person should be entirely in the junior preferreds.
In fact many of the $50 stated value junior preferreds trade for around $12, so to consider the commons one should believe that the expected value of the commons is at least $17. Even then the prospect of extreme variance generally requires a risk premium, so $25 is a more plausible average needed to pick the commons over the junior preferreds.
Of course all this assumes that the junior preferreds will get par (or near it; series like FNMAM traded around $44 pre-conservatorship) with no deviation. Since no mandatory conversion is possible, I don't currently see any scenarios that involve releasing the companies from conservatorship but the junior preferreds not returning to those levels.
Not a problem at all. I miss enough things that going to that level of detail is at least as much a sanity check for myself as anything else.
I still think my conclusion holds, though: a voluntary conversion of junior preferred to common (assuming it's even possible) isn't worth considering because it would reduce core capital at a time that increasing it is paramount.
For the same reason I think junior preferreds get their dividends turned back on rather than having them redeemed for the stated value: the latter incurs a far larger immediate cost that cannot be borne easily.
In addition, turning junior dividends back on allows common dividends to be distributed, raising their share price and allowing for faster recapitalization.
All I see for core capital is (114,526), or negative ~$114.5B, on page F-57. It is the sum of
Common stock, 687
Treasury stock, (7,401)
(Junior) Preferred stock, 19,130
Accumulated deficit, (126,942)
and retained earnings, but that's zero.
The $25B figure you're quoting is the minimum statutory core capital requirement.
If the government decides to cancel the senior preferreds as part of a settlement, I assume that the 117,149 number on the balance sheet would disappear, and the offsetting ammount would go towards the accumulated deficit, which would turn into retained earnings of 2,623. This is only $2.6B, not nearly enough to capitalize the company, but it is a necessary start.
It still seems to me that a conversion from junior preferred to common would reduce core capital, unless I have the common's stated value part wrong. The value per share on the balance sheet is around $0.59, but most balance sheets I see have stated values of $0.01, $0.001, etc.
About a possible preferred-to-common conversion:
The 2015 10-K says that core capital includes stated value of (junior) preferred stock, which is currently $19.13B, and stated value of common stock.
My ignorance is on display now because I couldn't find the common stock's actual stated value, but it is usually a rather small amount, with nearly all of the IPO proceeds being accounted for as paid-in capital.
Since there are just under 1.6B common shares outstanding, the total stated value of those is likely $16M (if the stated value is $0.01) or even less. Thus converting junior preferreds to commons will hurt core capital substantially, unless they offer 1000+ shares for each $50 of junior preferred stated value (lol).
Tim Howard's $75-100 calculating for common PPS post-release was taken out of context? I had taken it at face value, though it does (unrealistically) assume no warrant exercise or other dilution of any kind.
The problem with this approach is that you're essentially trying to time the market. At any time a piece of great news could come out and leave someone on the sidelines in the dust. I'm sure it happened to more than a few people on November 9.
While we have a handle on when the executive can start helping our cause, the courts could rule in the meantime on the Perry appeal or the writ of mandamus. If those two happen and Mnuchin takes real steps to release FnF, we could have gaps up that never fill.
As for me, I bought in everything I was willing to this summer, so for now I'm going to hold. To me, selling and hoping the stock goes lower so I can buy back in isn't worth the risk of missing a big upward move: several of these are clearly on the table.
P/E only means Price to Earnings; this doesn't include the redemption value of the junior preferreds.
Unless you mean that you expect FnF to redeem the junior preferreds at par as part of a settlement. I disagree with that: FnF will need capital badly and it is far cheaper in the short term to just turn the dividends back on, which costs far less than $19B per year. Heck, the dividends are non-cumulative so FnF could decide to wait a year or two before turning them back on. As long as a promise to do so exists, the junior preferreds will approach par, appeasing those plaintiffs (Berkowitz, etc).
Also, I don't see a scenario in which the extra $65B that FnF have paid over the senior preferred value gets kept by the government AND the warrants get exercised. Why would the plaintiffs as a whole agree to that? Getting the preferreds redeemed at par (or getting their dividends turned back on) won't satisfy common holders like Ackman.
I'm following your reasoning here, but if Watt retires before January 20, won't it be Obama who picks his successor? Or will the process be delayed so much (Republican Senate refusing to confirm any Obama nomination) that Trump will be the one calling the shots anyway?
There seems to be a disagreement here. In this post:
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=127231101
obiterdictum said that Trump will not be able to fire Watt at will, and included links to the PHH case (where the appeals court found that the President must be able to fire the CFPB director at will to avoid unconstitutionality).
Why do you think Trump will be able to fire Watt? I believe this is a key part of the investment thesis: can Watt unilaterally hold things up, will he, and if he chooses to do so can Trump, Mnuchin, or anyone else do anything about it?
First off, thanks for all of your detailed and well-thought-out posts. I, among many others I'm sure, appreciate your work.
I do have a question: does the recent ruling allowing the President to fire the director of the CFPB at will also have bearing with the FHFA? I know the ruling is being appealed, but in the meantime could Trump fire Watt while citing that case? Or is there a stay in the ruling, not allowing such firings until the Supreme Court has ruled?
I've wondered for a while if anyone will bring a lawsuit over FHFA similar to CFPB, seeking to give the president the authority to fire the FHFA director at will. Depending on how soon the Supreme Court rules on the CFPB appeal, it's possible that Trump could fire Watt legally before Watt's term expires.
I hope, though, that none of that is necessary and that Watt will follow Mnuchin's orders as faithfully as he did those of Lew. I don't think we have any evidence that Watt wants the status quo to continue. On the contrary, he has said that the dwindling capital buffers are a danger to FnF and that the law "got trumped" with the NWS.
This is why Corker's tired "public losses, private gains" lie about the FnF model is proven false. The public has GAINED $63B since the conservatorship started, and private investors LOST the vast majority of their equity stakes.
If I had Twitter I might try tweeting that to the whole world, especially CNBC whenever they trot out Corker to give his stale speech for the umpteenth time.
The fact that the price was 3.61 right around that time is another reason to call it a fat finger trade. Missing one digit is relatively easy, even with 1 and 3 not being adjacent on any number pad I know.
I'd be much more suspicious of another cause if it was something like 1.98.
I understand that some of the hardline right want Fannie and Freddie gone, or at least to strip them of any sort of guarantee be it implicit or explicit.
My point is that those same Republicans may not necessarily care about punishing the shareholders. Some of them, Hensarling and Corker included, could very well think that it would be worth $20 billion to pay off the junior preferreds so that the lawsuits go away and they can get their full privatization dream done quicker.
It seems to me that Congress would have to go out of its way to punish preferred shareholders, and I don't see an incentive for them to do that. Diluting commons heavily is much easier, especially since the warrants already exist.
If the Democrats were in control I could see punishment being its own motivation.