Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
"Charity" is absolutely the right word to use. Every dollar that legacy common shareholders end up with as the result of a senior pref writedown could remain with Treasury if they choose the convert the seniors instead. Placement in the capital structure matters.
The juniors also rank below the seniors, but the big difference is that the juniors have contractual protections against any amendments to their contracts that would adversely affect them (2/3 vote required for each series). The legacy commons lack this protection. That is the fundamental difference between the juniors and commons right now, and it is of enormous importance.
A bookkeeping entry that blows a $220B hole in the nation's budget. This is very big deal and likely a source of the political fallout Treasury said would result from a writedown.
The amount of the LP absolutely matters when it comes to the valuation. Stopping the LP ratchet would prevent the valuation from going up, which would cost the taxpayer future increases in the value of the LP (vis a vis leaving the ratchet on).
I just want money (highest expected value within risk tolerance), plain and simple. Things like "justice" and "fairness" mean nothing because they are opinions and thus differ in definition depending on who you ask.
I think the juniors have similar upside to the legacy common and much less downside at current prices, which is why I own only juniors right now. If the prices change enough, or if circumstances change to where I think the commons have significantly more upside, I will shift my allocation.
How is this any different than what legacy common owners want?
The conversions are not about repaying the face value of the seniors or juniors. It's about clearing the capital structure to invite new investors, and in the case of the senior conversion to fix the enormous regulatory capital hole.
Pretty much, yes. Treasury would get their "repayment" of the LP via conversion and sale of those new common shares.
No, this is false. The warrants are not, never were, and were never intended to be collateral. It's the senior prefs that exist to ensure that Treasury at least recoups their investment.
Why are you bringing the court definition of "hearsay" into a discussion that isn't being held in a court?
Calabria's reporting is evidence in the sense that he is making a clear, factual statement as a participant in the conversation. The words are right there in his book. The only way you can deny that this is evidence is to say that one side or the other was lying or misrepresented. If you're going to go that route than the vast, vast majority of anything that is ever said will have to be thrown out by your own standards.
The purpose of this exercise is to apply evidence-based reasoning to an estimate of the chances of a senior pref conversion, but the "evidence" part of that phrase has nothing to do with a court definition. If the only way you will believe something is if it's straight from the horse's mouth then you have no business investing in anything ever. Just about nothing in life is ever that straightforward.
Let's turn the question around: do you have any evidence that Treasury thinks a writedown is legal? By your own standards this would have to both be more recent than late 2020 and would have to be a statement directly from Treasury.
In addition, you twice said that the conversation between Calabria and Mnuchin happened over the phone. How do you know that it wasn't in person, or video chat, or some other medium?
My scenarios have the juniors taking an equal percentage haircut to full LP as the seniors, though since neither FHFA nor Treasury has a fiduciary duty to shareholders and FHFA has no reason to care at what rate the seniors are converted, the latter two scenarios are basically the same. Both involve Treasury diluting the legacy common to a greater extent than they did with AIG.
Those two things are not mutually exclusive, instead one is a subset of the other. Probabilities are quantified possibilities. The quantifying part is crucial in performing an expected value calculation, which is the only quantitative way to tell if buying or owning the commons or juniors is a good idea at these prices.
How do you calculate that? When you wrote this post FNMA was around $1.50 and FNMAS around $5.00. FNMA going to $2.00 would be a 33.3% return and FNMAS going to 50% of par would be a 250% (2.5x) return. Any combination of FNMAS and FNMA would have a return between those two numbers.
That depends on if you own enough of the juniors. Even if the seniors are written down, it's possible for warrant exercise + junior conversion + capital raise to dilute the commons enough that the juniors still come out ahead. In fact, all of the scenarios I have run for the common (that I think have a >5% chance of happening) involve the juniors coming out ahead of the commons in terms of total return from today's prices. That mainly stems from the fact that I don't see how the commons ever go above $10 or so without a junior conversion, and with that conversion then any appreciation past that point for the commons also accrues to the juniors.
In 2 of the 6 scenarios they included, yes. In the other 4 the warrants (and thus the legacy common) had a value of zero.
The senior pref liquidation preference has increased dollar for dollar with retained earnings, and the CBO's report involves the LP being retired for cash. That means the "updated" valuation would be exactly the same.
Only in the scenarios where FnF couldn't raise enough cash to redeem them in full.
There are no good reasons for Treasury to write off both the seniors and the warrants. Their perspective is the one that matters.
For Fannie the total LP right now is $199.2B (page 49), $120.8B of which is on the balance sheet (page 59). For Freddie the LP right now is $120.4B (page 2), $72.6B of which is on the balance sheet (page 45).
Correct, it hasn't and by the terms of the SPSPAs it cannot be.
"Paid down" and "owe" and "borrowed" are the wrong words to use here. The seniors are equity, not debt.
The LP only entitles Treasury to FnF's residual equity (assets minus liabilities) up to the amount of the LP in the event of a liquidation.
Yes. The off balance sheet LP grows by $1 for every $1 FnF retain as earnings. That's roughly $4.2B per quarter for Fannie and $2.6B per quarter for Freddie at current rates.
The LP that is on the balance sheet showed up there because it was the offsetting accounting entry when FnF were drawing money from Treasury in 2008-2012. Every draw added cash to FnF's balance sheet (assets) and thus needed the same amount to be added to equity (the seniors).
The LP that is off the balance sheet keeps growing per the terms of the December 2017, September 2019, and January 2021 letter agreements. All of those are linked to on this page that FHFA maintains. I highly recommend bookmarking that page and reading every document that it links to.
The off balance sheet LP still exists and can't just be ignored. Treasury's valuation of the total LP ($220) exceeds that of the balance sheet portion ($193B), showing that Treasury clearly thinks the off balance sheet portion has value too. Since they must approve any exit from conservatorship, the way in which they remove the LP overhang must be agreeable to them.
The cramdown is a way for Treasury to realize some cash value for that LP. From their perspective it is much better than just writing the LP off, which is part of why I expect the cramdown to happen as opposed to a writedown.
lol, lmao even
The only advice I can give you regarding Wise Man is to just ignore everything he ever says. Not a lick of it ever truly makes sense once you really dig down, regardless of how much he dresses it up. There is no secret account, dividends ARE allowed during conservatorship if the conservator decides they are in the public interest, etc.
From what I understand, a senior pref writedown would be accounted for by reducing the senior pref line in the balance sheet to zero and adding that amount to retained earnings. Since retained earnings do count towards all forms of regulatory capital, that writedown really would increase CET1/Tier 1/core capital by $193B.
I do think this is a viable path forward because it would allow FnF's retained earnings account to accurately reflect the reality of the company's health, rather than having a huge negative number for retained earnings (accumulated deficit) and a huge positive number for common stock.
Of course, all Treasury has to do is write down the seniors that are on the balance sheet and convert the off balance sheet LP into just as many commons as if they had converted the whole lot. There is no reason for FHFA to say no to this arrangement, and nobody else would have any say.
Liquidation preference matters in a restructuring, and a restructuring of FnF's balance sheets (mostly dealing with the senior prefs) is something that must be done in order for FnF to ever reach their regulatory capital requirements.
Yes, because you left restructuring off your list.
You also missed the fact that the conservatorships function like administrative bankruptcies, meaning FnF went into a bankruptcy-like state in 2008 and are still there. It isn't the entry into bankruptcy that legacy shareholders need to fear, it's the exit.
The money isn't paid until the judgment is final, which is after all appeals have been exhausted. If neither side appeals that will be relatively soon, but if either side does then that date is probably 1-2 years from now.
1) No court has been asked to rule that FnF have been nationalized, so I don't expect such a finding to happen. 2) Treasury has cited SFFAS No. 47, part 42, as its justification for not consolidating FnF's balance sheets onto the government's. That part of SFFAS No. 47 says that since conservatorship is temporary (yes, I know that's laughable) then FnF are not Consolidation Entities.
It will help about as much as all his past ones have.
It should be obvious by now that the judicial path to getting the conservatorships resolved is basically closed off now. All non-monetary relief claims have been dismissed, as have all monetary relief claims seeking payment by the government. The only claim to succeed involves the companies paying money to the shareholders.
The January 2021 letter agreement acknowledged that release from conservatorship can't happen while there is significant litigation outstanding. That means Bryndon Fisher is actually hurting the recap/release cause by continuing to fight. But once his en banc appeal is denied and SCOTUS puts one final nail in the coffin, his case will finally be dead and we can move on.
Wrong. The seniors are in the EQUITY portion of FnF's balance sheets. That is a cold, hard FACT that proves you wrong.
No wonder you're so bitter!
Being a pre-conservatorship shareholder, your boat has already taken on a lot of water. That's not a boat I want to be on.
You're also wrong in saying that I am "trying to give 95% of the corporations to the government". I don't have the power to do that, and I don't want it to happen either! I am just predicting that it most likely will given the evidence and precedent that we have.
They are even more common when the speaker is currently underwater on their investment. There are many, many bitter bagholders whose cost basis is well above current prices, accumulated during the previous presidential term.
The commons will be worth whatever Treasury allows them to be worth. KBW thinks that will be wherever they trade on the date of the senior-to-common conversion, which they predict to be $2.00 for FNMA and $2.50 for FMCC. I don't see why Treasury would be that generous, but KBW tends to know what they're talking about.
That your whole list ("decades of conservatorship when the GSEs are finally released and turned back over to the private shareholders, two of the largest financial companies with trillions in assets and the underpinning of the real estate market with a gov backstop") means nothing when it comes to the future share price.
No. There would be an appropriately-sized reverse split before uplisting.
To see an example of this in action, look at AIG's price chart dating back to before their collapse. You might notice that the peak on the chart is shown as $2,000, but at the time it was only $100 because there was a subsequent 1:20 reverse split.
I don't see any upside scenarios for the common if the seniors are converted, and even if they aren't they face potential dilution by the warrants, a junior-to-common conversion, and a capital raise. Those combine to totally kneecap the commons' upside, even if one of the latter two doesn't happen.
No. My claim that future actions by Treasury are unlikely to result in a successful implied covenant claim by shareholders have nothing to do with the $800M verdict.
Yes, that is in essence what Lamberth and the jury decided.
As for the rest, given the facts that no new lawsuits have been filed in a while and that only one of the existing/past ones has succeeded (where "success" meant only a $800M money payment made by the companies), I don't see why you should be so confident that a future lawsuit would even be filed let alone eventually succeed. The only way to ensure even the first of those is to file your own lawsuit. Ball's in your court.
You are conveniently leaving out the fact that shorting FNMA was part of a pair trade and not just a naked short. It was a statistical arbitrage designed to take advantage of a temporary displacement from the normal FNMAS:FNMA ratio, not a blanket suggestion to just go long FNMAS, short FNMA, and hold both positions until the cows come home.
It's also convenient that you left out my suggestion to go long FMCC and short FNMA as an alternative, a strategy with a similar idea behind it that would have made a handsome amount.
No, that's not how it's calculated. Instead of starting with a share price at conversion and calculating the number of shares, it's the other way around. First Treasury, FHFA, and the junior pref shareholders will negotiate how the pre-capital raise common will be divided among them and the existing common (note that the existing common won't get a vote here, just like they didn't in late 2020). Then the number of shares will result from that calculation.
familymang went over the math in this post, showing that if the equal haircut cramdown happened a year ago it would have resulted in a 35% haircut (65% recovery) to full LP value for both the seniors and juniors. Back in late 2020 that haircut was 70%, which is why the junior pref shareholders refused.
That haircut drops to 20% by early 2026, which is about the fastest FnF can leave conservatorship anyway since it will require lining up the capital raise, etc.
Perhaps even more. FNMAS was above 40% of par ($10) even during the lame duck period following the last election when hopes were much diminished.
I can't blame you at all for that. 50% of par on FNMAS would be well over a double from here, and given what we have been through getting out then could hardly be called a loss. I will be sorely tempted to take some off the table if prices get that high.
The higher prices go, the less gain there is to capture but the greater the euphoria. An insidious combination.
Short version: I think the juniors will end up with somewhere between 50% and 100% of par (stated) value via a conversion to common. Not converting the juniors makes no sense due to the CET1 capital requirement in the ERCF.
I think the commons are worth about $8 at the most when FnF are recapped and released, and that's only if Treasury chooses to write down the seniors entirely. If they convert those seniors to commons instead, as Mark Calabria wants them to do and as KBW expects, they will be worth somewhere between $0.25 and $2.00 per share, depending on how FHFA and Treasury structure the transaction. Probably towards the lower end of that range since there is no reason for either FHFA or Treasury to fear any lawsuits and that the situation for FnF common shareholders is far worse than that of AIG common shareholders, who got diluted down to 8%.
I expect the commons to rise and fall roughly in line with the juniors until recap/release time so I wouldn't short them, at least not for more than very short periods as an attempt at statistical arbitrage, but I avoid them entirely.
I'm glad they didn't. If it wasn't for all the government malfeasance that so many like to endlessly complain about, I never would have had the opportunity to make this much money on this investment.
Not gone but nationalized. Still, I see your point.
Ah, so you're underwater? That's hard to do if you really did buy in back in 2009.
You certainly seem to be suffering the same fate as the Sears investor in The Zurich Axioms. She lost money in Sears stock and kept buying more and more, chasing it down, to "make her money back".
There is no such thing as "making your money back". Yes, you want to make money, but why does it have to come specifically from FnF common shares? Some cosmic sense of justice? It doesn't exist.
I listened to the podcast, thank you for the link.
His quote at 14:53 is "I had fights with the Trump administration when I was an independent regulator and I was willing to push back on things."
However, the topic was the fact that FHFA is not independent anymore and that federal policy on many things, including housing now that the President can fire the FHFA director at will, is subject to a whipsaw effect where things change drastically whenever a President of the opposite party takes the White House.
Calabria's quote did not pertain to the conservatorships. You seem to have misconstrued it. I didn't hear any mention of the conservatorships at all in the entire podcast.
Another good quote by Calabria was at 30:22, though it also wasn't specifically about the conservatorships or even FHFA/FnF: "There's no enforcement mechanism for many parts of financial regulation. Sometimes there's the regulated entity, but external stakeholders - the rest of us - often don't have an avenue to make regulators follow the law."
When it comes to Calabria, something to keep in mind is that he has been much more active on social media recently, and by all appearances is angling for a spot in Trump's administration if Trump does win in November. This could very well be a second stint as FHFA director.
That means that his views can certainly affect FnF shareholders in the future and thus he needs to be given a lot of credence.
Fannie Mae's own 10-Q says that "Net income (loss) attributable to common stockholders" was negative $4M and "Weighted-average common shares outstanding" is 5.867B. That comes out to an EPS that rounds to zero.
And that's exactly the problem. The common share price won't reflect any economic or voting rights until those rights are restored. That requires both a removal of the senior pref overhang (via conversion or writedown) and an exit from conservatorship.
Bravo! It is good to know that I am not the only voice in the wilderness on this issue.
Whining incessantly to members of Congress cannot possibly help. It is, as you say, counterproductive because it just makes FnF shareholders look like greedy bastards. There are already members of Congress, like Bill Foster of Indiana, who want all current FnF shareholders to be wiped out.
We are all in this for the money and nothing else. The only differences among us are who is willing to admit it. This isn't about justice or fairness or any of that bullshit. It's only money.
There is a simple question to find out someone's real motivations for owning FnF shares: "would you support a full senior pref writedown plus unwinding the SPSPAs plus returning all the excess NWS money plus a full government apology (etc) if it means you and everyone you know who owns shares has to sell right now at current prices and never buy back in?"
An answer of "no" means they're only in it for the money. "Yes" is basically bullshit; if that were the case they would sell right now. Refusal to answer amounts to "no".
Amen.
But for some the need to feel like one is doing something is just too much to ignore. To our detriment.
The fact is that the Supreme Court ruled that HERA allows FHFA to act in its own best interests, even when that runs counter to the conserve and preserve mandate.
The first step to wisdom here is to accept what the Supreme Court has actually ruled, and reject what you think "should" be the case.
They will just do it. The jury verdict does not in any way prevent a senior-to-common conversion from happening. The knee-capping of existing shareholders happened in 2012 and the jury said that was perfectly fine, so long as the companies pay a total of $800M to shareholders.
I fail to see how a new amendment letting Treasury convert their seniors into commons would be positive for current common shareholders.
If you're talking about a new lawsuit, especially one based on the implied covenant case, all I can say is precedent shows that you will be waiting a long time for a pittance of a payout at best.
It's just the truth. I have heard the "common shareholders are the true owners of the companies" moralizing bullshit line so many times that it was worth putting things in stark terms.
The statement I made that you quoted is a fact in the present. There is no "time will tell" aspect because it isn't a statement about the future.
None of these things has to do with economic and voting rights, which is what the existing common shares lack right now. Ownership implies both control of decision-making and rights to profits. I didn't say the common shareholders have no rights whatsoever, I said that they don't have any ownership rights.
Not without running FnF through receivership and transferring their charters to newcos. This is fully half of my investment thesis in the juniors.
All of the Fifth Amendment takings cases over the NWS and original SPSPAs/conservatorships have been dismissed. A few are on their last legs having hail-Mary appeals outstanding, but it's hard to see any of them even getting to trial let alone winning.
If "the leader of the free world" looks to the court system to define what is and is not illegal and constitutional, which is the purpose of the judicial branch, he will find that the NWS, conservatorships, and original SPSPAs were perfectly fine from a Fifth Amendment standpoint given that all the takings lawsuits were dismissed.
If you're counting on future Fifth Amendment takings claims to either prevent future government actions like a senior-to-common conversion, or remunerate shareholders for those actions, keep your expectations extremely tempered. One long-standing Supreme Court precedent is that takings awards are based only on what the property owner lost, not on what the government gained. Right now the shareholders have no economic rights and only a couple of billion dollars of provable value (market cap: share float times market price per share).
As I explained in another reply, it isn't reasonable to expect that shareholders could even bring to trial (i.e. not get dismissed), let alone win, an implied covenant case against the companies in the event of a senior-to-common conversion given that reasonable shareholder expectations as of the date of the conversion have to include the LP ratchets in the letter agreements, which prevent the common shares from gaining any economic value.
Page 95 of the FY 2023 Financial Report of the US Government shows that Treasury values the Fannie senior prefs at $134.5B (about 71% of the full LP amount) and the Freddie senior prefs at $101.7B (about 89% of the full LP amount).
That first part misses the fact that only monetary relief was awarded, not injunctive (or any kind of other non-monetary) relief. What the jury said was that the companies can violate the implied covenant as long as they pay the shareholders a total of $800M, inclusive of pre-judgment interest on the Fannie juniors.
I don't see any justification for thinking that the jury verdict has any far-reaching consequences other than that monetary payment. Again, the plaintiffs asked for no non-monetary relief and the jury didn't award any either.
My point is that whether or not reasonable shareholder expectations have been violated, which is what triggers a breach of the implied covenant, depends on the expectations at the time of the alleged breach. That's the law, and that's what Judge Lamberth said when he allowed that claim to go to trial.
Shareholder expectations regarding an agreement between the companies (via FHFA) and Treasury to a senior-to-common conversion in the future would be set as of the most recent contract amendment before the conversion. That includes the removal of all economic rights of common and junior pref shareholders by the 2012 NWS and the fact that the letter agreements did not reinstate any of those rights.
This means that a senior-to-common conversion cannot possibly violate the implied covenant because legacy common shareholders would go from having no economic value to having very little. It's actually a net benefit, albeit a small one.
Saying that lawsuits will be filed if Treasury dares to convert the seniors to commons is a prominent bit of common nonsense. It ignores the fact that such lawsuits have to actually succeed to matter.
What is your estimate on how much will be converted versus written down?
I think it's a 25% chance of none converted and all written down. 50% that all of it is converted. 25% that only the $193B worth of balance sheet SPS is written down and the rest is converted.
That latter scenario exists because a conversion of the balance sheet SPS involves moving that amount into the common stock line rather than retained earnings. Both common stock and retained earnings count towards all forms of regulatory capital so that's not an issue, but it might be odd to have this enormous common stock amount on the balance sheet while having hugely negative retained earnings (accumulated deficit).
There is no reason for FHFA to say no to any conversion ratio of the SPS though, so there probably isn't any functional difference between Treasury converting the entire LP and only converting the part that is off the balance sheet.
Again, whether or not this is possible isn't really the point. What matters is the probability estimate of whether or not it will happen. I have a SPS writedown at 25%, and if anything I think that's too high. KBW has it at 0%, for example.
Your number is clearly much higher, though you haven't yet said what it is or why.
If you have a trivial amount invested in this there is no reason to run so many complicated scenarios as you claim to have done. And if you have a substantial amount invested, you should want feedback in order to find out flaws in your process that you haven't caught yourself.
At least I'm starting to understand your recalcitrance. You are refusing to answer only because it is me that is asking, as if publishing the details of your price model would somehow look like you giving in or losing face. Get over yourself. It is clear that you don't want an honest debate about the common share price, which I should have realized long ago when you were responding with blanket "I agree" statements to people who posted high share price estimates with absolutely no logic or reasoning behind them.
If you truly wanted to sharpen your investment thesis then you would publish all the details and welcome criticism. Alas.
Mnuchin told this to Calabria directly, then Calabria recounted it in his book. That isn't hearsay, it's reporting.
No you haven't. You don't have to be Nostradamus to give answers to things like what specific claim would be filed (such as your assertion that the LP ratchet can be the basis of its own separate implied covenant claim), what court it would be filed in, and what the requested remedy would be.
This isn't all-or-nothing. You don't have to have all the answers in order to have any answers at all.
Wrong. Hypocrisy is telling someone to do something while not doing it oneself. Talk of new lawsuits with no intention of filing them is a perfect example.
Treasury is the de facto owner of the companies, having rights to (more than) all of FnF's net worth and income due to the liquidation and dividend preference of the senior preferred shares.
FHFA has total control over the companies as conservator.
Existing common shareholders do not own the companies at all. They have no economic rights and no voting rights. Nothing.
What they do own is the very bottom of the capital stack of companies that are in conservatorship and are hundreds of billions of dollars below their regulatory capital requirements. That does not at all entitle them to any specific percentage (let alone 100%) of the companies once they reach their capital requirements and exit conservatorship.
Under the terms of the ERCF, FnF will have to meet their full regulatory capital requirements (minimum and risk-based) plus have at least 25% of the applicable buffer to pay a dividend.
Page 47 of Fannie Mae's 2024 Q1 10-Q form shows that they have a shortfall of $156B to the Adjusted Total Capital requirement of $106B. 25% of the $82B buffer adds another $21B to give the total shortfall to being able to pay dividends: $177B.
$121B of that could be made up in an instant if Treasury decides to cancel the seniors or convert them to commons, but the rest would have to be made up with some form of de-risking, retaining more earnings, or a capital raise.
Fannie's shortfall to the Tier 1 leverage capital standard is $164B. Adding in 25% of the $24B buffer brings that shortfall to $170B. Again, Treasury can wipe out $121B of that shortfall in an instant but the other $49B would have to come from some combination of retained earnings and a capital raise. Those are the only two options given the definition of Tier 1 capital used in the ERCF.
1) There is a $110B deficit to the base Adjusted Total Capital requirement. Add on 25% of the $51B buffer and the total shortfall to paying dividends is $123B. $72B of that can be wiped out by Treasury but the other $51B shortfall would remain. 2) There is a $124B deficit to the base Tier 1 leverage capital requirement. Add 25% of the $11B buffer and the total shortfall to paying dividends is $127B. Once the $72B of balance sheet senior prefs are taken care of (by cancellation or conversion to common), Freddie would still have to retain and/or raise $55B more in order to start paying dividends.