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Berkowitz sold most of his FnF shares several years ago. He certainly isn't the #1 shareholder right now, even if he might have been in the past.
And he didn't sell all of his shares. He still has 4.3M shares of FMCKJ left as of FAIRX's 2023 annual report.
That makes you 0 for 2. Keep swinging, buddy.
By contrast, Capital Group - particularly The Growth Fund of America (AGTHX) - publicly lists its share holdings. They currently have around 107M shares of junior pref stock, mostly FNMAS and FMCKJ.
They had held over 200M shares of commons before the Supreme Court Collins opinion in 2021, which they subsequently sold down to zero over the course of the next 5 quarters. That's more shares than Ackman had.
So it is you that needs to answer the question: how do you feel now that the then-number 1 common shareholder has sold all its shares?
Who are these people? Name some names. Because nobody on this board has advocated for a cramdown.
I think it has a 75% chance of happening, but I certainly do not want it to happen. It would mean less money in my pocket compared to a senior pref writedown.
I can see why my first signature line bothers you so much. Lots of high-minded legal claims by you, no actual lawsuits filed. Inactions speak louder than words.
It appears you haven't been paying attention. Courts have dismissed all of the NWS takings lawsuits. It is far easier for the government to say that there was no takings than it ever has been before because the courts have given them cover to say so.
What property is it that you expect to be returned? And why would Treasury do it? Especially in light of the fact that the courts have dismissed all the takings cases?
The problem is that you quoted an inappropriate source there. Whatever Treasury's plans for the seniors are, it isn't going to show up in either Fannie's nor Freddie's SEC filings.
No, it doesn't work that way. The amount of capital that common stock contributes has nothing to do with its market price.
Common stock is part of the definition of core capital in HERA, but currently it contributes next to nothing because of the value it has on the balance sheet ($687M for Fannie, zero for Freddie).
The reason that converting the seniors to commons would add to regulatory capital is that the seniors don't count towards any capital type (because they're cumulative), while common stock does. The conversion would move the senior preferred stock amount on the balance sheets into the common stock line.
It might go to additional paid-in capital instead, or maybe even retained earnings depending on how they account for it, but those also count towards regulatory capital requirements.
Tier 1 capital is a Basel III thing, which Calabria's capital rule uses but isn't required by HERA.
I don't think the implied covenant breach case will be a catalyst for price movement unless the plaintiffs appeal and succeed in getting a much higher damage award. That is both unlikely in my opinion, and would certainly happen after the election.
The election is by far the biggest catalyst on the horizon. There is a pretty widespread market belief that Trump will finish what he started in his first term when it comes to recapping and releasing FnF. That has already manifested in market prices, and I expect that to continue until the election.
A smart take by Ackman. There was a time when it made sense to bank on the courts to take meaningful action, but the series of unfavorable rulings makes that an unreasonable expectation now.
Freddie is much further away from its regulatory capital requirements than Fannie when measured in years of earnings.
For example, Fannie's shortfall to its core capital requirement is $157B as of their recent 10-K. Treasury cancelling or converting the seniors would knock off $121B of that shortfall, leaving $36B. That's a little over 2 years of earnings.
Freddie's shortfall to its core capital requirement is $120B as of their recent 10-K. Treasury cancelling or converting the seniors would knock off $72B of that shortfall, leaving $48B. That's almost 5 years of earnings.
If Freddie is to exit conservatorship at the same time as Fannie, they will have to raise more capital, meaning more dilution for the commons.
The knee-jerk argument that since Trump didn't accomplish recap/release in his first term therefore he won't in his second is both lazy and false.
FnF will be in a far, far different position in early 2025 than they were in early 2017. Well over $100B of net worth for FnF combined compared to only a couple billion, an actual published regulatory capital rule compared to nothing, and the cash NWS won't be on in 2025.
An opinion that has absolutely no bearing on what Treasury will end up doing with its senior prefs and warrants.
All the takings lawsuits over the NWS, and even the Washington Federal which wanted money damages for shareholders as of the day of conservatorship, have been dismissed in their entirety. A few of them are still twitching like Kelly and Fisher, but it won't be long until those cases are completely dead too.
I am assuming 25% as a ballpark figure, but it could be lower or higher.
I think the plaintiffs have little to lose by appealing, and I expect the government to appeal because they always have.
He could announce an intent to recap/release FnF, but I think that has a near zero chance of happening. I'm not holding my breath with regards to the State of the Union address.
Don't forget about the converse: what is everyone's exit plan if FnF get recapped and released but the commons never go over $5? Hold and hope? Cut bait because there wouldn't be any catalysts on the horizon?
Well well well, here you are taking a verifiable fact and making a completely unjustified and absurd conclusion from it.
Hypocrite.
All that sentence says is that if Fannie Mae was to issue capital stock in the future with the senior prefs in place, that capital stock would rank below the seniors in terms of liquidation and dividend preference. It's boilerplate cover-your-behind stuff and it's moot anyway: nobody will buy newly issued capital stock shares while the senior prefs exist in their current form.
There is nothing in that sentence that either states or implies that the seniors being converted to common "is [not] in the current plan".
Of course it does. Where else would they have come up with that share count number?
Exactly. The default assumption of Fannie and Freddie, as shown in the 10-K forms, is that the warrants will be exercised. That has been the case since the warrants were issued. It's the people who say that Treasury won't exercise the warrants that have the burden of proof here.
Why would Treasury not exercise the warrants? The only answer I ever get to that question is "lawsuits!!" but no detail beyond that. It's a stupid answer anyway because Treasury took a 92% stake in AIG and faced no liability, why would they fare any worse in court over FnF warrant exercise?
Where on earth do you get this number? Freddie's own 2023 10-K form says that "Net income per common share" in 2023 was negative 5 cents. See the chart on page 136, which is page 140 of the pdf.
It also shows that the "Weighted average common shares (in millions)" is 3,234. That's 3.234B shares, which shows that they are assuming that Treasury will exercise the warrants. You might want to update your share count to match the official one.
If your plan is to maximize return based on the jury's award, you shouldn't buy FMCC or any Freddie juniors. Instead get the cheapest par (stated) value that you can in Fannie series.
Based on the plaintiffs' proposed allocation plan:
FMCC holders get around 5 cents per share. Freddie junior pref holders will get around $1.00 per $50 of stated value (1 share of a series like FMCCT, 2 shares of a series like FMCKJ). Fannie junior pref holders will get around $1.34 per $50 of stated value (1 share of a series like FNMAN, 2 shares of a series like FNMAS).
All classes should get post-judgment interest of around 5.5-6% annualized, but that's unlikely to be more than 12 to 18 months' worth.
For Fannie juniors it's both. Pre-judgment interest accrues from the date of the NWS (August 17 2012) until the date that Lamberth enters judgment, then post-judgment interest accrues from that date until there is a final judgment (after all appeals have been exhausted).
The Freddie junior and Freddie common classes only get post-judgment interest.
Both the pre-judgment and post-judgment interest rates should be around 5.5 to 6 percent per year.
Wrong again. We have already been over this. One major matter that the Supreme Court addresses is circuit splits, which include both Constitutional and non-Constitutional rulings.
Wrong. It was not refuted. It wasn't even addressed.
There is no effective difference between Treasury having an explicit legal requirement to minimize taxpayer losses and them consistently acting as if they do. And there is no duty that Treasury has to anyone that would prevent them from converting the seniors into commons.
If you're implying that Treasury does not actually own the senior preferred shares, you're just plain wrong. I can't even imagine where you would have even gotten such a silly idea from.
I truly don't see why this matters. Dividend payments on preferred stock don't ever reduce the liquidation preference. Not for FnF, and not for any other company.
Saying that Treasury should write off the seniors because they more than recouped their original investment is equivalent to saying that any other stockholder in a company should write off their shares as soon as they receive more in dividends than their cost basis. Things just don't work that way.
It is astounding how similar some of that language you point out is to other shitco stocks, especially modern day AMC and GME.
It's like there is a bagholder club and you just listed their code phrases. You left out "to the moon" and "market manipulators" but your list still illustrates the point well.
It couldn't have been the DTAs because FHFA didn't have any authority to write them down until after FHFA became conservator. You said "I think most of us agree that the DTAs were just a ruse to get the leverage needed for the hostile takeover." and that isn't true.
As to what I think they actually used, I'm not sure. It was Hank Paulson, not James Lockhart, that was applying the pressure.
The boards were totally strong-armed into consenting to conservatorship. Hank Paulson admitted it in his book "On the Brink".
But as I've said before: it's not what you know, it's what you can prove in court. The only case I am aware of alleging that FnF's boards were coerced into consenting to conservatorship is Washington Federal. Judge Sweeney dismissed that case in its entirety without addressing the coercion claim.
Why does it matter anyway? Let's say someone who was on one of FnF's boards at the time comes out and says they only consented to conservatorship under duress. So what? It wouldn't change a single thing about how the conservatorships get resolved and wouldn't put a dime in either of our pockets. At most it would just generate yet more useless lawsuit threats by armchair lawyers.
"The boards were coerced into consenting to conservatorship" is in the same category as other useless statements like "FnF never needed the bailout" and "Treasury should cancel the warrants and seniors because they have been paid back". Good for getting the cheerleaders to wave their pom-poms but inconsequential in terms of future government action or FnF investors making money.
In terms of a legal fiduciary duty to taxpayers, I concede the point that Treasury doesn't appear to have an official one. But in the end there is no de facto difference between Treasury having a binding legal obligation to minimize taxpayer losses and them always having acted as if they do. And that is what should guide FnF investors' expectations as to how Treasury will act in the future. My overall point stands.
Treasury writing off the seniors for nothing in return would result in a $220B loss to taxpayers. There is nothing in the law or in past Treasury actions that would give any real reason to believe they would do that.
If you want to mince words for the umpteenth time and say that this isn't the same as a fiduciary duty, whatever. Hank Paulson clearly used the term "protect[ing] taxpayers" in that press release to at least include some sense of fiduciary responsibility, including mentioning the minimizing of losses and the potential for gains.
Treasury itself uses the term "protecting taxpayers" to include the minimization of losses, among other things. Writing the seniors off for nothing in return would result in a loss of $220B to taxpayers, using Treasury's own valuation.
That's essentially what FHFA did when it had FnF sign the original NWS. What FHFA's mission is or was didn't matter.
The GSEs are here to stay. Efforts to kill them have failed.
But a senior-to-common conversion is quite the opposite of liquidation. Those new common shares would have far less value in a liquidation than the seniors would.
It was the other way around. The boards consented to conservatorship, and afterward FHFA used its authority as conservator to force FnF to write down their DTAs and hit balance sheet insolvency, forcing draws from Treasury under the original SPSPAs to avoid mandatory receivership.
These "hundreds of billions in equity" already belong to Treasury. The liquidation preference of the seniors far exceeds FnF's balance sheet net worth. There is no equity for FHFA to give away to Treasury at this point because Treasury already has it all.
In addition, converting the seniors to commons adds $193B to all forms of regulatory capital. Increasing FnF's regulatory capital is absolutely in alignment with FHFA's mission.
And yet the Supreme Court still said it was okay.
And yet the Supreme Court still said it was okay.
Shareholders won the battle ($800M) but lost the war ($300B).
That's a different consideration. Writing off the senior prefs is something Treasury would do. Treasury never had a fiduciary duty to the companies or its shareholders.
As long as FnF remain in conservatorship, Treasury will not have to consolidate FnF's balance sheets onto the government's no matter how big of a stake they get in FnF. That's because Treasury says SFFAS No. 47, part 42 allows them to not classify FnF as consolidation entities.
Treasury can go all the way up to 99.99999% if they want to and still avoid consolidation. Neither 79.9% nor 92% are magic numbers.
They said that 4617(b)(2)(J)(ii) allows FHFA to do something that is not in the best interests of the companies, like the NWS, if FHFA determines that it is in the best interest of the Agency, i.e. FHFA itself.
It is a bizarre, stupid, and incomprehensible ruling, but is it the ground truth we have to deal with now. By any estimation FHFA should have a fiduciary duty to the companies, but the Supreme Court said FHFA can override that by acting in its own interests instead.
That is irrelevant to the AIG and FnF cases, though. Treasury feared that lawsuits against AIG's board brought by the shareholders would delay and complicate the resolution process, so Treasury took "only" a 92% stake to pre-emptively prevent those lawsuits from happening.
Three judges have already ruled that FHFA has no fiduciary duty to shareholders, and FnF's own SEC filings consistently state that the boards of directors have no fiduciary duty to shareholders either. Thus Treasury has no reason to limit the stake it takes in FnF commons to 92%, or any other number, as it did with AIG.
Exactly. Did you even read my post? The reason Treasury feared lawsuits with AIG was that the board of directors had a fiduciary duty to shareholders. And even then, the lawsuits they feared wouldn't have been against Treasury itself, but against AIG.
Similar lawsuits are not a concern with FnF. FnF's quarterly reports all say on page 1 (emphasis added):
It's right there in black and white. You calling it nonsense doesn't make it nonsense. This is looking like more like a case of "none is so blind as he who will not see" on your part. I was very clear in my explanation. Treasury's reason for fearing lawsuits brought by AIG shareholders does not apply to FnF.
Take note that Treasury feared lawsuits by AIG shareholders and converted their preferred shares into a 92% common stake anyway! Given how bad of a position FnF shareholders are compared to AIG shareholders (lack of fiduciary duty by the boards, HERA's succession clause, etc), Treasury only ending up with 92% of FnF looks like the best case for FnF commons.
The commons would be in a far better place if the seniors are written down compared to if the seniors are converted to commons. The former involves 79.9% dilution via the warrants, while the latter is likely to exceed the 92% stake Treasury took in AIG.
I don't think FnF the companies are in worse shape than AIG was in 2009-2010. I think FnF shareholders are in worse shape than AIG shareholders were at that time, mostly for three reasons:
1) AIG's board of directors had a fiduciary duty to shareholders and FnF's don't 2) FHFA as conservator has far broader powers over FnF than the Fed and Treasury ever did over AIG 3) FnF have enormous regulatory capital deficits that can only be resolved by Treasury writing off or converting the senior prefs, and it's pretty obvious which of the two is better for Treasury
Treasury has an equity position in FnF (the senior prefs) that has a liquidation preference of almost $300B, and Treasury has it marked on their books at a $220B valuation. Calabria is already on record as saying that in late 2020 Treasury thought a writedown of the seniors was illegal.
As such I can't put a probability of a senior-to-common conversion at any lower than 50%.
But that's just my reasoning based on the evidence we have. Differences of opinion are what make a market.
I appreciate your posts as well. They are a welcome change to the constant common nonsense chatter.
This is basically the scenario I think has a 75% chance of happening. Though with slightly different reasoning: I think the reverse split wouldn't be done to reduce the share count to something palatable to the market but instead to increase the share price to wherever FHFA/Treasury/outside investors want it to be.
No. The analysis can, and should, be done right now.
How could you tell if holding or buying at today's prices is a good idea without an analysis of future possibilities, their probabilities, and the resulting share price for each one?
That means actually thinking about potential dilution now, rather than waiting for it to happen. Otherwise holding or buying is just pure gambling, akin to buying lottery tickets without knowing what the odds or jackpot are.
Nope, Such "speculation" is necessary in order to know if one is making a good investment or not. Sticking one's head in the sand is never a good idea.
One of Louie's specific brands of bullshit is the idea that since nobody knows the future, everyone's predictions are equally useless. Upon reading this last paragraph of yours I am afraid you have succumbed to it.
There are many reasons it is wrong; the easiest to articulate is that if it were correct the insurance industry would not exist at all.
None of us has to KNOW Treasury's intentions in order to make predictions and assign probabilities to them.