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Treasury actually did fear lawsuits by shareholders, and that led them to "only" take a 92% stake in the conversion of their preferred shares to commons.
AIG's board of directors had a fiduciary duty to its shareholders. FnF's boards of directors don't, as three judges have ruled and as FnF have stated in their 10-K forms since conservatorship started.
That means the AIG precedent sets a ceiling on how much FnF common shareholders can hope to keep of the companies when it's all said and done. 8% of a roughly $250B market cap is $20B, which comes out to a little over $11 per share.
Since FnF shareholders are in a far worse position than AIG shareholders were (due to the lack of the boards' fiduciary duty to shareholders), there is ample reason to believe that they will fare worse and thus get (potentially much) less than $11 per share when all is said and done.
Nope. He "won" at the district court level in that Judge Wheeler did find that the government had committed an illegal exaction, though he awarded zero in damages.
Wheeler's illegal exaction finding was overturned by the appeals court. That took away even the moral victory Starr thought he had.
The Net Worth Sweep caused FnF to send almost $300B to Treasury, about $110B more under the NWS than they would have under the original SPSPAs, made them operate on the edge of insolvency in perpetuity (under the terms of the 2012 NWS), and ensured that the publicly traded common and junior preferred shares had zero economic value. The final damages to common shareholders? Zero for FNMA and a few pennies for FMCC. And only a few hundred million out of $33B worth of total stated value for the junior prefs.
In light of that, if Treasury were to be sued over a senior-to-common conversion why on earth would anyone expect to recover more than a pittance in damages? That conversion is far less damaging to the companies than the NWS was, and wouldn't have any more of a negative effect on shareholders either considering that the NWS removed all of their economic value already.
Supreme Court precedent is that in a takings case, what the government gains means nothing, it's only about what the property owner lost, i.e. market value. When it comes to publicly traded stocks like FNMA and FMCC, the market value is clearly known: the last traded price. That represents the most that a shareholder can lose, and therefore represents the most that Treasury could be on the hook for in a takings case. Does anyone out there really think Treasury would avoid converting the seniors to over $100B worth of commons to not have to pay out a couple billion in damages? Please.
Yes. And there is no logical explanation for lawsuits being part of that reason. Potential major threats to Treasury, such as lawsuits, are the kind of things that are internal to Treasury and (if credible) would have stopped the talks with FHFA from ever starting.
Whatever the reason was that the conversion didn't go through had to have been something external to Treasury. Probably external to FHFA too because they wouldn't really have any reason to care about the specifics of the conversion terms: FHFA has no fiduciary duty to shareholders.
Occam's Razor would tell me that it's actually the junior pref shareholders that prevented the conversion from happening, in that they were unwilling to accept the amount of haircut (to stated value) it would have taken to get the deal done. And if that's true it would be deliciously funny, in that it was the junior pref shareholders who saved the legacy commons from being diluted to almost nothing. The same junior pref shareholders that the common nonsense crowd loves to shit on.
Go read those two posters' posts again. Their argument is that Treasury wouldn't dare convert the seniors because there would be lawsuits filed as a result. "Fear" is an appropriate descriptor.
A similar argument is that the government won't screw the legacy common because it would cause new investors to be unwilling to buy Treasury's common shares. That one is proven wrong by countless restructurings in which the old money got screwed, and also again by Treasury's willingness to get to the point of negotiating a senior-to-common conversion with FHFA; if the "they wouldn't dare!" argument was true the conversion talks would have never even started.
Speaking of those two posters, you told me "You are clearing stating #2 is TRUE, as if a foregone conclusion. It is not." Why do you not ask those two posters the same thing? Both of them stated that there will be lawsuits if Treasury converts the seniors to commons. How can they possibly know that? They don't have a crystal ball!
#1 is true according to Calabria's book, and of course #2 is true.
#3 is a simple logical argument: if lawsuit threats were truly enough to prevent Treasury from doing a senior-to-common conversion, Treasury would never have gotten to the point of negotiating it with FHFA and junior pref shareholders. It is not a burden of proof fallacy because there can be no proof either side can provide, short of getting an actual explanation from Treasury.
#4 is you committing the strawman fallacy because I never said that the conversion is imminent. Change "imminent" to "possible" and the statement would be correct. What I actually said is that threats of lawsuits, or fear of them, won't prevent a senior-to-common conversion from happening.
#2 is not the topic of this discussion. The topic is the argument that the other two posters advanced, and I have explained quite enough times why their argument fails basic logic. Whatever other reasons Treasury had for not consummating the conversion are irrelevant to that topic.
Just don't make the mistake of assuming that these powerful forces would have to buy common shares to make a lot of money. There is almost $30B to be made in the junior prefs alone.
I also think you are quite misguided if you think the resolution of the conservatorships will have anything to do with what you (or me or anyone else here) think is just or fair. It flies in the face of all the evidence we have seen so far. Hope is not a strategy.
What good does rooting do? This isn't a sports team, it's an investment that anyone can get into or out of at any time. There are tens of thousands of other fish in this sea. Trying to turn discussion into "us versus them" is useless and counterproductive. It smacks of identity politics, which obviously drives messages boards such as these but doesn't help anyone actually make money.
My point is that owning the commons for the long haul is betting on Treasury's largesse. Given everything they have done in the past that seems like a pretty bad bet to me.
No. That makes no logical sense. You have lost sight of the entire premise here, which is that some people (such as the two posters whose posts I linked to) claim that Treasury wouldn't dare convert the seniors to commons because of lawsuits. That is proven false by Treasury getting to the point of negotiating with FHFA over just such a conversion.
The reasons that Treasury did not seal the deal are irrelevant to that argument.
Because the alternative is just ludicrous.
The opposite argument to mine is that Treasury started negotiating with FHFA over a senior-to-common conversion and then decided to stop because they suddenly realized potential lawsuits might be a problem. That makes no sense. Treasury is not that stupid. They envisioned a senior-to-common cramdown as early as September 2019, and actually did one with AIG in 2010. To say that they listed that cramdown in their housing finance reform plan but failed to even consider the possible legal ramifications would be nonsensical.
One conclusion is inescapable: ANY reason that supposedly might have prevented Treasury from moving forward with a conversion is wrong in light of the fact that they were ready to move forward with it.
I single out lawsuits as one of those reasons because that is by far the most common answer when I ask the question "why would Treasury not convert the seniors to commons?"
It was both. Each of those posters in essence said "Treasury won't convert the seniors to commons because of lawsuits". Given people's track record around here of legal theories and not filing lawsuits I don't expect either of those two posters to actually be the ones to file, but it was still a threat (albeit a vague one) nonetheless.
The difference is that my position is supported by reasoning and logic, whereas theirs is defeated by reasoning and logic.
Please don't go back to the whole "nobody knows the future so everybody is equally wrong" idiocy.
Horseshit. I still have yet to see you challenge either of those two posters on their certainty that lawsuits would be filed if Treasury converts the seniors to commons. If you want to appear unbiased then start acting that way.
And for god's sake if my signature bothers you so much, it isn't that hard to turn signatures off. Settings -> My Site Options -> Show Signatures in Messages -> No. Four or five clicks. So easy a caveman can do it.
Once again you are completely misrepresenting my words. I did NOT say that I would WANT John Paulson to do these conversions if he were to be named Treasury Secretary. I said that I think it is plausible that he WOULD.
You then use this as justification to go on a string of childish personal attacks and name-calling. Perhaps you consider that to be moral and ethical, but it is still a very bad look.
There would be nothing criminal about a senior-to-common conversion. "Immoral" or "unethical" is merely your opinion. Your response to me said NOTHING about that type of conversion anyway.
Existing common shareholders are buried underneath several hundred billion dollars of liquidation preference and dozens of billions of dollars of dividend preference. They have no economic value under the terms of the current agreements.
That means there is nothing left to steal from the commons. It was all taken in 2008 and 2012.
Therefore no government action in the future can be construed as stealing from them, again because there is nothing left.
And yet when that happens all you do is react with name calling and personal attacks. What good does that do you?
Yes. You expect others to do the dirty work of actually contacting a law firm and, heaven forbid, pay money out of their own pocket to pursue legal theories that you clearly don't think are strong enough to spend your own money on. Blatant hypocrisy. Inactions speak louder than words.
You can say this as many times as you want, but you're wrong. I do not advocate for a senior-to-common conversion at all.
I want Treasury to write down the seniors. I expect (with a 75% probability) them to convert the seniors to commons. Two totally different things.
"Been involved" as in actually funding a lawsuit? If your own legal team made the mistakes that you keep pointing out, you have only yourself to blame for your bad choice.
Current CET1 capital: -$78B Senior prefs on balance sheet: $121B Junior prefs on balance sheet: $19B
Converting both the seniors and juniors to common adds a total of $140B to CET1, bringing it to positive $62B.
For Freddie, as of September 30 2023:
Current CET1 capital: -$47B Senior prefs on balance sheet: $72B Junior prefs on balance sheet: $14B
Converting both the seniors and juniors to common adds a total of $86B to CET1, bringing it to positive $39B.
Right now we don't know exactly what the exit threshold is. The January 2021 letter agreement says CET1 capital equal to 3% of adjusted total assets.
For Fannie that's $137B, so even converting all preferred shares into commons leaves a shortfall of $75B. For Fannie that's $113B, so even converting all preferred shares into commons leaves a shortfall of $74B.
But the most important capital requirement in HERA is the minimum (leverage) capital requirement, which is 2.5% of adjusted total assets. That can only be met with core capital, and while a senior-to-common conversion adds to core capital, a junior-to-common conversion doesn't.
Fannie's current core capital is -$47B. Freddie's is -$28B.
For Fannie, 2.5% of adjusted total assets is $114B, so converting the seniors into commons leaves a shortfall of $40B. For Freddie, 2.5% of adjusted total assets is $94B, so converting the seniors into commons leaves a shortfall of $50B.
It doesn't matter if you call FnF's current state conservatorship or bankruptcy, it's all the same because what's important is that FnF's exit from conservatorship will be handled like a bankrupt company's exit from bankruptcy. That means a restructuring will be necessary, and that's the key word here.
Burned slightly, but not crushed like the commons can be. The juniors would take around a 40-50% haircut to face value if the cramdown happened today, while the haircut that the commons face would be as much as Treasury wants it to be.
There's a reason that Treasury negotiated an simultaneous cramdown with the junior pref shareholders but didn't negotiate with the common shareholders: the former group has the power to turn a bad deal down and the latter doesn't.
Section 6 that you quoted only means that Treasury cannot force the companies to convert the seniors to commons. There is nothing in any agreement, contract, or law that would stop FHFA from offering a conversion to Treasury.
To sum up, when you say that the seniors are not convertible you are 100% wrong.
The fantasy that you should be sick of is the idea that the seniors cannot be converted to commons. For goodness sake it almost happened three years ago! Do you blame a weatherman for forecasting a hurricane? Neither should you blame anyone here for forecasting a senior-to-common conversion. Blame FHFA and Treasury.
1) Three different judges have ruled that FHFA has no fiduciary duty to shareholders, and none have ruled that they do. 2) Any suit against FHFA or Treasury would be moved out of Delaware state courts and into federal court. To get a suit in a Delaware court it would have to be only against Fannie Mae and not FHFA, which would probably be useless given that FHFA has been involved in every decision Fannie has made since conservatorship started. A suit against Freddie couldn't be in Delaware at all. 3) Lamberth specifically disallowed the plaintiffs to present a recission-based damage model in the jury trial because recission is equitable relief barred by 4617(f) in HERA. This isn't binding on any other courts but he is the only one to have ruled on that specific matter.
I agree. I expect prices of both the commons and juniors to go up at roughly the same rate until the election.
Right. Trump's words were that he would have "sold the government's common stock in these companies at a huge profit". That doesn't have to mean a senior-to-common conversion but it certainly doesn't rule that conversion out. It does mean that there is no reason to believe Trump would both write off the seniors and cancel the warrants.
I disagree. The only way newcos can happen is either Congress passing specific legislation or FHFA putting FnF into receivership, neither of which I think are even remotely likely. That means the legacy common would still exist, though changing the ticker symbols may or may not happen.
Wrong. I do not advocate for a cramdown. I predict that it has a 75% chance of happening.
Wrong. The existing "owners of the company" (by which I assume you mean the legacy common, even though you're wrong about that too) have about $2B worth of wealth: 1.8B outstanding shares times around $1.30/share in market value.
Wrong. I did not say that.
Three strikes in a row. You're approaching ano levels of wrongness here. That's some pretty terrible company.
Strategies that nobody, not even yourself, have actually tried. Hypocrite.
It's not what you know, it's what you can prove in court. You saying something is illegal doesn't actually make it illegal.
Irrelevant.
See my first signature line.
Only the implied covenant of good faith and fair dealing, and the verdict was only for money damages.
None of them support any lawsuits either because if they did those lawsuits would have been filed by now.
Rodney and I were talking about capital classifications until you jumped in and changed the subject.
The NWS dividends were all sent. No lawsuit against the NWS has succeeded other than the implied covenant case that resulted in only money damages.
The NWS was signed over 11 years ago. Unless you have plans to file some sort of constitutional claim against it, the 6 year statute of limitations in the USCFC passed several years ago.
There were a bunch of takings lawsuits over the NWS and conservatorships, both direct and derivative. All of them ended up being dismissed by the CAFC, and the Supreme Court upheld that dismissal by denying cert to the plaintiffs.
A takings is by definition legal, by the way.
In other words you have no plans to file any lawsuits yourself, because otherwise you would have done so long ago rather than complain about other plaintiffs. Inactions speak louder than words.
No, that isn't possible. The juniors have contractual rights with the companies that cannot be bypassed. I have been through this argument before, albeit not with you.
It certainly will be a political decision, but a senior-to-common conversion would be much more about Treasury realizing value from assets they value at $220B (the seniors) instead of throwing them in the trash can rather than profiteering.
There are plenty of other things along the way that have been optional and not mandatory.
1) 10% dividend rate when big banks got 5% 2) Non-repayability of the seniors 3) The NWS 4) The LP ratchets in the last two letter agreements
Once is happenstance. Twice is a coincidence. Three times is enemy action.
Could Treasury change its stripes? I suppose it's possible. But I can't put a probability of more than 25% on that given all the evidence.
The juniors would just say no. They cannot be forced to accept a conversion to common.
Treasury considered it illegal 3 years ago. I have already conceded that they can change their mind: hence my estimate of a 25% chance they actually do it, rather than 0%. It's the preponderance of evidence on the side of the conversion that leads me to assign a low probability to the writedown outcome.
It is a logical inference that directly follows from the evidence we have.
If Treasury feared lawsuits enough to not move forward with a senior-to-common conversion, they wouldn't have moved forward with a senior-to-common conversion! It would have never gotten to the point of negotiating with FHFA. But it did.
I never said that there couldn't be other considerations by Treasury. It's just that those other considerations aren't relevant to this discussion. As I said above, if Treasury feared lawsuits enough to not move forward with a senior-to-common conversion they wouldn't have moved forward with a senior-to-common conversion. Therefore the argument that Treasury wouldn't dare move forward with the conversion due to lawsuit threats is logically false given the evidence we have.
A strawman is when someone deliberately advances a weaker form of someone else's argument, defeats that weaker form, and says therefore the other person's original argument must also be incorrect.
That's not what I did. There have already been twoposts just in the last hour threatening Treasury with lawsuits over a senior-to-common conversion. My argument is that there is evidence that Treasury does not fear those lawsuits, and no evidence that they do.
It would be refreshing if you held those two posters (and others who advance the same argument) to the same logical and evidentiary standard that you apply to me. They are the ones threatening lawsuits: the burden of proof is on them to be specific about the contents and arguments of those lawsuits, what they hope to gain, and why they think the lawsuits would succeed.
Remember that the background context of all of this discussion about a senior-to-common conversion is to estimate a probability that it happens. You agree with me that it isn't 0%. I say that Treasury's willingness to do a senior-to-common conversion, enough that they proceeded to the point of actually negotiating with FHFA, along with other evidence (Supreme Court Collins ruling and Treasury's AIG conversion), means that assigned probability should be closer to 100% than 0%.
The tangible common equity part is correct, as shown by your link. I didn't see anything in the press release about reduced dividend obligations being a motivator but it certainly didn't hurt.
FnF's equivalent of tangible common equity is CET1 capital. A senior-to-common conversion (or writedown) would increase CET1 capital by $193B for FnF combined, and a junior-to-common conversion would increase CET1 capital by $33B.
It was at a haircut of 5-15%. Considering that those preferred shares traded around 25% of par the day before the offer, they got a really good deal. Three times as good as what they could have gotten by converting in the open market the day before.
1) Trying to "stay all plans to release" would be asking for injunctive relief against FHFA. Section 4617(f) of HERA specifically bars that. 2) Treasury already was willing to move forward with plans to "screw the common shareholders" in late 2020. If your lawsuit threats had any teeth, why did Treasury get so close to doing it anyway? 3) Given how all the NWS court cases have gone (all losses except for a relatively small jury award that didn't undo the NWS), how can you have any confidence at all that any future lawsuit would succeed?
Because the most recent evidence we have from Treasury is that they are not willing to have their equity be junior to anyone else in the capital stack, which would happen if the seniors are written down or converted to common while the juniors stay in place.
And if Treasury has somehow changed its mind since then, that's even better for the juniors.
No. The only way Treasury exercises the warrants is if they write the seniors down. Warrant exercise after a senior-to-common conversion is useless.
I never said it was a fact. It is a logical conclusion.
When faced with the possibility of a senior-to-common conversion the most common argument as to why Treasury won't do it is that they would immediately get hit with lawsuits. As in, Treasury wouldn't dare even try such a conversion because of what the courts would do to them. Treasury being ready to do it anyway in late 2020 proves that argument wrong.
If you think there is a logical argument for the opposite of my conclusion, by all means try arguing the other side.
Note that I didn't say that no lawsuits would be filed at all. Only that Treasury's actions show that they don't care whether or not those lawsuits are filed.
You're putting words in my mouth now. Classic strawman fallacy.
My argument is specifically this: Treasury almost converted the seniors to commons, therefore they don't fear any lawsuits that might arise from said conversion. You can't just replace "senior-to-common conversion" with "something" and "lawsuits that might arise" with "anything" and act as if my argument would be the same.
The January 2021 letter agreement, specifically the definition of "Litigation End Date" on page 3, is proof that Treasury is aware of and cares about litigation pertaining to the conservatorships and NWS. There is no logical argument to be made that they would not have even considered potential lawsuits when making that decision.
You are the one committing the logical fallacies here. First a strawman, and now an ad hominem.
My evidence proves my assertion. SEC papers are not required. If you're so worried about SEC papers, ask stockprofitter to post the SEC letter showing that the warrants are illegal. I'll wait.
But striking down or repealing HERA wouldn't unravel the conservatorships. The OHFEO had exactly the same authority as FHFA did to put FnF into conservatorship with consent of the boards of directors.
No lawsuit to try and overturn HERA has been filed anyway.
If you're expecting legal theories on this board to turn into actual lawsuits you will be sorely disappointed. If I had a nickel for every time someone posted "someone should file a lawsuit about this" or "the plaintiffs should try this" or "this is what the plaintiffs' lawyers got wrong" I could recapitalize FnF myself. Actions speak louder than words.
FnF are already in administrative bankruptcy (conservatorship) and have been for over 15 years. In an exit from bankruptcy, both placement in the capital stack and the amount of liquidation preference are of enormous importance.
Some combination of:
1) Treasury converts the senior prefs to commons 2) Treasury exercises the warrants and FHFA offers the juniors a conversion to common 3) FnF do a capital raise, diluting the existing common
FnF being recapped and released is not anywhere close to being the same as legacy common shareholders making a lot of money.
In order for the legacy common to make money they need much more to happen than just recap/release. The most important thing is that they would have to dodge all three of these things:
1) Senior-to-common conversion (almost happened in late 2020) 2) Junior-to-common conversion (almost happened in late 2020) 3) Highly dilutive capital raise (allowed by the January 2021 letter agreement)
No it wouldn't. Much of HERA was just amendments to and modifications of the GSE Safety and Soundness Act of 1992. Getting rid of HERA would just put that law back into effect as originally passed in 1992.
Read the four posts linked to in this post to see my explanation of why FnF could have ended up in the exact same situation they are in now even if HERA were to be repealed, struck down, or never had existed in the first place. The OHFEO (FHFA's predecessor as regulator of FnF) had the same statutory powers to put FnF into conservatorship as FHFA did.
While FnF are in conservatorship even their boards of directors have no say in anything. FHFA controls all of their decisions.
Since the Supreme Court failed to strike down the NWS, it stands to reason that they won't strike down anything FHFA does that dilutes the legacy common.
Anyone threatening lawsuits over a senior-to-common conversion ignores the fact that Treasury was ready to do that conversion in late 2020. They clearly didn't fear any lawsuits then and thus clearly wouldn't fear any in the future.
Rewarding existing shareholders is not on Treasury's priority list at all. Why would it be? Especially when their interests are opposed to those of existing shareholders?
Exactly. A senior-to-common conversion makes the warrants useless, for example.
Quite the opposite. You are seeing something others are missing.
A few years ago I thought there was a 10% chance of the seniors being converted to commons. Once the Supreme Court ruled against us and word came out that a senior-to-common conversion almost happened in late 2020, I updated my estimate to 75%.
That doesn't disprove either of my two main points. Since Treasury was ready to move forward with a senior-to-common conversion the following things must be true:
1) A senior-to-common conversion can happen. 2) Treasury does not fear any lawsuits over that conversion.
Anyone who says that a senior-to-common conversion cannot happen, or will not happen because of lawsuits, is just plain ignoring reality.