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.
That's not how it works at all. If Treasury converts the seniors to commons it will be able to name the conversion price. It doesn't have to depend on the market price at the time. FHFA has no reason to say no to any particular price because it doesn't owe any duties at all to common shareholders.
The liquidation preference was $293B as of the end of Q3, probably close to $300B once the 2023 10-K forms are released.
The commons have only briefly poked their heads above $5 since the start of conservatorship, in 2014 before Lamberth's initial ruling throwing the whole case out.
Given the massive liquidation preference overhang ($100B and counting more than it was in 2014) it will be hard to get back to $5, though trading momentum might get it there. But as I said above that won't really matter when it comes to how dilutive a senior-to-common conversion would be.
Right. The shareholders that will get the payout are whoever owns the shares on the date of settlement or final judgment. A settlement could technically happen at any time, but when Lamberth finally enters judgment it won't be final. Final judgment only happens once all appeals are exhausted.
It could become final in the next several months if neither side appeals, but I expect at least one side to.
There is a vast chasm between "Treasury didn't have any intention of exercising the warrants in 2008" and "Treasury won't exercise the warrants in the future". 15+ years is a long time.
Since Treasury was ready to move forward with a senior-to-common conversion in late 2020, it is clear that they don't fear any lawsuits over it. They would fear lawsuits over warrant exercise even less.
Yes. And that applies whether you're talking about a senior-to-common or junior-to-common conversion. Both almost happened in late 2020.
That's not a fixed number, it can only be estimated.
The juniors cannot be forced to accept a conversion to common. The only way to accomplish such a conversion (which would be good for the companies because it would raise their CET1 capital by $33B, and their exit from conservatorship threshold is dependent on their CET1 capital) is to give the juniors a generous enough offer that they accept. That will likely depend on the common share price around the time of the offer.
If such an offer were to happen today, and if Treasury uses the same playbook that they did with Citi (who offered their preferred shareholders a conversion to common to increase tangible common equity, equivalent to CET1 now) then it would be around 3x the current market rate. That's roughly 3:1 right now based on today's closing prices, so the offer would be 9 shares of FNMA for every share of FNMAS. Applying that to all of the juniors means this conversion would create roughly 12B new shares.
As for a senior-to-common conversion, it will be at whatever rate Treasury wants it to be. If they take a 92% stake like with AIG, that would be 1.8B / 0.08 = 22.5B shares total, or 20.7B additional shares.
Combine the two and the share count will go up much higher because the juniors aren't likely to accept only 8% ownership, and if they do that would leave almost nothing left for the legacy common. The unadjusted-for-reverse-split share count could easily exceed 200B.
Absolutely. As much as he possibly can. He owns a lot of juniors but no commons. If he becomes the Treasury Secretary then a senior-to-common conversion would benefit him in an official capacity and a junior-to-common conversion would benefit him in a personal capacity. Doing neither would not benefit him at all.
Of course not. Why would I want to do that anyway?
I post for the benefit of readers who have either privately or publicly thanked me for my posts, plus any lurkers who would appreciate a reasoned and detailed analysis of the merits of investing in FnF juniors or commons.
Oh come on, not this bullshit again. This is the "JPS board". And the common board. Over 95% of the posts on iHub regarding FnF are on this board. Trying to separate "common posts" and "JPS posts" or "common board" and "JPS board" is a fool's errand.
I tell people they should file lawsuits if they don't want to be exposed as hypocrites/armchair QBs. There is a choice there.
That is a gross mischaracterization. My first signature line is designed to point out both the hypocrisy and uselessness of continued legal theories that the espouser has no intention of ever bringing to court. It should be obvious by now that just about everyone else on here ignores that part of my signature anyway. I can't understand why you are so hung up on it.
When did I say people shouldn't be allowed to express their opinions? People are free to post their opinions, and I am free to highlight the holes in their reasoning. You act like I am trying to suppress on-topic conversation here, but I'm not.
An absurd and baseless accusation. The ones who think they have the moral high ground are those who constantly use moralizing terms like "theft", "fairness", "government overreach". If you're going to lecture people about the moral high ground you have a long ways to go on the list before getting to me.
It would be nice to get the topic back to Fannie Mae and its shares rather than continuing to just post about me and my first signature line. That certainly is getting tiring.
And I guess I will never get your probability estimate of Treasury writing off vs converting the seniors then, let alone an expected value breakdown of your future common share price. Oh well. I was really hoping a common shareholder could post a detailed breakdown of different scenarios including the final common share count in each one, and you have been one of the more reasonable ones I have corresponded with.
The regulation in question is FHFA's suspension of capital classifications during conservatorship.
Again, re-read the thread. I even provided links. Rodney and I were discussion that regulation until you jumped in and changed the subject to stuff about "out of funds legally available" and more armchair QB stuff about how dumb the plaintiffs are.
Speaking of changing the subject, you never have provided an answer as to why you don't file your own lawsuit if you know so much better than the plaintiffs' dumb lawyers.
If you're not convinced by my answer, by all means take it to a judge. They will give you an authoritative, and more importantly, binding answer. But that would require you to file your own lawsuit so I won't hold my breath.
The FNMAS:FNMA ratio usually oscillates around 3.5:1. I expect it to continue to do so until the election, and I also expect both series to trade higher. FNMA tends to be more volatile but for a pre-election trade I don't think it matters much whether one owns the juniors or commons.
The point at which recap/release happens is when I expect there to be a 75% chance of a big divergence.
I'm glad I covered my FNMA short at only a minor loss. There is no way I would want to be short the common before the election.
The issue when you first entered this thread was whether or not FHFA had the legal authority to suspend FnF's capital classifications during conservatorship. FHFA has done this anyway, and if someone wants to challenge this action they will need to file a lawsuit to do so.
All you did was provide more armchair QB talk about what the plaintiffs' lawyers should have done, rather than filing your own lawsuit as you would have done if you truly believed in your theories.
Ironically, your post shows that you are guilty of exactly what you are accusing me of. There must be something in the water around here.
That doesn't answer the question. I asked why the defendants would care how the money would be distributed to the various shareholders, not if.
From the various briefings from both sides, the defendants' lawyers do not appear to be challenging the payout itself. They are only challenging how it will be divided amongst the shareholders.
Once again you have a fundamental misunderstanding of what is happening here.
Armchair QBs are people who talk about what others should do or should have done. This usually leads to lots of discussion about counterfactuals and moralizing language.
I, on the other hand, talk about what I think others will do, i.e. my expectations. Since this pertains to the future it is naturally uncertain, which is why I like to talk about my future expectations in terms of probabilities. But it isn't armchair QB'ing at all.
This would require someone filing a lawsuit who held shares before conservatorship started and has held them until now. Given that no such challenge has occurred (and no, neither the Kelly nor Washington Federal lawsuits actually challenge the conservatorship) I can't see one ever happening in the future.
So you are completely discounting the possibility of a senior-to-common conversion? That is by far the biggest threat that the legacy common face.
Do you expect that to ever be challenged in court, let alone successfully? I don't, on either count.
That's why this whole conversation about whether or not the letter agreements violating the implied covenant is just an exercise in semantics. You're never going to file your own lawsuit on that front, otherwise you would have done so rather than wondering about it aloud on here. And it doesn't seem likely anyone else will do so given that it has been 3 years since the most recent letter agreement.
Those economic rights can be restored if Treasury chooses to allow it. Anyone who owns either juniors or commons is banking on that happening.
It's also why I own the juniors instead of the commons: the juniors only need Treasury to convert or write off the seniors, though a writeoff is better. The commons have to have a writeoff.
The commons and juniors both trade like options. The juniors are a OTM call spread (with a $33B spread, equal to the total junior pref LP), while the commons are a pure call at the higher strike price of the juniors' spread.
The shareholder agreement is informed by all changes in law, regulations, and relevant contracts at the time of the alleged breach. That's what Lamberth said. A shareholder just prior to the letter agreement in 2019 or 2021 could only reasonably expect the status quo that existed just before the letter agreement to continue. That includes the 2012 full cash sweep NWS.
I would highly recommend that you just look at the source directly. That's a link to Fannie's 2023 Q3 10-Q form.
By doing a search for the term "liquidation preference" you should be able to corroborate that:
1) The total LP was $190.5B as of September 30 2023 (page 19). 2) The on balance sheet LP was $120.836B (page 63). 3) And therefore the off balance sheet LP was the difference, or $69.7B.
Since all the relevant information is in a publicly available SEC filing, I wouldn't call it shenanigans. The on-balance sheet LP values have been publicly reported every quarter since conservatorship started, and the off-balance sheet LP values have been publicly reported every quarter since they started accumulating in Q3 2019 with the signing of that letter agreement.
Here is a link to Freddie's 2023 Q3 10-Q form which you can also search for the term "liquidation preference". They are nice enough to put both pieces of information in one place, in the balance sheet on page 48.
The "Senior preferred stock" line will show you that Freddie's total SPS LP on September 30 2023 was $114.605B, with $72.648B of that being on the balance sheet. That leaves right around $42B of off-balance sheet LP.
The Supreme Court said this was okay in two different ways:
1) By denying the APA claims in the Collins case. 2) By denying cert in the NWS takings cases, effectively upholding the CAFC's ruling that the NWS was neither a direct nor derivative taking.
The Supreme Court disagrees. If you don't like that, see my first signature line.
No. Not anymore.
What you keep getting wrong is this: the 2012 NWS completely extinguished the possibility of any future economic gains for common and junior preferred shareholders. That is what violated the implied covenant. The 2019 and 2021 letter agreements cannot further extinguish what had already been completely extinguished. The jury award was to compensate shareholders for the complete extinguishment of their economic rights by the 2012 NWS. A similar award for the letter agreements would be double-dipping.
To get a judge to allow an implied covenant claim over the 2019 and/or 2021 letter agreements to go to trial, you would have to show that those letter agreements caused shareholders harm beyond the harm done by the 2012 NWS. But how can shareholders be more harmed than complete extinguishment? Good luck getting a judge to agree with you, assuming you even file your own lawsuit.
No, that's not the same thing. A senior-to-common conversion costs the companies nothing at all, not a single penny of cash. It also greatly increases all forms of regulatory capital. To the companies that conversion is all upside, no downside.
"Pay[ing] off the SPS LP by dilution" is not a good way to phrase it at all. Treasury would get cash from the conversion, but that cash would come from outside investors, not the companies.
If the LP ratchet continues then yes, this is likely going to be the case in the future. It's even true now: FnF make around $25B per year right now but the LP is more than $250B.
The current situation is worse than if the 2012 NWS had never happened, but it is better than if the 2012 NWS did happen and the September 2019/January 2021 letter agreements didn't.
You seem to be misinterpreting what I have been saying. I said the letter agreements help the companies relative to what had been in place before those letter agreements (full cash NWS). That's the only comparison that can be made because this world in which the 2012 NWS never happened is a counterfactual.
My first signature line does provide a second option. 😉
To answer your question, it's because filing a lawsuit would actually show that the poster actually takes their theories seriously, rather than just posting to get that dopamine hit of other posters liking and agreeing with their posts. The latter is just cheerleaders waving their pom-poms at a pep rally.
And no, the discussions on this board are not pure entertainment in their own isolated bubble from the rest of the world. For example, Barron has taken it upon himself to directly contact some of the plaintiff teams with his theories and has officially been ignored. Behind the scenes, though, at least one of the plaintiffs' lawyers has expressed exasperation that "untrained common shareholders" (that lawyer's own words) think they know the law better that they do. This can have a real impact if these lawyers' disdainful stance towards common shareholders causes them to handle things differently than they otherwise would.
Also, there is a third, read-between-the-lines, part of my first signature line. I had hoped I wouldn't have to spell it out like this, but here is a more accurate version.
Got legal theories no plaintiff has tried? File your own lawsuit, shut up, or be shown to be a hypocrite.
Perhaps terms like "armchair QB" or "member of the peanut gallery" fit better than "hypocrite", but you get the idea. Criticizing from the sidelines when it's possible to get directly involved (via filing one's own lawsuit) is quite hypocritical.
You are the one that pointed out your own hypocrisy. I can't say that I dislike that.
My first signature line also contains an "or" clause.
Those two things are rarely that interconnected. My first signature line applies to posts like those of Barron who repeatedly bring up possible avenues of attack in court while crying poor mouth when it comes to actually putting their money where their mouth is. That is, hypocrisy. Those type of posts are not about politics.
I believe this is what the parties are discussing right now. I don't think the defendants can put entry of judgment on hold by appealing to the Court of Appeals for the DC Circuit on this issue.
Personally, I don't understand why Lamberth allowed the defendants to chime in on the allocation plan at all. It is none of their business. The jury awarded a fixed amount of money, why would the defendants (either FHFA or the companies) care how it is distributed?
No, I don't think so. Once the parties have nothing left to dispute there is no reason for Lamberth to delay, let alone derail, formally entering the judgment and opening the appeals window.
You have a point there. FHFA waited until it was Treasury and not FnF that would benefit from the settlement money to actually settle the cases. I can't see that as coincidence.
Page 52 of Fannie Mae's 2023 Q3 10-Q form says that its CET1 capital is -$78B (yes, that's a negative number) and that adjusted total assets are $4.560T. 3% of that is $136.8B, meaning that they are $214.8B short of exiting conservatorship.
Page 40 of Freddie Mac's 2023 Q3 10-Q form says that its CET1 capital is -$28B and that adjusted total assets are $3.758T. 3% of that is $112.7B, meaning that they are $140.7B short of exiting conservatorship.
The only way FnF will ever hit their regulatory capital requirements is either:
1) They retain earnings until the gap is filled. This will take until 2040 or so because their asset base will rise over time. 2) The $193B worth of senior preferred stock on the balance sheet ($121B Fannie, $72B Freddie) goes away and they conduct a massive capital raise.
The second option requires an equity restructuring. That means the senior preferred shares either being exchanged for common shares, written off, or some combination of those two. The exchange must be for common shares due to the definition of CET1 capital.
What are your estimates of the three components of the future common share price? Those three are earnings, P/E multiple, and share count.
You seem to be projecting much higher earnings going forward, and a $100 share price would mean a rather low share count.
This can't be right as evidenced by the fact that FnF's balance sheets have risen very quickly in the last few years even while they were in conservatorship.
KBW has historically been rather bearish on FnF stocks. And unfortunately they have also been right along the way. Their $1 price target on the common immediately after Mnuchin said that he wanted FnF out of government control on November 30 2016 was eerily prescient.
I will certainly sell some if they hit 50% of par before the election. The combined possibilities of a significant haircut if Trump wins and a big drop in price if he loses would make it hard for me to hold on to my entire position.
For me it depends on if it happens before or after the election. If Trump wins and the juniors trade at 50% of par, I will likely hold on to a good amount because I think speculation will push them even higher.
Treasury had the warrants issued to them in 2008. Nobody who bought shares after that date has any leg to stand on, legally or morally, in challenging them.
The NWS was determined by courts to be neither a direct nor derivative taking. In that light, how could warrant exercise possibly be seen as a taking? Or, more specifically, how could anyone reasonably expect any lawsuit against Treasury for exercising the warrants to succeed given what happened with the NWS takings cases?
Then, by extension, if a legal challenge to warrant exercise doesn't succeed, why would a challenge to a senior-to-common conversion succeed?
The shareholders have not ever paid a single penny to Treasury. All the money Treasury got came from the companies. And no, that's not the same thing at all.
All the equity in the companies were given to Treasury in 2008. The "theft" you keep referring to happened over 15 years ago. Anyone who bought shares after that was not stolen from at all.
Did you own shares on the day of conservatorship? Or the day of the NWS?
It's only because you are thinking of buying commons. If you had said you wanted to buy junior prefs instead and asked which series were best, you would have just gotten a bunch of childish emojis.
I can't recommend the commons in the endgame, but as a short-term trading vehicle they are just fine. I expect them to more or less keep pace with the juniors for the next several months.
That is far different from the specific (and fallacious) accusation that Treasury forced FnF to buy toxic mortgages after conservatorship started.
So what? This doesn't prove Guido right, or prove Tim Howard wrong.
As an aside, anyone who bought shares after the conservatorships started really has no business criticizing the government for implementing the conservatorships to begin with. Had that not happened, such a low entry price point for the shares likely never would have happened, depriving the post-conservatorship shareholders of the chance to make lots of money. Talk about biting at the hand that would feed you!
Yes. That would render the warrants superfluous. I estimate a 75% chance of it happening.
Note that a senior-to-common conversion is something that I do NOT want to happen. It limits the ceiling of the junior prefs to something less than full par value. I would make a lot more money if the seniors are written down.
While I do not want the conversion to happen, I expect it to given the Supreme Court's Collins verdict and the fact that such a conversion nearly happened already (in late 2020).
Read the post you linked to again. I said that I covered my short at that point. I had only held it for a couple of weeks. Prior to that it had been about 16 months since the last time I had a common position at all, and that position was a (short-term) long position I took in the summer of 2022 as AGTHX finished selling all of its common shares.
Your flawed premise led to a logically fallacious conclusion.
Reasonable expectations are what define the implied covenant.
Wrong again. From Lamberth's opinion linked to above, this time on page 19:
Shareholders' expectations with respect to the September 2019 and January 2021 letter agreements by definition included the status quo at the time, which was the full cash NWS signed in August 2012 being in force (though modified in 2017 to allow FnF to keep $3B of net worth each, in return for increasing the LP by $3B per company). Those expectations did not include the jury's verdict because that verdict didn't happen until 2023.
Once they hit full with-buffers capitalization, every quarter they will pay the lesser of 2.5% (10% annualized) of the LP and the increase in net worth from the prior quarter (profits). At that point the LP will stop increasing. Your sentence suggests they would have to pay both.
The LP has never been repayable, and it's hard to tell if Treasury will ever allow it to be. FHFA asked Treasury to allow the seniors to be repayable twice (in 2010 and 2011), and Treasury refused both times. Maybe they will change their mind in the future?
You're taking my words out of context. It was not a blanket statement for all of humanity ever, just this board.
This board is for the discussion of the merits of investing in the common and junior preferred shares of Fannie Mae and Freddie Mac. Not general discussion about whatever strikes a poster's fancy. iHub's TOS prohibits off topic posts for a reason.
It should be blindingly obvious by now that what any of us thinks should happen has no bearing at all on what actually will happen. Talk of "FnF never needed the bailout!" and "Treasury should write the seniors down!" and "Treasury should cancel the warrants!" and "the companies should be returned to existing common shareholders!" is mental masturbation and does nothing to give any logical or numerical reason to invest or not invest in any series of shares, let alone at what price it would be prudent to do so.
1) Tell that to the people that keep threatening lawsuits if Treasury dilutes them (via warrant exercise or senior-to-common conversion). 2) The purpose of the board is a matter of opinion. I agree that it's about discussion, but only about topics that pertain to future expectations of share prices for FnF juniors and commons. Your definition is overly broad. Many types of discussion, especially politics, are off topic and talking about those makes a post off topic and against the TOS.
You're telling me what to do by saying that I should not tell other people what to do. Hypocrite.
As I have said before, the purpose of me continuing to point out others' failures to bring their own lawsuits is to highlight hypocrisy. If you choose to interpret that as a coping mechanism I can't stop you, even though you're wrong.
More armchair lawyering here. What makes you think anyone will ever challenge HERA? Why blame incompetent lawyers when you have the ability to file a lawsuit yourself? Constitutional violations don't have a statute of limitations as far as I am aware.
No. The plaintiffs did not ask for any injunctive relief, the jury did not grant it, and 4617(f) bars it anyway.
I don't see a reason for the government to appeal if the plaintiffs don't because the damages are so small, but the government has fought every lawsuit tooth and nail all along so they probably will appeal anyway.
Yes, pretty easily. Biden can direct Sandra Thompson to direct FnF to buy MBS, and if Thompson refuses he can fire her and replace her with someone who will do what he wants. I don't see a link between FnF buying MBS (in order to lower the spread between mortgage rates and Treasury bonds) and them being released from conservatorship.
A senior-to-common conversion like the one Mnuchin proposed would involve both Treasury and junior pref holders taking an equal percentage discount on their respective liquidation preferences. If it had happened in late 2020 the haircut would have been huge (70%), but now it would be more like 50% and will be something around 30-40% by the end of 2025.