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"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.
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.