Blackstone Plan Proves Value was Taken By Treasury
Summary
Treasury received Blackstone's recapitalization plan.
Recap plan proves that the equity shares had some value.
The 3rd Amendment of the PSPA was designed to destroy value.
Mario Ugoletti's sworn testimony is contradictory to this document.
On July 29th, another potentially damaging document was made public in the ongoing Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) legal debacle. Somewhere in Russia, Vladimir Putin is chuckling.
Connect the dots. In December 2010, a memo circulated by Treasury proved that they had an unspoken policy to "ensure that common equity holders will not have access to any positive earnings from the GSEs in the future." The problem with this policy was that the common stockholders still held valid shares that traded in the equity markets. And they knew nothing of this secret policy.
One might give the Treasury the benefit of the doubt and say that they must not have believed Fannie and Freddie would ever return to profitability. The problem with this defense is that it cannot be supported. Obviously, the companies are profitable and have recorded excess profits that far exceed the amount received from Treasury to begin with. To date, Treasury has received a multi-billion dollar cash profit from the combined bailouts of at least $26 billion.
But more importantly, Treasury was given options by the private sector to restructure the companies. This is what the Blackstone document represents. The document proves that the experts believed the companies could be saved and it documents that Treasury was informed. This gives even more reason to support a shareholder's assertion that these companies had value. Any value at all is more than none. The Treasury's 3rd Amendment to the PSPA was designed to eliminate that value, whatever it may be.
It is very unlikely that this is the only document that exists and there may be many more unearthed in the discovery process. These documents will prove that Treasury acted willfully and fully knowing that their actions would destroy shareholder value.
Blackstone's presentation includes the acknowledgement that the "GSEs are showing improved financial performance and stabilized loss reserves." As time passed, it appears that Treasury came to acknowledge these assertions as facts, publicly. And suddenly, they took steps to eliminate shareholders and keep all profits for taxpayers. The final blow was leveled with the 3rd Amendment to the PSPA in August 2012.
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Again, the problem with the 3rd Amendment is that shareholders were relying on previous statements and promises from Treasury. They were blind-sided by the sudden change in their contractual rights. The original purpose of Conservatorship was to restore Fannie and Freddie "to a sound financial condition." However, the illegal 3rd Amendment to the PSPA was sold to the public as having the goal "that the GSEs will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market."
Blackstone presented Treasury with a number of restructuring options. At this point, it could be assumed that the Treasury received other proposals from other firms. This could have been one of the biggest restructurings in the history of the world. So, of course, there were others lined up to provide assistance.
One of the most troubling facts from this presentation involves the suggested recapitalization plan. Under this plan several sources of capital are listed, including "capitalization of tax attributes." This refers to the multi-billion dollar deferred tax assets.
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This part makes some shareholders scratch their heads. In written testimony, Mario Ugoletti wrote,
"At the time of the negotiation and execution of the Third Amendment, the Conservator and the Enterprises had not yet begun to discuss whether or when the Enterprises would be able to recognize any value of their deferred tax assets. Thus neither the Conservator nor Treasury envisioned at the time of the Third Amendment that Fannie Mae's valuation allowance on its deferred tax assets would be reversed in early 2013, resulting in a sudden and substantial increase in Fannie Mae's net worth, which was paid to the Treasury in mid-2013 by virtue of the net worth dividend."
The Blackstone document appears to contradict Mario Ugoletti's sworn written testimony. They had begun to discuss the tax assets and Blackstone even pitched the tax assets as a source of capital for a new entity.
The Blackstone document was delivered by a shareholder with Investors Unite. Investors Unite was formed in 2014 to advocate for shareholder rights and provide unity to the Fannie and Freddie shareholder activism efforts.
Conclusion:
The lawsuits against Treasury are moving forward progressively. As time passes, it will be more likely that shareholders will have their contractual rights returned. The target price for the common will soon be based on an earnings multiple and not legal outcomes. This leads to a short-term price target of about $20 on Fannie Mae and Freddie Mac common stock.
Disclosure: The author is long FNMA, FMCC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
