Fannie Mae-No Politics (FNMA)

[Dallas66]

Snatching Defeat from Victory at Frannie

How can these people be so friggin stupid and unwilling to look at the BIG picture, and dare I say....the law.

http://online.wsj.com/articles/heard-on-the-street-snatching-defeat-from-victory-at-frannie-1408294612

How can these people be so friggin stupid and unwilling to look at the BIG picture.

By
John Carney


Aug. 17, 2014 12:56 p.m. ET

Don't get too excited by the fact William Ackman has joined the legion of fund managers suing the government over terms of its support for Fannie Mae FNMA -1.00% and Freddie Mac. FMCC -1.01%

Even if the well-known activist manager of Pershing Square Capital Management scores a courtroom victory, the mortgage giants aren't likely to generate the returns shareholders see as theirs. That is because such expectations turn on an improbable notion: that a legal decision would pave the way for Fannie and Freddie to pay down preferred stock held by the government.

At the heart of Mr. Ackman's lawsuit is the claim the government overstepped its authority when it amended the bailout of the companies in 2012. This required Fannie and Freddie to turn over nearly all their earnings to the Treasury Department rather than pay a quarterly dividend equal to 10% of the government's holding of senior preferred stock as well as a commitment fee on the government's backstop. The latter, though, had been repeatedly waived.

Assume Mr. Ackman or other managers prevail. Even then, under the bailout agreements, Fannie and Freddie can't force redemption of the government's preferred shares as long as it is committed to backstopping the companies.

This means the companies' obligation to pay the 10% dividend would remain outstanding. And both would need to pay the commitment fee. At a level of, say, between half a percentage point and one, either company would struggle to make both those payments.

That means they would have an even tougher time building a capital buffer. And until they do so—a process that could take years—little to none of the companies' earnings power could accrue to the benefit of private holders of their preferred or common stock. Legal arguments won't change that.




There are 2 comments.


John Olesen

John Olesen
37 minutes ago


If a judge finds that they should have only paid 10 percent. That will mean they overpaid by about 80 billion dollars. You also fail to mention that if the sweep is invalidated then dividends that they "owed" were calculated incorrectly. There are strong arguments that can be made that the Senior Preferred Stock will have to be voided in any favorable decision.

Your article also fails to mention their borrowing capacity and credit rating. GSE status necessitates a tradeoff with private capital. The private capital of the company can only lose their ability to borrow in the debt markets cheaply and their government backing if they FAIL TO PROVIDE LIQUIDITY. My overall point is that it is impossible for Bill Ackman to win and for the Senior Preferred Stock liquidation preference to remain the same. It's impossible.


John Olesen

John Olesen
48 minutes ago

I hope Judge Sweeney reads this article so that she can see the type of Orwellian misinformation campaign that shareholders in the GSEs have to put up with. While it is true in a technical sense that no one is forcing us to keep our investments, the practical realities of selling our stock in the current state of things could leave many of us with a loss. So for many GSE shareholders they are "forced" to hold their stock because the consequences for selling make selling a less favorable choice than holding.

With simple logic the entire premise of this article can be refuted. Your premise is that if the 2012 third amendment sweep "agreement" is found to be unlawful and Bill Ackman wins, he will still lose because the companies will still owe 187.5 billion toward the preferred stock and would have to pay the 10 percent dividend as well the commitment fee from their earnings.

You neglect to mention that since the 2012 sweep they have paid almost 100 billion in dividends at 100 percent