That's already been done
navycmdr Member Level Thursday, 10/16/14 07:24:55 PM
Re: None
Post # of 257644
Fannie And Freddie Did Not Need A Bailout
Oct. 16, 2014 1:31 PM ET ... Disclosure: The author is long FNMA, FMCC.
".... Previous price targets remain unrevised until additional facts come into view. At this time, the upside of the common is still in the $30 to $45 range, long-term.... "
Summary
Losses were overstated, due to Treasury involvement.
Equity book value would be about $31 per share, without the bailout.
Treasury knows that the evidence is damaging to the financial markets.
Judge Sweeney agrees that discovery documents could damage the financial system.
Sometimes the biggest breakthrough comes from an audacious idea. These types of things are so shocking that people don't want to believe them and they immediately get dismissed as foolish or immaterial twisting of facts.
The reader must understand that some of the very brightest legal minds have recently accused the Treasury of booking $161 billion in non-cash losses for the bailouts of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC). Here is the section of the lawsuit again for your convenience:
For a starting point, let's begin with the actual amount of funds lent by Treasury to the GSEs. The most heavily reported figure is $187.5 billion. However, this is wildly inaccurate on a cash basis. Phillip Swagel sets the record straight by simply removing the dividends paid from the equation. Several years ago, the GSEs were actually borrowing money from Treasury to pay a dividend to Treasury.
Taxpayer support has ensured that mortgages have been available throughout the financial crisis even while other credit markets have been strained, but at a cost to taxpayers of roughly $132 billion so far, including $187.5 billion put into the two firms less $55.2 billion in dividends received.
Thus, to taxpayers, the actual bailout cost has been $132 billion on a cash basis. The difference is accruals of unpaid dividends added to the principal balance.
Can we break down that $132 billion and see if we can actually find the non-cash losses that it covers?
Here's some of it.
Deferred Tax Assets $74.5 billion
Excess Loan Loss Reserve Released $18.3 billion
Current Excess Loan Loss Reserves $41 billion
Total of $133.8 billion
Deferred Tax Assets
To non-accountants, this description may seem like a misnomer, as taxes are usually an expense. The Deferred Tax Asset (DTA), though, is genuinely an asset with real value. It represents future benefits from prior net operating losses. DTAs are generally recognizable if an entity is believed to be a going-concern with future profitability sufficient to offset a portion of the prior net operating losses.
Here is the key. Before conservatorship, Fannie and Freddie had DTAs with full value. The act of taking over the companies put their futures in doubt, which triggered an impairment of the DTA value. The DTAs did not go away. But negative rhetoric and a tricky legal status caused the accountants to say that the DTA may never be recognized. Treasury triggered DTA impairment by seizing the companies, creating a $74.5 billion loss.
The future of these entities should never have been in question, as they are vital to the health and function of the housing market.
Excess Loan Loss Reserves
The loan loss reserves fall into two categories. First, we have losses that were reversed. Second, we have loss accruals that are still on the books but are unnecessarily high.
Since about 2012, each company has consistently been reversing prior loss accruals each reporting period. In total, Fannie Mae has reversed losses of $15.3 billion. Freddie Mac has reversed losses of $3 billion. This reflects the benefit flowing through the income statement, which nets the gains and losses. The net benefit is recorded as income, but in prior periods, it was reported as a loss.
In a prior piece, Fannie Mae and Freddie Mac's loan loss reserves (current accruals) were compared to other businesses, including Bank of America and Citigroup. Based on the comparison, it was determined that Fannie Mae was carrying an extra $29 billion in loss reserves and Freddie Mac was carrying $12 billion in excess accruals. This total of $41 billion was previously recorded as a loss in the income statement and now sits on the balance sheet ready to be reversed.
Why were the GSEs booking losses that were too large?
Perhaps they were concerned with some of the billions in dollars of loans that regulators asked them to purchase. Maybe they did not know that FHFA would eventually pursue $200 billion in claims against the banks for faulty mortgages.
Implications of Excess Losses
The implications are simple. If the GSEs did not need to borrow the $132 billion that eventually ballooned into $187.5 billion, then they never would have paid the Treasury $213 billion in cash from the 3rd Amendment to the SPSPA. Thus, the GSEs would currently be sitting on equity capital of $91 billion. This is the $213 billion of net worth swept to Treasury plus the $10 billion currently on their books, less the $132 billion sent from Treasury through the Senior Preferred Stock Purchase Agreement.
After subtracting out the Junior Preferred stock, the $91 billion becomes $57 billion in equity book value that would be available to common stockholders on undiluted shares of 1.8 billion. In other words, the common stock would have book value of about $31 per share. This is a revision of history and assumes that the GSEs would have continued to access capital markets for short-term financing. And of course, each entity would have its own story and valuations.
Update on Tim Howard and Discovery
Yesterday, Judge Sweeney issued a ruling that said she would not allow Tim Howard, the former CFO of Fannie Mae, to participate in the discovery process. Judge Sweeney essentially agreed with the government that the risks involved outweighed the benefits and that having Tim Howard involved could have a "destabilizing effect on the nation's housing market and economy."
What is so damaging in the sealed documents that it could destabilize the entire U.S. economy?
The opinion goes on to say, "Defendant has clearly defined a serious injury that could occur if protected information is disclosed-not merely to one discrete business, which would, in itself, justify denial of the motion, but rather, to United States financial markets. Indeed, it is evident in this case that defendant offers specific facts with a cognizable risk, rather than mere conclusory allegations, of harm. "
Wow. Now, its really getting interesting. Apparently, we are sitting on pandora's box here. Opening it will destroy the entire United States financial markets. Specifically, Judge Sweeney goes on to say that the fact that Mr. Howard is a stockholder is another reason that he cannot view the documents.
Whatever happened to due process? Basically, stockholders are now sitting here not knowing the facts in a case that may determine their rights as owners.
Conclusion
As facts become known, it may become more clear that the GSEs never needed a bailout. Could this be damaging to the financial markets? Yes. Could this vindicate former executives of the companies? Yes.
Does this have value to the current stockholders? This remains to be seen, as stockholders still don't have a complete picture.
Previous price targets remain unrevised until additional facts come into view. At this time, the upside of the common is still in the $30 to $45 range, long-term.
