Fannie Mae-No Politics (FNMA)

[kthomp19]

Professor Epstein stated the SPS would have been redeemed.

And he's wrong. FnF did not have and never have had the ability to pay down the seniors any time they wanted to. This fact means the expectancy damages model is in real danger of being disallowed by Judge Lamberth, because it is based on that faulty assumption.

The Senior Preferred Stock held by the Treasury was not a perpetual equity investment in Fannie and Freddie at the moment in time when the companies were put in conservatorship.

The seniors are a perpetual equity investment. They were issued to Treasury a few days after conservatorship started.

The pay down option of the Liquidation Preference and cancel of the SPS was worded in the documentation between the Treasury and the Companies at the time when Fannie and Freddie were put in conservatorship, this wording remains unchanged today.

Optional Pay Down of Liquidation Preference Following termination of the Commitment.

Look at the word "Following" there. That part does not apply and never has applied because the funding commitment has never terminated.

The companies cannot terminate the commitment WHEN ALL THE NET WORTH IS SWEEP INTO THE TREASURY.

1) The companies can't terminate the commitment anyway no matter what without Treasury's approval.
2) The funding commitment doesn't have anything to do with the NWS. The funding commitment came into existence when the original SPSPAs were signed in 2008.

FHFA and Treasury ripped up the old agreement and substituted in its place a new deal that created a “Net Worth Sweep”

Wrong. The NWS was merely an amendment to the SPSPAs, not an entirely new agreement. You can read the Third Amendment yourself. Everything from the original SPSPAs that was not changed by any of the first three Amendments remains in force today and has remained in force since 2008.

Quote “Without the Third Amendment, virtually all the senior-preferred stock would have been redeemed. With the Third Amendment, about $128 billion that could have been used to redeem the preferred shares has been reclassified as a dividend payment, rather than a return of capital.” End of Quote

Whoever said that is just plain incorrect. The senior preferred stock certificates say on page 3 (emphasis added):

Prior to termination of the Commitment, and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, out of funds legally available therefor, but only to the extent of (i) accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference and (ii) Periodic Commitment Fees previously added to the Liquidation Preference pursuant to Section 8 below and not repaid by any prior pay down of Liquidation Preference.

This really isn't that hard to understand.

1) The funding commitment has never been terminated, so this sentence (and not the one that says "following termination") is the one that matters.
2) The bolded part shows that FnF can only pay down liquidation preference increases that happened due to missing or incomplete past dividend payments or commitment fees. FnF have never missed or made a partial payment of either of these types.
3) Therefore FnF does not and has never had the ability to repay the seniors.
4) As a consequence, any damages model that assumes FnF could is completely flawed, and it would surprise me if a jury is allowed to consider it.

The above statement was made by Professor Epstein on April 5, 2016. Since that time the Fannie and Freddie has sent to the Treasury $301 billion.

Wrong again. $301B is the total amount of dividends paid from FnF to Treasury from 2008 to 2019.

If you're only talking about April 5 2016 to the present, the correct numbers are $33.754B for Fannie, $21.475B for Freddie, and $55.229B total.

You can check the math for yourself in FHFA's Table 2.