Fannie Mae-No Politics (FNMA)

[Rodney5]

We all know what took place with Lamberth.

Sent this to Lawyer Hume encouraging the firm to read the contract to the jury.

“Optional Pay Down of Liquidation Preference”

It cannot be argued, Fannie Mae and Freddie Mac were never provided with a mechanism to emerge from conservatorship. The SCOTUS ruled the Net Worth Sweep was legal. The SCOTUS did not rule the Optional Pay Down of Liquidation Preference as being void. No, it is not void, the court did not say it was void.

The hung Jury Trail in the Court of Judge Lamberth looks to be rescheduled in the future. I do not understand how the Judge could not allow the Plaintiffs to read and explain the Contract to the Jury. Written in the Contract “Optional Pay Down of Liquidation Preference” was never changed in any of the amendments. And the Contract “Optional Pay Down of Liquidation Preference” exists in the same form as we speak today.

Any loyal conservator of Fannie and Freddie would take advantage of this refinancing option to end the bailout arrangement, by paying off the senior preferred in full once Fannie and Freddie have sufficient capital to resume normal market operations. At this point, it is a fair inference that the Treasury commitment would end once that recapitalization is complete. In light of this arrangement, it seems incorrect to argue, that “the GSEs were never provided with a mechanism to emerge from conservatorship because it was never expected they would do so.” The mechanism is there as clear as day in the stock certificates and the repurchase option set out is fully consistent with the view that the government advances were, if possible, only a short-term backstop that Fannie and Freddie could refinance at any time with private capital. Furthermore, FHFA would also refinance the expensive 10 percent preferred for cheaper preferred or common, once it became clear, as it is now, that these are healthy companies (in which case cheaper financing is available).

I am asking every Investor having an interest in Fannie Mae and Freddie Mac to kindly, take the time and read for yourself, THE CONTRACT, link provided below: After reading the contract for yourself compare your understanding of the writing to Professor Epstein's explanation in his writing provided. Thank You

The Treasury sweeping the Net Worth by the Third Amendment and the SCOTUS allowing the Net Worth Sweep did not change the 10 and 12 percent dividend rates in the initial stock certificates. The Third Amendment cannot be used to wipe out the 10 and 12 percent dividend rates. IT DOES NOT MATTER if the Third Amendment Net Worth Sweep is declared legal or illegal, THE DAMAGES ARE the extra payments to Treasury must be treated first as though they were a return of capital that calls for a dollar-for-dollar redemption of the senior preferred, thereby reducing the Treasury’s liquidation preference. Once all those shares are redeemed, the remainder of the money paid over to Treasury should be treated as excess payments that must be repaid in full to Fannie and Freddie with interest.


According to Professor Richard Epstein
The Senior Preferred Stock would have been redeemed.

Quote “The conflict of interest took a more ominous turn with the adoption of the Third Amendment between FHFA and Treasury nearly four years later. At that time, the market had quieted down, and the GSEs were making timely dividend payments on Treasury’s preferred stock. Nonetheless, FHFA and Treasury ripped up the old agreement, and substituted in its place a new deal that created a “net worth sweep” whereby all of the funds received by the GSEs were paid over to Treasury as a dividend, even in amounts far in excess of the original 10 percent dividend. The consequences have been huge. 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

Please Note: “Without the Third Amendment, virtually all the senior-preferred stock would have been redeemed.”

Link: https://ricochet.com/326448/fannie-freddie-fiasco/


Professor Richard Epstein explained the Optional Pay Down of the Liquidation Preference.

Link: Below

So why go through the charade of asking Fannie and Freddie raise additional capital to pay off the senior preferred in full when it has already been paid.

The mechanism is there as clear as day in the stock certificates and the repurchase option set out is fully consistent with the view that the government advances were, if possible, only a short-term backstop that Fannie and Freddie could refinance at any time with private capital.

Quote: “Section 3 then, set outs “Optional Pay Down of Liquidation Preference” that specifies that “[f]ollowing termination of the commitment” of the Treasury to make further advances of cash for new senior preferred shares, “the Company may pay down the Liquidation Preference of all outstanding shares of the senior preferred stock pro rata, at any time, in whole or in part, out of funds legally available therefore.” Since there are no unpaid cash dividends all, these payments immediately go to reduce the amount of the liquidation preference.

With or without the Third Amendment, the Treasury’s commitment to make further advances remains, even if no such advance has been made since the beginning of 2012. But that commitment is of little if any value now that further advances from Treasury are no longer needed. Most critically, Section 4 addresses “Mandatory Pay Down of Liquidation Preference Upon Issuance of Capital Stock.”

Its exact provisions need to be quoted to grasp the full legal position. This section comes into play “if the Company shall issue any shares of capital stock (including without limitation common stock or any series of preferred stock) in exchange for cash at any time while the Senior Preferred Stock is outstanding.” Note that this provision does not require the consent of that “the holders of record of the outstanding shares of the Senior Preferred Stock” (which need not be the US Treasury). These shareholders receive full protection because Fannie and Freddie are obligated to “use the proceeds of such issuance . . . to pay down the Liquidation Preference of all outstanding shares of Senior Preferred Stock pro rata, out of funds legally available therefor. . .”

In sum, Section 4, of the senior preferred stock certificate in essence allows the trustees of Fannie and Freddie to go to the market at any time to raise new capital, including new capital with lower dividend coupons, to buy back the Treasury’s senior preferred. Any loyal conservator of Fannie and Freddie would take advantage of this refinancing option to end the bailout arrangement, by paying off the senior preferred in full once Fannie and Freddie have sufficient capital to resume normal market operations. At this point, it is a fair inference that the Treasury commitment would end once that recapitalization is complete. In light of this arrangement, it seems incorrect to argue, as does Goodman, that “the GSEs were never provided with a mechanism to emerge from conservatorship because it was never expected they would do so.” The mechanism is there as clear as day in the stock certificates and the repurchase option set out is fully consistent with the view that the government advances were, if possible, only a short-term backstop that Fannie and Freddie could refinance at any time with private capital. Furthermore, FHFA would also refinance the expensive 10 percent preferred for cheaper preferred or common, once it became clear, as it is now, that these are healthy companies (in which case cheaper financing is available).

At this point, the Third Amendment cannot be used to wipe out the 10 and 12 percent dividend rates in the initial stock certificates. Once the Third Amendment is declared illegal, as it should be, the extra payments to Treasury must be treated first as though they were a return of capital that calls for a dollar-for-dollar redemption of the senior preferred, thereby reducing the Treasury’s liquidation preference. Once all those shares are redeemed, the remainder of the money paid over to Treasury should be treated as excess payments that must be repaid in full to Fannie and Freddie with interest.

Nothing else makes sense. Suppose the government sought to just repay the extra money to Fannie and Freddie in order to reinstate the above-market 10 percent dividend. It still could not reasonably prevent Fannie and Freddie from exercising the mandatory repurchase under Section 4 So why go through the charade of asking Fannie and Freddie raise additional capital to pay off the senior preferred in full when it has already been paid. Read together, Sections 3 and 4 make it impossible for the government to keep the highly favorable 10 percent dividend in place when it is no longer warranted by market conditions.” End of Quote

https://www.forbes.com/sites/richardepstein/2014/09/10/what-happens-if-the-government-loses-on-the-third-amendment-the-senior-preferred-stock-certificates-spell-nothing-but-trouble-for-the-government/?sh=50886006a393


The money swept by the Treasury if it had been applied to LP and the 10% over payment returned to the companies the LP would be paid in full and the SPS would be redeemed and at that point in time SAME DAY IN TIME the companies could turn to the Market with a secondary IPO replacing the commitment.

NO MONEY LEFT TO PAYDOWN THE LP AND REDEEM THE SPS WHEN THE TREASURY SWEEPS THE ENTIRE NET WORTH. AND BY SWEEPING THE NET WORTH THE COMMITMENT CANNOT BE TERMINATED.

Again,

The Third Amendment cannot be used to wipe out the 10 and 12 percent dividend rates in the initial stock certificates. IT DOES NOT MATTER if the Third Amendment Net Worth Sweep is declared legal or illegal, THE DAMAGES ARE the extra payments to Treasury must be treated first as though they were a return of capital that calls for a dollar-for-dollar redemption of the senior preferred, thereby reducing the Treasury’s liquidation preference. Once all those shares are redeemed, the remainder of the money paid over to Treasury should be treated as excess payments that must be repaid in full to Fannie and Freddie with interest.

https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/FNM/SPSPA-amends/FNM-Fourth-Amended-Restated-Certificate-04-13-21.pdf