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Replies to post #315206 on Fannie Mae-No Politics (FNMA)
Fannie Mae Common Shares May Have Little Upside
Glen Bradford
Oct. 1, 2015 9:46 AM ET
Summary
*According to Judge Lamberth, FHFA's Melvin L. Watt can irrevocably repurpose anyone's property at zero cost without judicial review.
*Civil forfeiture, not unlike Lamberth's interpretation of HERA, is a legal process in which officers take assets from persons without necessarily charging the owners with wrongdoing.
*FHFA has sole discretion regarding the earnings attributable to common shareholders and Treasury may want $18.75B/year in dividends, subject to potential accounting fraud charges.
The Federal Housing Finance Agency (FHFA) used to be no different from any other government agency. Since around this time last year, however, the court system has at least in an Iowa Court Room made what appears to be settled law that allows the FHFA to take valuable private property at a price of its choosing. The US Government is currently running a deficit and is making up for this by investing through the FHFA where it pays $0 to buy companies that some prognosticators say have a total worth nearing $500B.
Two companies in question, Fannie Mae (OTCBB: OTCQB:OTCQB:FNMA) and Freddie Mac (OTCBB: OTCQB:OTCQB:FMCC) are government sponsored enterprises known as the GSEs that have been in conservatorship for 7 years during which they have earned over $100B dollars. The terms governing where their money goes currently send all of the money to the world's largest tax collector where it gets redirected into all sorts of programs from roads to military spending and even NASA. On balance, since Fannie and Freddie have earnings power north of $20B/annum it could be said that if you own a home in America and are paying a mortgage, part of that mortgage payment is a tax that is pays for space exploration.
5 Problems With Conservatorship
The first problem with conservatorship is that it is temporary in nature. This one has been going for seven years with no end in sight, at least officially. What is by design supposed to be temporary in reality can also be perpetual as we have no end in sight.
The second problem with conservatorship is that the people who are put in charge of the companies have to take pay cuts for the privilege of having the government tell them what to do. Donald Layton is one such example. He was paid more before he joined Freddie Mac and he could get paid more if he left. When it comes to capital, it gets more interesting:
"We work as if we have capital," Layton explained. The model is to currently shed risk if it comes at a low cost to Freddie Mac and hold risk if unwinding it would be considered a high cost.
The third problem with conservatorship is that the CEO's pretend there is capital when there isn't. By 2018, Fannie and Freddie are scheduled to have $0 capital, not because they aren't making money, but because tax collectors are taking it all.
The fourth problem with conservatorship is that according to Lamberth's interpretation of the law Melvin L. Watt is the most unilaterally powerful person as it would appear that he can if he chooses to cancel all the mortgages outstanding in America and reclaim your homes that you've been living in and paying a mortgage in the spirit of American home ownership, and then replace it with rental terms and perhaps establish some sort of income based rent system and no one can stop him. This basically extends civil asset forfeiture beyond highway stops and into your home.
The fifth problem with conservatorship is that it favors debt over equity. If you are a private shareholder of GSE debt, FHFA pays you before they pay tax collectors. If you are a private shareholder of GSE equity, right now you don't get anything. As such, the government is incentivizing taking on as much debt as you can but is also making it tough to figure out where to put that money to use because now the government can take it. It remains to be determined if the government will use its powers as conservator to take the home that you paid for and make you keep paying the mortgage.
Money Managers Footing The Legal Bill
Unfortunately what goes around comes around and if mortgage rights can be stripped from its owner, the people who have been trying to do all the taking will eventually find themselves in the cross-hairs of their own well-oiled taking machine and who is to save them when they can't save themselves? This is why the world's most successful money managers have stepped up to the plate and put millions of dollars per month on the line in order to protect the right to be a taxpayer first and foremost and not be forced by the world's largest tax collector to ignore property rights and trample ethical expectations that when you agree to take on a mortgage that there is a hope of ownership. More recently, Judge Sweeney granted the plaintiff's motion to file produced discovery material in other cases challenging the net worth sweep without awaiting a response from defendant:
(click to enlarge)
Lamberth's court room, however, justifies the government unilaterally reclassifying tax payer firms as tax collector agencies and this becoming settled law is horrible for tax collectors who will find taxpayers unwilling to pay because it's not a willingness to pay that is of concern but a willingness to allow FHFA to systematically and legally void your bank account and take all your assets in a land where there is nothing you can do about it. There is more truth to Hank Paulson's "the first thing they'll hear is their heads will hit the ground" than he cares to admit in this circle of life where what goes around comes around and a small few of perhaps no more than 1000 people have set out to make the rule of law tired and old.
We aren't there yet and I don't expect those who are in charge will let it get that far. The least I can do is bring it to their attention and say, "Hey, you know that if you keep doing this, this is going to apply to you too and here is why you might want to stop before you get ahead of yourself."
According to Tim Pagliara:
When I was on a panel with Ralph Nader and Ted Olsen I looked at the crowd and said " if they can sweep the net worth of the GSE's they can sweep the net worth of anyone in this room.
According to CHLA:
The GSE profit sweep should end.
Multiple Accounting Audits Suggest Foul Play at FHFA
First, Adam Spittler and Mike Ciklin produced a forensic audit demonstrating that the GSEs did not need any of the money that FHFA forced them to take from US Treasury. Second D. Larry Crumbly confirmed their findings that the interests of management and the majority shareholders were aligned, to the detriment of the minority shareholders:
In the situation of Fannie Mae, had they not had sufficient internal capital outside of the conservatorship, it seems as though management should have preferred to use funds from the credit facility before issuing senior preferred stock. Management's actions in issuing senior preferred stock indicates a willingness to pay a 9% financing premium at a time when Fannie Mae was potentially financially distressed. This decision suggests questionable management practices at best. However, this practice is consistent with a notion that the conservatorship damaged minority shareholders at the benefit of the majority shareholder. In this situation the majority shareholder, the Treasury Department, enjoyed a 9% borrowing premium by purchasing senior preferred stock instead of allowing Fannie Mae to draw on the GSE credit facility.
More recently, G. Stevenson Smith, Ph.D., CPA, CMA produced a white paper analysis of the treasury takeover of Fannie Mae:
Fannie Mae could have survived the financial crisis of 2007-2008 without the intervention of the Treasury.
Because of the terms of the takeover, Treasury can increase its dividend payments by simply making a managerial decision to increase their investment in Fannie Mae and thus increase its cash dividend payments.
The Fannie Mae's Board had no choice. They agreed to the terms and were fired.
[Fannie Mae] operations provided enough cash to cover its cash outflows. Yet, the Treasury continued to make cash injections into Fannie Mae. It is interesting to speculate as to why these injections continued. It appears the decision to write off the deferred tax assets was a political decision to show the need for the Treasury's financial support and to justify a takeover.
In 2008 when Fannie was taken over by the Treasury, it had a positive cash flow. It did not need cash to meet its obligations. There appears to have been no financial reason to essentially write off the deferred tax asset in 2009 or generate the going concern implications from such a write-off. Three years after the deferred tax asset was written down, in 2012, a net income was earned. Three years is not the "foreseeable future." During the time period under review, Fannie Mae was a going concern, and it was not going bankrupt. The low point for Fannie Mae was when it had a negative cash flow in 2009 largely caused by Treasury requirement to purchase the toxic assets from investment banks.
Preferred vs. Common
Right now, preferred shareholders take 100% of the money after the bondholders get paid. This leaves common shareholders high and dry. Common shareholders own the residual profits after all other stakeholders are paid their dues. This is why equity securities are generally seen as more risky than debt. Preferreds have a liquidation preference and a fixed dividend rate and are made whole before common shareholders.
The primary risk to common shareholders is that FHFA is still in charge. So far, 100% has gone to preferred shareholders under FHFA at the exclusion of common shareholders. It's worth noting that 100% has gone to government tax collectors leaving private taxpayers 0%. Once the preferreds are made whole, money flows to common shareholders on a fully-diluted basis.
In the case of the GSEs, before it gets to common shareholders, affordable housing fund payments are made. Since congress controls the G-Fees and FHFA controls the GSEs normalized profits, the government effectively controls how much money accrues to common shareholders. After 7+ years of conservatorship with 0% going to common shareholders with preference given to government equity holders over cheaper sources of private capital at the expense of private equity holders, it is unreasonable to suggest anything other than what Melvin L. Watt has himself said:
I don't lay awake at night worrying about what's fair to the shareholders.
Considering that this is the man who according to HERA unilaterally has the power to end the conservatorship in a way of his own choosing, this serves as a warning for common shareholders.
Summary & Conclusion
Fannie Mae and Freddie Mac are not the only government sponsored enterprises in the world today but they are the only government sponsored enterprises in the world today that send everything to tax collectors.
Forensic audit reports suggest foul play but no lawsuits have been filed fighting FHFA's accounting. FHFA has so far not taken any money away from private bondholders and those still trade around par. There are hundreds of businesses that invest in agency mortgage backed securities expecting that the current flow of funds will continue to make good on their debt securities. If the government puts Fannie and Freddie into receivership in 2018, the markets that millions of Americans depend on to finance their homes will shift to shorter duration mortgages and the average buyer will be able to afford less home.
If the third amendment is reversed, the preferreds could potentially consume a vast majority of the profits coming from Fannie Mae and Freddie Mac, which isn't a significant change from the status quo.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
AI
