The Legal Twist For A Political GSE Resolution
Jan 11 2017, 06:10
About: FNMA • Includes: FMCC
Summary
Pagliara leaves the door open for a political resolution in his latest legal filing.
Recapitalizing Fannie Mae and Freddie Mac could be enormously expensive and is limited to their ability to earn money and how long it takes to recapitalize.
Preferred shares are owned by Pagliara, Berkowitz, Perry and Bradford.
Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two companies that the government placed into conservatorship in 2008. Since then, the government has taken their net worth via the net worth sweep leaving existing shareholders effectively trying to reconcile the practical definition of capital structure to a nationalization. The government's senior preferred stake balooned in response to FHFA's discretionary accounting writedowns and shareholders have filed lawsuits.
Investment Thesis: The purpose of capital structures is to ensure an orderly marketplace where there is a priority of payments in the event of a liquidation. In the case of the conservatorship of Fannie Mae and Freddie Mac, the government has been paying itself the net worth of the companies and running their capital buffer to zero putting their more senior members in the capital structure at a greater risk than they were at when they had more capital. In a new legal filing, the incoming administration's immediate priority of ending the conservatorship of Fannie Mae and Freddie Mac is addressed. If Steven Mnuchin ends the conservatorship, the two companies would probably need to be recapitalized because it is only in the void of conservatorship where capital doesn't matter according to FHFA.
Pagliara's Legal Snippet
Investor Unite's Tim Pagliara has been fighting to access documents and his latest filing asks for a 30 day extension in light of the fact that we're getting a new President of the United States:
One has to wonder what sort of political resolution would have to take place for the plaintiffs suing to drop all of their lawsuits?
My Speculations
I think that the preferred shareholders who are suing for all sorts of reasons aren't going to drop their lawsuits on a recapitalization that hangs them out to dry. My guess is that any political resolution, therefore, would result in dividends out of the gate to the preferred shareholders along with a monster capital raise.
That's just one source of capital. Another source of capital would be the government giving back part of the money that it has improperly taken by redoing the accounting surrounding the net worth sweep. If this is going to be resolved politically, however, I don't expect anyone to be readily declaring mea culpas. There are warrants out there and doing anything with them would make it more challenging for the enterprises to raise capital.
Summary & Conclusion
I own preferred shares. I own 4050 FMCCH, 9340 FMCCP, 10127 FMCCT, 2600 FMCKI, 1025 FMCKO, 6585 FMCKP, 26876 FNMFN and 6 FNMFO totaling around $3.4M of par value.
I am not opposed to a political resolution that restarts the dividends on my shares as part of raising capital. Given the strength of the breach of contract claims I'd be surprised to see the lead plaintiffs dismiss/settle for less.
Disclosure: I am/we are long FMCCH,FMCCP,FMCCT,FMCKI,FMCKO,FMCKP,FNMFN,FNMFO.
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