Replies to post #678560 on Fannie Mae-No Politics (FNMA)

[krab]

After the SCOTUS decisions, what will be the next steps for the final outcome. Case goes back to lower court for ruling & how much of a delay is that ?

[Jxx]

Thank you Ano for giving us your deep insights

[Brooge warrants cancelled]

thanks ANO
you are an asset to the board

[stockprofitter]

Awesome thank you!

[nagoya1]

Thanks for fnma fact based contributions. Fnma

[Donotunderstand]

bluntly - a lot I can not follow

I do wonder about this sentence - as the dollar amount is used by the lawyers as well for the NWS --- yet IMO - it is not the marginal cost of the NWS

The sentence

Then we have the 3th amendment, this is illegal no question about it, under this agreement fannie gave $165,91M to treasury, if it is void the funds will have to come back, Collins suggest to pay down the SPS, so that would be 165,910 – 117,149 = surplus $48,761M and there would be no SPS outstanding,


So - in the above the NWS cash to Treasury is - just from Fannie - was $165,910 (I assume in billions)

However - would one not have to net out the 10% which is part of the original deal and is not the result of the move to ALL - NWS

Or does the 165B represent the marginal increase due to NWS ?

I thought that was about 30-50 B ?

[kthomp19]

To exit conservatorship in the coming months, they need to restructure.

Agreed. Specifically, they need to recapitalize (a form of restructuring). And in a restructuring, position in the capital stack is of supreme importance.

Treasury holds $120,836M and a warrant for 79.9%, Fannie also has $19,130M in junior preferred outstanding, and $25,259M in stockholders’ equity

If you're using numbers from Fannie's 2021 Q1 balance sheet (page 6) then the stockholders' equity is $30.225B. However, this includes both the seniors and juniors. Stockholder equity attributable to (non-Treasury) common shareholders was $30.225B - $19.130B - $120.836B = -$109.741B.

in the equity the government has in fannie we can instantly see the government is a majority shareholder, preferred shareholders have $19B and common shareholders have 20.1%

1) Treasury is not a majority shareholder. Judge Sweeney specifically shot this idea down on page 32 of her opinion on the Fairholme motion to dismiss: "Plaintiffs have not established that Treasury meets either control test."
2) Correct about the juniors.
3) Treasury has not yet exercised the warrants and is unlikely to do so until there is a capital raise. At that point Treasury will have (in my opinion much) less than 79.9% and the existing commons will have less than 20.1%.

So The Treasury holds $120,836M in equity, this equity was build up thru the years

Right. For more clarity, every time FnF took a draw from Treasury there were two accounting entries: add the amount of the draw to both cash and the senior pref stock line. That kept the books balanced.

Then whenever FnF made a dividend payment (either before or after the NWS) they would deduct that amount from both cash and retained earnings. That's why there is such an enormous accumulated deficit, and why its size is in the ballpark of the size of the senior pref balance. It's also why the accounting entries to write off the seniors, were that to happen, would be to deduct that amount from the senior pref line and add it to retained earnings/accumulated deficit. This would have no net effect on overall shareholder equity, but would be necessary to meet regulatory capital requirements (as well as raise capital).

Converting the seniors to common would add that amount to additional paid-in capital rather than retained earnings, but otherwise the effects are the same.

and on the invested money, treasury wants a 10% annual interest that will come due each quarter(~1.78%) on the outstanding SPS

Actually it's closer 2.5% per quarter, which makes sense because the annual rate is 10%. Take one of the pre-NWS dividend payments ($2.929B in 2012 Q3) and divide by the senior pref balance at the time ($116.149B); it's just over 2.5%.

Then we look at the PSPA, this is a contract established to wind down the companies, while the FHFA was appointed as conservator (not receiver) never the less the FHFA-C agreed to the terms to wind them down.

No. The original contract wasn't meant to wind down FnF. That contract was signed in September 2008 while George W. Bush was still president. It's President Obama who wanted FnF wound down, and the NWS was signed on his watch.

Next in 2012 they engineered the 3th amendment that gave all future profits to treasury, to make sure they never would emerge from conservatorship in its prior form. Conservatorship by design should be a temporarily thing, never the less they want the conservatorship to be permanent until the entities emerged into something else, while they change the regulation at the same time, this deal also made sure all profit from the companies in the future would belong to the Treasury Forever, as they would like to wind down the companies

Correct.

holding that a conservator can legally duly appoint itself, without any statutory control, and implement a “wind-down” contract “the PSPA”, while at the same time it is protected under a conservatorship statute(courts cannot take action)

No. Courts can only not take action to review a decision FHFA made as conservator if the court finds that action to not be ultra vires. 4617(f) is not even close to being full blanket protection, as the Fifth Circuit en banc majority and the government's own lawyer in the Collins oral arguments said.

the 3th amendment holds that the dividends fannie paid to treasury $165B during 2012-2019, ($20B 2008-2011) belong to the government because the amendment clearly tells this is the case

The dividing line is actually after 2012 Q4. The first dividend payment under the NWS in Table 2 is listed as 2013 Q1, for whatever reason.

The breakdown in payments for Fannie is $31.427B pre-NWS and $153.3B post-NWS.

so to sum-up:
$117,149 Fannie received from Treasury
$165,910 Fannie paid in dividends from 2012-2019
$19,813 Fannie paid in dividends from 2008-2011

Actually it's $119.836B (see Table 1), $153.5B (see above), and $31.427B (see above).

on “for cause” Collins and Treasury agree so we know $19,813 is not legal

No. Your conclusion does not logically follow from your premise. You are assuming that the Supreme Court will unwind the entire SPSPAs (which would be disastrous for the housing finance market and the economy as a whole) when nobody is asking them to.

Then we have the 3th amendment, this is illegal no question about it, under this agreement fannie gave $165,91M to treasury, if it is void the funds will have to come back, Collins suggest to pay down the SPS, so that would be 165,910 – 117,149 = surplus $48,761M and there would be no SPS outstanding

No. If the seniors are voided, some of FnF's past payments would be recharacterized as paying the 2.5% quarterly dividend before the seniors were counterfactually (and contrary to the original contract) paid down. The amount of Fannie's total overpayment, taking that into account, is actually $14.209B, not $48.761B.

David Thompson quoted $29.5B on page 69 of the Collins Supreme Court oral argument transcript, and that was for both Fannie and Freddie combined. My calculations came up with $14.2B for Fannie and $14.9B for Freddie; rounding errors probably account for the $0.4B difference.

Then the new restructuring looks like this:
$00.000 Treasury
$74,020 Shareholder’s equity
$19,130 preferred stock

Close. The $74.020B should be $39.468B, and that includes the junior prefs' $19.13B.

Then we have the Warrant for 79.9% of the common stock, this warrant when obtained legally by the itself appointed director who is not accountable to any of the 3 branches in the separation of powers, gave treasury a 79.9% warrant, for this to become legal, we first must wait for the un-redacted files (page 77 for Freddie and page 81 for Fannie) because the price at issuance was estimated $3.5B (estimated by fannie mae) but the boards agreed to give away the $3.5B the scope of why that happened first needs to be un-redacted, as that would breach the BOD duties

1) The warrants are legal until and unless a court rules them to be otherwise.
2) The redactions in the documents have nothing to do with the Collins case because they are not challenging the conservatorships.
3) 12 USC 4617(a)(6) specifically shields the boards from liability over fiduciary duties to shareholders when acquiescing to conservatorship:

(6) Directors not liable for acquiescing in appointment of conservator or receiver

The members of the board of directors of a regulated entity shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consenting in good faith to the appointment of the Agency as conservator or receiver for that regulated entity.

So there can be no lawsuit over your supposed breach of duty. Well, not one that would get anywhere; it would be immediately dismissed in light of the part of HERA I just quoted.

So it logically follows when the government sold its share in Fannie Mae the explicit became an implicit guarantee

There never was an explicit guarantee on FnF's MBS or debt at any point. Section 6.6 just spells that out.

The SPSPAs, plus the first two amendments, give an explicit guarantee on the net worth of the companies up to $200B each. This is to stop them from facing mandatory receivership under 4617(a)(4), at least until after they burn through the $200B.

but for sure we know the 3th is illegal and the PSPA is illegal because it cannot be paid down, given those 2 facts, the easiest way out is to declare the SPS paid and void the amendments and contract

Neither of those two things is a fact. Both are speculation. The Supreme Court has not made their ruling yet.

You can make a very strong case that the NWS is illegal. The case that the original SPSPAs are illegal is much, much weaker and no current plaintiff has ever tried to have them overturned.

Voiding the entire agreement might be simple in theory, but in practice it would be enormously complicated and could be catastrophic to the economy. No Treasury backstop could mean panic selling of MBS and the companies themselves could very well go under. Be very, very careful what you wish for.