Maybe you missed my earlier post, posting again. Regards
Professor Richard Epstein explained the Optional Pay Down of the Liquidation Preference. The Plaintiffs should pay close attention. Explain this to the Jury. 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
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