Replies to post #764614 on Fannie Mae-No Politics (FNMA)

[trunkmonk]

What Dr. Calabria and the “conversion crowd” don’t seem to understand (and I’m being kind with that characterization) is that converting the senior preferred stock to common shares does absolutely NOTHING to resolve the negative balance in each company’s retained earnings (i.e., accumulated deficit). The glaring accumulated deficit numbers will, at the very least, cause rational investors to question how and why these billion-dollar companies have these adverse amounts on their equity statements.

[Wise Man]

Fairholme's Bryndon Fisher and Howard keep on covering up the law and basic concepts in Finance, like the fact that a dividend is a distribution of earnings and impossible to pay out if there is a negative balance (deficit) in the Retained Earnings accounts (a change in Equity: a dividend ends up being de facto debited from RE)
This is why any dividend is a capital distribution. Restricted in the FHEFSSA's Restriction on Capital Distributions, as amended by HERA Subtitle C - PROMPT CORRECTIVE ACTION.
Today's SPS LP increased for free every quarter and the payments of Securities Litigation claims (added to the definition of capital distributions in (3) CFR1229.13, are capital distributions too.

Then, RESTRICTED. PROHIBITED. BARRED. ACHTUNG!
Because the payments to UST existed, we can't say that they were actual dividends, as they are prohibited while undercapitalized by law.
Instead of bringing them to Justice accused of violating the law, there is another statutory provision that authorizes the conservator to lie and carry out a different plan behind the scenes: The conservator's Incidental Power: "Take any action authorized by this section,...."

Whatever it wants if the endpoint is the rehabilitation of FnF. Taking in account that it may take actions that reduce the profitability in the best interests of FHFA ("May" also in the FHFA-C's Power), but it's not an authorization to be excused from complying with its Power, neither with "may" nor with the "best interests", that is, once the capital is built, it's kept by FnF (or this Common Equity is held in escrow and lie about it if you wish. Just so that you know, at some point in time, it will be returned to their Balance Sheets, for the normal functioning of a corporation). It's called Retained Earnings (Core Capital) for a reason.
Then, you can't claim that there is a non-repayment provision of the SPS, because that's related to the dividend to UST, and no actual dividend existed but capital distributions under the guise of dividends.
Actually, the law authorizes the capital distributions for the repayment of the SPS (An exception to this restriction)

The problem with the "and" in the exception "(A) and (B)" was recently solved by simply acknowledging that the intention of the legislator was to raise fresh cash in the same amount as the redemption of the SPS and he didn't know that by building Common Equity (Comprehensive Income + OCI), there is also cash accounted for, due to the double-entry accounting. This is how the SPS were reduced with cash, at the same time the Common Equity increased and as seen in my signature image below.

In 2011, the FHFA added up another exception: a capital distribution (deplete capital) for .... wait for it... for their recapitalization (build capital: "Meet the Risk-Based capital and Minimum Capital requirements") in the CFR 1237.12 (Separate Account wording right there)

Above all, it would comply with the conservator's Rehab power: "Put (restore) FnF in a sound (build capital) and solvent (reduce the obligations SPS. Debentures) condition". Another statutory provision covered up by the plaintiffs and Co.

Hence, no one can say that nowadays FnF have been rehabilitated, with:
- $-216 billion Retained Earnings accounts. The only account that absorbs future losses.
- $304 billion SPS outstanding that will have to be paid back.
- $-194 billion Core Capital.
- $402 billion capital shortfall over Minimum Leverage Capital requirement.
You can't claim that the SPS are converted to Commons and that's it. Problem solved. Primarily, the Net Worth is only $111 billion and the rest of SPS are wiped out. Secondly, you must acknowledge that the FHFA-C has failed in its Rehab power, which would put into question the entire conservatorship. The "for cause" removal restriction of the director that was constitutional, is activated and the Fanniegate trials would kick off. Unless, it's announced the Separate Account plan: the Common Equity is held in escrow. The FHFA has lied to us all along.

Then, the dividend rate on SPS was authorized in a provision inserted by HERA in the Charter Act, with the same name as another one just above it in the Charter, with a rate that "takes into consideration the Treasury yields as of the end of the month preceding the purchase", also known as cheap UST backup of FnF, in exchange for their Public Mission.
This is why the plotters repeat "HERA, HERA, HERA". (Even the alleged jury asked for the HERA text). So, you don't see the Charter Act in its entirety with the original cheap UST backup of FnF.
So, quit repeating like mad that there is a 10% contractual rate. FnF aren't governed by contracts between Federal Agencies to begin with. It must uphold the laws in force. Again, the Incidental Power allows the conservator to mess around with the dividend rates, and eventually, its Rehab power and the special borrowing right from UST must be respected.

Finally, the Fee Limitation of the United States clause, tells us the Charter dynamics (the spirit of the Charter): the UST can't make profits off the securities and assets of FnF, other than the a low rate on redeemable obligations, in exchange for their Public Mission (section Purposes). Although it's been broken with the TCCA fees, HERA's 4.2 bps to UST/HUD and, likely, the CRT expenses (prohibited in the Credit Enhancement clause too) that might be being syphoned off to UST.

Numerous attorneys and social media influencers, funded by the hedge funds, play the fool over and over again. The thing is that the coverup of a material fact is a crime of Making False Statements, stock price manipulation and, in court, abuse of court process.

[JOoa0ky]

Both Howard and Fisher think it impossible that anyone can think this way... Yet, who is the financial advisor that has been hired by FHFA/Treasury? Houlihan Lokey who've been doing these restructurings since time immemorial.

The writing is on the wall.

[Rodney5]

Bryndon, gave us the calculation of the pay down of the liquidation preference . Now if he will apply the LAW written in HERA.

https://drive.google.com/file/d/15978NWfDcTtuClMBnwgWFmoPnwK94vWn/view

The liquidation preference has be paid and the Senior Preferred Stock should be canceled.

The FHFA Director can at any time, REPURCHASE, REDEEM, RETIRE... First the Senior Preferred Stock and second the Junior Preferred Stock.

HOUSING AND ECONOMIC RECOVERY ACT OF 2008

Quote: “Page 2732

EXCEPTION.—Notwithstanding paragraph (1), the Director may permit a regulated entity, to the extent appropriate or applicable, to repurchase, redeem, retire, or otherwise acquire shares or ownership interests if the repurchase, redemption, retirement, or other acquisition— ‘‘(A) is made in connection with the issuance of additional shares or obligations of the regulated entity in at least an equivalent amount; and ‘‘(B) will reduce the financial obligations of the regulated entity or otherwise improve the financial condition of the entity.’’.

NOTE: REPURCHASE, REDEEM, RETIRE...

WILL REDUCE THE FINANCIAL OBLIGATIONS OF THE REGULATED ENTITY.

Link: https://www.congress.gov/110/plaws/publ289/PLAW-110publ289.pdf

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.

[altruism]

Yes formal nationalization is the only choice.. agreeing here with Th

[Donotunderstand]

yes
this is the right way - IMO - to view a conversion and its futility to the final goal

capital is raised - (more capital via common - or simply less obligation on the other side) = higher NET capital level

but what price can GOV get per share of a new offering to gain the needed remainder when there a Gazillion common shares ?

copy and paste from TH

Bryndon—While you are correct that converting Treasury’s senior preferred stock to common “does absolutely nothing to resolve the negative balance in each company’s retained earnings,” it WOULD increase their regulatory capital by the amount of the converted senior preferred, thus bringing them much closer to their required capitalization (since common stock, even if owned by Treasury, is classified as regulatory capital by FHFA, whereas the Treasury senior preferred is not). But I agree with you that this conversion would very likely make it quite difficult, if not impossible, to attract new investor equity into the companies–or to allow Treasury to monetize the value of its virtually 100 percent ownership of Fannie and Freddie by selling its shares to third parties (while raising no net new capital).

[kthomp19]

Nothing personal here Robert, I'm just responding to part of Fisher's post. It has the same "logic" behind it that I have seen often on this board (that a senior-to-common conversion will prevent a future capital raise), and I don't think Tim Howard's blog is the right place to post this so I'm putting it here.



Fisher has long argued that a senior-to-common conversion will destroy FnF's ability to raise capital in the future. But FHFA and Treasury have done the following things that should have forever destroyed any investor's willingness to ever even get close to recapitalizing FnF:

1) Strongarmed FnF's boards into consenting to conservatorship
2) Signed the SPSPAs that were extremely punitive to both the companies and shareholders
3) Entered into the NWS to prevent FnF from ever building capital and escaping conservatorship
4) Eventually agreed to let FnF retain earnings but only at the cost of the liquidation preference ratchet that keeps non-Treasury shareholders underwater

Supposedly even after all of these things happened, new investors would be willing to step forward, but a senior-to-common conversion is the last straw? That makes absolutely no damn sense.

If the things in the above list were enough to scare away investors forever, then a senior-to-common conversion won't matter. And if that list wasn't enough, a senior-to-common conversion certainly won't be what kills the effort.

Fisher's comments are comically transparent. He doesn't want Treasury to exchange the seniors for commons so he comes up with every possible reason he can think of to say why it won't happen. It's akin to creationism: start with the conclusion and only pay attention to evidence that confirms it.

He completely ignores three facts about a senior-to-common conversion:

1) It is far better for the companies than the NWS was.
2) It already almost happened! Thus it is clear that neither FHFA nor Treasury agree with his logic as to why it shouldn't happen.
3) He (and many others) are willing to own common shares right now. Therefore saying nobody will ever want to buy them in the future is an absurdity.