FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[allnatural]

Assuming Sweeney's decision holds on direct claims, the only other case pursuing monetary damages for shareholders is the Lambert case which is progressing favorably.

[Guest cherzeca]

Sweeney decision... commentary below from Peter Chapman.

Under seal, Judge Sweeney issued an opinion and order (Doc. 447) this evening "granting in part and denying in part" the government's motion to dismiss.  "The court grants defendant's motion to dismiss with respect to the direct claims and denies defendant's motion to dismiss with respect to the derivative claims.  The parties shall propose redactions by 12/16/2019 and file a joint status report in which they propose further proceedings by 1/10/2020," according to notations on the docket sheet.

 

It appears Judge Sweeney was prophetic when she said "we'll have many days in court," at line 12 of page 255 of the hearing transcript from Nov. 19, 2019. 

 

there is nothing on the dockets yet for fairholme and Washington federal.

[Guest cherzeca]

strike:  this is on docket in fairholme not Washington federal

[Guest cherzeca]

Assuming Sweeney's decision holds on direct claims, the only other case pursuing monetary damages for shareholders is the Lambert case which is progressing favorably.

 

forget about who is to receive what damages for a moment.  if you are the govt you are facing claims, whether they are direct or derivative.  in collins, the claim is a "direct" claim filed by a shareholder because APA Section 706 authorizes such a claim, but the assertion of the claim, even  though direct, would lead to a payment from treasury to the GSEs if successful.  the govt will also apparently be facing claims in fairholme (status of Washington Federal is still uncertain since its docket hasn't been updated), which have been styled "derivative", which will also see funds flow from treasury to GSEs if successful.  and there is fairholme before Lamberth, which is a "direct" claim for damages that would see money flowing from treasury to shareholders. so while I would need to read Judge Sweeney's opinion, it seems that the govt will be entering 2020 subject to three separate lines of attack, subject of course to what SCOTUS might do to the collins claim (and subject to any govt appeal in the federal court of claims system).

[Luke 532]

Anybody see a scenario where some classes of junior prefs (those with high dividend rates) are converted at or near par, and some (low dividend rate) are not converted at all and simply left alone/ignored?  Maybe this happens through Admin action and/or a legal settlement, maybe they claim some classes are not convertible, maybe the conversion dates outlined in the prospectus don't align with the plan, etc.  Thanks in advance for your opinions. 

[rros]

Sweeney decision... commentary below from Peter Chapman.

Under seal, Judge Sweeney issued an opinion and order (Doc. 447) this evening "granting in part and denying in part" the government's motion to dismiss.  "The court grants defendant's motion to dismiss with respect to the direct claims and denies defendant's motion to dismiss with respect to the derivative claims.  The parties shall propose redactions by 12/16/2019 and file a joint status report in which they propose further proceedings by 1/10/2020," according to notations on the docket sheet.

 

It appears Judge Sweeney was prophetic when she said "we'll have many days in court," at line 12 of page 255 of the hearing transcript from Nov. 19, 2019. 

I am not sure what this means in terms of the big picture. But Sweeney did not sound like she would be happy rewarding post-nws buyers. Perhaps her ruling reflects this?

[DRValue]

Anybody see a scenario where some classes of junior prefs (those with high dividend rates) are converted at or near par, and some (low dividend rate) are not converted at all and simply left alone/ignored?  Maybe this happens through Admin action and/or a legal settlement, maybe they claim some classes are not convertible, maybe the conversion dates outlined in the prospectus don't align with the plan, etc.  Thanks in advance for your opinions.

 

Depends what the offer is. If the offer is good rational people will vote for it. The best offer should be aimed at the higher rate prefs, unless it's a global offer in which case higher rates may not accept unless they don't want to be called.

[Guest cherzeca]

Anybody see a scenario where some classes of junior prefs (those with high dividend rates) are converted at or near par, and some (low dividend rate) are not converted at all and simply left alone/ignored?  Maybe this happens through Admin action and/or a legal settlement, maybe they claim some classes are not convertible, maybe the conversion dates outlined in the prospectus don't align with the plan, etc.  Thanks in advance for your opinions.

 

Depends what the offer is. If the offer is good rational people will vote for it. The best offer should be aimed at the higher rate prefs, unless it's a global offer in which case higher rates may not accept unless they don't want to be called.

 

each junior class will be made an exchange offer together with a coercive exit consent. if 2/3rds of a class accepts, then those not accepting and remaining will be whacked by the consent that will likely eliminate divs for that class.  so to get 2/3rds to accept of each class, the exchange offer has to be attractive. if less than 2/3rds of any class accepts offer, that class will remain outstanding and unchanged

[DocSnowball]

W/ Sweeney there are two separate claims being made. 1) Derivative claim, if Ps win that it would be the same as winning the APA claims, excess payments would flow back to the GSEs or a write down of the senior pfds. In this situation the claims traveling issue isn't relevant. 2) Direct claim, if Ps win here, whether claims travel or not matters. Luckily for us I believe this is already established law w/ securities, and if she asks the district court to opine, Lambert already ruled on this issue last year. He made it clear all claims travel (see bottom of page 17 from last years ruling, https://gofile.io/?c=z5mtXw). Ps can further argue that every NWS payment since 2012 is a new takings if it really comes to that. I wouldn't lose sleep over the claims question.

 

 

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

 

thanks for posting allnatural.  if this comes to pass, very favorable.  as to whether subsequent-to-NWS stockholders acquire litigation standing when they acquire shares, it is not surprising that this might be undecided in ct of fed claims in the takings area, as there haven't been many transactions affecting stock like the NWS, to say the least.  Sweeney "should" be able to handle that question as the injury done by the NWS is done with respect to the share rights that the shares confer on the shareholder so that the identity of the shareholder should not matter, but she may feel better if the appeals court handles it (I mean, trial courts should be able to handle novel questions in the first instance knowing there is opportunity for review).  so either way, there is treasury exposure going forward, but much more damages potential if all current shareholders have standing.

 

@cherzeca and others understanding the legalities: Thank you for your very insightful comments to date. I have two questions. Does the derivative claim going forward mean that any reparations may end up going to the GSEs? If this is the case, I think it is favorable to individual shareholders like us because greenmail during settlement is less of a concern, or even when one purchased the shares, since money (or tax credit) is flowing back to GSE capital restoration. Secondly, how does Lamberth's breach of covenant ruling factor in to this where he wrote that FHFA did not fulfill it's fiduciary duty to shareholders when negotiating the third amendment with Treasury?

[ValueMaven]

Im finally starting to realize that - WOW - this was a big deal.  Blew up in the govt face.  I just wonder what the govt can block in discovery???

 

-VM

[Guest cherzeca]

Im finally starting to realize that - WOW - this was a big deal.  Blew up in the govt face.  I just wonder what the govt can block in discovery???

 

-VM

 

well, actually, discovery has been performed...

[ValueMaven]

Im finally starting to realize that - WOW - this was a big deal.  Blew up in the govt face.  I just wonder what the govt can block in discovery???

 

-VM

 

well, actually, discovery has been performed...

 

Ok then - how big of a deal then was Friday nights news?  Seems to me FHFA and Treasury are playing with a ticking time-bomb

[Luke 532]

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at.

 

It's clear that they're putting a lot of resources into the saga, though.

 

my problem with ACG is that like any other consultant that advises clients for a fee, it must not give away to the public what it charges its clients.  but it can't seem to keep form hitting the twitter button, halfway as it were, with tidbits that it doesn't want to elaborate upon...which leaves non-clients not knowing the whys and wherefores, or whether what they think makes sense

 

Agreed.  It's tough to know whether they are offering guesses/predictions based on information they have heard vs. concrete facts based on what they have heard.  I am guessing the former.  With that said, David Metzner said this earlier this morning...

 

The key to the Settlement will be the overpayment being credited back to the #GSEs as a prepaid asset for future commitment fees. Means less capital to raise. #housingfinance

 

Seniors will be deemed paid back.

[DRValue]

Just remind me how the treasury gets to keep any nws dividends above principal if you can't pay divs in conservatorship?

[Guest cherzeca]

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at.

 

It's clear that they're putting a lot of resources into the saga, though.

 

my problem with ACG is that like any other consultant that advises clients for a fee, it must not give away to the public what it charges its clients.  but it can't seem to keep form hitting the twitter button, halfway as it were, with tidbits that it doesn't want to elaborate upon...which leaves non-clients not knowing the whys and wherefores, or whether what they think makes sense

 

Agreed.  It's tough to know whether they are offering guesses/predictions based on information they have heard vs. concrete facts based on what they have heard.  I am guessing the former.  With that said, David Metzner said this earlier this morning...

 

The key to the Settlement will be the overpayment being credited back to the #GSEs as a prepaid asset for future commitment fees. Means less capital to raise. #housingfinance

 

Seniors will be deemed paid back.

 

ROLG's twitter reply:

[Midas79]

With ACG, it's hard to tell how much they know from inside sources versus how much they're just making educated guesses at.

 

It's clear that they're putting a lot of resources into the saga, though.

 

my problem with ACG is that like any other consultant that advises clients for a fee, it must not give away to the public what it charges its clients.  but it can't seem to keep form hitting the twitter button, halfway as it were, with tidbits that it doesn't want to elaborate upon...which leaves non-clients not knowing the whys and wherefores, or whether what they think makes sense

 

Agreed.  It's tough to know whether they are offering guesses/predictions based on information they have heard vs. concrete facts based on what they have heard.  I am guessing the former.  With that said, David Metzner said this earlier this morning...

 

The key to the Settlement will be the overpayment being credited back to the #GSEs as a prepaid asset for future commitment fees. Means less capital to raise. #housingfinance

 

Seniors will be deemed paid back.

 

ROLG's twitter reply:

 

Using the royal third person?  ;)

 

I think you're underestimating the line of credit amount, though. Right now the undrawn amounts are $110B for Fannie and $140B for Freddie if I remember right. Given the relative sizes of the companies, I would expect Fannie's to go up by $100B if Freddie's stays the same. That would make the total undrawn amount $350B, and 50 bps on that is $1.75B. It would still take 14 years for that to add up to $25B, but that's more reasonable than 50 years. The time value of money doesn't have as great an effect over a 14-year span.

 

We could also see something crazy like an increase of the credit limit to $500-600B. This sounds outlandish, but it essentially becomes an explicit guarantee while raking in more cash for Treasury each year without materially increasing Treasury's risk; the last $150-250B of that fund would have a vanishingly small chance of ever being needed.

[Guest cherzeca]

@midas

you make a very interesting point.  treasury has twice raised its maximum commitment by amendment to the PSPA and HERA simply says that all amounts advanced under the PSPA shall be deemed appropriated by congress; congress gave treasury a blank check in HERA.  so I think you are right, the commitment could be raised substantially (and this would make some sense since congress is not going to agree to guarantee mbs). and I agree with your point re my usage of $100B as the continuing line; it will not be reduced below what it is now.

 

@DR

dividends not permitted by PSPA without treasury approval, and yes treasury approves of its own receipt of dividends

[Luke 532]

Sweeney decision... commentary below from Peter Chapman.

Under seal, Judge Sweeney issued an opinion and order (Doc. 447) this evening "granting in part and denying in part" the government's motion to dismiss.  "The court grants defendant's motion to dismiss with respect to the direct claims and denies defendant's motion to dismiss with respect to the derivative claims.  The parties shall propose redactions by 12/16/2019 and file a joint status report in which they propose further proceedings by 1/10/2020," according to notations on the docket sheet.

 

It appears Judge Sweeney was prophetic when she said "we'll have many days in court," at line 12 of page 255 of the hearing transcript from Nov. 19, 2019. 

I am not sure what this means in terms of the big picture. But Sweeney did not sound like she would be happy rewarding post-nws buyers. Perhaps her ruling reflects this?

 

Ok then - how big of a deal then was Friday nights news?  Seems to me FHFA and Treasury are playing with a ticking time-bomb

 

Subsequent e-mail from Peter A. Chapman...

Everything is under seal at this time.  Put your dancing shows on.  This is a huge win for GSE shareholders.  It's a Wow! moment that feels really, really good.  It could also add up to a judgment directing the government to pay shareholders nothing years from now from the U.S. Court of Federal Claims if administrative reform isn't completed.

[ValueMaven]

Thank You!

[Mephistopheles]

Anybody see a scenario where some classes of junior prefs (those with high dividend rates) are converted at or near par, and some (low dividend rate) are not converted at all and simply left alone/ignored?  Maybe this happens through Admin action and/or a legal settlement, maybe they claim some classes are not convertible, maybe the conversion dates outlined in the prospectus don't align with the plan, etc.  Thanks in advance for your opinions. 

 

 

Also curious about this. Technically they're all pari passu but as others mentioned we need 2/3 of each class to agree on a deal to convert to common. What is your thinking behind this and which classes do you own? I tend to own the cheapest ones as a % of par which happens to be a few of the Freddie prefs but maybe I should trade in for some FNMAT.

[Wiggins]

Some of the variable rate JPS have such a low dividend rate that it would make sense to just leave them outstanding and pay their dividend. One such example is FMCCL which has its dividend calculated as the 5-yr CMT rate, currently 1.54%. If dividends were reinstated this would trade below par. There are about 10 others across the GSEs that are like this.

 

One way they could both incentivize conversion into common AND take into account dividend rates would be to offer a conversion based on a fixed percentage of par plus a fixed number of yearly dividends (e.g. 60% par plus 6 years of dividends). Thus, most of the JPS would be valued around par (between 90-110%) with the higher coupon JPSs being rewarded a little more. Just a thought.

[Luke 532]

Did U.S. steal $300 billion from investors in ‘coercive’ takeover of Fannie Mae, Freddie Mac?

https://www.inquirer.com/columnists/fannie-mae-freddie-mac-mortgage-refunds-20191209.html?outputType=amp&__twitter_impression=true

 

 

[Luke 532]

Some of the variable rate JPS have such a low dividend rate that it would make sense to just leave them outstanding and pay their dividend. One such example is FMCCL which has its dividend calculated as the 5-yr CMT rate, currently 1.54%. If dividends were reinstated this would trade below par. There are about 10 others across the GSEs that are like this.

 

I wonder if it's plausible for the gov't to convert some series of jr prefs to common, and simply turn on the dividends for other series of jr prefs?  In other words, treating various series of jr prefs different than others.

[Guest cherzeca]

Some of the variable rate JPS have such a low dividend rate that it would make sense to just leave them outstanding and pay their dividend. One such example is FMCCL which has its dividend calculated as the 5-yr CMT rate, currently 1.54%. If dividends were reinstated this would trade below par. There are about 10 others across the GSEs that are like this.

 

I wonder if it's plausible for the gov't to convert some series of jr prefs to common, and simply turn on the dividends for other series of jr prefs?  In other words, treating various series of jr prefs different than others.

 

if there are any outstanding juniors that are cheaper than what would be issued by GSEs in today's rate environment then it would make some sense to leave them outstanding...unless for some reason the GSE financial advisors don't want any prefs outstanding (I wouldn't know why if they are cheap)

[Luke 532]

 

I wonder if it's plausible for the gov't to convert some series of jr prefs to common, and simply turn on the dividends for other series of jr prefs?  In other words, treating various series of jr prefs different than others.

 

if there are any outstanding juniors that are cheaper than what would be issued by GSEs in today's rate environment then it would make some sense to leave them outstanding...unless for some reason the GSE financial advisors don't want any prefs outstanding (I wouldn't know why if they are cheap)

 

That's a good point.  A possible counter-point, not that I necessarily agree with the strength of it, could be that if the gov't leaves them outstanding then they wouldn't count towards Tier 1 cap. They'd also have to pay out dividends, albeit just 1.54%, but that would be money leaving the company when they're trying to raise capital levels. Again, not saying I think the counter-points are necessarily a strong argument, just mentioning them.