Fannie Mae (QB) (FNMAM) News

HOWEVER I refuse to believe that it would be in the governments best interests to keep pref holders intact then go ahead and dilute common holders and THEMSELVES to nothing when the alternative would be to enrich themselves and common holders.

SPS-to-common conversion enriches Treasury and does not enrich legacy common holders.

That's the weak link in Ackman's common investment thesis. The only possibility he saw was Treasury exercising the warrants which would align Treasury's interests with those of the legacy common. An SPS conversion puts those interests in opposition, and guess who would win that fight?

Government can hold 100 billion common shares but if they are worth 1 penny each no one wins

If the shares really do go to a penny, Treasury would have a lot more than 100B shares. Treasury's stake will be proportional to earnings, P/E, and what percentage of the commons Treasury ends up with. The market price will be a function of those, not a determinant.

Why wouldn’t they seek a win win where they write off SP as paid in full and sell their warrants with a price tag in the hundreds of billions and shareholders can enjoy some profits finally.

Because Treasury wins even more by converting the SPS.

They’ve held shareholders hostage for almost 2 decades there is no reason to screw everyone over.

They've held shareholders hostage for almost 2 decades there is no reason to do anything different now

This post deserves a sticky. It succinctly lists the facts and would help people avoid incorrect conclusions.

The SPS LP grows to $350B by next year. At that time, the SPS agreement gets re-written to cap the LP at that amount, and future earnings go to the GSEs without a corresponding dollar to LP. This finally ends the NWS.

I would suggest that the 10% divvy on the $350B LP can be reduced to a lower percentage, something more in line with an appropriate "guarantee fee" percentage. But the Charter Act prevents this. So let's go with zero percent dividend on the SPS. No need for Congress to change anything. Treasury holds 1M Senior shares, with just a LP and no dividend. This becomes their safety net - should they need to swoop in and liquidate the GSEs in the future, they hold $350B of LP. Warrants are not needed, and are left to expire.

Why on this green earth would Treasury choose to do this? It would run counter to everything they have done before. The LP ratchet itself is in place as a return consideration to Treasury for allowing FnF to keep their net worth.

At the very, very least Treasury would do what you say but exercise the warrants instead of canceling them.

Is this possible? Technically yes. But given all the evidence we have there is no reason to assign more than a token probability to it. What matters are numerical probability estimates, not just possibilities. Hope is not a strategy.

Another big flaw in this plan is that FnF would still need until 2040 to reach their required regulatory capital levels for release. With a 0% div rate Treasury would presumably be okay with the SPS reclassified to non-cumulative, which would fix the core and Tier 1 capital holes, but no form of preferred shares (either cumulative or non-cumulative) count towards CET1 capital, which is one of the capital requirements FnF must meet to be classified as "adequately capitalized" by HERA and is the requirement for exit set in the January 2021 letter agreement.

For FnF to meet the CET1 requirement before 2040, the SPS must be written down, converted to common, or some combination of both.

I believe that the Twins are now too big to kill. There is no other alternative for what they do in size and scale.

Don't conflate killing the company with killing the common shareholders (via dilution to near nothing).

The former is not possible without receivership. The latter is trivial, even in a recap/release scenario.

Between the two approximately $138 billion dollars now in equity!!

All (and more) of which is spoken for by the senior preferred shares.

GSE's capital levels are already sufficient.

No, their regulatory capital levels are hugely negative.

Stress tests have been passed for several years.

Irrelevant. The stress tests have nothing to do with regulatory capital levels.

FHFA invented the "valuation analysis" to make it look like they may not pass the stress test.

What "valuation analysis"?

Without the "valuation analysis" USG has no reason to keep them in C-ship.

No, the reason FnF are still in conservatorship is that their regulatory capital levels are far, far below what the regulations call for.

In the meantime, where does the windfall go? Yep, to Treasury!

In the eyes of the politicians that Layton referred to, when the money goes to Treasury it isn't a windfall because Treasury is the one who bailed FnF out.

Heaven forbid the legal shareholders of the company receive any of the profit.

The "windfall" thing is not a legal issue, it's a moral/political issue. The argument goes like this: the vast majority of FnF's shareholder base has turned over since the conservatorships started, so why would vulture investors who bought at distressed prices be entitled to a windfall? All politics is envy, FnF's release from conservatorship is a highly political process, and many politicians feel that shareholders who bought in after the conservatorships started deserve nothing.

This is exactly the sort of political fallout that a senior pref writedown could trigger, as Mnuchin told Calabria.

Wait... Isn't there a reasonable expectation to reap in the company profits embedded in the Shareholder agreement? Wasn't there a jury verdict that the Govt should not breach the good faith and fair dealing with Shareholders?

The thing is, one result of the jury verdict is that FnF have now been essentially indemnified from any further frustrations of shareholders' ability to profit from their investment. The NWS already extinguished all economic rights of the common and junior pref shareholders; any further action by the government cannot make things any worse.

You keep thinking that the jury verdict is somehow potentially the start of shareholder-friendly rulings when in fact it is much more likely to be the end.

The sooner the litigation is over the better.

I totally agree. The Supreme Court's rulings that the NWS was legal (not ultra vires) and also was not a takings (by denying cert on the takings cases that were dismissed) plus the Litigation End Date language in the January 2021 letter agreement should make it obvious that court cases are not going to factor into FnF's eventual release from conservatorship.

The best thing that all plaintiffs (other than the Lamberth class action) could do now to streamline the process is to just drop their cases. The chances of winning are so slim that it isn't worth holding out for some Hail Mary.

Whatever the case may be FHFA is DIRECTLY telling us and everyone else they are NOT going to end the c'ship and are specifically telling Congress they must do so. I don't know how much clearer they can be telling us they are NOT going to budge from this position.

I agree. Sandra Thompson is mirroring Mel Watt's stance.

If Biden wins the election in November I would put recap/release timing at 2029 at the earliest.

Conservatorships happen all the time. Like it or not they are analogous with Chapter 11 bankruptcies, except that in Chapter 11 shareholders actually have rights.

It's rather funny that some people here contort themselves into knots trying to distinguish the conservatorships from Chapter 11 bankruptcy, not realizing that the only ways in which they differ are bad for existing common shareholders.

For someone who values semantics, you should note that JPS have a redemption value for when they get called. It happens to be the same as their liquidation preference, except for FNMFO.

They have a stated value, a redemption value, and a liquidation preference. They are all the same except that the stated value doesn't include accrued dividends (which I don't expect to ever matter). The FnF investor community calls this "par" even though it's a misnomer. I also call it "par" because it's much easier to type and effectively communicates what I mean.

I agree this could be the long term method that Treasury was hoping for, but it's problematic. First, because the dividends on the SPS are a huge windfall, likely to be in excess of $30B per year and not in line with what a "reasonable" funding commitment fee should be.

When I said that I expect the senior prefs to remain in existence I meant at a LP of $1B, not the >$300B LP they have today. The reduction in LP would happen alongside the conversion or writedown.

Second, because the Charter Act, which is the actual law - prevents a commitment fee from being charged. FHFA may be able to do what they want and ignore laws at the moment, but I don't think that will become status quo.

This is an opinion being presented as a fact. I highly doubt the lawyers who drafted the original SPSPAs would have included a commitment fee on the funding commitment if it were so obviously illegal. I trust their judgment far more than the armchair lawyers on this board.

So if I were to get Calabria in a room and ask him point blank to his face:

"Do you have any evidence that shows writing down the SPS LP is illegal?"

What do you think he will say?

I think he would say that he already answered your question in his book. Your unwillingness to take Treasury's words at face value doesn't extend to him.

My money would be on "Well no, but that is what I was told."

You expect Calabria to agree with your interpretation that something that was told directly to him doesn't count as evidence? I can't agree with that.

Unless you think he did research and validated that there is a law behind what he heard?

Maybe, but I doubt it. He wouldn't have any reason to believe that he was being lied to.

You think he'll enlighten me when I corner him in a room?

Maybe. With you up in his grill he might be less than inclined to answer your questions. He is active on Twitter, though; perhaps he would answer you if you asked him there.

Is the court saying the FHFA can do illegal things?

No.

I think the inference is that it can perform any *legal* act in it's own interests.

Yes. The Supreme Court ruled that the NWS was not ultra vires, and thus not a violation of the APA. It said that FHFA can use its power to act in its own interest to override other duties HERA imposes on FHFA, like their obligation to conserve and preserve FnF's assets. A true "elephant in a mousehole" ruling that made no sense, but there is no higher court to appeal to.

So the inverse is also true. Every dollar that is taken from the common shareholders as the result of the senior preferred write-UP, could remain with Common shareholders if they chose to stop stealing the equity.

"Stealing" is just your word, not FHFA's or Treasury's. How does one "steal" equity anyway?

You seem to get the point, though. Treasury and legacy common shareholders are fighting over the same pot of money. One side has all the power and the other has none. I would buy the SPS myself if I could, but I'm sure as hell not going to count on the side with no power coming out with any more than they are allowed to.

The absurdity of the NWS (cash or LP) must be lost on you.

I do think it is absurd that Treasury got away with it, but given their actions all along I am not all that surprised that they tried it.

At what point does the government get to take every profit dollar from a company or citizen, and add it to their books as an accounting entry?

Trust us - we're from the Government... We'll let you keep a dollar if you owe us a dollar in the future.

Brilliant! Let's just do that with every American company and watch our National Debt melt away like magic!

Classic strawman. FnF are a very special case: when the LP ratchet started, Treasury already had the rights to every penny of profit FnF would ever make. They took a downgrade in that deal because $1 of LP is worth less than $1 of cash, even if you don't take the time value of money into account.

The FnF situation does not even come close to applying to any other company out there. Stop acting as if it does.

You don't think it's likely that someone at Treasury would make a misleading statement to get what they want? Really?

I think that's less likely than the possibility that they were just telling the truth. Especially in the light of incentives: converting the SPS gives Treasury far more of what they want than writing them down does.

Or concrete evidence that writing down the LP is illegal, such as a statue, executive order, past ruling/case law, or official word from DOJ - not a recollection of a conversation from years prior, and from only one side of the conversation.

Once again you are demanding an extremely stringent standard of evidence from Calabria and Treasury while out of the other side of your mouth are giving blanket agreement to other posters without questioning them.

It is obvious by now that you just don't want to admit to the real evidence that is right in front of you: Treasury is far more likely to convert the SPS than write them down.

That means exactly zilch for determining the legality.

We have been over this already. It isn't about what really is legal or not, it's about what Treasury thinks is legal or not. Treasury will act based on what it believes is true.

Not words said in a conversation, meeting, phone call, video chat, or written memoir.

Calabria's account IS evidence. Not in a court of law sense, but this is not a court of law. What Calabria said directly pertains to the possibility of a SPS writedown and shows what Treasury's thoughts were on the matter at the time. In the absence of any further evidence, there is no reason to believe that it is likely that they have changed their mind.

No. First because Treasury is an entity and not a person. Second, what a person thinks is irrelevant unless they are in a position to act on bad information and nobody advises them of their error. Third, because anything that is not overtly illegal is by definition, legal. So barring any evidence that writing down the LP is illegal, it is by definition... Legal.

1) Meaningless semantics.
2) Nonsense. What Mnuchin thought was highly relevant. If he thought writing down the SPS was legal then he could have easily done so at any time. There would have been no need to make the equal conversion offer to the junior pref holders.
3) It's not nearly that cut and dried. Laws have interpretations: that's why courts exist. Just about every FnF investor ever thought the NWS was illegal but the Supreme Court disagreed.

The difference is that some are blinded by what they *think* will happen, ignoring other possibilities.

The difference is that some people, like me, actually put forth a number for things like the chances that Treasury converts (75%) or writes down (25%) the SPS. Most others just list possibilities without assigning numbers to them, which is completely useless when deciding whether to buy, sell, or hold at current prices.

But players are reluctant to relinquish their pick because that's the path they chose. The closer they get to the end, the more they think their pick is right.

That's just the endowment effect, a well-documented phenomenon.

Even I would sell some juniors to buy commons if the prices diverged enough. The FNMAS:FNMA ratio hit 4.0 today; if it goes much higher I probably will do just that.

Calculated from my cost basis. As the market fluctuates, I need to adjust my ratios as I accumulate. I haven't accumulated since common went back over 0.65. I've averaged down to roughly $1.00 per common, and less than $0.068 per $1 of JPS redemption value (mixed $25s & $50s).

The 6.8% figure depends pretty heavily on if you're buying the most liquid series (FNMAS, FMCKJ), the least liquid (usually the 5-letter ones starting with FMCC), or somewhere in between. They have all done well recently though.

Yes, and not knowing how much of each of those will actually happen, I've positioned myself for as many variations as I can.

You can only position yourself one way. It will be a function of the different possibilities and probabilities you assign to those variations.

If junior come out ahead of common, I win. If common realizes a higher multiple than JPS, I win more. I don't think Common nor JPS are getting wiped. I think there is upside in both.

I suppose that depends on what you define "winning" to be. If the juniors outperform the common you would lose relative to owning only juniors and no commons. But differences of opinion are what make a market.

I don't think either class gets totally wiped, but a SPS conversion would cause there to be little upside, and perhaps substantial downside, from current prices.

You know what I agree. After doing my new calculations you are right.

100% correct. The "rule of law" has lost all meaning.

My Schwab account shows that post market FMCC jumped .07 and FNMA jumped .04.
That is highly unusual.

Go FNF.

Well, they've proven they are willing to break every standing law to screw us so why not? lol.

Well, today was no fun. Possibly opportunity on some chip stocks but I'd like to wait and see more about how Trump/Biden pursue the protectionism here. Could have a major impact on these stocks.

Oh wow. Sherwin Williams strikes again end of day.

The share price drop did not hurt post 3rd shareholders which is how they came up with $612MM (which is a joke) but they do not consider damage to shareholders at any time with the taking of $300 billion from the twins from 2012 through present. The cause of action has been wrong since the opening bell. Plaintiffs legal team is a shambles.

All I can say is that rights travel with the shares. They would have to unwind hundreds of years of law to do that. I’m sorry for your predicament but I believe that they don’t have a leg to stand on here. GLTA!!!!!

Likely, just a gas issue!

the conclusion on the last page “Defendants have steadfastly maintained that the share price drop did not cause any injury to post-Third Amendment purchasers”

when you flip it, doesn't it mean they admit that pre Third Amendment purchasers were caused injury. does it?

if this holds, they pretty much don’t payout anything as all of pre 3rd amend purchasers have exited imo.

isn't there a law that rights travel with shares? can someone cite it? they appear to make a case but i didn't bother to read, just jumped to the last page as always

Not a lot. 16,000 between the 2 in commons. I think around double that counting prefs.

Someone is keeping the price fixed at $1.46 and will not let it go up. Big time manipulation.

Dow keeps going up and up and we keep going down and down. Yup.

The design of that article is to get common holders to sell (weak hands)
so SA's insider friends can buy in to commons cheap

how many shares do you have now?

Bought another 1,000 Fmcc at 1.36. I’m not worried.

guess that depends on your own risk tolerance and perspective on mechanics and outcomes.

i actually think that this article was fairly well written

generally outlines a reasonable perspective

i owned commons many years ago, but my perspective evolved based on the legal rulings being overwhelmingly disappointing

I would ask that question after Lamberth either pays the plaintiffs or screws them

Hope so. Looking pretty bloody right now.

SHOUld us COMMINS BE CONCERNED THAT PREFFEREDS WOULD GET PAID AND MAYBE COMMONS GET LEFT HOLDING THE BAG??
(Please read)

https://seekingalpha.com/article/4704478-fannie-mae-preferreds-a-safer-choice-than-common

FNMA closed at $1.13 on 6/21/2024

its a really dumb angle for any logical discussion where somehow they create value by destroying commons just so preferreds can get rich with institutional investors saying, wow, we got a hosed down commons, what a value. the concept is so oblivious on how wall street works. as a matter of fact when they brought WS consultants in, they were confused when that dumb concept was proposed to them(which included dilluting commons to infinity). wall street is much smarter than the local Ps or even useless FHFA anyone.

Yes these bastards have been shaking the tree for sometime !!

Don't bother with the Seeking Alpha article. He's a retired reporter and former editor for the San Francisco Chronicle with an MBA. In other words, just another government approved mainstream media hack ex-journalist with an opinion looking for accolades. I read the article, there is ABSOLUTELY NO NEW or even worthy analysis in it; it's the same garbage you've been reading for years - much of it spewed here by preferred holders.

The article from SA just reiterates what those of us holding pref shares have been saying. HOWEVER I refuse to believe that it would be in the governments best interests to keep pref holders intact then go ahead and dilute common holders and THEMSELVES to nothing when the alternative would be to enrich themselves and common holders. Government can hold 100 billion common shares but if they are worth 1 penny each no one wins. Why wouldn’t they seek a win win where they write off SP as paid in full and sell their warrants with a price tag in the hundreds of billions and shareholders can enjoy some profits finally. They’ve held shareholders hostage for almost 2 decades there is no reason to screw everyone over.

No worries. The whales were summoned early this morning with the whale horn. They are en route as we speak. We should close in the green.

Bradford's SA bs: "While Fannie is now retaining profits".

.

You got that Whale Horn fixed? We have a need!!!

Yes it is called Bradford.

Is Vlae Kershner a pseudonym for an IHub poster?

Omg, so is there a next date?

I cannot remember I thought there was something around the 23rd?

You forgot the disclaimer: a shill for the hedge funds' government theft story.

Gov final Reply in Lamberth Case ...

+ plus the Seeking Alpha Article below:

https://storage.courtlistener.com/recap/gov.uscourts.dcd.160910/gov.uscourts.dcd.160910.436.0_1.pdf





*******************************************************************************************************************************

Fannie Mae Preferreds: A Safer Choice Than Common

Jul. 17, 2024 1:45 AM ET

...... Summary .......

--- Fannie Mae is likely to be recapitalized in the event of a Donald Trump victory.

--- The value of the common stock would be highly uncertain in a recap, but preferred issues
are likely to be redeemed or converted at face value.

--- The three most liquid preferred have compounded average annual returns above 100%
in the base scenario.



The last few weeks have seen renewed interest in the stocks of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC). The government-sponsored enterprises have been the Schrodinger's cat of the market, alive and dead at the same time, since the mortgage insurers were taken into conservatorship during the 2008 financial crisis.

SA analyst Chris DeMuth Jr. recently highlighted the GSEs as a good way to bet on a Donald Trump election victory because of the likelihood they would be recapitalized and released to private investors--turning the zombie cat into a roaring kitty.

Rather than echo his arguments, I will address the differences between common stock and the various preferred issues, focusing Fannie Mae since I've followed it for at least 25 years.

Common Has Negative Equity

The reason the preferreds carry less risk in the event of a successful recapitalization is found on the balance sheet. The GSEs were prohibited from accumulating equity by the Obama administration. Instead, all profits were subject to a net worth sweep, in which the Treasury Department confiscated profits in return for implicitly guaranteeing the GSEs' debt in case of failure.

As a result, Fannie showed negative common equity of over $130 billion until the Federal Housing Finance Agency reversed the policy under Trump's director, Mark Calabria. While Fannie is now retaining profits, common equity still stands nearly $58 billion underwater.

Balance sheet of Fannie Mae



Preferred equity, which is divided between the government and private investors, shows a positive balance of $139 billion. It is senior to the common. Under any normal reorganization plan, for common shareholders to get anything of value, preferred issues would have to be made whole first, either by being redeemed at par or by being converted to common. (Caveat: Nothing is normal about this situation.)

Calabria, an advocate of recapitalizing and releasing the GSEs, was replaced by the Biden administration, which has not reimposed the net worth sweep but has taken no steps toward release.

Calabria explained his views that the net worth sweep was illegal and release is legally necessary as well as desirable in a June recorded interview with Bloomberg. An especially relevant portion begins around 30:30 of the audio.

When people ask me, you know even in a Trump term, it's not going to be a 2025 exit. 2026, '27 is more likely."

Interviewer: "Do you feel that the 2028 warrants are a meaningful deadline?"

Calabria: "No. (Laughs). The reason it's really not is if you look at the total value pie for Treasury, it's a rounding error. The value really is in the senior preferreds..."

To understand what he's saying, it's important to know the government owns warrants to buy 79.9% of the common stock, which expire Sept. 7, 2028. The government also owns senior preferreds that were issued to support FNMA during and after the financial crisis. Investors own about $35 billion in junior preferreds. These are senior to the government's common warrants and thus cannot be diluted if they are issued, unlike the common stock.

So what Calabria says about the Treasury's shares would also hold true for those held by investors--most of the value is in the preferreds.

Release Scenarios

In 2020, the Congressional Budget Office released an analysis of three release scenarios, with optimistic, median, and pessimistic assumptions.

In some scenarios, the GSEs would raise enough from the common-stock sale to achieve three goals: meeting their capital requirements, redeeming their outstanding senior and junior preferred shares, and providing the Treasury with some value for the warrants it received from the GSEs. (Those warrants give the Treasury the right, though not the obligation, to buy common stock in the GSEs for a nominal price in the future.)

The middle of these scenarios called for redemption of approximately $35 billion in outstanding junior preferreds but ascribed a value of zero to $100 million to the common stock warrants owned by the government, which implies that the investor-owned common shares would be worth less than $20 million.

That's not to discount the possibility of a good return on the common. One possibility is that current shareholders will receive rights to buy new shares, which like many IPO's could be at a favorable price.

Also, if recent profits continue, common equity would turn positive around 2028, and existing shares would have a positive book value. And unlike the preferred, there's no theoretical limit to the value of the common.

However, the preferreds have to be taken care of before any recapitalization can take place, and thus offer a better chance of success. The common stock is more of a bet on a Trump victory and could be risky after the election even if he wins.

Which Preferreds To Buy?

Fannie Mae has 15 issues of preferreds that are trading over the counter, according to Quantum.

Most of them do not trade a lot of shares. By far the most liquid is FNMAS, with average daily volume of 471,000. Others with fair volume are FNMAT (63,000) and FNMFN (65,000).

Let's use FNMAS as an example. It recently closed at $5.55, or 22% of face value of $25. If investors purchased 1,000 shares for $5,550, and it was redeemed for face value in July 2026, they would receive $25,000, for a compound annual growth rate of 112%.

Other issues would give even greater gains, as there is a tradeoff between return and liquidity. FMMAT would have a compound annual growth rate of 127% under the same assumptions. FNMFN is at 147%. Some of the others are still higher, but stocks with low liquidity are not recommended for most investors.

If instead of redeeming the preferreds, the reorganization plan calls for resuming quarterly dividends, the calculations would be different. This does not appear likely, however, as 8.25% fixed coupon on FNMAT and the variable rates on FNMAS and FNMFN represent higher-cost capital than a huge, well-capitalized financial Fannie should need to pay. All of the securities are non-cumulative, so there will be no payment of arrears.

Risks

Re-election of President Biden likely would mean a continuation of the "dead" version of the cat and a tumble in both common and preferred prices. Even if Trump wins, there are various legal and regulatory obstacles to completion of recapitalization. A serious recession that freezes the mortgage or IPO market could make recapitalization untenable before the 2028 election.

Conclusion: FNMA should continue to do well through Election Day as long as there is anticipation of a Trump victory, but its value in a recapitalization plan is speculative. FNMAS, FNMAT, and FNMFN are recommended for investors who can afford to take risks.

This article was written by - Vlae Kershner

Cartel fraudsters @USTreasury & @FHFA have scammed U.S. citizens and corporations more than all the Mexican fraudsters combined.

If US isn’t a 🍌REPUBLIC…
RETURN THE STOLEN FUNDS!
FREE FANNIE!
FREE FREDDIE!— Guido da Costa Pereira (@GuidoPerei) July 17, 2024