Marcus Fahey

$FNMA | $TSLA | $XLE | $IONQ | $TSM | $NVDA | $LLY | $GOOG | $MRVL | $NOW | $ONDS | $ASTS |

*Not financial advice*

[Marcus Fahey @TheMarcusFahey]

Thank you, @BillAckman!

The Fannie Mae conservatorship makes you question the America we are living in.

[Bill Ackman @BillAckman]

A number of press reports have characterized our and other shareholders’ efforts on behalf of Fannie and Freddie (F2) as seeking a ‘gift’ or ‘handout’ from the government. We, the shareholders of F2, seek no such thing.

Hundreds of financial institutions were bailed out during the GFC by the U.S. Treasury. Nearly all of the financial institution bailouts during the GFC involved an injection of capital in the form of senior preferred stock by Treasury at an interest rate of 5%, plus warrants to acquire common stock in an amount equal to 15% of the face amount of the preferred with an exercise price at the then-current stock price of the rescued institution.

For example, Treasury’s preferred stock investment in Goldman Sachs was in an amount of $10 billion and, in addition, Treasury received warrants on $1.5 billion of GS' common stock at its then market price.

The bailout terms for F2 were materially more burdensome and expensive, with a higher interest rate and substantially more warrant coverage, than that of every other financial institution (other than those of AIG whose terms were similar). Despite the F2 bailouts’ massively more burdensome terms, shareholders are not complaining about the original terms.

Treasury invested $193 billion in F2 in the form of senior preferred stock (SPS), including funding for $2 billion of commitment fees, with a 10% coupon (twice that of the banks). Treasury also received warrants on 79.9% of both companies’ outstanding shares.

Fannie and Freddie have since repaid Treasury $301 billion, which includes interest on the SPS at a blended rate of 11.6%, an interest rate which is 160 basis points more per annum, and have returned the entire $193 billion of outstanding principal, $25 billion in excess of what was contractually owed. In summary, the F2 SPS has been fully repaid according to its original contractual terms plus an extra $25 billion.

Despite the fact that the SPS has been more than repaid in full, Fannie and Freddie have not accounted for these payments on their respective balance sheets, and the $193 billion of SPS remains an outstanding liability as if no principal payments had ever been made.

How can it be, you might ask, if indeed F2 have repaid $301 billion to Treasury when only $276 billion was due could there be any remaining balance of the SPS on the F2 balance sheets?

The answer relates to something called the ‘Net Worth Sweep (NWS).’

During the second term of the Obama administration, on August 12, 2012, two quarters after F2 returned to profitability, Treasury announced that it was unilaterally amending the terms of the SPS stock to provide that Treasury would take 100% of the profits of F2 each quarter in lieu of the 10% annual dividend rate. This was not a negotiated resolution with F2. It was a unilateral amendment of the original terms of the SPS that was done in bad faith.

The supposed rationale for the amended terms of the SPS was akin to the IRS garnishing the wages of someone who will never be able to pay the taxes that they owe. That is, the Treasury said F2 will never be able to pay the 10% coupon, let alone the SPS’ $193 billion principal balance, so it decided instead to ‘settle’ for 100% of F2’s profits forever.

In discovery, shareholders learned that the stated justification for the amendment was false. In mid 2012, the Obama administration had come to learn that both companies would soon be reversing tens of billions of reserves on their balance sheets as housing values had increased and the reserves taken during the GFC had been excessive. The NWS was instituted by Obama to forestall F2 from forever being able to recapitalize and be released from conservatorship. The NWS was not a ‘settlement’ for a lesser amount of future payments. It was the outright theft of the forever profits of both companies.

Never before or since has the government ‘swept’ 100% of the profits of any company, let alone a financial institution in conservatorship, a form of government intervention where the goal is rehabilitation of the institution, and where the hierarchy of corporate claims has always been respected.

The accounting for the NWS payments while it was in effect (until Secretary Mnuchin terminated the NWS in Trump’s first term) was also unusual. The NWS was treated by F2 as a quarterly adjustment to the dividend rate on the SPS such that the dividend amount owed was made equal to the after-tax profits of F2 for that quarter with no limitation.

In other words, regardless of the amount of profit F2 generated for the quarter – whether or not it was in excess of the original 10% annual dividend – the dividend payable under the NWS was made equal to the quarterly profit. The absurd terms of the NWS sweep therefore made it impossible for any partial or full repayment of the SPS to take place as every dollar paid to the Treasury on the amended terms of the SPS was considered a dividend payment, even if the amount was massively in excess of the original contractual SPS terms.

The absurdity of the NWS was made clear just two quarters after the NWS went into effect. Fannie Mae generated a profit of $59 billion in the first quarter of 2013, and the SPS dividend rate for that quarter was set at $59 billion so the entire amount was swept to the government, more than 10 times the contractual dividend rate.

I had the opportunity to discuss F2 and the NWS with Warren Buffett about a decade ago and he said that he “couldn’t believe what the government had done.”

In short, the shareholders of F2 are simply asking the government to respect the original and highly burdensome terms of the SPS. There is no dispute that Treasury has received more than the original 10% coupon and full repayment of principal of the SPS, that is, an extra $25 billion.

We and the millions of other shareholders of F2 are simply asking the administration to honor the original SPS terms and properly account for the $301 billion of payments, thereby eliminating the SPS liability from both companies’ balance sheets.

Shareholders have not asked for the extra $25 billion to be returned to the two companies. Treasury can decide whether to keep those funds or return them to the companies.

Accounting for the repayment of the SPS has other important implications. Namely, it is critically important that conservatorships respect the rule of law, in particular, the contractual terms of corporate instruments and the hierarchy of claims. Otherwise, no financial institution that gets into trouble will be able to raise rescue capital in the private markets.

Notably, the treatment of F2 in conservatorship explains why Silicon Valley Bank and other recent large bank failures since the GFC were unable to raise private capital and avoid government intervention or a forced sale to J.P. Morgan. If the government with the stroke of a pen during conservatorship can at a whim wipe out common and preferred shareholders, no one is going to step in to try to save a financial institution that gets into trouble, and only the top few banks will be possible rescuers of big banks that fail.

Furthermore, because of F2’s history, their reputation in the capital markets has been greatly damaged. F2 raised $22 billion of preferred stock in the year or so prior to conservatorship as the government pressed both companies to raise capital. Institutions were willing to invest billions of dollars of capital into both institutions before they failed because, based on all precedent conservatorships, the contractual terms of all financial instruments and the hierarchy of claims had been preserved. Unfortunately, in light of the precedent of the net worth sweep, no investor can be confident that they won’t be wiped out in a future conservatorship so none has been willing to take the risk.

Some have proposed that Treasury simply convert the SPS into junior preferred and common stock and massively dilute shareholders. Putting aside the potential legal challenges to this approach, the result will be that Treasury will at best own something approaching 95% of both companies rather than 79.9%.

While the government’s percentage ownership stake would be larger in the SPS conversion approach, the value of the government’s larger stake would be considerably lower as the companies would become un-investable. Who would invest in F2 alongside the government when they just wiped out the previous owners?

In the SPS conversion scenario, the government’s stake, at best, if it could be sold, would trade at a massively discounted valuation, well below the value of the government's stake if Treasury retained only its contracted for 79.9% stake and respected the original terms of the SPS. In other words, a slightly smaller ownership stake of much more highly valued companies would equate to considerably more value for Treasury and taxpayers.

In a public letter to Rand Paul after his first term in November of 2021, President Trump recognized that the net worth sweep was theft from the shareholders of Fannie and Freddie. He wrote:

“Another Obama/Biden scam in legal trouble was when they allowed the Federal Housing Finance Agency (FHFA) to steal the retirement savings of hardworking Americans who had invested in Fannie Mae and Freddie Mac…The idea that the government can steal money from its citizens is socialism and is a travesty brought to you by the Obama/Biden administration. My Administration was denied the time it needed to fix this problem because of the unconstitutional restriction on firing Mel Watt. It has to come to an end and courts must protect our citizens.”

I couldn’t have said it better than President Trump.

Now that you have the time, Mr. President, let’s Stop the Steal!

[The Hormuz Letter @HormuzLetter]

BREAKING: Massive explosions reported at the Karun Petrochemical Complex and the nearby town of Mahshahr in Khuzestan Province, Iran's primary oil and petrochemical region.

[Insider Wire @InsiderWire]

#BREAKING: Israeli strikes in Iran were coordinated with the United States.

[Berniegirl No More @Hedgesgurl]

Just a reminder: You may notice gas prices inching down a bit. They’re now increasing the level of ethanol they put into our gasoline from 10% to 15%. Started May 1. This is really bad for our cars and will cause damage to our car’s fuel system due to corrosion.

[Marcus Fahey @TheMarcusFahey]

He’s insane if he goes, after tonight.

[Defiant L’s @DefiantLs]

Stephen A. Smith tells President Trump not to come to Madison Square Garden for Game 3 of the NBA Finals,

“He’s coming to Game three of the Finals, and I don’t want him there. It has nothing to do with politics, policy, or anything like that."

[Marcus Fahey @TheMarcusFahey]

Maybe this is his only way to save face and get out of there?

[Lauren Witzke @LaurenWitzkeDE]

This entire conflict has been eye-opening to many I hope. It’s obvious that we did not bomb Iran “for America” and that it was indeed a service done for Israel.. who, by the way, is in no way grateful or even appreciative of the U.S. soldier’s lives lost on their behalf.

To Netanyahu, it’s not enough. They don’t want peace and they don’t respect our President or his orders.

Time to pull the plug and get out.

[Marcus Fahey @TheMarcusFahey]

After a decade of Trump getting dragged through the mud in the media & in investigations, in the end, he bent the knee and sold out his own country for his own benefit. Complete cowardice.

[The Maverick of Wall Street @TheMaverickWS]

By striking Iran right after Trump told him no, Netanyahu is demonstrating that he has no respect to Trump or the United States

[The Hormuz Letter @HormuzLetter]

BREAKING: Iran launches a new major ballistic missile wave from multiple sites toward Israel, in retaliation for Israeli strikes on Iran a short while ago. Sirens are sounding all over central and southern Israel.

[Marcus Fahey @TheMarcusFahey]

So much for Benji heeding Don’s warnings

[BRICS News @BRICSinfo]

JUST IN: 🇮🇱��🇷 Israel confirms it has carried out strikes across multiple targets in Iran.

[Oil Co Intern @OilCoIntern]

Single women sway left with the peer group vibes

Dating a man? ‘I’m not really into politics’

Married? Quietly right-leaning while playing centrist

Then kids hit: Mom’s loading the family into the 6-ton grocery hauler with a ‘Protected by 2A and Prayer’ sticker, suddenly obsessed with the gubernatorial race

Many such cases

[Marcus Fahey @TheMarcusFahey]

👀

[The Kobeissi Letter @KobeissiLetter]

BREAKING: South Korea’s stock market has been halted after falling -8.4% at the open.

[James Chanos @RealJimChanos]

This isn’t even remotely true. $AMZN went public in 1997 at a $450M valuation, or 3x revenues. $GOOGL went public in 2004 at a $23B valuation and at 7x revenues. $META had a $104B valuation in 2012 at 20x revenues(and immediately sold off almost 50%). SpaceX dwarfs these numbers.

[Marcus Fahey @TheMarcusFahey]

Do it.

[The Halfway Post @HalfwayPost]

BREAKING: National security experts are warning that, with Jared and Ivanka having so much money tied up in their now frozen Albanian island resort, Kushner is an extreme blackmail risk because his Saudi and Emirati investors can withdraw their money and bankrupt him at any time.

[Marcus Fahey @TheMarcusFahey]

Give me a break.

[The Kobeissi Letter @KobeissiLetter]

BREAKING: S&P 500 futures erase all losses and turn green after President Trump says Israel has "no choice" but to accept an Iran deal.

[Nostra, House of Gold @Nostre_damus]

The Houthis are mobilizing

they are planning to close the Bab al-Mandab Strait

[TM @RealTrouble_Man]

Gentle reminder

[Marcus Fahey @TheMarcusFahey]

Insane.

[MonitorX @MonitorX99800]

🇺🇸🇮🇱⚡️BREAKING: American soldiers deployed to defend Israel had their phones bugged and wiretapped by Mossad – New York Times

[zerohedge @zerohedge]

U.S. EMBASSY IN JERUSALEM HAS DIRECTED ALL U.S. GOVERNMENT EMPLOYEES AND THEIR FAMILY MEMBERS TO SHELTER IN PLACE

[The Masculine Creed @Masculincreed]

GOD CREATED 5 TROPICAL FRUITS THAT FIGHT CANCER, DESTROY PARASITES AND REBUILD IMMUNITY.

1. Soursop

[The Hormuz Letter @HormuzLetter]

BREAKING: Israel is requesting a "green light" from the US to immediately strike Iran's energy facilities through the entire country, following tonight's Iranian ballistic missile waves toward northern Israel, per Walla News.