Fannie Mae, Freddie Mac: Crapo/Johnson Not As Bad As Reported

Fannie Mae, Freddie Mac: Crapo/Johnson Not As Bad As Reported

I reading the Crapo/Johnson Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) “draft”, and that is all this is folks….a draft, I came across some interesting items. Remember, last week when the bill was rolled out every person from Congress who spoke about it said “this is in the court’s hands”.  To me this means if the court dismisses the cases, shareholders are screwed (but, we already knew this). However, what if they survive dismissal and the cases head to trial (I strongly expect they will)? How are shareholders in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) going to be treated then under this bill?

Now, most of the draft deals with the new entities, how they will be set up, powers, regulations etc. I’m going to ignore all of that because this is simply a draft and any final version (assuming there ever is one) will be materially different than this one.   So, the 10% “first loss” everyone is rattling on about may very well be 5% or 8% when all is said and done.

What I did find interesting was the wording in a few sections dealing with the wind down of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). While the “draft” does lay out the way in which Fannie Mae and Freddie Mac will be dissolved, the draft does give some pretty big leeway to those doing it essentially “to get this done”. From page 360

‘‘(c) PRIORITY OF EXPENSES AND UNSECURED CLAIMS.—

‘‘(1) IN GENERAL.—Unsecured claims against a regulated entity, or the receiver therefor, that are proven to the satisfaction of the receiver shall have priority in the following order:
‘‘(A) Claims of the receiver for administrative expenses.
‘‘(B) Any amounts owed to the United States, unless the United States agrees or consents otherwise.
‘‘(C) Wages, salaries, or commissions, including vacation, severance, and sick leave pay earned by an individual (other than an individual described in subparagraph (F)), but only to the extent of $12,475 for each individual (as indexed for inflation, by regulation of the Agency) earned not later than 180 days before the date of appointment of the Agency as receiver.
‘‘(D) Contributions owed to employee benefit plans arising from services rendered not later than 180 days before the date of appointment of the Agency as receiver, to the extent of the number of employees covered by each such plan, multiplied by $12,475 (as indexed for inflation, by regulation of the Agency), less the aggregate amount paid to such employees under subparagraph (C), plus the aggregate amount paid by the receivership on behalf of such employees to any other employee benefit plan.
‘‘(E) Any claim arising solely from a covered guarantee transaction involving the regulated entity.
‘‘(F) Any other general or senior liability of the regulated entity (which is not a liability described under subparagraph (G), (H), or (I)).
‘‘(G) Any obligation subordinated to general creditors (which is not an obligation described under subparagraph (H) or (I)).
‘‘(H) Any wages, salaries, or commissions, including any vacation, severance, and sick leave pay earned, owed to senior executives and directors of the regulated entity.
‘‘(I) Any obligation to shareholders or members arising as a result of their status as shareholders or members

‘‘(2) CLAIMS OF THE UNITED STATES.—Unsecured claims of the United States shall, at a minimum, have a higher priority than liabilities of the regulated entity that count as regulatory capital.

‘‘(3) CREDITORS SIMILARLY SITUATED.—All creditors that are similarly situated under paragraph (1) shall be treated in a similar manner, except that the receiver may take any action (including making payments) that does not comply with this subsection, if—
‘‘(A) the Agency determines that such action is necessary to—
‘‘(i) maximize the value of the assets of the regulated entity;
‘‘(ii) maximize the present value return from the sale or other disposition of the assets of the regulated entity;
‘‘(iii) initiate and continue operations essential to implementation of the receivership or any limited-life regulated entity;
‘‘(iv) minimize the amount of any loss realized upon the sale or other disposition of the assets of the regulated entity; or
‘‘(v) preserve the financial stability of the United States; and
‘‘(B) all creditors that are similarly situated under paragraph (1) receive not less than the amount provided in subsection (f)(2).

‘‘(4) DEFINITION.—As used in this subsection,the term ‘administrative expenses of the receiver’ includes—
‘‘(A) the actual, necessary costs and expenses incurred by the receiver in preserving the assets of a failed regulated entity or liquidating or otherwise resolving the affairs of a failed regulated entity; and
‘‘(B) any obligations that the receiver determines are necessary and appropriate to facilitate the smooth and orderly liquidation or other resolution of the regulated entity.’’;

 

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)

One has to think of this in terms of “what gets this done”.  Basically this section does what a lot of others do. It places shareholders last in “unsecured claims (I)” but then tells the receiver that ”any obligations that the receiver determines are necessary  and appropriate to facilitate the smooth and orderly liquidation or other resolution of the regulated entity” can then go to the top of the list if it helps . I take this to mean if the receiver deems ensuring value for Fannie Mae and Freddie Mac’s common and preferred stockholders in order for them to drop their litigation and “ensure a smooth resolution” , they can vault to the top of the list  and go under “administrative expenses”.  Or, additionally “any obligations” could simply be a settlement ….it certainly can be open to a wide swath of interpretations.

I still maintain any of these Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) plans are going to be stunted by the litigation that is continuing. Discovery by the plaintiffs has been granted in one case (the second is awaiting the Judge’s ruling but ought to also be granted).  Treasury/FHFA have filed motions to dismiss in both cases and I expect those to be defeated and a trial date set. Once it is, all of these plans grind to a halt.  You cannot dispose of assets that are being litigated (who has a valid claim to them). That being said I would expect the Judge to halt any alterations to the Fannie Mae and Freddie Mac and any additional payments to Treasury (to preserve the assets). THAT will get them to the table to settle this and further, this draft in several sections gives them the authority to do just that.

Additionally regarding Fannie Mae and Freddie Mac,

During the “wind down” process (pg 374) Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be required to present a plan to the FHFA (these will all be public). Part of that includes:

(6) VALUATION STUDY.—After reviewing each resolution plan required to be developed under paragraph (1), the Corporation shall conduct a valuation study of each enterprise’s business segments, including any technology, business unit, legacy book, and other assets and liabilities that may be sold for value in a manner consistent with the purposes and requirements of this Act.

Remember from above (an other places in the draft), it refers to “maximizing the value of the assets”. Why do a “valuation study” for Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)? There are a few reasons. I think the main one would be to determine if the Treasury can be repaid in full and maintain value for other shareholders (remember, Treasury will still own 80% of the common). It can also be used to determine if there is validity to the Berkowitz plans put forth a month or so ago. While perhaps not letting one entity take over a Bruce proposed but perhaps having several.   The draft includes language that talks about the sale of “any holding company, trust, subsidiary, or joint venture” as a going concern “to facilitate the formation of the following”:  ”ii: an approved guarantor” (1 of 5 possible buyers).  Could the “approved guarantor” be a Berkowitz-proposed entity?

In any event there is little used for a Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) valuation study if all of the assets are simply going to be transferred as they are now into a new entity.

Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Page 387

(C) CONTINUED DIVIDEND PAYMENTS.—
Notwithstanding the provisions of this section or any other provision of law, provision 2(a) (relating to Dividend Payment Dates and Dividend Periods) and provision 2(c) (relating to Dividend Rates and Dividend Amount) of the Senior Preferred Stock Purchase Agreement, or any provision of any certificate in connection with such Agreement creating or designating the terms, powers, preferences, privileges, limitations, or any other conditions of the Variable Liquidation Preference Senior Preferred Stock of an enterprise issued pursuant to such Agreement—
(i) shall not be amended, restated, or otherwise changed to reduce the rate or amount of dividends in effect pursuant to such Agreement as of the Third Amendment to such Agreement dated August 17, 2012, except that any amendment to such Agreement shall be permitted if it facilitates the sale of assets of the enterprises to facilitate compliance with this title;

Again, we see the same thing. Very strongly worded language that the SPSPA is not to be altered in any way (this also means the net worth sweep) “except that any amendment to such Agreement shall be permitted if it facilitates the sale of assets of the enterprises to facilitate compliance with this title”.

They always have an out and that out always relates to “getting this done”.

I think the media has really missed the meat of this draft by focusing on the summaries.  The authors are putting forth the correct talking points about “winding down the Fannie Mae and Freddie Mac” , “making sure taxpayers are off the hook” and other sound bites but it seems folks are looking over some details as to “how this gets done” and the effect on current shareholders.

To me this bill lays out a new Fannie Mae and Freddie Mac system (I have no comments on that yet) while at the same time giving tremendous latitude to those implementing it to do what is necessary to make it happen and that includes making current shareholders (common and preferred) happy enough with the end result to end their litigation. Never forget that when we talk about shareholders, we are including the US Treasury who, if the exercise their warrants will own 80% of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and only add billions to taxpayer profits.

I think this bill, far from being a dagger to the heart of Fannie Mae and Freddie Mac shareholders basically says to them, “if your litigation gets pass the dismissal challenge and heads to trial, we can do what we have to do to make everyone happy and still get this done”.

Fannie Mae and Freddie Mac CrapoJohnson-Bill-1

Fannie Mae and Freddie Mac Via: valueplays