Summary
- A cursory review of the government’s recent amendment to their agreement with the GSEs sounded positive for shareholders.
- The government is going to let the GSEs retain enough earnings from cash flow to potentially fully recap.
- A closer look at all of the major details indicates this may be a trap with the real intent to head off a potential loss in the case before SCOTUS.
Anyone reading this Seeking Alpha article is probably familiar with the GSE's situation at least in part due to S.A. contributor Glen Bradford's numerous articles over the past half decade or so that I have been following this story. Glenn's articles are overwhelmingly bullish on the prospects of Fannie and Freddy (OTCQB:FNMA) (OTCQB:FMCC) shareholders either winning one of a number of court cases or eventually benefiting from administrative action to recap and release them. I will present a bearish case in this article.
Trump's Treasury Secretary Steve Mnuchin famously stated it was a top priority for him to "Get the GSEs out of government control ASAP" when he was announced as Trump's pick over four years ago and with Trump's loss to Biden before Fannie and Freddy were released the prospects for any new shareholder friendly administrative action are all but dead for the foreseeable future.
In the lame duck session of the Trump administration, Glenn wrote a number of articles predicting there would be administrative action via a consent decree to put the GSEs on an irreversible path of recap and release. While I was highly skeptical this would happen, there was a last minute agreement that based on headlines at the time seemed to suggested such a path might have been provided. In particular, the agreement allows the GSEs to retain enough capital from cash flow to potentially fully recap at some point in the future and suspends any dividend to the Senior Preferred stocks "UNTIL" the two GSEs are fully recapped.
I highlighted "UNTIL" because it's a critical part of the amendment that is being overlooked in Glenn's articles and on the message boards discussing the GSEs' fate going forward. I believe it's the key to understanding how the amendment was probably designed to address GSE shareholders next great hope in a case before SCOTUS attacking the Net Worth Sweep. Recall the third amendment to the PSPA converted the 10% dividend to a net worth sweep that guaranteed the GSEs could not recap and pay off the SPS from cash flow. In other words, the NWS was enacted to ensure Fannie and Freddy remained wards of the state until the government chose to let them go or officially nationalized them. It's been the focus of most of the shareholder lawsuits and therefore it's probably safe to assume it's the weak link in the government's legal chain.
Getting back to the most recent amendment to the PSPA, here are some critical highlights from an article discussing the amendments:
