Moelis & Me

[bryndon....@gmail.com]

For what it's worth, here are my thoughts and alternatives on the Moelis plan discussed on J. Timothy Howard's blog post, titled The Economics of Reform.

Dear Mr. Howard:

I so appreciate your writings on Fannie Mae, Freddie Mac, their conservatorships, and the ongoing mortgage finance reform efforts by government officials and industry operatives.  Each time I come away from one of your articles, I have a better understanding of the competing forces involved in the future outcome of these two shareholder-owned enterprises.

As you and the rest of us like-minded folks know by now, the conservatorships of Fannie Mae and Freddie Mac were a convenient fraud perpetrated by the Washington-Wall Street elite using the 2008 financial crisis as the perfect curtain for their Wizard-of-Oz illusion.  Neither company was undercapitalized at the time their boards were coerced into agreeing to the conservatorships.  And, when the companies were finally placed into conservatorship in September 2008, not one single criterion required under the Housing and Economic Recovery Act of 2008 (“HERA”) that authorized the appointment of a conservator, was met – not one!

Moreover, the companies were forced by government officials to record unsupportable loan loss reserves (which, as expected, never materialized) that required Fannie Mae and Freddie Mac to borrow large and contractually unrepayable sums of money from the U.S. Treasury.  This ultimately required them to borrow additional and unnecessary funds just to pay the egregious 10%/annum interest payments required under the original Senior Preferred Stock Purchase Agreements (“SPSPA”).  Incredibly, they had to pay interest on money borrowed to pay interest – until the third amendment to the SPSPA changed all that.  Now they hand over nearly all their earnings to the government – UNABATED.

According to everything I’ve read, the companies “borrowed” approximately $187.5 billion but have returned in excess of approximately $265 billion – a 77.5 billion-dollar undeserved windfall for the government, over and above the money received through the U.S. Treasury’s interest payment shenanigans.

Now, almost ten years later, we have the Moelis plan.  I must confess that I haven’t read the details of the plan, but I am aware from reading the opening bullet points and executive summary that it not only permits the U.S. Treasury to keep ALL its ill-gotten gains obtained through these illegal quarterly earnings transfers, but it goes on to unbelievably encourage (NOT DISCOURAGE) the U.S. Treasury from exercising its warrants in order to seize another $75 to $100 billion dollars of shareholder money.  If the Moelis plan is operationalized and the government is allowed to walk away with and/or squander (and I’ll be kind because I know it’s a lot more) approximately $177.5 billion (excess repayments + warrants) of shareholder equity, without regard to the common and preferred shareholders (the true owners of the two companies), then it’s going to be yet another FIFTH AMENDMENT TAKING – and make no mistake. It. Will. Be. Challenged.

But, setting aside the unconstitutional and grovel-like aspects of the Moelis plan for a moment (and I say “grovel-like” because this plan is the perfect and bigger-than-life example of the schoolboy having to hand over his lunch money to the bully, just so the bully will relinquish the schoolboy’s things) their blueprint calls for the two companies to build a combined core capital balance of approximately $155 billion, which will help to qualify the firms for release from conservatorship under HERA.  For arguments sake, I’ll assume that figure is appropriate.  But I see a better way of accomplishing this goal without infringing any further upon the constitutional rights of the shareholders – including (if not particularly) the current shareholders that purchased and, thus, assumed the rights, risks, and rewards of the common and preferred shares of Fannie Mae and Freddie Mac from willing and able sellers of the companies’ shares.

First, forensic accountants need to unwind the history of the borrowings and payments made between the companies and the U.S. Treasury since September 2008, in order to eliminate the payments of interest that included borrowings based on past borrowings of interest (since in-kind payments were allowed) and not principal borrowings (even though those are based on fraudulent loan loss reserves).  I suspect this will produce approximately $30 billion in overpayments to be returned to the companies.  Second, FHFA needs to declare the U.S. Treasury repaid at $157.5 billion (or less, if the Honorable Director Watt is truly honorable) and, thus, the senior preferred stock fully redeemed.  Third, the $77.5 billion of obvious overpayments is to be returned to the companies.  And fourth, the warrants are to be extinguished, since they are no longer needed for repayment of the debt owed to the U.S. Treasury and, more importantly, the American taxpayer.

If my math is correct, that leaves approximately $47.5 billion needed to complete the “capital build.”  However, the companies need to include approximately $33.3 billion in the capital build figure to retire the preferred shares at full redemption value.  That brings our remaining total needed for full recapitalization to $80.8 billion.  So, how do we fill our 80.8 billion-dollar hole?  Through retained earnings and the issuance of new preferred shares. 

According to the Moelis posse, the companies will earn approximately $15 billion per year.  By the end of fiscal 2020, they will have retained approximately $60 billion.  Also, Moelis & Friends estimate that the two firms can raise $25 billion through a public offering of non-cumulative preferred stock.  So, where does that leave us?  With a cool $4.2 billion of extra capital and no need to issue any additional common shares beyond the original, undiluted amount displayed on their balance sheets.

Surprise, surprise, surprise.  The preferred shareholders rightly receive full redemption value for their stock, and the common shareholders won’t have to share the future earnings of their two companies with any new owners.  It’s rather amazing what can be accomplished when one points out that the king is not wearing any clothes.

A few additional thoughts.  No plan will succeed to garner the support of private equity, like me, if the government continues to behave in such a flagrantly, mean-spirited manner as it has over the last ten years towards the loyal and steadfast shareholders of America’s mortgage finance giants, Fannie Mae and Freddie Mac.  Moreover, the government is NOT in the business of business because of its overwhelming advantage (e.g., endless resources, perpetual existence, etc.) in the marketplace, and they have NO business trying to make a profit for the taxpayers.  They need only recoup the costs of their public-interest efforts on behalf of the American taxpayers (of which I am one) – PERIOD!

Thank you for allowing me the opportunity to contribute to the discussion on The Economics of Reform, and thank you for everything you’re doing to save those companies.

Best regards,

Bryndon Fisher

[ron...@comcast.net]

Outstanding, Bryndon.

Thank you for your service and encouragement all these years.

[littlede...@gmail.com]

What happens to my 10 month car loan if my monthly payment is 100 bucks in which 7dollar is interest.  I only have 97 dollars in the bank.  I have the principle covered though!

In our case, treasury lent us the extra 3 dollars but tacked in on to the principal instead of repoing my car.  As much as you dont like the adding to the principal of the 3 dollars, you dont want a repo.  And trust me shareholder Bryndon, Tim or Benny blanco, you dont want a repo of fnf.  That is rship.  The 187.5 billion principal is good.

As of date we owe 187.5 + compounding interest.  The past 3 years, interest is 18.7B alone per year.  We are about breakeven if we win the nws case and are only required to pay the 10% dividend.  I believe the 10% will stand against any court challenge. 

Why is aig only charged 3 and fnf 10?  It does not matter....they will always argue....extreme times....extreme measures....a threat to US economy....national interest...blah blah.....goobers...our interest is 10%.  Deal with it.....it will not change and no judge will lower it.  

Lets not even talk about the warrants yet.

It does not matter anymore or to the courts on how we got into c ship.  Those days are long gone.  Talking about it is produces no outcome legally.

As for the buffer....in cship we need about 6 billion each....will that happen?  Who knows......

Moelis is a good plan.  Da devil likes it.  The outcome is still likely an utility model.

NWS is wrong/ illegal 100%.  That we all agree....go figure....devil

[neo]

The courts have broken even Tim's belief in Justice... sad fucking statement

[joseph s]

Some seem quite upset that Tim Howard came out in favor of Moelis. Hardly a surprise. He favors a swift resolution, rule of law and America. If shareholders settle, it can accomplish all 3.

[SimSla]

Joseph,

People are upset at the Moelis plan because it rewards the illegal actions of the government by allowing them to keep what they stole and even get more. If the plan was calling for conversion of the preferred 1 preferred for 0.00001 common you were going to be up in arms also ( and at the end do not be surprised if this actually happens. Nobody likes the hedge funds on the Hill so the Travelers may actually stick it to them).

[joseph s]

If the preferred were told at the onset of cship that those rights of redemption were eliminated, I would have steered clear. I think the warrants were wrong.

But what I think matters not.

[joseph s]

People get upset with Howard, Paglaria, etc. They really should be upset about an expection of massive returns based on a highly unlikely outcome. Sue to cxl the warrants if you can. I dont know the rules about how long you have to sue. Ackman himself said the warrants were fine.

[ron...@comcast.net]

Let me clear up some misconceptions.

1. The heart of the Moelis plan pertains to reform and capital. The part about the warrants is purely bait and not an essential component of the plan. As such, the plan doesn’t gain merit because it advocates a strike price for the warrants.

2. Even if Ackman’s opinion on the warrants was relevant, his plan does not include an additional stock dilution for capital. Accordingly, it’s folly to suggest he’s ok with the warrants without caveat or remainder. I have no idea whether he’s ok with the warrants in the context of a plan that entails additional dilution beyond the warrants.

3. The existence of the warrants can be distinguished from the reason for ever exercising the warrants. That they exist isn’t illegal. There’s no ground to challenge them. It would be premature. Yet if they’re exercised on the basis of the governments risk-reward, then look out. The statute of limitation hasn’t even yet begun because the crime is not yet ripe.

[ron...@comcast.net]

“If the preferred were told at the onset of cship that those rights of redemption were eliminated, I would have steered clear.”

Joseph,

Is that because you think the government making money off the warrants ensures that we too make money? In other words, without the warrants the government wouid turn everything over to the banks?

[joseph s]

No. It is because I would expect that if they said that, they would defend that position to the bitter end. There are two people I dont care to fight.

1. The press(you dont want to fight someone who gets ink by the barrel.)
2. The govt(you dont want to fight someone who literally prints or can digitize money out of thin air)

If their stance was to not honor pref contracts at the onset, I would have avoided this in July 09 after my research.

[littlede...@gmail.com]

How are warrants illegal? What hint or from who do da goobers say it is going away? It is not from any branch of the government.

How can you say warrants are not an important part of the moelis plan? It is a very important part. Da devil disagree.

Da devil dont like da warrants either, but da devil is not going to invest pretending its illegal and wishing it will magically go away.

I would have invested in the Preferreds in 2009 and post NWS. The junior Ps are worth 20.1% of FnF. The risk rewards makes the Preferreds worth being in...go figure....devil

[seysmont]

SEC said in 2008 that the whole scheme was illegal. They didn't do anything about it, though. Maybe they think warrants are illegal, but it has no relevance on anything, because they are not bringing any enforcement action. It never made much sense, but seeing how FBI operates, I get it now.

[littlede...@gmail.com]

Ron, no no and no.

1. Moelis will have no credibility if it does not include the warrants. Moelis is not just a concept it is a resolution. And the one that matter that favors you and the commons the most.

2. Ackman addressses the warranrts and even said its ok for the gov to exercise them. His problem is his valuation. Its too rosy. Commons will still make good money.

3. Did not get to this one. My coffee was ready. Chances are, I disagree with it too.

Ron, its okay to listen to the birds chirp chirp...but, goober....you dont make monies off chirp chirp....

All shareholders hate the warrants....but come on....if you are a common holder, give it a rest.....warrants aint going nowhere.....only hardcore commoners or the likes bitch about it.....go figure....devil

[littlede...@gmail.com]

If goobers are banking on the warrants magically going away houdini style, then you are on da side of a losing bet. Not one tarp or any 2008 entity that received money from the gov got their warrants eliminated or retired......its either the gubment sold it or exercised it. Not one case where da gubment retired it....

There is also no winnable challenge to the warrants. They arw ironclad...da devil dd it....go figure...devil

[SimSla]

Littledevil,

Now that we are talking precedent which TARP recipient got all their net worth taken by the government. You need to compare apples to apples.

[ron...@comcast.net]

“You need to compare apples to apples.”

Yes, he should, but that would require minimal effort.

[ron...@comcast.net]

“If goobers are banking on the warrants magically going away houdini style, then you are on da side of a losing bet.”

That’s an assumption I’ve corrected over and over again. One can build a strong case against the exercising of the warrants while also placing their bets according to them being exercised. The former is a matter of original intent whereas the latter is a consideration based upon the corruption of our legal system.

[littlede...@gmail.com]

Simsla: oh no, da devil understands very well. Its not an apples to apples comparison but its a good comparison because fnf is LUMPED in with this financial crisis. Maybe I should have used the words financial crisis bailed out entities and not tarp? Not all tarp recipients got all their net worth taken away. I dont know the stats but i would say the ones that survived did not.

Ron: A good point is a good point...no need to be word picky...one thing da devil also understand in which you lack is simple...there can be no confusion.....one word.....

......REALITY......go figure...devil

[joseph s]

XXX-

Build a strong case and go to court. I wish you the best getting them cxld.

Cancelling the warrants helps pref financially as well. Not one person has said that it would hurt us or they were opposed(that I have seen)

The difference here is odds of that occuring are quite low otherwise the common would be 10-15 right now.

If you buy lotto tickets or bet straight superfectas or pick 6, dont be surprised if your horses dont come in.

Just be glad that you will get the consolation pool $...

[SimSla]

That is right we are lumped with the rest of the TARP recipients. This does not automatically guarantee same treatment( and we are not treated the same). The warrants will be exercised the question is will it be for 79.9% of commons or some other percentage. If we win a lawsuit the percentage might change. As of today it is 79.9%. I think until we loose every venue in court we can not mechanically assume the warrants will be exercised for 79.9%. This is what Moelis does not address how winning a lawsuit changes the math. The plan is for a perfect world where all is good and everybody is a friend.

[littlede...@gmail.com]

Moelis addresses the reality on the ground.

We face an uphill battle on all the lawsuits. Holding your breathe for a win is not advised.

Winning NWS has nothing to do with warrants. Lets make that clear. Even NWS is an uphill battle. How many lawsuits do we have that challenges warrants?

Da devil likes moelis and is okay with this reality on the ground proposal....go figure...devil

[seysmont]

Good luck with reason in this day and age.

[littlede...@gmail.com]

I thought commoners would be thrilled with the moelis plan. Even da hardcore commoners...geeez...its recap no? Isnt dat what Oz and his follwers wants?....there are certain things that will not happen like bringing back fnf to what it was in 2003. It seems dat is the only ding dat will please da hardcore commoners.... Like W said, you just have to adjust to da realities on da ground...dinking wez going back to 2003 is dilusional. Dinking like that is also a pitfall in investing....No?.....go figure....devil

[seysmont]

Come on. These people really tried to do CSP. They are stupider than I thought. GSE's will be exactly like they were pre 2003 with a new name for what they do and a new name for a regulator and a few other name changes. That's what Soviet losers did. When they got into trouble, they would rename things. US losers in government are identical. Try to blame somebody and change names.

[SimSla]

Winning the NWS has everything to do with the warrants. If we win do you really believe the Gov will hand you a check for 260 billion. Most probably will retire the senior preferreds and will bargain the warrants for the rest of the money. This way no cash expense in the current budget. 

"Moelis addresses the reality on the ground. " - after all the discussions you are still going with this? I don't think i can say anything else than what i have said regarding the Moelis blueprint.

[littlede...@gmail.com]

Legally winning nws has nothing to do with the warrants. Winning NWS will push da gubment to take action. The gubment do not need to bargain on the warrants and especially likely will not if they lose the nws. Nws is still for us an uphill climb.

What action? That action will force congress implement do the utility quicker. It will likely for sure get the warrants exercised. You are right about redeeming the seniors. They will need to suck up the money. All that will likely be done by connverting to a utility model

@seys, a utility will not be like 2003. There will be an explicit guarantee and a new business model based on that. Insurance models will be incorprated. Reporting and structurally it will be different. Even operational language and methodology will change. Regulation will change too. Many changes...go figure...devil

[seysmont]

Explicit guarantee = $6T on the books. No explicit guarantee. I think I know what they want to do, but it would only work if you suspend reason. No explicit guarantee in a conventional sense, though.

[littlede...@gmail.com]

No it doesn't. Hold that thought. Ad devil picking up ad littledevils.

[seysmont]

I know how to avoid putting it on the books, but I don't want to talk about it. 

[littlede...@gmail.com]

Cool. Da devil remain.....Da utility model is the most likely outcome. It can be done but it will take congressional will. Moelis is a good plan. It offers recap and release. Da devil is for it. Moelis have good reasonable bones and is flexible.

Juniors and commons will make money. The question is just how much. Do your dd......and as always.....go figure.....devil

[SimSla]

Re-posting Tim Howard's thought on the Moelis plan for convenience.

Reply

1. jtimothyhoward
   DECEMBER 4, 2017 AT 10:00 AM

   I do not disagree with your criticisms of the Moelis plan. It allows Treasury to profit hugely and improperly from two actions that were unfair (and I believe illegal) and are indefensible: the granting to itself of warrants for 79.9 percent of Fannie and Freddie’s common stock, and the payment of some $70 billion in dividends on $187 billion in senior preferred stock the companies did not need and did not ask for, but were forced to take by FHFA’s non-cash accounting entries, then were not allowed to repay by Treasury when their effects reversed. In the Moelis plan, common shareholders of the companies bear the full cost of these outrages, while holders of preferred stock could be made whole.

   I certainly understand that. In my earlier writings I’d argued for either cancellation of the warrants or a significantly higher strike price for them, and also for an unwinding of the (unjustified) senior preferred stock draws in a way that greatly reduced the quarterly dividend payments credited to them.

   But then I get to the question: how would these actually be made to happen? As I note in this post, you really have only two ways to get Fannie and Freddie out of conservatorship: legislation by Congress, or executive action by the administration. Since my primary goal for reform is to fix the system in a way that is best for the economy and homebuyers, I personally would not recommend going down the legislative road in the hopes that we could convince Congress to abandon the banks and get behind homebuyers, because I think the odds of success on that are too low. It’s possible that existing common shareholders of Fannie and Freddie could get a better deal with legislative reform that makes the companies vassals of the banks, but that is not something I would support.

   I do support the Moelis plan—with all its faults and its grossly unfair treatment of common shareholders (of whom I am one, although I also own Fannie preferred)—because for now it’s the only plan on the table that has a chance of leading to the macro outcome I favor. The challenge is that Moelis has to have Treasury’s support to succeed, and I can’t see Treasury leaving money on the table if it elects to go that route. And the Moelis plan does have a potential silver lining. With the warrants, Treasury has an incentive to maximize the long-term value of the companies, which also benefits existing common holders. This incentive should, and I hope will, lead Treasury to support measures like ensuring that the companies are not overcapitalized in a way that reduces their efficiency (and thus their business volumes), and also to manage warrant conversion—including perhaps through a higher strike price—in a way that makes all holders’ stock price as high as possible.

   I’ve seen or read a number of proposals for recapitalizing Fannie and Freddie that are better than Moelis for common shareholders, and the companies. But that’s not enough. To succeed, a particular proposal needs advocates, either in Congress or the administration, who are in a position to get it implemented. The latter is a very tough row to hoe, and without it a good proposal will remain no more than that.

[joseph s]

Excellent post. Unfortunately, it is true.

[littlede...@gmail.com]

 Da devil will end it here.  Some sort of Moelis continues to be the most likely outcome.....Moelis is a good plan foe recap and release and a roadmap to a utiltiy....whichever ot maybe....a conversion is coming....so goobers....max out rv and find valuez.....da devil is confident abouz fnf......wez all on da smae boatz....commons and preferreds......itz been a pleasure to talk to da goobers....da devil have a few commitments which will take time....da devil will retire from da boards after da trifecta.....goobers.....rememberz.......trust u gut....do your dd....read up on buffett and his strategies....da devil likes uncle warren.....manage risk to da tee....always consider risk reward....and as always....go figure....devil

[joseph s]

Agreed. We can disagree on the other stuff....

[gdac...@yahoo.com]

Far as I know, Bryndon is the only one in this thread that has filed a lawsuit against the government.
I have read the arguments that FnF are similar to AIG & Citi. Not true. Without the government exercising the warrants and then selling the shares, neither AIG nor Citi was in position to payoff the loans. See attached, and click on AIG or Citi for details.

https://projects.propublica.org/bailout/list/index

Unless Tim or Glen (most outspoken proponents of Moelis) can come up with convincing arguments, other than enriching some connected billionaires, I stay with Bryndon's arguments.

[Duncan Macleod "Beta"]

Bryndon is my hero.   You will Never hear a word of criticism from me.  

Could there be another outcome yes- Does this negate Bryndon, his efforts or his outcome . certainly not

[bryndon....@gmail.com]

My dear Duncan, I am deeply touched by your words.  And it's comments like that that keep me motivated to never give up.  So, in the slightly modified words of Franklin D. Roosevelt:

“No matter how long it may take us to overcome this premeditated [theft], the [shareholders] in their righteous might will win through to absolute victory.”

Cheers my friend, and I hope one day soon we'll meet for a victory celebration.  Until then, we continue the good fight.

Best regards,

Bryndon

[chrise...@gmail.com]

That guy named Chris Roberts had a suit in Illinois.  He can't say much about cases, but thinks Bryndon is a cool dude and looks forward to mucho champagne someday.... in Vegas.

The Lehman stuff and names, and common vs. preferred are never good.  I must say, I've done well with both, esp. when there is out-of-kilter time.... was in then out and now back a little more in common.

1.20s for FMCC is too low (my relative is $7.50)

FNMAS is low relative to FNMAT / FMCKJ at par.

As I can't stand inaction & squabble, I trade some... better than waiting another two years for the Lamberth schedule, right?

Best,

C

[zway...@gmail.com]

[zway...@gmail.com]

I thought you lost his suit or it got dismissed. I am obviously wrong. Was there a hurdle?

Lehman was never the issue. The issue is the desire to squash the talk at the admin level. Why? I dont know.

Funny Chris, I am going from an anti lehman board to a not so friendly P board. I will try to make it work. Good luck. I will miss you guys. I dont have beef with any poster. Not even with Joe or Joseph now. I was prepare to let it all go but mhill had to talk. Not even an apology from the guy. SMH. V out. I will see you guys at the winners circle.

Last Disclosure: mostly juniors and recently bought fmcc at 1.20s. :)