Fannie and Freddie
The Treasury has been earning a return on its investments, which has resulted in a profit. So far the companies have paid $225B in dividends to the Treasury.
This leaves a difference of $38B that can go to capitalize the companies and boost the economy and ensure that affordable housing initiatives are fully funded.
Treasury can release with Court Order
Take a look at the original agreement. Section 6.7 emphasis added:
6.7. Effect of Order; Injunction; Decree. If any order, injunction or decree is issued by any court of competent jurisdiction that vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of Conservator as conservator of Seller or otherwise curtails Conservator's powers as such conservator (except in each case any order converting the conservatorship to a receivership under Section 1367(a) of the FHE Act), Purchaser may by written notice to Conservator and Seller declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate.
The United States Court of Federal Claims
Judge Margaret Sweeney is running the show here. According to the court:
"The court hears suits involving government contracts, Constitutional claims"
"The Court of Federal Claims has had exclusive jurisdiction since 2001 to enter judgment in government contract cases."
According to Judge Sweeney on June 19, 2014:
And so far, I haven't gotten - I haven't received a good answer from the Government. Counsel is very able. But counsel has expressed concern of what could happen if certain documents are released, which I do not want to see happen, but counsel didn't answer to my satisfaction the discrepancy between sort of using the deliberative process as sword and shield. On one hand, FHFA is a government entity, you know, for purposes of booting the Plaintiffs out of court and not part of the Government, but for purposes of forwarding discovery, all of a sudden deliberative process is appropriate because they are part of the Government. So, it's a schizophrenic approach and I'm just waiting to hear a reasonable explanation.
I will say this, given everything that's been said today -- of course I haven't heard any evidence as yet, but just based upon counsel's arguments, what I've heard so far tends to suggest that FHFA is -- I don't want to say joined at the hip with Treasury -- but it doesn't sound like they're necessarily an independent entity that's just not -- has no connection to the Government.
The last time everyone came together in court, Judge Sweeney said that it was odd for the government to complain on behalf of the GSEs if the government wasn't controlling them.
Director Watt says "Law Got Trumped"
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With the director saying the law got trumped, a court order will enable the US Treasury to execute against the terms of section 6.7 of their own agreement that guarantees a release from conservatorship or an entrance to receivership. The Treasury can write a letter to FHFA after a court order from Judge Sweeney that cancels the warrants, recapitalizes the companies with the excess that they've paid back falling to their balance sheets, and ends the conservatorship. This is consistent with the Reuters news release.
The businesses according to Bruce Berkowitz make $21B/year, but after $2B/year of junior preferred dividends, $19B a year flows to common shareholders on a combined 1.81B shares outstanding. At 10x earnings that is a stock price of over $100 at this level of G-fees. At higher levels of g-fees, which is apparently where things are headed since everyone wants more private market participation, the valuation of the businesses according to Bill Ackman's financial forecast is over $200/share without warrants recapitalized in this way via a letter from Treasury.
Disclosure: The author is long FNMA.
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