4th Amendment

Riddle: When is a contract amendment not an amendment?

Answer: When the parties are being sued under a previous amendment to said contract.

On December 21, 2017 the Treasury Department and FHFA entered into an agreement to change the terms of the SPSPA. In this “letter agreement” it states:

“For the avoidance of doubt, following the amendment of the Certificate as provided in this Letter Agreement…” (emphasis mine)

So, our long-awaited 4th Amendment will not be called the 4th Amendment (which it is) – it is dubbed the “letter agreement.”

By calling this latest amendment a “letter agreement” it sends the signal that the intent of the 3rd Amendment – the Net Worth Sweep – is still in full force.

There are number of reasons the Administration needs to cling onto the spirit of the 3rd Amendment. First, the Administration is fighting numerous lawsuits pertaining to the legality of the 3rd Agreement. Making any changes that would alter the terms of the 3rd Amendment could jeopardize the court cases.

Plus, the optics of the terminology signals to Congress that the Administration has not initiated a recapitalization program. The “letter agreement” merely winds the clock back to the beginning days of the 3rd Amendment.

The Treasury Department put this amendment into “letter format” versus the previously utilized “amendment format” in order to colloquially refer to it as “a letter agreement.”

In simple terms, this amendment reverts the retained capital of the companies from $0 (set to take place on December 31, 2017) to $3,000,000,000. It’s clear that $3 billion was chosen as the capital buffer as it is the maximum amount allowed under the 3rd Amendment.

The 3rd Amendment went into effect on September 30, 2012 (dated August 17, 2012) calling for a reduction of the capital reserve starting on January 1, 2013 in equal amounts ending at $0 on December 31, 2017 or by $600,000,000 each year:

“Applicable Capital Reserve Amount” means, as of any date of determination, for each Dividend Period from January 1, 2013, through and including December 31, 2013, $3,000,000,000; and for each Dividend Period occurring within each 12-month period thereafter, $3,000,000,000 reduced by an equal amount for each such 12-month period through and including December 31, 2017, so that for each Dividend Period from January 1, 2018, the Applicable Capital Reserve Amount shall be zero.

Perhaps if the Administration did not have to consider the ramifications of the 3rd Amendment, it likely would have increased the capital reserve in excess of $3 billion. But, it clearly wanted to stay within the guardrails of the 3rd Amendment.

Another interesting observation regarding the “letter agreement” is the following:

Section 2(a) of the Certificate provides that Treasury, as the holder of outstanding shares of Senior Preferred Stock of the Enterprise, shall be entitled to receive, when, as, and if declared by the Board of Directors, in its sole discretion, cumulative cash dividends quarterly on each Dividend Payment Date. The Enterprise agrees to declare and pay the dividend payable to Treasury for the Dividend Period that ends on December 31, 2017 in an amount equal to the Dividend Amount minus $2,400,000,000 (the Q4 Dividend).

The first sentence above states the Board of Directors can only declare a dividend, i.e. “when, as and if” and “in its sole discretion.” However, the second sentence nullifies the Board’s independence by stating that the companies “agree to declare and pay the dividend.” How’s that for legal doublespeak?

Of course under dictatorship – err, rather conservatorship – FHFA assumes the power of the Boards.

(note: the reason the amount above states $2.4 billion and not $3 billion is because the companies currently have $600 million in reserve which would have been included in the 4Q17 dividend payment, resulting in a $0 reserve amount)

The “letter agreement” also provides a history or background of the other amendments. For instance, it makes note of the original term of the SPSPA with a 10% dividend.

The paragraph in the “letter agreement” that discusses the 10% dividend is taken verbatim from the 3rd Amendment and is only used as historical reference, i.e. the 10% dividend has no bearing on the new $3 billion or the total liquidation amount on the senior preferred stock.

Our wait continues for the resolution of the conservatorships…

However, we are inching closer as Treasury Secretary Mnuchin has from day one said this Administration would resolve the fate of Fannie and Freddie but that Tax Reform needed to pass through Congress first.

This “letter agreement” was only to avoid $0 capital reserve. Real change finally seems attainable in the first half of 2018!