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American Capital Agency Corp. Message Board

  • dlink_1510 dlink_1510 Aug 3, 2012 11:22 AM Flag

    The Ethical Issue

    The ethical issue is that rather than paying out the undistributed income to the current stockholders to whom it belongs, management uses it to subsidize the issuance of new shares because that increases their management fee. Rather than give the undistributed income to present shareholders, they use it to pay the distribution to the new shareholders whose money will not be deployed soon enough to earn the full distribution for them. The management is using the undistributed income to make up this shortfall and it comes out of the pockets of the present shareholders.
    The issuance of new shares to purchase paper with a lower interest rate does not benefit the current stockholders, unless you are operating a ponzi scheme whereby you pay the distributions out of the money raised by the offering rather than out of income. Present stockholders would be better off if management bought as little new paper as possible and paid the undistributed income to them. There is no benefit to present stockholders from increased size, especially if the interest spread on the new paper is less than the existing paper.

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    • IMO, the lifespan of nefarious activities would be greatly shortened in a free market absent political/regulatory cover.

    • that is a somewhat incorrect statement. an equity share entitles the owner to more than just a vote, subject, of course to whatever the bylaws have to say. in some cases, they say that some shares have more rights than others. in the specific case of AGNC, a share is entitled to some fraction of whatever remains after a chapter 13(?) bankruptcy proceeding. probably minimal, but no other share of the same class has more or less precedence.

      and even though i cannot just knock on the door with my shares and demand my puny fraction of the company's BV in exchange for them, they do represent exactly that, which includes any dividend over or underhang as well as a large number of other assets and liabilities.

    • "Never trust a corporation to do anything that isn't written down, and trust few to do even that."

      You seem very skeptical of a corporation to perform it's fiduciary duty to act in the best interest of shareholders.

      Even if not written in stone, if you burn your shareholders and I treat them with a little respect, I will accept your challenge to raise capital for that next venture.

      You will always have Enrons, and some regulators who turn a blind eye to accept a slice of moral hazard.

    • Sorry about the double post.

    • IYou miss the point that AGNC is not internally managed. If ACAS as the external manager of AGNC decides to use the undistributed income to subsidize the sale of additional shares which increase the management fee received by ACAS rather than pay it to the current shareholders of AGNC, it is unethical. Is it illegal? Probably not. Was it illegal for Enron to invest its employees money in Enron stock in their pension plans? Probably not, but it was certainly unethical, since it propped up the company while hurting the employees.
      As long as the money from SPOs can be deployed in a way to equal or increase the interest rate on the old paper, it is good for everybody. But if the SPO money is used to buy paper yielding less interest, and you have to sell off the old higher yielding paper in order to support the distribution, you are in a downward spiral. This is true whether book value is momentarily increased or not, because you are selling off the old paper which has appreciated (and accounts for the increase in book value) for current purposes, and ultimately the book value will decrease as well.
      I think that so far, ACAS has done a good job for all of us. I am just questioning the continual issuance of new shares via SPOs in an era when the interest rate spread is decreasing. In such a situation, it seems to me that the SPOs do not benefit the current stockholders of AGNC, but ACAS.

    • IYou miss the point that AGNC is not internally managed. If ACAS as the external manager of AGNC decides to use the undistributed income to subsidize the sale of additional shares which increase the management fee received by ACAS rather than pay it to the current shareholders of AGNC, it is unethical. Is it illegal? Probably not. Was it illegal for Enron to invest its employees money in Enron stock in their pension plans? Probably not, but it was certainly unethical, since it propped up the company while hurting the employees.
      As long as the money from SPOs can be deployed in a way to equal or increase the interest rate on the old paper, it is good for everybody. But if the SPO money is used to buy paper yielding less interest, and you have to sell off the old higher yielding paper in order to support the distribution, you are in a downward spiral. This is true whether book value is momentarily increased or not, because you are selling off the old paper which has appreciated (and accounts for the increase in book value) for current purposes, and ultimately the book value will decrease as well.
      I think that so far, ACAS has done a good job for all of us. I am just questioning the continual issuance of new shares via SPOs in an era when the interest rate spread is decreasing. In such a situation, it seems to me that the SPOs do not benefit the current stockholders of AGNC, but ACAS.

    • Rim's right. Until the div is declared, what the shareholders and the shares "own" is the right to vote to alter the board, on the board's schedule for voting for such things. BRKA/B can lose that money by investing it poorly at any moment, and there's nothing you could do to get it back. Or the Oracle could decide to take all the cash and deposit it into his personal checking account, and you couldn't stop him unless you found a prohibition in the bylaws.

      Never trust a corporation to do anything that isn't written down, and trust few to do even that.

    • Is it ethical to discuss an ethical issue on this board? Just sayin...

    • Well, this savvy investor has reached the conclusion any intelligent discussion on this topic would not be fruitful between the two of us and therefor I will give you the last word. Respond as you like.

      RIM

    • ahhh, grasshopper, i also own shares of berkshire hathaway, and that exact debate consumes us from time to time. ususally just before and after earnings.

      in a case like that, one has to trust that "the market" puts a fair value on the shares. a trust that is often misplaced. at which point a savvy investor must come to some conclusion.

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