WB_fan82

If the Supreme Court rules that the Collins dismissal was wrong and it gets remanded, what happens to all the other cases that were dismissed on similar grounds and where the dismissals were affirmed by the circuits? Do the cases get new life and get refiled?

I would prefer Calabria stays in the FHFA seat. I think he's the best ally of the GSEs, which I know is a contrary opinion w/ Tim Howard and many others. So I guess #1. If he's gone, we might have Wachter. But we have might Zandi or someone worse. I haven't heard MC discuss utility model. We know he would prefer private market competition with additional guarantors. nobody wants to do that. If MC is open to the utility model then I definitely prefer #1.

There are several ways Ps lose const case... 1. SC takes the "Significant executive power" aspect of Seila and reads HERA and realizes that FHFA doesn't really have much executive power. It can't bring cases against individuals or private entities. As such, the removal restrictions would be ok in this case and the agency is constitutional. 2. SC admits FHFA wields significant executive power, but then defines "for cause" as broadly, i.e. any cause. As you probably know, that hasn't really been ever defined. A broad definition could include "b/c of policy disagreements w/ the President", in which case the removal restriction isn't very restrictive. In contrast to Seila, where the removal was limited to specific causes. 3. SC admits FHFA is unconst and the removal restrictions are too broad, but rules that the acting director was removeable and therefore deny retroactive relief. This would have the benefit of clarifying how to read statutes without specificity on removals, which will be a recurring problem (see what just happened with the NLRB gen counsel) Seila was 5-4. All 3 of the above offer a form of "middle road" approach to this very big issue, and 2 of the 6 wanting to take any of those options means Collins loses.

On Scenario 2: It doesn't matter whether they can't or don't. The point is to show how two economically equivalent things are accounted for differently. On the takings liability: Imagine sr pfd conversion is done pre Collins. Public shareholders go from 20% to 1% ownership. And then Collins APA is a win. $100B++ back into the companies. Instant lawsuit, because the common holder share of that went from 20% to 1%. The govt basically took the fruit of the lawsuit away. You are limiting your analysis of damages to some assumption of the change in stock price, but that is not correct. Value is not confined to stock prices, and the courts are well aware of that. Look at how the DE courts have awarded damages in excess of merger prices during appraisal proceedings, for example. It's complicated and messy. I'd say the whole point of private capital raises isn't to protect the taxpayer but rather to exit from c-ship. That's all Calabria cares about. He doesn't care about "protecting the taxpayer", or minimizing dilution, or maximizing GSE earnings power or really anything except insofar as it's a box to check to accomplish his primary objective of exiting c-ship. Because he's the rare person who has strong conviction in following the statute.

The problem with that is it's a big fat lie. They can convert the entire preference into common shares. No writedown necessary. I think TH is correct, however, that conversion means a ton of lawsuits. Until we have clarity on Collins, at least. I disagree with Midas that the liability is capped at $5B on a conversion and therefore the lawsuits won't be a roadblock. The stocks are priced at < 1x PE b/c of the NWS. Winning the lawsuits means at least $30B back to the companies, which is 6x the current market caps alone. Bare minimum. The more promising route might be the carrot (affordable housing) instead of the stick (lawsuits). Calabria can offer a 20 bps reduction in affordable housing G-fees, which mostly flows to cheaper mortgages. That's got to be worth something to Democrats. Just exercise the warrant and drop the lawsuit caps (which seem totally irrelevant... the market will make up its own mind and what do the caps have to do with anything over at TSY?!). Jr prefs don't really care about a modest diminution in GSE earnings power, and I don't think Calabria does either. 55 bps G-fees are way too high.

I'll tell you who... Yellen, if Wachter is the FHFA appointee. Read her paper. If you are the TSY secretary, it's far easier to engineer a change in the capital definitions and requirements of the GSEs than it is to lower dividends, forgive principal, or otherwise transfer economic value out of Treasury's sr pfd to GSE shareholders. Especially when those shareholders are hedge funds. One of the biggest issues with this trade is the " branding" problem. The press loves to mention hedge fund speculators, which is partly true. If this was the Ohio or Florida pension system suing, it would be looked at far differently. It shouldn't matter, but it really does. Detroit pensioners did better than "hedge fund vulture" muni bond holders in municipal BK. GM union/pension creditors did far better than other creditors in that BK despite similar priority. Just how the world works. This note is about 10 years too early, but if nothing happens and we have a decade of retention then an additional road to recap is a change in the capital requirements. Currently the GSEs are too far away for this to matter today, however.

A couple observations... First on the capital.. the reason it's an economic fiction is to consider how the exact same economic scenario has different results on capital. Scenario 1: status quo. Fannie earns $5B. Retained earnings up by $5B, sr liq pref up by $5B but no adjustment for that on the balance sheet. Under HERA, capital is up by $5B. Scenario 2: Fannie sells $5B of sr pfd. It gets the $5B but now there is a $5B higher liquidation preference on the balance sheet. Under HERA, zero capital improvement. Same $5B into the company. Same $5B higher liquidation preference. But only one form is counted as capital under HERA. That's why it's something of a fiction. Second on the point of exit under this current PSPA... The whole exercise is HIGHLY dependent on the capital requirements for these entities. As they build capital, a change in the capital rule could dramatically change the equation in terms of overcapitalization. For example, imagine Calabria's 4% goes to Wachter's 2-3%. Or, imagine that we move away from CET1 bank regulatory concept and redefine capital to include ALL preferred (i.e. everything subordinated to creditors), or even the government's commitment to purchase preferred under the PSPA. You could have lower capital requirements, the sr pfd counting as capital, even unfunded commitments counted as capital. Any single one of those things could result in a lot of resources freed up that could pay down the senior preferred balance to the point where the 10% coupon is manageable. This is not a near-term thing, and likely wouldn't happen under Calabria (though I think there is a very good case to make to Calabria that the govt commitment to purchase capital stock should be counted as capital). But in time, someone else with a different vision of capital could make a huge difference here.

The remedy is tricky here for a Collins win. If we go back to the original (10% cash, 12% in-kind), it should be noted that there are ZERO provisions for paying down the balance of this instrument. It seems like the court would not pencil in such a material provision to the preferred that simply isn't there. So Treasury would need to agree to the remedy to consider it paid down.... But would they?! The alternative would be to send all the cash back to the entities, then figure out if the dividends since the amendment should have been paid 10% in cash or 12% in kind and settle up through a combination of cash back to the entities and/or higher liq. pref. And then we have to look at the amendment which put the caps to $25B and increased liquidation value, and then the most recent amendment... just rip those up and reduce the liquidation preference accordingly and have FHFA decide how much to pay in cash and how much to pay in kind under the fixed dividends? It's tricky. And another question for Cherzeca, or anyone.... who determines what legal position the FHFA takes in these cases? Now that Calabria has no earnings caps and isn't beholden to TSY with a looming cash sweep, can he come out and say that the original cash sweep was outside the power of the conservator and he agrees w/ the plaintiffs that it should be killed? We know he feels that way in his heart of hearts :) In-kind sweep does preserve/conserve and that is what he agreed to w/ Mnuchin, so it would be totally consistent for him to do that. Anyone have a take on that?

Calabria only entered the new amendment b/c it was his only option to make progress against the retained earnings caps. Calabria only agreed to the caps b/c it was his only option to deal with the full cash NWS. So if the full cash NWS falls due to APA, logically (legally?) the subsequent amendments shouldn't stand b/c they are directly traceable back to the bad contract. I bet Calabria would happily testify to that, too. So depending on the precise APA remedy, we are left with a 10% instrument and an Infinite War / Time Stone trick to unwind everything that came after it. That means mnuchin's boulders turn to dust on the exit. Unfortunately, GSEs can't sell new common shares b/c of the way the warrant is written (for 80% of shares instead of a fixed number of shares based on 80% of current), but it's a vastly preferable position.

Beau, Yea, it's gloomy but the prefs are down 50%. I think/thought Calabria was the GSEs best friend despite the capital rule b/c he was so ardent about getting them out of chip. Mnuchin was a brick wall, but Calabria had his hands tied b/c he had to give the store away to secure getting rid of the earnings caps. Now that he has those, he has far more leverage to negotiate something with the Dems. I say leverage b/c Calabria has at least two things the Dems want: the ability to unilaterally set GSE affordable lending goals under HERA, and the ability to regulate the G-fees (especially for affordable housing). He has things to give, and they are also consistent with the statute so Calabria's "by the book" nature will be warm to the idea. What must he want for it? We know he pushed hard to get them out of cship, and it involved some capital restructuring ideas (WSJ). It might be a bridge too far to get the Dems to budge on the sr pfd (he will surely try), but just getting them to exercise the warrant would be a win and I think he could get substantially more. That would clear the way for an APA win. It will be interesting to see Calabria's response to a utility idea. He was willing to move forward without additional guarantors, and he knows that's a non-starter now, so the duopoly was always the baseline. So.. why not? The only reason the G-fees are absurdly high today (55 bps including tcca today vs. 20 bps historical) is b/c they are priced based on aggressive private capital return assumptions. Those are things he should be able to work with the democrats on. Check out the Wachter paper on utility in front of NAR (She's the leading Calabria replacement, btw). There is a clear deal to be made here, and a clear win for Democrats, GSE investors (at least the prefs), homeowners, and Calabria. LOWER G-fees. Higher capital. Private ownership. Out of cship. He should be in a position to do it all, and now on the other side of the table he has someone that has worked at the Fed since the 70s instead of a right-place right-time movie producer, and an administration with a more cooperative attitude vs. the schoolyard playground of the last 4 years.

Cherzeca, I re-read HERA last night, while reading the majority and dissenting opinions on the statutory claims in Collins. I had to read the majority twice to follow along, but I think they make a pretty good case about how to read HERA. I feel better that the "in FHFA's interests" relates more to letting them take a subset of actions that are consistent with the "preserve and conserve" without worrying about fiduciary duties than it does as some massive grant of permission to do anything it wants like sell a commemorative conservatorship coin for $5 billion. I used to be worried that clause just kind of allowed anything, but the majority convinced me that's not the case. Of course my brain is working overtime to confirm why I still own the prefs, so I don't really trust myself! But on the Const. claims, I do wonder if the FHFA is far more of a regulatory agency than it is an executive agency. It doesn't bring claims or make rules on private individuals as far as I can tell. Everything it touches -- FHFA, Home loan banks, GSEs -- are other agencies of the government with public interests. It doesn't look much like the CFPB at all, which has vast power on private entities. When amicus pointed out that HERA is really an instruction manual and the FHFA doesn't wield much executive power, that strikes me as accurate. Therefore, I'm wondering why the FHFA is unconst. even with a single director. There are lots of purely regulatory agencies that have single directors, and FHFA seems to resemble them a lot more than it does the CFPB. Seila also referenced "significant executive power", which makes me wonder if it's actually more consistent with Seila that FHFA is deemed const. Do you think the first threshold matter in Collins is whether FHFA is an executive agency with "significant executive power" (quoting Seila here)? If so, why would it be? I am coming around to your view on the acting director (at least I've moved from "it's dead" to "coin flip"!), but now I worry about the executive aspect. Hope you don't mind getting wonky on this stuff with me. I'm not a lawyer, but I've read more legal docs and cases than I care to admit. Const. law is a new one for me, though!

Cherzeca, If FHFA is unconst. won't the justices have to address and opine on the acting director issue? If so, it seems like they have to take one of three paths on it: 1. Acting directors are always removeable unless statute specifies otherwise, or 2. Acting directors have the same removal restrictions as regular director when statute states the agency shall be independent (as HERA does for FHFA), or 3. Acting directors always have the same removal restrictions as regular directors unless statute specifies otherwise Which do you think they do with and why? I think I can make a reasonable case for all, which means it's hard to handicap. Collins could be a loser if SC goes with door #1.

Today I read the NAR research piece by Wachter about transitioning to a SIFMU utility structure. It's a heavy read, but since she's the leading candidate to replace Calabria, it's worth considering if Supreme Court is a bust. Her proposal has many good points, nearly all of which have been made by Tim Howard. If she takes over, she would probably find an ally in Yellen. Basically, the GSEs as SIFMU utilities can pay for TSY backstop, cover expected losses, and still pay profits to shareholders all while lowering G-fees substantially, especially to high risk borrowers. The trick is that the G-fees need to be regulated with caps and floors, and the stability of the earnings need to attract investors at low ROEs. My takeaway is that since the GSEs have all this in place, it's logical to work with them and just recapitalize. It would be quite simple to wipe out the commons w/ a sr pfd conversion, though it still has the optical problem of the preferred shares skyrocketing. My other takeaway, and what hasn't been pointed out to her (I might send her a note) is that the ROE models only matter if SIFMU GSEs need to place new capital in the market, which they don't. Otherwise, market prices take care of it by pricing the existing equity below book such that the P/E equates to the required ROE. If G-fees are set to earn a 5% return on equity, but equity investors require a 10% return, then the market will price the stock at half of book value. This makes the preferred seem quite compelling here.

Ok, I'll take it to the next level. Let's assume APA claim survives dismissal and gets remanded back. If Collins then loses on APA, aren't we back to a point where the govt has a lookback period to scotch the 4th amendment b/c it was done while FHFA was unconstitutional? Then all the retained earnings would be owed in cash under the 3rd amendment. I'm trying to sniff out any way for there to be unilateral action here, even if Calabria is willing to stick it out and make exiting cship his primary objective over time, but I just keep coming back to nothing works unless TSY plays ball. If Collins wins on APA, then 3rd amendment becomes void, but then what happens to the 4th amendment? Does it disappear too?! Or does it hinge on whether FHFA was kosher, so the courts would assume it's its own independent action and keep it since the president had oversight in the event FHFA is OK, but if FHFA is not OK then the 4th stays around until someone challenges (or ratifies?) it and we go back to the 2nd amendment? I'm trying to sketch out the scenarios forward and they are a total mess. Even the "wins" leave a pile of problems!

Cherzeca, Let's assume for a second that the FHFA is unconstitutional, but Ps still lose Collins b/c of the acting director point and the SC just changes the statute to make director removeable for cause. The 3rd Amendment stays. Couldn't the government, at any time in the next 6 years, claim that THIS 4th Amendment is invalid b/c FHFA was unconstitutional?

I encourage you to read the capital rule. It's a simple formula. Making the sr pfd non-cumulative does not change any of the parameters of the formula.

Sorry to be debbie downer, but I don't think that's correct either. All of these things are defined in the capital rule. Getting sr pfd to non-cumulative doesn't improve common equity. They still aren't counted. It would improve tier 1 capital by being non-cum, but the exit test is CET-1 capital. Only common equity, sadly. Calabria has some authority to deem things differently on the capital front, but sadly this latest PSPA even stops that b/c it explicitly states the sr pfd cannot count as common equity! Mnuchin blocked all the ways I can see that Calabria might move things along unilaterally. I try not to hate on people, but I'm going to allow it this time. What a mofo.

He doesn't really have the right to get them out unilaterally. It's a fig leaf. That is b/c to exit, even with a Collins win, they need to raise equity. They can't raise equity under this new PSPA until the warrant is exercised (and they are past the litigation date). You need TSY to cooperate for both of those things. So TSY still has an implicit veto right over exiting, as far as I can tell. And forget all about settlements. The optics of bailing out hedge funds are absolutely not going to work for Democrats. Even if somehow that wasn't an issue, there are so many cases. And only $5B litigation bucket. I'm not sure how many even fit into that bucket, but probably not many.

How is the math right? Take FNMA. I calculate common equity at negative ~$130B at end of Q3. He's looking at the $20 ish B of positive total shareholder equity, but that includes a $121B positive entry for the sr pfd which is explicitly not counted as common equity. The PSPA even restated that for the avoidance of doubt, lol. I would love to be wrong on this, but I don't think I am.

Snarky, You (and apparently Tim howard too with his comment on it) seem to be missing that common equity is defined in the capital rule as a formula and one of those parameters is retained earnings. This is a hugely negative account for both entities. Unless I'm missing something, your math is about $200B off.

oh man this is a stinker. Not just nws/cumulative but this new blockade of 3% CET-1 to exit, which is nearly the full capital requirement. Both companies are deeply in the hole on a CET-1 basis, even assuming $70B of equity (even for FMCC!). This just simplified things greatly. The WSJ was correct. There is no exit. none, nada without Biden approval. Mnuchin just made a consent order impossible. The good news is we know this thing got rammed down Calabria's throat. No way he wanted any piece of it, except the one thing he felt he had to have at any price: the permanent removal of the caps. And the other thing that there is a path out w/o TSY approval, even if Mnuchin just put a huge boulder blocking that road. That's good news insofar as he should be calling Yellen on the 22nd and asking for another go. But this time he has more leverage b/c he already has the one thing he wanted. He can trade something the D's would like such as G fee caps on affordable housing in return for flexibility on a consent order. Still probably need TSY to exercise the warrant, but Biden isn't any stranger to exiting investments. Obama had GM, AIG, and C under his watch. If we win Collins, then no sr pfd restructuring. If we lose Collins, then need a sr pfd conversion. All of this assumes no legislation, and I find it very interesting that the two R ranking dudes are calling tonight for working with Ds for housing reform. It might take a year for the dust to settle, and I'm definitely disappointed, but I'm very optimistic about the long-term outcome here.

The only journalists who have actual, real sources are Ackerman and Light (WSJ and Bberg). Nobody else matters. I read a lot of comments dumping on them and it makes me wonder about the awareness level of how marquis journalism works... Ackerman is going to be talking to people like Mnuchin and Calabria and Kudlow. None of them would pick up the phone to talk to Charlie Gasparino.

IG: Why not 5%? 4%? 1%? 0%? Think about this from the standpoint of Mnuchin, not the standpoint of what would be good for you (us). It's all the same reasons. And Calabria will not declare a penny to anyone while in c-ship. If the prefs go non-cum, it doesn't really matter what the rate is. So it's best to assume what would be the best for the taxpayer and involve as little "movement" as possible since we are at the 11th hour. That would be just keeping the NWS as is. Not justifying some alternative rate (though it would be easy to go back to 10%...). Keeping the NWS also means nobody gets a shiny penny before the govt gets all their money back. That's a very simple and reasonable position, and therefore likely in my mind. Bberg article said it's framed as "ending the net worth sweep". Non-cum would do that. But so would cumulative fixed rate divs. Hopefully we'll find out in a couple hours...

The benefit of the 3rd amendment was twofold. First, it let the companies build up capital under the formulas that define what capital is. Second, it makes it far easier to recapitalize them down the road. Building up the liquidation preference is like letting water pool behind a dam. At some point in the future, the dam will break and all of that liquidation preference can convert to common. Without the 3rd amendment, the water never pools. It just leaks out every quarter.

Yes that is how liquidation preference works. You can find it easily in the certificates. Then current dividend rates * then current liquidation preference = amount of dividend owed. They use the book value amount b/c core capital is just a formula that looks at the equity statement in the financials. The "extra" liquidation preference is not in that section. That's why it's sort of a capital fiction. If the GSEs earn $5B in Q4 and pay an in-kind liquidation preference div, retained earnings goes up $5B and there is no entry on the books. Compare to the GSEs sell $5B of sr pfd in the same quarter. Still the same $5B into the company, but now there is a corresponding increase in the sr pfd entry. In each case, the companies have $5B more. In each case, the sr liquidation preference is $5B higher. But only in one case does it increase the capital, per the formulas. That's why I say, even if the accounting is technically correct, it's misleading.