WB_fan82

The liquidation preference isn't just an academic thing in receivership. It's the same as increasing the principal outstanding on a loan. If the div was amended back to some fixed rate, it would be applied to the liquidation preference. The letter agreements are not currently raising "actual capital" from the viewpoint of any junior equity holders. That's why the common has done nothing as the GSEs have "retained" $20B. I predicted the NWS stays in place but they go non-cumulative. That would truly raise capital (And also get rid of this blockade of external capital) over time.

I bet a whole lot of holders bought the stock post the 2012 "theft". Every single person who did is forward looking... The simple reality is that can only happen in c-ship. And given the capital these guys will have, they aren't going back anytime soon. The far bigger risk and restraint on external capital is political/legislative uncertainty.

Two Cities: The whole "stealing" narrative is pretty irrelevant. First, investors are forward looking. But more importantly, that's the kind of thing that can (and did) only happen in conservatorship. It is impossible to raise capital while in conservatorship for that exact reason. That is why raising capital is the bridge OUT of c-ship. Retention over time and a big bang capital raise to get out of c-ship. Once out, they can't be stuffed back in. That is why changes must be paid so that external capital could even be raised. Cumulative senior preferred just keeps widening the capital chasm to exit c-ship over time. So they need to either be cumulative with a fixed dividend, non-cumulative with the variable dividend, or non-cumulative with a fixed dividend. I think the middle is most likely, but either one would do. Cumulative with a fixed dividend (say, 10%) doesn't help that much but they could still there through exchange offers + earnings retention + new slug of pfd if the cumulative srs were deemed repayable at par. And who knows, maybe we get lucky with lawsuits.

Yes Midas, the PSPAs would still be amended. I just listed what I thought he major provisions would be. Keeping the NWS but making it non-cum allows the GSEs to retain earnings over time (and the taxpayer to get 80% of it) while keeping the entire liquidation preference for the taxpayer, and the (non-cumulative) NWS ensures that nobody gets paid a cent until the government is paid back on the sr pref while still permitting the raising of external capital. To me this looks like the smallest "movement" that can happen in terms of optics, and it also maximizes the economics. I would have thought an exchange of sr pref into common would be better, but that worked best as part of a grand recap, potentially involving settlements. Simply ran out of time on that one. As long as sr pfd is amended to be prepayable, though, the GSEs can synthetically create the same via exchange offers to the existing pfd and the agency corporate bonds. Right now they can only be repaid with proceeds from newly issued capital stock, and exchange offers to the bonds wouldn't qualify. So I definitely see some changes here.

The lawsuits are not problematic to a capital raise. The main reason this is true is that the GSEs aren't liable for anything. The lawsuits either result in nothing, or they result in $125B of credits for the overage (either through deemed paydown, or cash back) back to the GSEs. New investors lose nothing and gain only optionality by investing new capital. My way is the only way to maximize value to the taxpayer. They get paid back the entire liquidation preference AND 80% of all value that flows to the common. Your way, to just forgive sr pfd, is not only optically terrible but economically suboptimal since it's an economic loss of 20% of the entire sr pfd.

My prediction on what Mnuchin does: 1. Kill the retained caps 2. Keep the variable div (NWS) in place 3. BUT, make the sr pfd non-cumulative 4. Make the srs repayable at par (except for the $1B needed to maintain the lines). Dividend goes from NWS to 10% once liquidation preference is down to $1B. 5. TSY permission not needed to release GSEs from c-ship as long as GSEs meet minimum capital requirements 6. Charge an FDIC-like fee on the committed lines This puts them on the path to exit via truly retaining earnings. It lets the GSEs raise external capital to exit c-ship. And it provides maximum return to the taxpayer possible while allow the two things above.

Rereading the supreme court transcript, I'm struck by an irony. The Constitutional argument seems like a loser because the arguments for the acting director being constitutional are far stronger than not. But the irony is that the Ps argue "structural error" during the administration of confirmed directors that had removal protection, but nobody has really given a good example of why that's a problem. And now we are living it. Trump couldn't get Calabria in there until too late, and now we are out of time because of the time and political considerations it takes to draft capital rules, change PSPAs, litigate, etc. Watt having removal protection from Trump likely ended up injuring the GSE shareholders. The Court missed the point when it asked whether the confirmed director making the payments contracted to by the earlier acting director caused harm, and Thompson dropped the ball to ACB when he admitted it wasn't a problem. Left unsaid was how the problem was the NWS couldn't be CHANGED b/c of the protection. That's the sort of reason why Seila held that Ps have no obligation to prove a "but for" world, but Thomspon not making that point means it was probably lost on the justices.

Call me crazy, I still think he acts. The optics were always impossible until the lame duck, and GA Senate + everything else made it have to happen at the end. He's not even back from his trip yet for pete's sakes. He's not resigning, so he probably has something he'd like to do for the past two weeks rather than dodge calls about a 25th amendment.

My understanding is that PSPA changes cannot just be reversed two weeks later. It's an agreement between the TSY/GSEs/FHFA. You need both TSY and FHFA as conservator to agree to change it back. That would likely require a confirmed Calabria replacement.

I feel very confident asserting there is no way Calabria is going to declare divs when the companies are in cship and below capital requirements. Not for the common, not for the jr pfd, and hopefully more to the point, not for the sr pfd. From a capital perspective, it's no different than a buyback. He's not going to let the assets dissipate (when/if given the choice).

Hi Midas, I'm a huge fan of your posts and thinking. You're one of the only reasons I bother to post at all, and I love the pushback. I think we do disagree on the importance of common dividends. Just ask yourself, do you really need to get cash back to invest in these companies? I sure don't. I'm sure Ackman doesn't. Dividends just don't change the intrinsic value of the company. The earnings are there and accessible in the future, and the future is where most of the NPV is. I also can't imagine Calabria declaring them when is all about retaining capital. Yes, the capital rule has the flexibility but that doesn't mean it will happen. It also had that section with flexibility to apply if the GSEs were released from cship early and yet here we are! I'm no fan of bombastic theories, but I think the accounting for the current NWS/buffers is a total fiction. I think only Bove has pointed it out. Earnings are "retained" but the corresponding higher liquidation preferences is not accounted for in the financials. "earnings per share" is something that first takes into account preferred dividends, yet the accounting ignore that the cumulative in-kind net worth sweep is just 100% of the "earnings per share" Realistically, the true economic EPS of the GSEs is $0.00 every quarter the net worth sweep is in effect - paid in cash or in kind. That economic reality is exactly why the common tread water even as Calabria touts "capital retention". When/if mnuchin changes this, the common will accrete upward every quarter (very rapidly). On the seniors converting, think about the likelihood of a sr pfd exchange happening given how things have unfolded. As part of a grand recap plan with a collins settlement and exiting cship it made sense and common was at risk given the low price. But now, I don't think it's in the cards. The easier alternative is just make them prepayable at par. Raise the capital in the market to pay them down. There are a bunch of other ways of dealing with them and none of them involve an exchange. There is no reason for urgency, especially if they become non-cum. Not exchanging also implies letting the courts play out, and it seems clear that is how Mnuchin decided to handle that front... Not converting seniors still allows third party capital raised over _time_ if srs are non-cumulative and if they were prepayable. It just can't happen until earnings retention has reached a point where external capital can take them out. That can always come from exchange offers, btw, and remember there is a huge stack of GSE liabilities that can be offered stock. Not just the sr pfd. But there is limited appeal in such an exchange, to anyone, until there is stability with the GSEs. Both in earnings power and, most importantly, political certainty with the new admin and what happens with FHFA. That takes time! Which, by the way, you need to consider that capital rule is modified and it could be a lot easier to meeting the thresholds... I think ultimately it comes down to this question. Is there a rush and why? I think there really isn't a rush. And if there was a rush they could have done all of this stuff already. I just haven't seen anything consistent with a rush from TSY (though FHFA moved quickly on capital rule and other things). Earnings recap over time, and that time brings us capital, it brings us certainty on politics, it gives clarity on lawsuits, it makes people comfortable with GSE values post PSPA restrictions/fees. All of those things make it much easier to pull off a future exchange, and the common will be higher as we get there. On the other hand, what's the rush to raise external capital? I'm struggling to make the case.

Midas: Re: divs. Look at the wireless sector. VZ and T pay divs. TMUS pays zero divs. Same businesses. Large TMUS investors even placed a ton of stock into the market. There are no dividends (or even buybacks) happening at TMUS. Same with certain utilities. That basically proves investors don't need a dividend to invest. Re: liquidation preference, that's not true with going concerns. The liquidation preference is irrelevant if/when the prefs are non-cumulative, which the jrs currently are and the srs are likely to be (imo) after a PSPA amendment. I gave you the example to prove the point... don't pay a div for X years to the pfd, then turn it on for a quarter or two and pay a huge special div to the common, then turn them off again. The liquidation preference doesn't mean anything when the value of a company is the present value of future cash flows AND being non-cum entitles the pfds to a very discretionary trickle of those cash flows. The reason the common haven't doubled in the past year on retention is very simple! There hasn't been retention. As you know, the sr liquidation preference goes up b/c the sr pfd is cumulative and the dividend is still the entire net worth sweep. Candidly, the entire notion of the GSEs "raising capital" this way seems fraudulent since the sr pfd doesn't count as capital and the higher liquidation preference isn't even on the equity statement in the SEC filings. I have no idea how they are allowed to do that. But the real economics of that are why the common are sitting here. Now next year, assuming a PSPSA that means actual CET 1 economic capital retention, the common will quickly rise over time with earnings retention. Yes, I do assume the commitment fees won't be absurd. If they are anything like FDIC premiums, they should be reasonable. A normal committed bank line for something like that would run < 1% per year on the undrawn amount. That still leaves huge earnings retention. The P/E of the common right now is just telling you how coiled the spring is. At < 1x P/E, or 1.5x P/E with a tough backstop assumption, earnings start to recap very quickly. And as the price of the common shares rise, the amount of shares to issue falls dramatically. The spring is very coiled down here. But it still comes down to Mnuchin. I don't think any bad outcomes if we get real action, by which I mean simply TSY keeps the sr, goes back to 10%, makes it non-cumulative, passes consent decree approval to Calabria (perhaps requiring meeting at least statutory requirements first), adds a backstop, throws some other changes in based on the plan, and calls it a day. Then barring Congress moving, the snowball has been pushed off and in 3 - 5 years earnings + external capital that snowball will be a snow moon.

Midas: They certainly can. I also think they _would_ in some circumstances, like to raise an amount of capital that would get them out of cship and qualify for a consent order. Common shareholders do NOT need to receive a dividend for this to happen. I can point to a hundred billion dollars raised in 2020 by companies that not only don't pay dividends but don't generate positive earnings. Investors aren't dumb, it's all about the future. No need for a dividend this minute. Common shareholders don't care about liquidation preferences. These are going concerns. It's just about the earnings power and how much of that flows to the common. With non-cum prefs, it's 100%. Whether retained earnings or not, it's irrelevant. Here's an example to show how little leverage the prefs have... The companies can retain earnings for a decade and pay nothing to the prefs. Then after 10 years, they can turn on the pref dividends, and pay a 10 year special div to common. Then turn off the pref divs and wait another 10 years. Does this happen in the real world? No. But it just emphasizes the point that the prefs are along for the ride and someone else is driving the bus. On dilution: not really. The earnings retention rate is so fast that it trumps dilution from the preferred. And some of these preferred are big enough coupons that the dilution ends up being quite small, really. This gets into reflexive math. It's amazing how little dilution there can be when the common shares are $5, $10, $15 in 1 - 4 years. It's a lot like GGP. Once there is some certainty on the path up, look out above. And it becomes a virtuous cycle, not a vicious one. B/c there is no urgency to do those prefs early with the commons relatively low (at < 1x earnings ballpark), we won't see the vicious cycle. Yes, I think FNF should do the C exchange on financial steroids. Don't stop with the prefs. Offer all the way to the bonds. I forget if C went past the trust pfd into the actual corporate sub debt. But remember, this big bang happens after earnings clarity, after political certainty, and at a point where the common are far higher than today. Also remember that the common is trading at < 1 PE. One year of retained earnings is a double to the stock. And that's a halving of the dilution. The dilution function falls really, really fast. That's why it's really important when judging prefs vs common to think about the order of things.

To be clear, my view is that the jr pfd WILL be exchanged into common. It's just that this will happen at the end, when the GSEs can go out and raise the equivalent in external preferred to replace them. That last slug of new capital will be to get them fully capitalized. Not as an early step in the road. And I do think the companies would be wise to extend a similar exchange offer to all the GSE bonds. Accomplishes the exact same goal. That would be done at the same time. Just can't do this early when there isn't enough certainty on the value of the common vis a vis earnings power and, most importantly, political uncertainty. It also has the benefit of minimizing dilution. The stock prices of the GSEs after 1-2 years of truly retained earnings will be 100 - 300% or more higher than they are today. That's not a primary objective of the GSE board, but it's a nice-to-have.

The prefs go at the end for two very simple reasons. First: what they are replaced with, i.e. selling other prefs, can only happen at the end. Second: doing it early accomplishes nothing. You should also consider how exchanges happened in C as a real world precedent. There was a huge package of exchange offers across several security classes - preferred, and trust preferred -- to recapitalize into common equity in one huge corporate event. That happens at the end, when the end product is clarity and certainty. For example, the GSEs could extend a similar exchange offer to hundreds of billions of agency corporate bonds issued at the same time it does for the prefs. There are mountains of capital available in the stack. It's just about getting TSY out of the picture. That's why I love this investment. But it does not happen in a weird series of one-offs. Exchanging the pfd first in a vacuum accomplishes jack squat. And the capital they need will not be done in one huge stock placement either - it's too big and see below -- so this idea that getting jr pfd out of the way first is a precondition to raising external common is bogus. The jr pfd has no leverage and no say. The board of dirs, outside of c-ship, would only consider minimizing common dilution not giving the jr pfd a nice IRR. That's more ammo for it happening at the end, when the dilution is lower into common by virtue of retained earnings and reflexivity. Before we get to the end, several areas of uncertainty need to be resolved: 1. political and legislative certainty/stability re: the GSEs. This includes what happens to the FHFA, and may span Constitutional ruling in Collins. 2. earnings power post PSPSA amendment restrictions

Yes, COBF. I see a lot of wishful thinking on the boards. But like Midas pointed out, what else would I expect? It's just weird owning something and being surrounded by fellow holders that I think have several pairs of rosy glasses on... On FHFA acting in its own interest, it's irrelevant whether we think it did. All that matters is that FHFA could make a colorable case that they did. And, unfortunately, they can. It's their judgment, not ours. It doesn't have to be a good or correct judgment either. FHFA makes the call for what is in its interests, not us. And perhaps not a judge, either. Sad but true. I also hate to be the bearer of bad news that the lawsuits are not a factor to SM. Winning the lawsuit just means the TSY owes $120B back to the GSEs. It's not even a bad thing to accelerate the recap in that way. Nor is it a problem for new capital. The lawsuits that would be a problem would be lawsuits where a plaintiff win would drain assets out of the GSEs, but Collins and others don't do that. They are suing the government, not the GSEs. The only problem the lawsuits really pose is that it makes a TSY exchange more difficult b/c if they get new common shares and therefore claim a bigger % of the $125B overage it's another nightmare of lawsuits about the TSY taking the economics of the overage through its additional ownership. And eventually people will realize that no self respecting centimillionaire is going to abdicate his duties and do an embarrassing and pathetic forgiveness of the senior preferred. It's just so weak sauce when the same objective could have been obtained with a few simple moves in a broader recap (settlement, exchange into common, etc) I also think, sadly, that a jr pfd conversion into common is the final piece of the puzzle, not the first piece. The investments still work. I think even in a retained earnings scenario these guys are fully recapped with capital raises in 5 years if there is any sort of legislative stability. The companies are simply far too valuable. It just seems to me that the commons work better. Basically the same downside by far greater upside. Just sort of waiting and hoping for SM not to just remove the buffers. Keeping the NWS in place or a cumulative 10% dividend makes it really, really hard to raise that external capital or makes the retained earnings train creep along at 3 mph.

HERA gave the power to FHFA to act in its own interests as conservator. The FDIC was not empowered to act in its own interests. That seems like a pretty fundamental difference.

Cherzeca, I challenged you before on the constitutional claim about the acting director issue and the SC zoomed right into that with nearly the entire extended time. I'll give the same challenge, but on the APA front this time. HERA explicitly permits the FHFA to act in the FHFA's interests. None of the old FDIC / bank statutes allowed the FDIC to do that. And that is precisely why the courts are likely to find that the FHFA's NWS actions were valid. It deemed that to be in its own interest. It didn't have to put its interest aside in some form of optimizing the conservation of assets. So case closed. There is no reasonableness standard. It's a crappy outcome, but it's what the law says. Nothing illegal about being a majorly suboptimal conservation of interests when the law provides that flexibility to the agency. Would love your pushback on that. I'm not a lawyer, but I've read a lot of legal filings and sometimes I think I've gotten the hand of it, lol.

The idea that the government "has been paid back" is kind of a fiction. Under the terms of the sr pfd, pre or post NWS, the GSEs simply cannot pay them back. More importantly, nobody in the administration has floated that idea. It's a squishy justification of a writedown, and I'm back to my previous post. Mnuchin doesn't need to do such an embarrassing thing to accomplish his objectives, so why on earth would he? The courts can decide whether there are $125B of overages from the NWS. Hopefully they say yes and award substantial interest. The reason I own common and pref securities is the GSEs are intrinsically incredibly valuable and I trust that Mnuchin will get us from here to there. It doesn't really matter whether it's a decade of retained earnings or 7,5,3,2 years. The investments work. The only way this doesn't work is if Mnuchin just keeps NWS, removes the caps, and retains the power to approve consent decree at TSY. Or Biden fires MC "for cause" and we have a pointless power struggle. And even then, we have outs with the courts (though I think Collins is an ultimate loser, sadly).

The only reason to write down SP is if urgency is a priority on the recap. Hasn't every single thing to date screamed out that urgency is NOT a priority for Mnuchin on the recap? He can definitely keep the SP outstanding and make a series of other changes that put them on track for real retention over time and the ability to raise third party capital. Namely: remove NWS, establish a fixed dividend, make the SP non-cum, make them repayable, and remove TSY approval to a consent decree. That still protects the taxpayer by not giving away all that liquidation preference. What self respecting multi centi millionaire would do such a bad financial deal for the taxpayer to just hand over all those billions to people with zero leverage?

Writing down sr pfd is a fantasy. Texas asked what their motivations are.. I'll tell you for Mnuchin. The self-respect and ego of a guy who made a huge fortune in banking. It's just embarrassing to write it down. It makes him look like a milquetoast puppet to somebody else's money, which he doesn't even need. And the kicker is it doesn't even need to happen to accomplish what he promised to do. So why on earth would he do it. It only maybe made sense as part of a grand recap where he converts it to common, but time ran out on that. Re: COBF, our urgency on the timing is irrelevant to them. Consistent w/ their actions to date and their stated objectives going forward.

IG: Some levers: they can extend exchange offers to the mountains of GSE corporate debt. They can convert junior preferred and then place a slug of new preferred to Berkshire. They can convert part of the government preferred into equity. I think the prefs will trade quite well once it's clear that TSY is out of the picture and Calabria can kick off a recap with no chance of putting genie back in the bottle. Par in 7 years at the latest on securities trading at 35c on the dollar is a very nice return. And the reality is Calabria is gone in June after the SC ruling and I would expect a good chance of significant capital rule loosening within three years of that, so really it's probably par in 5 years at the outside. The only real lynchpin is Mnuchin getting Treasury's veto power out of the equation. I think the common could also do well, just depends on the specific scenario.

Just repeating myself with nobody engaging except orthopa calling me an idiot, but here goes: 1. Mnuchin's objectives are private ownership. Timeframe doesn't matter. 2. Calabria's objective is raising capital and private ownership. Timeframe doesn't matter. 3. Calabria's job is most secure until June, and even more secure if Rs hold Georgia and nominating a replacement would be a slog. 4. Calabria therefore has until June to make major / irreversible change. 5. Calabria cannot do #4 unless Mnuchin gives up TSY approval of consent decree 6. Mnuchin will give that up b/c he's leaving and approval rights block #1 7. For #1, all you need is: no more NWS, no more cumulative property, and prepayable sr pfd 8. To reiterate, YOU DO NOT NEED SR PFD TO GO POOF to accomplish Mnuchin's or Calabria's objectives 9. Therefore the senior preferred will stay in place. It will be non cumulative. The dividend rate will change from NWS to X%. This is how mnuchin "protects taxpayer". 10. When the sr pfd is non-cumulative it will also count as capital 11. Calabria will be at statutory capital requirements by June with retained earnings and non-cum sr pfd 12. Consent order signed by June. Buffers fill up over time. GSE capital plans can be considered. Calabria gets time to build up his agency and the GSEs 13. GSE commons and preferred both do well from here. 14. Pray Biden doesn't pick a fight by trying to fire Calabria for cause, and then fire all his deputies too 15. Pray we win the lawsuit, even though likely scenario is a remand then a loss b/c statute allows FHFA to act in its own interest so Collins is a total dud. I see a lot of assumption that capital can't be raised with sr pfd liquidation preference outstanding, but that's totally wrong. Once the GSEs are under a consent order and the mgmts are free to act on recap, there are many levers to pull even with a 200B weight of sr pfd. Meanwhile it's retained earnings over time since calabria won't be declaring divs on any of the pfds, sr or jr.

Midas, Yes, it's about a decade of just retained earnings, if nothing else changes. But once we have a couple years of stability and as capital approaches capital requirements, it becomes very easy to bridge the gap with a big external raise. I think $75B is easily doable, that gets you down to 7 years worst case. And then there are other things that would likely happen over the next 7 years: 1. Calabria leaves and his replacement may lower the capital requirements somewhat 2. The GSEs could lobby his replacement to change the capital requirements, for example accepting those unamortized upfront fees as capital. 3. The GSEs could lobby his replacement to change the mix of preferred vs common equity, thereby letting the entire massive slugs of non-cum govt preferred count as massive increases to both capital requirements (statutory and adjusted) 4. Other steps that would accelerate release but dilute the common: jr pfd exchange, corp bond exchange, sr pfd exchange 5. Lawsuit resolution on NWS overage (a win bringing $120B back). Any or some of those 5 things can vastly accelerate the timeframes to sub 3 years from now. Whether common fares better than the preferred is more scenario dependent, but at this stage it's all about Mnuchin and just getting to a place where the above can happen. Regardless of timing. A lot of shareholders look at this like urgency or the lawsuits matter, and they don't.

Finally, somebody (COBF) takes off the rosy glasses. The sr pfd balance does not need to be written down to accomplish Calabria's objectives. Frankly, I don't think Mnuchin's self-respect and ego is compatible with simply writing it down. It's just a stupid thing to do and embarrassing to give hundreds of billions to GSE shareholders. The NWS can end and the sr pfd be left outstanding as a non-cumulative instrument, and calabria will happily not declare those dividends. That sets the GSEs on an inevitable recap path. As long as the sr pfd is also made repayable, eventually private capital can be raised to pay it down. Yes, this is a slow process, though accelerated by the fact that sr pfd with non-cum now qualifies as a huge slug of capital, but the only people who look at this really thinking there is urgency to the recapitalization are us security holders... And Mnuchin's comments do not seem accidental to me... an alternative to what I wrote above is to convert some or all of the sr pfd into common. But then what happens when the SC remands the NWS and shareholders get lucky and win in Texas on the overages? Then TSY gets sued all over again b/c they ultimately benefited from those overages after all with the new common shares they got from any exchange. It's messy. And messy doesn't get done with a tight deadline.