WB_fan82

Listened to the whole thing. I think the Ps are dead in the water on the constitutional front. Just like the ROP or Bhatti case (I forget which), they are honing on the very neat and convenient fact that the acting director WAS removeable at will. So you have an unconstitutional agency, but one that took an action which did not suffer from the same fatal constitutional flaw. Therefore retroactive remedy not available, and affirm en banc. But I also think the lack of discussion of the APA is telling. The justices will remand back to S. Texas where we can enjoy trial on the merits and will have to survive the fact that HERA explicitly states that FHFA can act in its own interest, which provision is NOT in the similar FDIC statutes with similar conservatorship structure. That will takes years to work through the appeals. The legal path here is not a great one, sadly. In Mnuchin I trust. Kill the NWS, change the sr pfd in a way to remove the cumulative nature so it counts as capital (Tim removed a comment from "Patrick" yesterday on this very idea, but I saw it), and then there are no barriers to private capital and we can do the consent order. The courts awarding NWS overage then becomes a lottery ticket for newly raised external capital. And now we have the endorsement of the WSJ ed board. No worry about being excoriated for taking "the least bad option". COME ON STEVE!!!!

How the hell does WJS ed board say the government hasn't been paid back? I'm flabbergasted how idiotic and factually false that is. The government has gotten back the 10% coupons in cash, plus the entire principal, plus extra. Very disappointing.

The only rationale for Treasury to settle was to inject capital back into the GSEs. That only made sense as part of a grand recap plan, which didn't happen. Nothing said on Dec 9th will change this. There will be no settlement. If capital comes back from the Treasury via overage over time, great. Let the courts work it out. Zero upside for TSY to do this and zero rush to get that $125B of capital back to the GSEs. But even if I'm wrong, there would be no settlement until the optical cost is zero. That doesn't happen until after the GA Senate elections.

Ortho, I DO believe the prefs will be offered a conversion. At least all except the floaters. It's just going to happen at the end. I could be wrong b/c, as you point out, there is flexibility to pay some distributions after they meet the core requirements. But that just leaks out capital for no reason and I don't see what is accomplished by converting the prefs early. What part is me saying Calabria is lying? I think Calabria has been transparent Day 1 and he's the GSE holders' best and only friend. Huge fan of that guy.

They don't have a seat at the table b/c they are just along for the ride. The preferred stock is just a pile of securities with a set of rights that FHFA and advisers will consider when solving for the recap. Nobody will be asking the preferred holders for their input. And while a conversion at par to common is very possible eventually it would happen at the end. The reason is simple. Converting the prefs creates CET1 and frees up Tier 1 room to sell new preferred. It is far easier to sell $30ish B preferred than it is to sell $30B ish common. But you can't sell preferred while in c-ship or under a consent decree with the buffers binding b/c Calabria won't be declaring dividends until the GSEs are out. It happens at the end to get the GSEs out of c-ship. That end could come fast if TSY converts sr pfd to common or there is grand administrative action, but I suspect the end is actually several years away when the dust has settled on the courts and the NWS outages. That doesn't mean the prefs are a bad outcome - far from it - but it does mean they sit patiently while retained earnings accrete to the common. As an aside, it's frustrating to watch this. The govt recapped Citi easily in 2009/2010. The GSEs could easily offer exchange offers to their CORPORATE DEBT HOLDERS and create an arbitrage mechanism by offering common shares that are worth more than market value of those bonds. There's a whole lot more bonds outstanding than preferred stock outstanding. Maybe this is all in the works and everyone is just holding their breath for Treasury to exit the picture by amending the NWS and making the sr prefs payable by the GSEs. I guess anything else is jumping the gun, right?

#1: The later we go, the harder it is to do complex things. Converting sr pfd to common is complex (issues: setting the ratio, fiscal ramifications of consolidation, explicit ownership, exiting the govt's senior position). It makes the most sense as part of comprehensive action which would also involve a jr conversion. But as time ticks away, tweaking the sr pfd is far easier. It's the easiest way, actually, to get the GSEs to the point where retained earnings are truly building up capital (not this fake accounting where retained earnings go up but nothing reflected for higher sr pfd liq pref) #2: Agree. The operative question should be are we heading in that direction... #3: Agree on all of that except I don't know what base case is anymore after WSJ article and Mnuchin comments. Base case might be slow recap. #4: One where TSY steps out but forces Calabria to keep them in real c-ship until minimum capital. Agree common do not benefit if SM just removes the reserves but keeps NWS in place. #5: Disagree! You are missing that Calabria will not be declaring divs on ANY securities, including new govt non-cum prefs. That means retained earnings over time. That benefits the common. a 10% coupon doesn't mean much if Calabria doesn't declare the divs, which as conservator he definitely won't. #6: I agree, but emphasize this happens at the end of a recap not the beginning. Buyers of new prefs need divs right away. #7: It's so reflexive that it's hard to be definitive. I tend to agree in quick recap scenarios. But in extended scenarios, or counting a win in the courts on the NWS, the common could easily do far better. Thanks for the thoughts. I joined the boards to get out of my own head on this situation, and I've greatly appreciated the posts from you and others.

There wont be urgency to recap the company as soon as possible? Why, to pay out an exorbitant % of earnings in commitment fee to treasury? To withhold dividends as long as possible to current and new investors? To keep a lid of CEO pay? That makes no sense and you know it. That only makes sense to the retail common investor who hasn't read the capital rule. Preferred get converted early and enjoy the upside of the common not at the end. Where has preferred getting converted at the end happened? C? AIG? and why does where the common trade in relation to eps matter now all of a sudden? Place in the capital stack matters as will be shown in the recap plans. Maybe its warrants, maybe its a better then market conversion but preferred holders, hold preference in the capital stack and a 33B key to getting out of conservatorship early. What do common hold? Just the pie that will be taken from. No way the preferred holders that have ridden these cases up to the SCOTUS for the benefit for all involved don't come away with a sweet deal in the recap. You think Paulson, Berkowitz et al are doing this for the good retail common holder when they will have a seat at the table with the GSEs in recap? For "the rule of law"? Get out of here. You think he was throwing $150,000 plate fund raisers for Trump 4 years ago trying to get to make the retail common holder a millionaire while he holds preferred? Nope. This is for him, its simple, hold what he holds. I agree with you that common has the pie that everyone wants to eat. But at this late hour, scenarios where the pie gets devoured (jr pref exchange, sr pref exchange) start withering and the pie might be getting put in the fridge. Amending sr pfd to kill NWS but leaving the pref outstanding, for example, turns time into the friend of the common shareholders. Recapping over time is far better for the common than the preferred. Your best point is that the incentives of the companies and the management team favor recapping ASAP. In a scenario where TSY steps out of the picture and a consent decree with FHFA is signed, I agree. But you need both of those things to happen to raise private capital. If that doesn't happen, the common at 1x earnings could easily do better than prefs at 40c on the dollar. Imagine if TSY amends PSPA, changes its prefs to non cumulative, reverts the dividend back to 10%, and says thou shalt not exit c-ship nor sign a consent decree until minimum capital requirements met. Now you have recap over retained earnings, you run through SC (if $125B of NWS overage comes back, that's to the common), etc. Prefs are in time out while this happens. And what happens if Calabria is replaced?! At least the common accrue value over time. At 1x you're paid to wait. At 40c on the dollar, you get paid a lot less in the prefs. Unfortunately, Jr preferred do not have a seat at the GSE recap table. Look, I own a ton of jr pfds. I've never been tempted by the common shares until now. But I find it hard to imagine a complicated recap/exchange offer happening with no momentum. And unfortunately the optics still matter since the Senate is in play in Georgia, so Mnuchin might not do anything until the last two weeks of lame duck. I'd love to be wrong, but I've lost a little love for my jr pfd position.

There are several scenarios where the common do far better than the preferred. If the jr preferred gets converted to common, it won't be when the common are trading at $2-3 per share. The common will be trading far higher than that. This is an ultra reflexive scenario with respect to common share price, and extrapolating common price at current 1x earnings is a mistake. And keep in mind there is no real reason or urgency for this to happen until the very end of recap. As earnings retain, the common stock goes up while the pfd patiently wait for this conversion. It's not going to happen early in the process. Converting the sr pfds is the "right" economic scenario, but it's also messy. Time might be up for this one. That leaves other scenarios with amending the sr pfd that are far more favorable to the common and earnings retention scenarios, and also far easier to Mnuchin to do.

The upside case for the common is recap over time, no extra dilution. I.e. kill the NWS but no recaps. OR small dilution in a couple years at a much higher stock price. The common trades for 1x earnings. It doesn't matter if it takes 8 years, that value builds up to the common over time. It's not a great scenario for prefs who could be sitting for all that time and "only" playing for 120% upside.

Fannie Mae just said on their earnings call late 2020 or early 2021. I'd be shocked to see it in November, given that context.

Hugh Frater at FNMA is 64 and as a founding partner of Black Rock and with a long career in the private sector, is probably financially set. Brickman, on the other hand, is a Freddie lifer and only 54. He's in his prime earning years. Perhaps FHFA asked for commitments from both executives and it just didn't make sense for Brickman to hold it as a public service.

https://www.washingtonpost.com/business/2019/04/22/how-fannie-mae-freddie-mac-dodged-cap-ceo-pay/ "At about the same time, Freddie Mac’s longtime chief executive, Donald Layton, announced he would be stepping down this summer. Freddie also created a new position, promoting the head one of its largest business units, David Brickman, to the president’s job, earning $3.25 million. But unlike its sister housing company, Freddie Mac says that when Brickman becomes chief executive in July, his pay will fall to $600,000 and the president’s job will disappear." ... "Still, the inspector general’s office has challenged the arrangement. Freddie Mac now spends $3.85 million to pay two people for work that used to be done by one person for $600,000, according to the report. Both companies are involved in “financial engineering” meant to allow them to “circumvent” the salary cap put in place by Congress, the report said." The bill on GSE CEO comp limits: https://www.congress.gov/bill/114th-congress/house-bill/2243/text?q=%7B%22search%22%3A%5B%222243%22%5D%7D&resultIndex=1 My read is that this $600k is set in stone for all time until Congress changes it. It doesn't seem to me like the CEOs would be eligible for stock-based comp on any IPO, either, but I could be wrong about that.

I think you have a good point about the money. There is a gold rush in mortgage finance right now across originators, brokers, the whole industry. Brickman could be making a lot more money than his current paycheck. He could get involved w/ a finance SPAC. There must be a dozen more lucrative options. Which leads to the facts... do the pay limitations fall off upon a c-ship exit? Or are they legislatively set in stone forever? As an aside, WSJ is a marquis paper of the highest journalist standards. Disagree w/ any idea that their reporting isn't well sourced.

Isn't the simplest answer on Brickman that Calabria is molding these companies in his own image and he wants him gone? Read the Propublica piece on the loans from Freddie to Kushner. It stinks to high heavens: how it happened, the terms, and the subsequent performance. Calabria criticized the corporate cultures... that loan should have been investigated. And I bet it probably was, under MC's direction. So now a head will roll. But it's not material to shareholders, so no need to disclose it. In fact, earlier in 2020, MC mentioned supervisory actions that need to be cleaned up and they aren't made public. This seems like an obvious one. Don't make incredibly generous loans at far better than normal rates for the economic benefit of the President's son - in - law and daughter... Doesn't seem so hard. And MC seems like an idealistic sort of guy that would despise this sort of thing. I don't know if it's a positive, but it's not as negative as I first assumed.

Have you ever heard of a settlement after oral argument? I've found settlements in the weeks before, but never after argument.

Off topic, but I can't resist. Trump is toast. The reason is simple. He net lost people that voted for him in 2016 to Biden. Especially women. On the other hand, almost nobody that voted for HRC in 2016 now finds themselves voting for Trump in 2020. Remember his victory margins were narrow in 2016. So he needs to pick up 2 new voters for every 1 he loses to Biden. That hill is way too big to climb. If only 1 or 2% switch it's 2 - 4% ground to make up. Just not happening. The women are deciding 2020, like it or not.

I think this is simple. There is an elephant in the room. There is no upside, none, nada, zilch for Mnuchin to move on the GSEs before the election. It's all downside from optics of bailing out hedge funds and opens up all kinds of scrutiny. Mnuchin has been the consummate survivor in this administration that has seen record turnover. He's smart. Another poster said he's an analytical guy -- based on lack of TSY personnel, he's a micromanager that does things personally. He's also been super busy with more pressing items: China, stimulus, covid, funding the govt, etc. So all of that tells me that the GSEs are in his "want to do" pile but not in his "need to do now" pile. And he's fully aware of the political risks of acting before the election. After the election, that falls off the table. That would be THE time for him to act. There is still a white house order to reform Fannie/Freddie. There is still an order to negotiate a new amendment and covenants. And we WILL get something. FNMA is close to the capital reserve buffer, which forces the conversation. The real question is whether Mnuchin punts by increasing the buffers to $200B and keeps the NWS in place, or whether he wants to take the step to convert the sr pfd and negotiate a commitment fee to truly get the GSEs privatized. I don't think he needs to settle Collins to do any of this. He can let Collins play out. Worst case, $125B+ goes back to the GSEs which increases the value of TSY's stake. TSY is in a win-win position. In fact, I think it might very well be a bridge too far for him to settle Collins. He can accomplish the same objective of getting govt out of ownership w/o all the bad press of settling Collins (and I'm not even sure if he has the authority to do a monetary settlement?!). Obviously that's only half a loaf, but it's the only half he's ever talked about.

GSE earnings were amazing. Major "amortization income". Good explanation of how that MBS refi fee will be recognized over time. Seems like a mismatch that the fee is to compensate for the GSEs providing Covid support, where they have to book the allowances upfront, but only recognize this upfront fee over the span of 30 years. Maybe it's time to give them credit for unamortized upfront fees after all, like some of the commenters suggested (but not, interestingly, the GSEs or Tim Howard). Also, FNMA CEO said on conf call they expect FHFA to finalize rule late 2020 or early 2021.

There are so many levers to pull to put in private capital. Convert the sr pfd common Settle Collins for the NWS overages (TSY might prefer to wait for court outcome on this one) List the common stock and make exchange offers to the existing agency bonds Convert the public pfd to common Sell new sr pfd to the public for the pfd part of capital requirements All of this helps capital. The common share price doesn't matter one iota here b/c nobody is buying newly issued common. Seems to me the common shares are a bet on TSY killing the NWS and letting the GSEs accrete retained earnings over time with no increase in its preference. Or a bet that you get some positive reflexivity in the price if Collins wins in court or we get more clarity on a recap or something where a higher price reduces dilution. I don't really understand the investment case for the common shares, especially vs the pfd shares.

It's super easy to get private capital into the GSEs. Just stop the NWS. And convert it to common. voila.

This is an old article...

"Other critical mile-markers"... sounds to me like: "putting in place prudent and sustainable lending standards" = figure out QM and GSE patch? "sound risk management" = CRTs? "and world-class regulation that applies the same set of rules to all market participants" = equal terms for selling loans to GSEs, and/or equal capital treatment by banks of mortgages (i.e. 20% risk weight same as GSE MBS instead of 50% risk weight holding the mortgage)? Excerpt from MBA remarks: "Of course, having a capital rule is not the same as having capital. But it is a critical step toward ensuring that the Enterprises can support sustainable homeownership throughout the economic cycle. It is also a critical step toward responsibly ending the conservatorships. It was insufficient capital that triggered the conservatorships. And building private capital is a necessary precondition to ending them. Ending the conservatorships will be process-driven, not calendar-driven. Other critical mile-markers include putting in place prudent and sustainable lending standards, sound risk management, and world-class regulation that applies the same set of rules to all market participants."

New FHFA rule! Slow but sure progress. Curious about what MC would want to bake into an amended SPSA and what he would want to get done through rulemaking.

Where are the 2020 DFAST results for the GSEs? Was the deadline extended? "Reporting Format and Timing The Enterprises must submit results of the Baseline and Severely Adverse scenarios to FHFA and the Board on or before May 20, 2020, and must publicly disclose a summary of the results of only the Severely Adverse scenario between August 1 and August 15." https://www.fhfa.gov/Media/PublicAffairs/Documents/411/Fannie_Mae/Summary-Instructions-and-Guidance_2020-Reporting-Cycle.pdf

There is no way in hell there is a settlement before the election. The optics look horrific, especially with the yellow press about Freddie and the Kushner multifamily loans. I would also be very surprised if there is a PSPA amendment pre-election, for the same reasons. The reason being it's too to cast as a windfall for security holders. B/c make no mistake, GSE securities would fly on either (some chance the common could decline on a PSPA amendment but why chance it). Meanwhile, there is still work to be done. The capital rule has to be finalized. Maybe the Freddie stuff is what Calabria means about being bad corporate citizens. Besides, Mnuchin is basically running the government. Congress, China, stimulus, the economy, he's doing it all. Where is the facetime for FHFA and settlement and all the provisions that would probably accompany a PSPA amendment? Post election, different story. There is still a month between the election and the Court. That's plenty of time to settle and in fact the government has settled other cases in the weeks before oral argument, so it wouldn't be unprecedented either. Then nobody cares about the optics.