WB_fan82

Luke, I think you are right. All the paths of least resistance go that direction. But I'm also trying to not take anything for granted here. The only way the jr prefs have downside is r-ship (though legal optionality is probably worth at least 10c on the dollar at this point). Many companies file BK to deal with lawsuits, so do the GSEs have the same reasons? So far it appears the answer is no. B/c with the exception of Lambert (previously discussed), everything else comes from TSY if there is money owed. And if that's the case, to Cherzeca, why do outside investors have to wait for a global settlement? The lawsuits are a TSY issue. Nothing to do with the GSEs. GSEs have no liability.

And if the GSEs exit c-ship, does Lamberth go away b/c the jr prefs are live again? That would make make the Lamberth case moot since new investors wouldn't have to worry about it by definition of the GSEs exiting c-ship. Maybe that's what Calabria intimated when he says the issues go away? Just musing out loud - I've got my thinking cap on, Cherzeca!

If any of the dozen different lawsuits might require a payment of assets out of the GSEs, then it will be difficult to raise outside capital. Other than r-ship (bad side effects) and global settlement (very hard to pull off, imo), what are the other options? Treasury indemnification of the GSEs?

Hi Midas, I really appreciate your detail oriented and even-keeled analysis on this board. Thank you! In your scenario, the government would own > 80% of the common shares outstanding. A lot has been written/speculated about why the government couldn't own > 80% of the common (hence why the warrant is limited to pro forma ownership of 79.9% of shares out at time of exercise). Do you have any thoughts on whether there are real impediments to owning > 80%?

Reading HERA, I see two ways they can be put into receivership without being insolvent: 1. Consent via a resolution of the GSE board of directors. 2. Has no reasonable prospect of becoming adequately capitalized. #2 is probably in abeyance until the capital rules are published. But looking ahead, the sr pref does not qualify as capital under the definitions. So unless TSY is willing to change the terms, r-ship would be on the table, maybe even required. Because the NWS retention by increasing the sr. pref balance would never be progress towards adequate capitalization. I'm not saying TSY would actually want to force them into r-ship. Whether that up/down equation makes sense for them is a different subject. I'm just trying to see the paths to even get to that consideration. BTW, if they do go into r-ship, who owns the equity in the new LLRE? TSY or FHFA?

I think it's smart to think through the receivership scenarios. On the one hand, it's a possible rinsing of the legal liabilities. That's about the only positive I can see. That could make it easier for the successor entity to raise capital. On the other hand, it doesn't comport well with the change to the NWS. All of the ongoing retained earnings / capital is an increase in the sr. liquidation preference. If they enter rship, that retained capital would sit in the old company. It wouldn't help at all with the new company b/c the r-ship regime doesn't allow the capital / equity to transfer over. Whereas if they keep status quo in c-ship, all of that retained capital is building a reservoir that can be tapped in the future by amending the terms of the sr. preferred to qualify as capital or to exchange into capital (common or even other pfd). Also, can Calabria even push them into r-ship at this point? IIRC, HERA says they have to be insolvent to be put into r-ship and the companies are far away from that and every day of retained capital is another step away from the insolvency cliff (and they are already half a mile away from the edge). R-ship seems to me to be the only major downside scenario, so would appreciate feedback on thinking through this possibility.

Thinking about the statements Mnuchin made on FBN this morning re: currently negotiations to amend NWS with FHFA, one obvious way to do this is to increase the liquidation preference of the sr. pfd. As Midas noted, this doesn't actually increase capital (until the sr. pfd are converted to capital... either being non-cum or converting to equity). But there is an alternative. Instead of increasing liquidation preference, why not just issue common equity equal to the amount of dividend foregone? Either through actual shares or warrants. My question for the board is, does anyone know the triggers for the 80% accounting consolidation rule that would put the GSEs on the books of the govt? Is it actual share ownership, or "beneficial ownership" (meaning the % of shares out the govt could have tomorrow if it wanted to)?

I think Pinto is referring to the div sweep halted when he says "reversed", not a 5th circuit invalidation/win. The NWS can halt and the sr. prefs would still remain outstanding. It's a fair question what the new div rate should be. 4%? 5%? 8%? Pinto says 10%. BTW, if they are made non-cumulative as part of any amendment halting the NWS, I think that would instantly shift the entire sr. pref balance into the "capital" column. Since no divs would be paid in c-ship anyway (sorry public prefs!), I don't think the coupon on the sr. pref really matters as long as they are non-cumulative (and are redeemable at par by the GSEs). GSE could retain earnings over time, and at some point raise a bunch of capital to redeem the prefs.

A couple thoughts on the stress test and midas note: I wonder if the stress tests are over such a short period that the total credit provisions may not have hit maximum. It takes time for borrowers to go seriously delinquent, not cure, go into foreclosure, etc. The credit losses are only a fraction of the credit provisions, so it's hard to know what would happen with another year, and therefore I wonder if the capital requirements would need to be higher than indicated. Also the accounting change starting in January books expected total credit provisions over the life of a loan upon guaranteeing the loan. Does this also apply to changes in total credit provisions on the entire book as expectations change? That might make their provisioning much more volatile in a stress period as they end up predicting the defaults rather than reacting to the evidence of defaults. Finally, on Midas' point on the minimum capital levels being 2.5% on all balance sheet assets including the now-consolidated trusts. This is one reason I think Calabria wrote in his letter to Congress that he wants power to determine things that count as capital. There are some large liability accounts that perhaps should be thought of as "capital" - like the liabilities associated with the cash from upfront G-fees received. But by the letter of the law, I don't think he has that power...

Easier scenario this year with a 25% decline in home prices rather than a 30% decline in home prices. Does anyone understand the difference between the credit provisions and "Credit losses" line near the bottom?

The GSE stress test results were all out by now in previous years. Looks like the administrative plan isn't the only thing being delayed?

re: prefs getting divs... guys, this isn't going to happen while we are in conservatorship. Safety/soundness and conserving/preserving assets is not compatible with dividends. Any NWS halt will follow that reasoning, so why would the public prefs get paid? re: Hume, why not offer the preferred a rights offering to recap the common? Govt currently owns $18B of value via the warrants. Give the Jr prefs a rights offering to invest up to $30B. The Govt via Sr. prefs invests $120B to keep its 80% ownership static. Voila, $150B of capital raised. The prefs as a class could easily find $1 of rights offering money for every $1 of par value and the govt has infinite pockets. The only one getting screwed would be the diluted common holders. One of the wrinkles here is people are annoyed by hedge funds making money, so the political optics of the common losing their shirts could be desirable. This situation is so fun to follow. There are many creative solutions available that haven't been discussed, b/c they would never be a conventional option in any kind of normal paradigm (which this is definitely not).

Milken Institute getting on board!

Twiddling thumbs waiting for January hearing en banc in the 5th circuit. Anybody know when the government's reply will be filed?