Luke 532

At the FSOC meeting last month, Treasury’s Craig Phillips (Mnuchin's #2) approves of FHFA’s risk-based capital requirements. Seems to align FHFA/Moelis as agreeable to the Treasury. Edit: meeting minutes attached June152018_minutes.pdf

Tim Howard on the Collins ruling... I’ve just finished reading the decision (and no, I’m not that slow a reader; it took me a while to get to it….) and was struck by the extreme contrast in how the majority addressed the two issues before it: the APA claims and the constitutionality of FHFA as an independent agency. I found the discussion on the constitutionality question accessible, informative and lucid. I learned a lot from reading it, and after doing so found the majority’s decision to be persuasive (and Judge Stewart’s dissent less so). The majority’s decision on the APA claims was another matter entirely. It said, “The Shareholders’ statutory [APA] claims mirror the claims made against the FHFA that the D.C., Sixth, and Seventh Circuits have all rejected. We reject the Shareholders’ statutory claims on the same well-reasoned basis common to those courts’ opinions.” That might have be a defensible position, had it not been for the stinging dissent authored by Judge Willett amended to the majority decision, to which the majority obviously had access. Willett begins by stating, “This case concerns whether the net worth sweep falls within the scope of the FHFA’s statutory authority as conservator. To answer the question before us, we need only look at HERA’s plain text. I won’t attempt to summarize or excerpt from Willet’s argument–readers should read it for themselves (it begins on page 58)–but I find it very hard to understand how the other two judges (Chief Judge Haynes and Judge Stewart) could have read Willet’s dissent and said, “Sorry, we don’t agree with any of that; we read HERA as being free of the judicial history of the FIRREA statute upon which it is based, and that HERA allows FHFA to blur the distinction between conservator and receiver in whatever manner it chooses, with no judicial review permitted.” On the silver lining side, in addition to the likelihood of SCOTUS accepting cert on the constitutional aspects of the decision (assuming FHFA appeals it), the Collins appellate judges finding that, “Divesting the Shareholders’ property rights caused a direct injury [to shareholders]” is a very good one for the regulatory takings claims now being pursued (with “all deliberate speed”) in Judge Sweeney’s court.

The market hasn't been paying attention to this situation for a pretty long time. That is one reason I encourage people to ignore price action and instead focus on whether or not the thesis is playing out.

Full opinion attached. Collins.pdf

GSE's solvent in 2008 (attached)

Collins... FHFA is unconstitutionally structured, but NWS upheld.

GSE reform starts with a recapitalization plan https://www.scotsmanguide.com/News/2018/07/GSE-reform-starts-with-a-recapitalization-plan/

Tim Howard comments this morning on FHFA capital reqs... https://howardonmortgagefinance.com/2018/07/10/some-pre-comment-comments/

Bartiromo: "There's been a conversation on Twitter and has been for a long time that President Obama needed money for Obamacare and he would take from all the agencies and he took from Fannie and Freddie. Is that true?" Mnuchin: "It's true. They used the profits of Fannie and Freddie to pay for other parts of the government while they kept taxpayers at risk." The suspension doesn't appear to involve subsidies. It looks like it's a redistribution program between insurers that has been stopped. This is mildly interesting, how would Rosner know? Most likely he's just guessing. Rosner... "There is a valid connection. It just hasn’t been publicly acknowledge yet. It has been privately acknowledged." This was in response to someone else's comment... "Unfortunately, there is no valid connection between the NWS and Obamacare subsidies. Treasury can stop paying the ACA subsidies and keep sweeping the total net worth."

http://www.pionline.com/article/20180709/PRINT/180709891/fannie-mae-freddie-mac-privatization-would-affect-many-real-estate-portfolios

Bartiromo: "There's been a conversation on Twitter and has been for a long time that President Obama needed money for Obamacare and he would take from all the agencies and he took from Fannie and Freddie. Is that true?" Mnuchin: "It's true. They used the profits of Fannie and Freddie to pay for other parts of the government while they kept taxpayers at risk."

I'm curious if anybody has thoughts on why in Sweeney's court the Fairholme attorneys did not oppose recent government requests for delay? The two most recent filings, unless I'm mistaken, were: -May 17, 2018, motion to stay briefing -June 19, 2018, motion to revise briefing schedule Both unopposed by Fairholme attorneys.

Tim Howard commentary: I’m obviously disappointed by this ruling. I had a couple of reactions to it, one specific and one general. My specific reaction is that, unlike the appeal of the Perry Capital decision, which was based on contorted logic and deliberate misquoting of the HERA statute, Judge Schiltz’s ruling on whether plaintiffs had standing to bring the suit seemed to me to be reasonable. He said, “Plaintiffs have no coherent theory for how their injury—a Third Amendment that, in Plaintiff’s view, is unduly favorable to the President, could have resulted from the President having too little control over FHFA. Nor do plaintiffs have a coherent theory as to why giving the President more control of FHFA will lead to him renegotiating the Third Amendment so that it is less favorable to himself.” And while I’m not qualified to assess Judge Schiltz’s legal arguments in support of his statement that even absent the issue of standing he still would have ruled for defendants on the merits, I didn’t find those to be unreasonable either. My bigger concern relates to the first several pages of the decision, which show Judge Schiltz continuing the pattern of judges in the net worth sweep cases completely buying into the government’s argument that, “Lending policies by government-sponsored companies Fannie Mae and Freddie Mac resulted in massive losses during the financial crisis; Treasury heroically saved them with an $187 bailout, and now greedy hedge funds want to recover the value of their investment by suing the government. They tried and failed to get the net worth sweep declared illegal as an APA violation, and now they’re trying to get the same result through this lawsuit.” (Judge Schiltz called this “killing the tree [to] kill one of its fruits).” It has now become clear that plaintiffs’ counsel in their initial filings in all of these cases did not react aggressively enough to the lies put out by Treasury and others about their handling of Fannie and Freddie during the crisis; those lies now have become embedded into the historical record, and plaintiffs are paying the price. The strategy by plaintiffs’ counsel not to attack the government’s actions or motives for the conservatorship in the initial filings (which it has changed in the more recent motions and amended complaints, but the damage has been done) was taken consciously, for what appeared at the time to be good reasons. Back then I had several conversations with plaintiffs’ counsel urging them to be more aggressive in challenging the government’s version of the 2008 takeovers. Their reason for not doing so went along the lines of: “it will be very difficult to win a challenge against the 2008 conservatorship decision because the courts grant great deference to regulators during a time of crisis, and if we call too much attention to the results of what FHFA and Treasury did to Fannie and Freddie after the conservatorship (i.e., running up their losses with non-cash expenses and forcing them to take so much senior preferred stock that they owed more each year in non-deductible senior preferred stock dividends than they ever had made in after-tax earnings), it will weaken the case we’re filing on behalf of the junior preferred holders, because the government’s argument then will be, ‘the net worth sweep really didn’t prejudice your clients, because the original terms of the PSPA would have made their shares worthless anyway’.” I understand how plaintiffs counsel could have thought that, but we’re now seeing how allowing the “false narrative” to become entrenched is backfiring. Framing plaintiffs’ cases as an opportunistic attempt to game the legal system for selfish financial advantage—as opposed to seeking a justified judicial remedy for the premeditated theft of all of the assets of two private companies who were operating in compliance with their capital standards at the time Treasury bullied them into conservatorship—gives any judge air cover to accept virtually all of the arguments made by the government in a motion to dismiss, and to grant that motion. Judge Schiltz showed early on that he would be no exception, when he essentially rejected the plaintiffs’ version of the facts in this statement: “Plaintiffs’ assertion that Fannie and Freddie could have remained solvent without the help of the federal government is dubious…but the Court is required to treat it as true at this stage of the litigation.”

Have shareholders won anything? Remand to Lamberth Sweeney allowances throughout discovery Probably some other stuff I don't recall off the top of my mind Admittedly, this is getting frustrating from a legal standpoint. I believe Mnuchin will act without the courts, but I was hoping Bhatti would be favorable to speed up Mnuchin's actions and give him cover to do so.

Yikes! No es bueno. Thanks for posting. Curious of the thoughts on this ruling from the lawyers on this message board...thanks in advance for any input you provide.

How is it in the gov't best interest to keep the conservatorship going? On one hand you claim that $20B is great and the incentive to keep the conservatorship going, on the other hand that money is fungible and doesn't matter to the President. Which is it? I happen to think, no matter where one stands on the money issue of 20B/100B, that there are more incentives than not for the gov't to end conservatorship. All quotes from this Admin which make logical sense for the gov't: "need to reduce gov't role in housing", "need to end conservatorship on our watch", "need to preserve 30 yr fixed rate", etc. Perhaps I'm alone in this line of thinking, but I'm comfortable with that as I believe the prefs represent a rare investment opportunity given the current discount to par and what I see as the writing on the wall for what the future holds.

I hear you, but how does the NWS stay intact if the conservatorship ends? Mnuchin has been very vocal about ending the conservatorship on his watch, as has Watt, and the White House (if we're to believe the Mulvaney report). Yes, it is possible that all of them are lying or change their minds. Edit: I didn't word that carefully enough. Watt hasn't said he wants conservatorship ended on his watch, but he has said it can't last forever.

What he's saying is $100B today in a politician's pocket (with a term ending in X years) that he can use any way he sees fit is better than $20B every year for eternity in someone else's pocket... especially if that somebody else likely will use it for purposes the politician doesn't agree with. Generally speaking, legacies in politics are built with what is actually accomplished while somebody is in office, not with the impact it has for years to come.

This is a key point many people miss due to the complexity of the situation. Once you come to the conclusion that the GSEs aren't going anywhere as they are the pillars behind US's housing economy, how do we get to zero? Are we going to see a new housing system built from scratch? Unlikely... Is the status quo sustainable? Sure until another downturn in the market and the government is on the hook for all future losses... Is the government going to be able to monetize its warrants by jumping over the Jr Pfds? No we are senior to them... Will congress ever pass anything? don't make me laugh... You say the government wants private capital back in the GSEs? Ok we are sitting in a pretty position then. How do we get there? that's another question. But between admin reform trending in our favor little by little and litigation as a backdrop- I don't think investors are risking much at current levels. You guys both nailed it. I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

Trump's Fannie-Freddie Plan Needs Clarity, Key Republican Says https://www.bloomberg.com/news/articles/2018-06-28/trump-s-fannie-freddie-plan-needs-clarity-key-republican-says

Long vid, do you have a time stamp? I don't. I haven't even listened to it myself... 3.5 hours and all :-) Got the quote from somebody that did listen to it.

From one of our own... https://seekingalpha.com/article/4184507-fannie-freddie-investors-get-ready-bhatti

Ben Carson today... https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=403643 "GSE's play a big part in our economy. We want to make sure we don't make a big change as to create a shock to the system."

so isn't it kinda weird that they just stopped this call 1/2 way thru? That was the UFOs that's one way to avoid Q&A Transcript, video, slides, etc. posted here: https://www.fhfa.gov/Videos/Pages/Webinar-on-Enterprise-Capital-Proposed-Rule.aspx?utm_medium=email&utm_source=govdelivery

Government Reorganization Plan: A Good Start But Needs Some Improvement https://www.forbes.com/sites/norbertmichel/2018/06/26/government-reorganization-plan-a-good-start-but-needs-some-improvement/#3750e1ee50ca