orthopa

Found a copy of letter. UST_FHFA_letter.pdf

The fatigue is getting real. Going on 7-8 years for some on the board. Sigh. Anyone able to find a copy of letter to the Senators??

When would trial/summary judgement montions start on this?

55.4% Concentrated holdings some leverage. MA,V, AAPL, BRK.B and Fannie preferred.

Those are all parts of the Moelis plan, yes. But I wouldn't assume that the conversion would happen at anything close to Moelis prices. They think the juniors will convert at 1.7 to 2.1 commons per $25 of par value, when the market ratio now is closer to 3.5. It is quite easy to keep everything in Moelis the same other than the conversion rate, and end up with a common share price in the mid to high single digits. Moelis also only has half of juniors converting, when it could be either all of them or even a voluntary conversion, when the total amount won't be known until the end, as with Citi. Also ask yourself this: why would junior pref holders hire Moelis to come out with a plan that gives the commons a much greater return? "Smokescreen" is a much more plausible explanation than "generosity". I agree with this. moelis is the blueprint, but I expect the exchange offer will be harsh on the common. why? because the junior pref big holders understand that the re-IPO will be harsh on the common, as the bankers will insist on a low price to build their book for what can be expected to be a very large offering...and the junior pref big holders will insist that their exchange ratio will incorporate the discounted common share price that will obtain in the re-IPO. as to phillips, I recall a video from an interview by vartanian of Phillips for the George mason law school institute vartaninan heads, with pollock in the audience (with his new job one hopes pollack will become less of a Zelig), where phillips refers to pollack as "his hero" when phillips refers to the "10% moment", saying that there is a good argument that the treasury has already been paid back, then phillips pauses and says, there is a "very good argument". while the treasury plan did not get into any of this, this gave me some comfort that there was acceptance at treasury for the proposition that the senior pref would be eliminated. +1 not to mention if Treasury truly means it when they say this is a priority and they want them out of conservatorship the above has to happen. Really no other option as it blocks a recap immediately.

Agree things are lining up nice, everything except timing but like Munger says "the big money is not in the buying and selling … but in the waiting". ACG has been pretty spot on with things but I agree in this video Gabby may have miss spoke. Again as informed as ACG may be, she is speculating like we are. It seems as if the court cases especially the SCOTUS cert could directionally speed things up or slow things down in regard for the PSPA. A year from now hopefully we are sitting at a much higher level then now. Whats another year?

I guess I am kind of, but only in regards to a settlement that could come any day. I get the preferred to common thing and agree with that. What i was referencing was a podcast Sullivan had right after the en banc decision in which he said that he "knew" or talked to people who expected to get way more then par via "damages" in a settlement with treasury. That narrative is what I think is false.

Capital rule doesn't necessarily have to take place before a settlement. I'm not saying that you're saying this, allnatural, but more of a general comment for everybody to think about. Tim Howard and Rule of Law Guy discussed this yesterday afternoon starting with comment 13564. Link here: https://howardonmortgagefinance.com/2019/10/21/some-simple-facts/#comment-13564 Howard: I don’t know why there couldn’t be a settlement between plaintiffs and the government on the net worth sweep and liquidation preference issues in the absence of a final capital rule. The two are related, but the first two are not dependent upon the last. In any case the companies will need to have built a significant capital base through retained earnings before they can do a public offering, and this will take time. Provided that FHFA does produce a final capital rule by the end of next year, we should still be on track for the sort of “staged release” from conservatorship that Treasury and FHFA have been describing over the past several months: final capital rule, settlement with plaintiffs canceling the net worth sweep and liquidation preference (with these now possibly being reversed in the sequence), negotiation with the companies of a consent decree governing... ROLG: Tim is absolutely correct that a litigation settlement that eliminates the senior preferred could be negotiated prior to the adoption of the final capital rule, and I believe that once this settlement is reached, there would be massive financial exposure to the govt in the event a successor FHFA director tried to reverse any such settlement. the practical reality of this administration’s actions to date, however, is that what has been thought to be able to be done relatively quickly actually gets done quite slowly. In terms of the effect of delay upon the settling parties, usually the party that has the “most to lose” from a settlement delay must consider “giving up” more to get the settlement done sooner rather than later…and that party in this case would be GSE shareholders. I also agree that the two can run separate I just don't see the rush from the govt to settle unless forced to. Why would they? The real leverage for shareholders is the need to recap and if treasury wants to recap the Sr Preferred have to be gone and that wont be until next year as the capital build hasn't been long enough. Secondly I have read others saying that a settlement could mean 100+% of par for preferred. How exactly? What are the mechanics that makes the Preferred worth more then $25 a share exactly? Any over-payment will not go directly to dividends and govt is not buying the Jr preferred from us so how exactly do we get 100%+ in a settlement? I think the relief that is possible is along the lines of what was requested in the en banc case. Sullivan after the en banc opinion noted that he talked to people who where expecting way way more then par. How exactly does that happen? I think at this point that is unrealistic and any settlement will be regarding the Sr Preferred which is essentially the last PSPA agreement. Unless someone can fashion up a reasonable explanation and mechanism of how exactly the Jr preferred shares get money directly from treasury I think it just a pipe dream. There surely could be a court that awards something of substance but does that happen before mid next year after appeals etc? Unlikely

I'd love to hear responses to this as I have a very similar viewpoint to Snarky. I agree and cherzeca's phrase was dead on. Uncertainty/timing has increased a bit, risk has not. People just don't want to wait and I think many are jittery holding something like this so any news viewed as unfavorable and they bolt. As far as settlement my thought is that this will likely happen with a PSPA agreement, likely a final one as it would set the path for a dealing with the Sr Preferred being paid down +/- any overages and allowing capital to come in without the overhang. Unless a court forces otherwise sooner and puts treasury at immediate risk I dont know why they would settle? Right now Treasury still has the leverage with the Sr Preferred, the increasing liquidation preference and a court system that is slow and really has not put the screws to them yet. In regards to a settlement I don't think you get more then par for preferred this avenue unless $$$ is returned and earmarked specifically for dividends. If history means anything a tax credit or the money going towards recap is what would be done and I dont see the avenue for preferred getting more then par that way. The opportunity for more then par for the Jr preferred will come in the recap plan from the financial adviser approved by FHFA via a favorable conversion etc. The financial advisers in reality can't submit a capital restoration plan until the Sr. preferred's ultimate fate is known. Once the happens by my logic treasury is out of the picture negotiation wise and has no control over preferred getting par or not.

I think its pretty clear delay, delay is the name of the game. Why of course Im not privy to. Maybe dont want to deal with election risk? Want courts to decide? I have also thought that maybe FHFA wants another PSPA agreement before doing the capital rule and capital raise plan which makes sense. Its clear there has been a material change even since this summer on urgency starting with the delay of the plan. I think many are sick of waiting. Sometime in 2020? Shit could be a year from now although unlikely. I don't think anyone honestly has an idea now of a general timeline based on what Calabria has said. Everything is convoluted. Market will default to worst case which is what? 22-23 till this is all said and done? Im not changing my investment thesis for the endgame but surely disappointed on what we were spoon fed since January.

Amen to that. He has been talking his mouth off lately but doesn't seem to know any more about what will happen then we do. Every other day you get new info but its convoluted and contradicts the day before. InvestorG mentioned this too but the 23-24 timeline gives much more time for retained capital so apples to apples common has much higher upside with all of those retained earnings then preferred to par. Even better would be a preferred to common conversion and then they can retain all the earnings they want.

This is mainly a question for Midas and anyone who wants to chime in but I'm admittedly getting a little confused with the capital necessary to release with consent decree which to me seems like the next situation outside of another PSPA amendment that could vault the preferred closer to par. Couple of questions. 1. Do we not know yet what the capital level will be to release on consent decree because the capital rule isnt done yet? 2. I know you posted the different capital levels before but we do not know yet which level; under capitalized, critically undercapitalized, etc Calabria will choose to release and the amount for each level correct? 3. Fannie is at 10.3 B of capital now so a level of ~20B would be accomplished mid June I know that has been speculated by some but others have mentioned the current earnings cap of 45B combined between the two as a target before consent decree agreement and new PSPA. What are your thoughts on that? Thanks

+1. +1 I agree that the last 12 months have been positive however does current situation has more risk or less risk compare to 12 months ago? Do we have more variables now that has to go right compare to 12 months ago? Literally everything about this has been directionally derisked relative to 12 months ago. I think the current situation is a combination of continued terrible reporting/analysts, uncertainty on specific timelines, and movements in quotes affecting opinions. Long term investors who own these securities are not touching their positions. The remaining effective “free float” is volatile given the free float is dominated by LIFO investors and short term traders who aren’t able to look out 3-5 years, and are unfamiliar with the practical constraints involved in removing F&F from conservatorship. Add in some uncertainty and confusion caused by scotus cert request, uncertainty on specific capital requirements, uncertainty on specific mechanics of recap, and the initial scary optics associated with the short term increase in liquidation preference on top of the fact that we are late cycle- and it’s not difficult to understand why there’s been an impact to the quotes. But it’s important to understand whether any of these are critically impactful to solving for the practical constraints involved in raising private capital and ending conservatorship. FNMAM ($50 par value, 5.81% fixed) closed with a quotation of $18.00. I think sellers are absolutely nuts if they are selling these things because there is uncertainty regarding whether this is resolved in 2022 or 2023. At $18, if it takes 5 years your cagr is 22.6%. If it takes 10 years your cagr is 10.8%. Risk = permanent loss of capital, which isn’t relevant to whether this is resolved 3, 4 or 5 years from now. Agree with nearly all of this. Many of the LIFOs and honestly I think some of those that maybe have held for a long time but had maybe 2-3-5% of the portfolio in it and are really following the trade have lost patience and moved on. In May it looked like this could be a year end early 2020 thing. While things have gone very much so in the right direction the thought of waiting another 3-4 years is probably too much for many. If your cost basis is in the low single digits sure hold on but I can see someone who bought at 9-10 saying fuck it and just getting out thinking there is a better trade out there. It is late cycle and market near all time highs so other options are not as plentiful as mentioned by some but there is certainly comfort in cash for those who dont want to wait. As a long time holder myself I certainly sympathize with those who have sold out of frustration. I continue to think (hope) Calabria will under promise and over deliver but the more he talks its becoming harder to know which time line to believe and which avenue to model/think about. We went from wanting a single PSPA agreement and recap as fast as possible to signalling there will be multiple more, delays and more conflicting statements ever since the treasury plan was released. I think all the receivership talk is BS and can see through that but the copious amount of time all the steps could take up with capital rule, PSPA amendments, capital restoration plans, consent decree implementation, capital raise, etc it gets annoying. We all know its best to literally just pack this away and just check back in a couple years but its already been a bunch of years for a lot of us and just getting a little old waiting. I do wonder why Calabria has become so vague and has been expanding publicly on time lines. This certainly has been a change. Some have speculated things have purposefully been delayed to not jeopardize the election but we all know the consequences of what could happen if trump doesn't win. I guess we wont know until we know.

I think your right. Not related to recapping it seems. False alarm. FHFA has said they will get their adviser first.

4 month engagement so plan/suggestion should be done by April. Not sure when this hits the market but seem like a majority of our fate price wise will be known then.

Thinking about this more from a capital structure standpoint, how much influence does a majority shareholder of common have over a higher class of security (Jr Preferred) in a recap? Could treasury put the nix on a favorable conversion ratio of preferred to common in a recap?

FWIW I dont think it makes a lot of sense to worry about receivership as 1. It will not happen, 2. Once we found out likely after market hours of weekend we would probably be down nearly 100% once the market opened so the information advantage or knowledge of such once it got to us via media etc would useless. What I have been thinking about is that I was always thought treasury would dictate how the Jr Preferred shares are treated but I think now that is not be the case. They certainly have full say over the warrants and Sr Preferred shares but depending on the time line and what happens they may not at all. There is an assumed settlement with plantiffs over the NWS/ overpayments but that settlement should not deal with what will happen with the Jr Preferred in a recap. The assumption is once the final PSPA agreement is done it will include some final treatment/conversion/cancelling of the Sr Preferred. When that comes to fruition if the Jr preferred have not been converted to common it is FHFA(overseeing) FNF that will determine the outcome as Calabria has said that they will figure out how to go to market/raise money/recap etc. I guess my point is the lawsuits deal with the NWS and overpayments not final treatment for Jr Preferred/conversion decision or ratio etc. Treasury could settle with plantiffs, say hypothetically Sr Preferred cancelled and 10B tax credit given. Treasury is much more so out of the picture then as their skin in the game are the warrants only. Its really Fannie/Freddies advisor that is going to determine the Jr Preferred's fate. FHFA will have their adviser too of course but my feel is that will be more so to guide the appropriateness of what options Fannie/Freddie have from a conservator standpoint. Lots of moving pieces for sure and the timing will dictate everything but our final treatment IMO really is in the hands of the adviser that Fannie hires and their input over what a recap should look like.

Lets hope for a decision that forces the Treasury's hand to settle or relief as requested then!

Interesting. It seems they let the mandate slip though then. Again I know little about legal proceedings so any insight is much appreciated. If I remember the remand is not a full trial right? The judge can rule on the merits/evidence only? That should be faster then a full trial right?

Im the furthest thing from a lawyer, but your implying that treasury wants the district court to rule/force their hand on remedy?

Optics are sufficient rationale, I think. I always took Mnuchin's "compensation" statement to mean payment of a periodic commitment fee commensurate w the explicit "credit line" guarantee + warrants. In the scenario you describe where the senior prefs are sold in a secondary to the market - would these not naturally have to convert to common first to avoid a top-heavy capital structure and meet the likely capital rule? And this scenario does not contemplate whether investors would be willing to buy $190bn of securities that will continue to have a contingent liability attached (junior pref lawsuits). Whoever occupies the UST seat seems to immediately develop Sweeney's described schizophrenia. You either want to capitalize them and release them (per admin plan and testimony and FHFA strategic goals or you can keep fighting in court). With that said, I default to thinking this is purely optics for two primary reasons 1) Mnuchin and Calabria absolutely already have a plan for how this resolves itself. Public contradictions must be optics related bc these men are extremely calculated and probablistically are on the same page 2) Since Mnuchin's initial press release post election, he has been incredibly calculated in any statements on F&F +1 This has been extremely calculated since the beginning of the year. Otting said "I signed off, Mark signed off, Steve signed off", etc. Its all been planned out and the optics are there where each side can throw their hands up and say I didnt enrich shareholders. Treasury/Mnuchin will say I did all I could, I increased the liquidation preference for our support and investment and fought all the way to the supreme court. We are out of options and any long term delay that would not recap FnF goes against the presidential memo/treasury Plan. FHFA/Calabria will say I followed the law like I said I would. That was my job and its up to FnF to raise capital so they are the ones that enriched there shareholders. I made sure they were safe and sound. Fannie/Freddie CEO will say we raised capital and decided to do dividend/xyz because we have a fiduciary duty to our shareholders to get this done quickly and get out of conservatorship. In the end who enriched John Paulson? Everyone is pointing at everyone else.

Hopefully by year end as he originally mentioned this past summer.

Technically your right. He probably could move them to receivership, but as you also mention what is the value? Again these were obviously throw away statements for the hearing which no doubt did perk up peoples ears. Moving to receivership would go against nearly everything Calabria has said since being confirmed. 1. Lawsuits go away when NWS goes away 2. Increasing capital threshold to 45B and the document saying another amendment coming. 3. FHFA hiring a financial advisor. 4. Comment on CNBC on whether preferred gets par or conversion 5. Meeting regarding consent decree 6. Im going to follow the law of HERA, and not waiting for congress. It an interesting point of discussion but zero chance of happening IMO. Calabria was conveniently hand picked to do this job and it wasn't for receivership. Just the opposite, and as expected he is moving and talking his way to the end objective. I also think its interesting that the day after the hearing and receivership talk the WSJ article comes out of no where talking about "sources" and Treasury talking to banks and early footsteps for raising capital. That was some very good timing to contradict what was said dont cha think? The media has been used a couple times to clear up misconceptions in this manner over the past couple of months.

I kind of see the angle there are taking but this guy has been wrong all along from start to finish on Fannie. I think the receivership option discussion was a show for the idiots at the hearing. When listening to the context of the discussion it was in response to questions that question whether some people (hedge funds) were to stand to make a windfall in privatization. Mnuchin even walks back from receivership as an option towards the end.

this was from a tweet by Katy O'Donnell who is at least somewhat reliable. it is strange, since if fhfa can make a determination that no reproposing is required, then it should have come to an at least close to final capital rule. which means that fhfa should just issue the final rule. I suppose there is some minor tweaking that it could want to do which it believes in no way would create such a different rule as to require reproposing, but why beat around the bush, and just put out the final rule when it is done. all you are doing by announcing in two weeks that you are not reproposing is give some GSE hater time to lawyer up My one thought about reprposing the capital rule is that gives Calabria the ability to release the GSEs via consent decree without being held to any capital levels other then the statutory levels previously discussed. Then if the capital rule is published afterward that would take precsident as a goal to operate without a consent decree. I could be way off on this and conflating an interaction between the two but just something I thought about. Otherwise I agree. Just publish the damn thing. If he doesn't though I must be because publishing it too early would hinder the process in some fashion.