beaufort
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Posts posted by beaufort
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If FnF are recapped according the the capital rule as currently presented, I don't know if they still need the PSPA backstop. If they do keep it, the price of the backstop price should be very low. Let's assume it's negligible because there will be so much capital in front of the Treasury backstop that if it is not extremely cheap, FnF would be best to self insure if possible.
In addition, if the Temporary Payroll Tax Cut Continuation Act of 2011 ("TPTCA") levy representing 10 basis point is diverted to the GSEs after it expires in 2021, the ROE goes from 8 to 10ish%.
In 2018, the total average guarantee fee was 65 basis points, including the 2011 ten basis point fee paid directly to Treasury currently but set to end in 2021:
https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/GFee-Report-2018.pdf. See page 1 first bullet point and page 9.
Another 5 basis point increase in guarantee fees brings us to 11% ROE and 70 basis points in fees.
I don't know the level of guarantee fees where FnF become uncompetitive. Another 5 or 10 basis points doesn't seem like that much, but I don't know.
With 10 basis points coming from the current TPTCA fee and 10 new basis points charged, we get to approximately 12% ROE with the rule as presented and normalized earnings according to Howard on his blog in the latest post "Now We Know":
"With 4 percent minimum capital, Fannie and Freddie’s normalized earnings (that is, earnings without the recent benefits for credit losses, which are about to end) would produce returns on equity (ROEs) for each of around 8 percent, far below the 12 percent average ROE in the banking industry last year and even further below the ROE of a typical Standard & Poor’s 500 company. Both companies could potentially increase their ROEs by raising guaranty fees, but this would reduce the amount of business they can do in normal times [...]."
We are 10 basis points away from today's guarantee fees to an approximately 12% ROE normalized as currently presented by FHFA (and with my TPTCA diversion assumption).
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Calabria is a hero to his think tank buddies. Meanwhile middle class Americans must send more of their wages to mortgages (or apt landlords if they are shut out). The arbitrary and excessive buffer amount will likely turn into a political football with changes coming under every administration (assuming Seila's outcome is as expected). I can guess who Mr. Tim Howard is rooting for in 5 months.
while my preference is for the trump administration to carry through on its "plan" for the next 4 years, I am beginning to see the silver lining of a Biden administration.
Good comment submitted.
I still have reservations about Calabria, but he's who we have. A total 4 more potential years is not that long of a period to get both GSEs to a lower, more reasonable capital level.
Despite Howard's views, we are not going back to capital levels pre financial crisis. In addition, the excess capital is a way to guard against another risk that has manifested itself: Treasury and other political interests. If Fannie and Freddie had much more capital pre financial crisis, I am not sure they would have been taken over so easily. Their capital weakness permitted political motives to do them in. Having excess cash guards against that, and new money will be aware of that.
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As I am settling in, I am getting more comfortable with this capital rule. I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions. Also, with the exceptions to distributions while building capital (hat tip: Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common. And I like the high CET1 for the businesses moving forward. It means there will never be a concern about capital again. Overall, a balanced effort. It's early days in interpretation, but that's my current view.
I come out the same...with the proviso that Calabria will have to be accommodating on the capital buffer build up, so as to help GSEs hit those targets, and can be more of a hard ass on any rebuild up down the road.
but remember, GSEs dont need to hit a 100% payout level...why would fannie need to dividend or repo stock equal to >$10B per year? those higher % tranches should look good to politicians though...
I agree with you on the payout ratio observation, competition and that Calabria becomes more of a hard ass as time goes on.
I also don't accept the common assertion that raising massive amounts of capital, all of it in one lift, is not substantially possible, or even probable. With clear rules, the GSEs become more attractive. Even the arguably excessive conservatism can be construed as a positive. There are lots of huge holders of capital looking for utility-like returns, which is what they will be getting. It is better to put the money to work and start earning, rather than sitting in cash and watching a respectable, conservative return walk away.
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As I am settling in, I am getting more comfortable with this capital rule. I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions. Also, with the exceptions to distributions while building capital (hat tip: Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common. And I like the high CET1 for the businesses moving forward. It means there will never be a concern about capital again. Overall, a balanced effort. It's early days in interpretation, but that's my current view.
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@investorG
You're right. I corrected myself in my edit.
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@genesis
thanks, you beat me to it.
so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied. max distribution payout is basically annual net income.
so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.
not great, but not too shabby either, methinks
Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).
That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).
20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.
This whole thing about "no dividends until $175B in common equity" is way, way off.
you are right, it's not all or nothing until 175bn. but it's important to look at the leverage ratio also. the minimum leverage ratio excluding buffers is 152bn in tier1 capital. if you assume 25-50bn for preferred, that's around ~115bn common equity. throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid. still a lot.
edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.
I don't think this is right. Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP.
@midas
Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?
Tier 2 capital in my reading defined as preferreds.
Also, page 101:
FHFA expects that each Enterprise generally will seek to avoid any payout
restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based
and leverage ratio requirements during ordinary times.
I won't get to looking up above definitions tonight. I don't know where 'ordinary times' are defined yet.
see page 15 of the fact sheet for what goes where. Tier 1 capital is basically common + preferred. I am guessing that any potential asset from Tsy from overage (not expected by me) would count as common.
I looked at page 15. It is consistent with the definitions I cited and specifically says CET1 capital does not include par value of preferred stock.
Edit: But I also see I wasn't clear in my original post because I am mixing up terms. Tier 1 capital includes both common and preferred as you say. CET1 does not.
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@genesis
thanks, you beat me to it.
so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied. max distribution payout is basically annual net income.
so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.
not great, but not too shabby either, methinks
Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).
That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).
20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.
This whole thing about "no dividends until $175B in common equity" is way, way off.
you are right, it's not all or nothing until 175bn. but it's important to look at the leverage ratio also. the minimum leverage ratio excluding buffers is 152bn in tier1 capital. if you assume 25-50bn for preferred, that's around ~115bn common equity. throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid. still a lot.
edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.
I don't think this is right. Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP.
@midas
Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?
Tier 2 capital in my reading defined as preferreds.
Also, page 101:
FHFA expects that each Enterprise generally will seek to avoid any payout
restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based
and leverage ratio requirements during ordinary times.
I won't get to looking up above definitions tonight. I don't know where 'ordinary times' are defined yet.
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@cherzeca
I did a search in the pdf of the fact sheet for 'consent' with no result. The numbers you cited may be what gets us to consent decree.
Management will want to get paid well, and quickly, which gets us to the buffer numbers.
(I am looking forward to some sort of future congressional testimony with GSE management saying something along the lines of 'buffers, yeah, yeah, buffers. The enterprises had a lot of buffers.)
@InvestorG
Current JPS holders haven't gone through years of waiting, and investing in litigation, to not get a significant amount of the recapped GSEs and start earning dividends.
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highly likely jr pref isn't getting par.
So you say.
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GSEs are going to need that dividend overage payment of ~$30B in settlement of litigation.
I have it down as 20. I wasn't kidding re rough math. My instinct is current JPS holders get more of the newly constituted GSEs and the dividend overage will play a part.
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Very rough math.
CET1 Fannie 110
CET1 Freddie 65
JPS combined 33 - assume exchange face value.
Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line. Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.
Fannie current common approx 15
Freddie current common approx 10
Comprised of
Warrant dilution of current common at 80% = 20 for UST
Current common = 5B of re capped GSEs.
Total 253 of newly re capped GSEs.
This is close to the headline number of 245.
Assume settlement of litigation etc.
Assume exercise of warrant before raising capital CET1 and JPS exchange.
My guesstimate is target ROE of 11-12%.
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Progress continues with this good news. I also like that both CEOs acknowledge the pandemic, the commitment to stability and exiting conservatorship. As Howard has previously mentioned, nothing FnF releases is not vetted by FHFA. I just wish Calabria would get on with the PSPA amendment.
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@Midas
Yes I had seen your post about the Citi exchange and thanks for reposting the link to that. It was really an outstanding bit of research on your part. It was good to re-read. I will continue to monitor the commons. I went back and looked and noticed that in December 2018 the FNMAS:FNMA ratio was 7. It's now at 4.5
+1
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@Midas
Interesting speculation re net worth caps.
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I posted this elsewhere but I'll do so here too to see if anyone has ideas or theories about this.
Last September, FHFA and Treasury agreed to lift the caps above which FnF have to pay all net worth to Treasury, from $3B for each company before that date, to $25B for Fannie and $20B for Freddie.
https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/9-27-19_FRE-Capital-Agreement.pdf
At the time I couldn't figure out why they used those numbers. Freddie is around 2/3 the size of Fannie, but its cap is 4/5 as much. That's enough of a difference to make one pause.
Also, Fannie's total par value of its junior prefs is $19.130B, and Freddie's is $14.109B.
Now I have a theory: the fact that the difference between the letter agreement cap for each company and its total junior pref par value is almost identical is no coincidence. Said difference is $5.870B for Fannie and $5.991B for Freddie; the $121M difference between those amounts to a rounding error given the round $25B and $20B numbers in the letter agreements.
Of course, I don't really know what this could mean. It could very well just be coincidence.
@Midas
To be clear, is your theory that JPS holders get redeemed for cash? Without a simultaneous very large capital raise, Calabria isn't preserving and conserving to soundness. My initial take was that Mnuchin and Calabria didn't think either Fannie or Freddie would earn past the 25B and 20B amounts.
If both FnF go back to a similar business model as pre 2008, with strong underwriting, they will be superb businesses. I have always thought that the major JPS holders will want a sizeable piece of the businesses moving forward, along with new common.
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For healthy populations, the virus will resemble the typical flu.
Yeah, sure developing countries have healthy populations. They are just crushing this chart: https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
Please all go to Africa and work in subsistence farming. You'll be so healthy. Just leave all your stuff for people who decide to stay and suffer in the first world countries. They need it.
::)
Healthy with respect to blood pressure and diabetes particularly is what I meant. And those are key issues for this virus as I understand it.
Diabetes by country: https://www.indexmundi.com/facts/indicators/SH.STA.DIAB.ZS/rankings
Hypertension prevalence by country: https://www.who.int/gho/ncd/risk_factors/blood_pressure_prevalence/en/
Hypertension deaths by country: https://www.worldlifeexpectancy.com/cause-of-death/hypertension/by-country/
Here is my source for rural Africans as I initially mentioned: https://nutritionfacts.org/2017/04/06/high-blood-pressure-normal-but-not-natural/
I don't know who (population) your source includes.
In another article, the same source, Dr. Michael Greger, says the same thing applies to rural Chinese. The key point is a largely vegan whole food diet, with meat a couple of times a year, leads to the good outcomes in blood pressure and diabetes. That is not what rich countries typically have. If Africans and Chinese adopt our diets, they will have the same results. The results cited by Dr. Greger refer to rural Africans with traditional diet.
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For healthy populations, the virus will resemble the typical flu.
Yeah, sure developing countries have healthy populations. They are just crushing this chart: https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
Please all go to Africa and work in subsistence farming. You'll be so healthy. Just leave all your stuff for people who decide to stay and suffer in the first world countries. They need it.
::)
Healthy with respect to blood pressure and diabetes particularly is what I meant. And those are key issues for this virus as I understand it.
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I know this has come up before, but what would the rationale be for converting the low yielders in today's environment? Reissuing new prefs will be more expensive to the companies.
The only thing I can think of is to clear the capital structure completely to raise new common with nothing ahead of the new money. For those more knowledgeable about this than me, please provide some colour on this. For example, I have not looked at whether C had low yielders such as FMCCL and if something similar happened in that recap.
Would clearing up the capital structure be such an advantage that it would prevail over keeping the payouts cheap?
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Do you guys ever wonder why deaths per capita are higher in the "first world" countries?
We have crappy diets, resulting in first world problems like high blood pressure, diabetes etc. In rural China and rural Africa, people have 110/70 blood pressure well into their old age. In the western world, with processed foods and high salt and high sugar, we have extremely high blood pressure and diabetes rates very early in life. Our bodies don't fight off viruses as well as healthy people.
My view is it's largely diet based.
All, the above and second and third world countries also have reporting issues, plus the epidemic has not run its. course yet. There are reports of bad situations in Ecuador (Quito) and Brazil but numbers are hard to come by.
I am in the camp that the denominator on this virus is huge, and I have accepted Dr. Ioannidis' analysis and conclusions regarding spread. If his analysis is correct, non rich country numbers will resemble rich country numbers soon enough if poorer countries track the virus as has been pointed out here. The difference is our population will die at a higher rate because of our health problems. For healthy populations, the virus will resemble the typical flu.
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Do you guys ever wonder why deaths per capita are higher in the "first world" countries?
We have crappy diets, resulting in first world problems like high blood pressure, diabetes etc. In rural China and rural Africa, people have 110/70 blood pressure well into their old age. In the western world, with processed foods and high salt and high sugar, we have extremely high blood pressure and diabetes rates very early in life. Our bodies don't fight off viruses as well as healthy people.
My view is it's largely diet based.
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Re Fannie Q1 earnings.
There is a significant difference in cash on the balance sheet that changed from December 31, 2019 to March 31, 2020. The change in cash is from $21,184 to $80,463 (difference of $59,279) and total assets are up to $3,601,356 up from $3,503,319 (difference of $98,037). There is a corresponding significant change in total liabilities from $3,587,411 up from $3,488,711 (difference of $98,700).
The net difference between total liabilities and total assets is nearly a wash, but why did Fannie raise so much cash?
Page 11:
https://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2020/q12020_release.pdf
On the conference call the CFO mentioned selling bonds to finance the P and I advancements after 4 months for the loans on forbearance? Did they raise cash for this?
I read the conference call transcript. Your explanation is consistent with the documents and the call.
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Re Fannie Q1 earnings.
There is a significant difference in cash on the balance sheet that changed from December 31, 2019 to March 31, 2020. The change in cash is from $21,184 to $80,463 (difference of $59,279) and total assets are up to $3,601,356 up from $3,503,319 (difference of $98,037). There is a corresponding significant change in total liabilities from $3,587,411 up from $3,488,711 (difference of $98,700).
The net difference between total liabilities and total assets is nearly a wash, but why did Fannie raise so much cash?
Page 11:
https://www.fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2020/q12020_release.pdf
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The only positive I see in adopting the CECL standard, for the recap and release, is that this orchestrates the conditions for an instant recap. But I am leaning towards the negative here.
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Yes, my conclusion as well is that this cannot be what the MBA wanted. Not much to hurt the recap and release efforts here.
If this continues, the MBA may realize that the only way out of this for the servicers (to not lose their shirts) is for FnF to be capitalized very, very quickly. They should quickly start lobbying for that.
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
Posted
This is the first interview where I have heard Calabria bring up a private capital raise as a possibility, along with retained earnings and a public capital raise.