beaufort

Correct me if I am wrong. After 4 month mark GSEs pay principal and interest. By keeping the loan in the MBS, the GSEs don't have to buy out the loan. This results in less of a hit to capital for up to a year because the loan is not yet in default. After 1 year, the GSEs would have to buy the loans out of the MBS, with the accompanying significant capital hit (if on a large scale) due to default.

I get your thinking, but I just think the credit markets will give credit to that prepaid asset and lend as if a discounted amount of that asset was actual capital on the b/s. that prepaid asset is money good over the period needed to earn it out I'm more concerned with whether this asset would end up increasing core capital by that amount. I don't think the PSPA amendment and potential $30B return (no matter what form it takes) will happen nearly quickly enough, though. That seems like a Q4 thing to me. Perhaps the Fed, if not commercial banks. But I also don't forget about the income producing assets these amazing businesses have. My scenario is credit by another name - but it's not the PSPA line, which seems to be where Calabria has drawn a line in the sand. I don't know how it would be treated for core capital purposes. It's a grand bargain of the kind we have speculated about recently. Midas, to your point, my continual disappointment has been that this has not been quick enough and I think you are likely to continue to be right.

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset? Treasury doesn't send out any money. NWS is done. Seniors are gone. Servicers get liquidity. Recap stays on pace?

Why is it not a live option? I just want to hear the argument against it, if for no other reason than to assure myself that it isn't a possibility. A senior cramdown is not great for the prefs compared to a share exchange followed by the re-IPO anyway. I don't see a reason why Treasury would have to send the $125B in cash, by the way. If the $25-30B overpayment could be "returned" by giving FnF that much credit against future taxes and commitment fees, while still increasing core capital (perhaps it would be booked as a prepaid tax/fee asset in the asset section of the balance sheet and an increase to retained earnings in the equity section), then why couldn't the $125B be treated the same way? And if that form of overpayment return doesn't count towards core capital (whether it's $25-30B or $125B) then ACG is wrong about it reducing the size of the offering. I'm playing devil's advocate here. I don't think this senior cramdown will or even should happen, but I can't yet convince myself that it's completely off the table. It allows for a much, much faster recap than the re-IPO route. I think you answered the question yourself: a senior cramdown is not great for JPS. If there is a way to make it work for JPS, I think it could work. By making it work, I mean that JPS get a substantial minority of the future companies in common. For that to happen, the warrants have to be exercised before the juniors are exchanged. My unoriginal thesis is that the new money (whoever that is) plus current JPS end up with substantially all of the recapped entities, with very little left for current common holders. I am unclear what the MBA and Whelan want from Fannie and Freddie. I know they want liquidity. I have not seen a clear articulation of what the mechanics would be to getting the liquidity, or how much. We might be getting back to some kind of portfolio business, of the kind the GSEs were required to wind up.

@midas Much appreciated.

@midas With the C preferred conversion, was the deal take the twenty day average closing price for common and then convert the prefs on that basis with a discount to par value applied across the board to all prefs, regardless of yield? If yes, do you have a memory of whether there was any indication it was coming?

https://www.theglobeandmail.com/business/international-business/us-business/article-mnuchin-says-us-not-bailing-out-airlines-boeing-not-using-federal/ Mnuchin said Boeing said it does not intend to participate in the federal programme. “Boeing has said that they have no intention of using a programme that may change in the future,” Mnuchin said. “These are things that the companies need to come and ask us for. ... Right now Boeing’s saying they don’t need it.” Boeing is undoubtedly aware of the NWS.

Hopefully he is an idiot who's view on this one issue, exercise warrants and provide 'balance sheet support' (with Treasury recapping both Fannie and Freddie instantly), gets some traction. They can sell the commons later, along with Boeing and whatever else Treasury buys.

How do JPS holders agree to a conversion without a capital rule? I agree that the ideal kitchen sink PSPA negotiation, conversion and lawsuit settlement is coming up, especially with the favourable news cycle.

It doesn't look like Collins is set down for trial in the summer of 2020. I called the court to verify.

@cherzeca I am expecting stalling along the way, much the way the litigation has been conducted thus far. But things will move quicker by resolving the points of law hopefully by June. https://www.law.cornell.edu/rules/frcp/rule_26 Federal Rules of Civil Procedure. Rule 26. Duty to Disclose; General Provisions Governing Discovery (2) Disclosure of Expert Testimony. (A) In General. In addition to the disclosures required by Rule 26(a)(1), a party must disclose to the other parties the identity of any witness it may use at trial to present evidence under Federal Rule of Evidence 702, 703, or 705. (B) Witnesses Who Must Provide a Written Report. Unless otherwise stipulated or ordered by the court, this disclosure must be accompanied by a written report—prepared and signed by the witness—if the witness is one retained or specially employed to provide expert testimony in the case or one whose duties as the party's employee regularly involve giving expert testimony. The report must contain: (i) a complete statement of all opinions the witness will express and the basis and reasons for them; (ii) the facts or data considered by the witness in forming them; (iii) any exhibits that will be used to summarize or support them; (iv) the witness's qualifications, including a list of all publications authored in the previous 10 years; (v) a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and (vi) a statement of the compensation to be paid for the study and testimony in the case. © Witnesses Who Do Not Provide a Written Report. Unless otherwise stipulated or ordered by the court, if the witness is not required to provide a written report, this disclosure must state: (i) the subject matter on which the witness is expected to present evidence under Federal Rule of Evidence 702, 703, or 705; and (ii) a summary of the facts and opinions to which the witness is expected to testify. (D) Time to Disclose Expert Testimony. A party must make these disclosures at the times and in the sequence that the court orders. Absent a stipulation or a court order, the disclosures must be made: (i) at least 90 days before the date set for trial or for the case to be ready for trial; or (ii) if the evidence is intended solely to contradict or rebut evidence on the same subject matter identified by another party under Rule 26(a)(2)(B) or ©, within 30 days after the other party's disclosure. So unless otherwise ordered, 90 days before trial for assertive opinion reports and 30 days before for rebuttal reports. My memory is that the 5th circuit en banc appellate court remanded the matter to the lower court and that the matter has been set down for summer 2020. I hope I am not making the latter part up. If we have a trial date end of summer 2020, we will be getting to settlement discussions, particularly after reports have been served. It is also possible that the Trump admin doesn't want to settle and wants an order, or that they don't want to settle before the election. I guess in that case we could have a trial and a potential settlement after the trial but before getting judgment. I have narrowed my worry to the PSPA issues for now.

I agree with everything you said. I think it is more likely that the court gives congress X number of days to remedy the defective statute than going back to OFHEO. Hopefully the court keeps it clean as in your most likely scenario, decreasing the risk of further blowing up the timeline to release.

@cherzeca Excellent analysis. Question for you: If CFPB single director is found to be unconstitutional and the remedy is to strike down the whole statute, then we should assume the same thing would happen with HERA. That means we go back to the previous governing statute OFHEO presumably. Do you agree? I don't know what that opens up moving forward. I understand this is an unlikely scenario.

I know it's not new to us, but I still like hearing it as long as Calabria continues to answer questions in public.

"Failure to review would be devastating [...]." I prefer failure to review could be devastating in the short term. These stocks move around a lot on nothing, or when it's been quiet too long. We're in illiquid securities with a limited pool of buyers. In the short term, anything can happen, including the stocks going up. I know it's a truism, but it boils down to that.

I think you are right regarding the cramdown scenario and so I hope that will put pressure on the Administration to get this done quickly. It seems that all major financial interests are still in line with a conversion of JPS and a cramdown to move quickly. Calabria is a wildcard in my view. If the capital rule as drafted under Watt was unsatisfactory, why wait so long to address it? One speculation I have is that Calabria believes himself to be very smart. He has a need to 'fix' the rule with his own process. It's very complicated and requires his distinct analysis. Of course this is a subjective speculation based on watching videos with interviews and nothing more. I don't know if I would be happier with the above, or if there was a genuine problem to be fixed. I have another problem as well with the Admin recap. Why didn't Mnuchin negotiate with Watt for a higher buffer at the time of the letter agreement? We could have been further along with the recap, with the letter agreement at approximately the 10% moment, with a much larger buffer that would have been easy, in my view, to justify. What is the difference between 3B and 12B each, for example? Everybody knows 12B wouldn't have been enough to recap the enterprises at that time, just as we know that the current buffer won't do it. Further, the surplus paid to Treasury would not be an issue to fight over now because it largely wouldn't have happened. On the positive side, 2019 was a very positive year for JPS holders, both from the courts and the Admin. It's just moving too slow and unnecessarily so. Edit: On balance, with all the advances we have seen this year both for Admin action and the lawsuits, the only negative I see is the slow play.

Midas, Do you think all of the various financial interests involved in the recap and release (ie. investment bankers etc) stand to make as much money in your scenario?

If FHFA is hiring a financial advisor, the capital rule is likely ready.

Does convertible debt count as capital?

I've gone on margin buying Preferred against my other holdings before, in fact I am now. :) This is how I have understood Druckenmiller to have had the slugging percentage that he did. When a trade is working, pile in. Edit: I will add that managing money professionally is different than one's own. If you are in a daily liquidity product, obviously you cannot pile into Fannie and Freddie prefs. If you are not, or you are managing your own money, I don't see why you cannot. My understanding of Druckenmiller is that he was in liquid securities/currencies etc, presumably because he was managing money professionally. One more point. I start with the assumption that everybody on this board is an adult and competent to make their own decisions. Knock it out Orthopa.

They are phenomenal companies. Will be nice once this fiasco is over to go back and reassess their prospects going forward. I think this is principally why jps holders would push for favourable conversion to common. Of course I am assuming that the companies will not be gutted (absurd capital levels, etc).

@cherzeca There is also an assumption many of us have made as well and explicit in your point: there will be new shareholders (making a massive common stock buy in the form of the capital raise). Let's assume the 150B combined capital that Calabria has been speculated to want. At 20B net income, even after paying out jps dividends, retained earnings get the businesses recapped in 7sih years. If a secondary offering happens after a slow build of capital of 4ish years and on Calabria's watch, great. If not, Calabria doesn't push them out of conservatorship and the companies continue to slow build for another couple of years before getting pushed out. My base case is still that we have a massive capital raise in the next year or so and that the businesses are out of conservatorship before the next election.

During his CNBC interview- he floated the idea of jr pfds getting converted or receiving PAR, didn't mention anything re: div's, but its possible. or getting par value of common in connection with a conversion, which is what I thought he was referring to. that interview gave me the impression that mnuchin and calabria have been discussing the matter... I'm going to stretch here: Calabria may also have assumed par if the dividends are resumed. @cherzeca I hear you re good treatment. But I think Paulson/etc. signed up for good treatment as well.

Re dividends getting paid out on jps while in conservatorship I have long speculated privately that the conversion of jps to common is not settled. Has anyone read anything that makes paying the jps dividends inconsistent with Calabria's views? If FHFA can declare dividends that permit it to pay out all of the companies' earnings to Treasury, FHFA can pay out a 10% of net income (2-2.5 B dividend) to jps holders while building capital over a period of years. To be sure, it means a slower capital build. But it does permit Fannie and Freddie to honour their contracts (Lamberth) and address expropriation (Sweeney). I thought the capital raise in one shot would not be as difficult as some have suggested, but I have no experience in such matters. My impression (hope) was that given these two businesses are amongst the best I am aware of, at an appropriate price, and I assumed that the stock sale would be appropriately priced, there would be a buyer. I may be wrong on that point and Don Layton's recent interview outlines the easy capital build. Hume says not to prejudice some classes of shareholders over others. As previously pointed out on this thread, If the dividends do not start getting paid out on jps, it is the the jps holders who will be most prejudiced moving forward. The common gets to slow build and not get diluted. Treasury has been paid back. Don Layton talked about how to easily build capital and the tougher road. Obviously it's jps holders who want as quick a resolution as possible here. Paying dividends to jps holders takes care of a lot of problems.

If there is a swift recap as Snarky suggests with a private sweetheart deal, how does that forcibly hurt the jr. pref position? Perhaps no favourable conversion. There will still be par and dividends to come in due course.