SnarkyPuppy

I generally agree that receivership is not in the cards after listening to Calabria's hearing. Just won't happen. The guy is clearing pragmatic and reasonable. Pref prices are truly unbelievable...

Yeah, I was posting the numbers showing how much various crypto coins were down since their peak. But you're the ingenious one, citing a common value investing saying with regard to something that can't be valued conventionally (what's the IV based on the discounted future cash flows of this? can you value invest in gold or oil or US dollars/Yen/Euros? What's the return on capital there?), and for something that is clearly not just random short-term volatility. When something is down 98%, it needs to be a 50-bagger just to get back. If the thing you're tracking is moving by that much up and down regularly enough that it can be considered just short-term volatility for that instrument, you're gambling, not investing. I don't think the same things apply to long-term investors and long-term gamblers... You seem confused. If I offered you the ability to bet $10 to win $1,000,000 on a 50% odds coinflip, would you not take the bet because the coin doesn't generate cashflow and because munger said gambling is bad? You're applying an irrelevant framework (investing in businesses which generate cash flow) to a new asset class which is priced as if it will not become a mature asset class.

Is there a transcript for the hearing?

Long term value investor cites short term price fluctuations as indication of long term thesis success/failure

good way to destroy $100B of value for no good purpose. next? philosophical reasons could override a monetary payment that isn't directly payable to those making the decision...

What is stopping FHFA/Tsy from reversing NWS -> leaving current GSEs with minimal capital (what was the relief from the en banc, $13bn?) -> FHFA declare undercapitalized and force receivership?

As an additional video: calabria talking about shareholders and turning fannie/freddie into bank holding companies -> if they can survive capital requirements and have value then shareholders will do well. if they cant, they lose value. let market decide. this is more consistent w/ recent signaling 33:20 mark

I guess to further my point: Calabria at 18:00 starts with "im going to start with what might be a radical notion here in washington... why dont we follow the law?" and then begins to talk about why following the law = receivership in 2014. 18:40 "what we should do today and what we shouldve done in 2008 is place these companies into receivership..." Talks about how current limited commitment by treasury is not perpetual/not core capital and therefore by definition they are undercapitalized and should be taken into receivership. Also says "receivership is time limited. congress does not act and the 5 year time limit under receivership would light a fuse under congress to force them to do something which they otherwise wont" link: As a follow-up question: Could they not reverse NWS and then say $13bn = undercapitalized against FHFA capital requirements -> receivership?

Aside from a mutually owned private structure w prior equity wiped, my only other concern (and not mutually exclusive w the mutual model) is that mnuchins administrative option = Declaring w FHFA rhat the companies are critically undercapitalized and as such will be placed into receivership (per HERA). While unlikely because of TINA and the takings claims becoming ripe - how is this inconsistent with anything these guys have said? There's a video of Calabria on youtube in 2014 (post NWS) adamantly stating that the companies can go into receivership. nothing has changed from 2014 which would change Calabrias view that receivership can occur

This isn't him lol

Extending this trail of "related" items with another Pollock op-ed which came out this morning. I believe the answer we are all looking for is in plain sight. https://www.americanbanker.com/opinion/changes-to-capital-rules-should-be-part-of-gse-overhaul?utm_campaign=amerbanker-tw&utm_medium=social&utm_content=socialflow&utm_source=twitter A consistent stream of thoughts have been clearly outlined from those who are about to decide the end game. Not sure why this isn't being commented on more.

That could be possible, but the takings claim would be validated right? That's the real danger for common but not for preferreds. However, with 79% warrant for common, I just don't see how Mnuchin can be that stupid to wipe out the common that way. And the courts for Lamberth, 5th circuit are looking promising. I personally apply $0 value to the legal thesis but that's only due to my circle of competence. My confidence in the situation stems purely from a variant perspective in finance theory and incentives specific to this situation.

My concern from the past remains to be a possibility under this framework. Mutually owned co-ops where the equity is completely new.

rros- that's what I'm thinking the linkage to explicit paid for is as well. All securities issued on CSP = guaranteed at security level Unclear to me why Michael Bright wouldn't like this -> not confident that this is Otting/Muchin/Mulvaney/(Paulson) plan

I guess my initial reaction is admin recap/release is not inconsistent with privatizing per this plan. -But why does this not address the fact that an implicit guarantee will remain? Resolution plans and CCAR/DFAST stress testing does not remove any implicit guarantee. Unless I'm misunderstanding Ginnie's role versus guarantor role in this model -It seems like Michael Bright would've liked this. Why would he leave Ginnie abruptly less than a month ago? https://www.politico.com/story/2019/01/09/michael-bright-ginnie-mae-1071645

I think everyone is over complicating what is obvious: Announce plan for broader reform simultaneously with specific administrative steps to be taken to protect taxpayers and recommendations to congress for broader legislative steps: 1. Legislative recommendations a. Ask federal charters to be modified to allow for private competition and explicit paid for catastrophic guarantee b. Other recommendations (such as changes to affordable housing specifics or ginnie item mentioned by cherz recently which are not relevant to our thesis) 2. Administrative actions to reduce taxpayer risk a. Amend agreement to original contract terms and deem fully repaid (10% moment) consistent w/ mulvaney prior legislation and w/ Calabria's views on NWS b. Finalize capital requirements c. Implement capital requirements through some moelis type recap d. Unwind govt "line of credit" relative to recap progress (moelis) e. FHFA to deem conservatptship ended once these steps have been accomplished When asked why administrative actions are being taken without approval by congress: - lack of capital exposes taxpayers and does not adequately price current explicit limited backstop under all scenarios - existence of SPSA and conservatorship does not allow capital to build (secondary offering) - government makes $150bn and private capital bears risk of impairment of net income stream - explain conservatoeship and SPSA are mutually exclusive from congress reforms and for reasons described above create hidden taxpayer risk - won't be said but will be true: congress can't do jack sh1t

I don't know as much re Buffett as others here. But a pound of flesh is what he got historically. Which means if preferreds are in play and Srs. may go he could ask for perpetual and cumulative. Which might give the Jrs. a little less value. you are right he would want cumulative, but I think he sees his greatest value as the validation effect he provides, which in this recap scenario is very important to GSEs, and therefore very valuable to Buffett This. The companies benefit with Buffets endorsement and Buffett gets to pull their pants down. Bingo.

This position itself has been extremely contrarian. Joel Greenblatt talks about when he was running Gotham he would constantly be asked about the positions he owned in terms of "are you crazy? haven't you seen the news?!". Being contrarian =/= successful investing. But it's a common ingredient. Within the contrarian Fannie position one of my more contrarian ideas was that Warren Buffet's been sitting on $100bn and Fannie Mae... well... needs $100bn. Buffet loved these companies before the excessive risk taking. Buffet loves the banks post liquidity/capital rules. To me it's a perfect match. Crazy I guess.. There's also 0% chance that Buffet is not intensely aware of the details of the situation.

Reasonable concern but surely shutting down the government arbitrarily for weeks isn't any worse from the perspective of creating a narrative dems can run with?

Why specifically would this require Congress? Treasury and FHFA (in its capacity as conservator on behalf of FNMA Board) can modify the terms of the existing contract. Only these two parties are needed. If both agree that the original terms have been paid off and negate the 2012 terms, and there is no actual exchange of money but rather a simple agreement that the loan has been deemed paid, why then would Congress need to be involved?

At this point, assuming the politico tapes are real, what could possibly be meant by the $150-200bn capital statement other than recap release? I understand that the "upside" has various scenarios which I don't pretend I can handicap accurately. But with respect to downside... what is the risk here aside from a recap plan that is intended to kill the GSEs (uncompetitive - but this would be entirely irrational given govt warrants) or tail risk (trump + pence impeachment and munchin removal?). What's going on here?!

Again. Another strong signal. After another. After another. Unbelievable you can still 2-3x your money here. A shame all COBF threads > 100 pagers never make any money ::)

Going through older articles to try to piece together likely outcomes. Writing on the wall. Calabria/Pollock 2015: https://thehill.com/blogs/congress-blog/economy-budget/240014-making-a-fannie-and-freddie-we-could-live-with What is required are practical steps forward, rather than designing the ideal but politically unachievable solution. We offer Congress the following suggestion as something that can be done now: simply take away all Fannie and Freddie’s special privileges. They could be allowed out of conservatorship when all of the following actions have been taken: 1. Take away Fannie and Freddie’s capital arbitrage and set their equity capital requirements in line with other financial institutions of similar size. Equity of at least 5 percent of total assets should be their required leverage capital ratio. 2. End all their securities law exemptions. 3. End all their preferences in banking law and regulation. Banks aren’t allowed to hold corporate equity, but as a mistaken exception were allowed to make large equity investments in Fannie and Freddie, on a highly leveraged basis. 4. End their exemption from state and local income taxes. 5. Open up their charters to competition just like banking charters. End their exclusive duopoly privileges. 6. End all their exemptions from consumer protection rules. 7. Designate them as the Systemically Important Financial Institutions (SIFIs) they indubitably are. Implementing these steps would go a long way towards making Fannie and Freddie less distortive and far less dangerous, rendering them a Fannie and Freddie we could live with as two competitors among others. Such a de-fanged, de-privileged Fannie and Freddie could safely be brought out of eternal conservatorship. If they again get themselves into insolvency, they could be placed into receivership. In the meantime, debates about the ideal housing finance system can continue. Mulvaney 2016: https://www.valuewalk.com/2016/02/fannie-mae-fincher-mulvaney-press-fhfa-treasury-on-risks-of-sweep/ It is extremely troubling that these massive agencies – deeply imbedded in our financial system with over $5 trillion in securities outstanding – are being specifically directed to deplete their capital reserves. According to the 2013 FHFA report, four out of five mortgages are now backed by Fannie Mae and Freddie Mac, which is a level higher than before the crisis. Should a sudden shock to the system or even a normal downturn occur, it is American taxpayers that will have to fit the bill. The letter also echoed an idea that housing policy experts from across the political spectrum have backed: Treat Fannie Mae and Freddie Mac like systemically-important financial institutions, or SIFIs. Mulvaney 2016 The Housing Finance Restructuring Act of 2016 https://www.congress.gov/bill/114th-congress/house-bill/4913/text Key sections: "(1) DEEMED REPAYMENT IN FULL.—Effective on the date of the date of the enactment of this Act, the liquidation preference on the Variable Liquidation Preference Senior Preferred Stocks of each enterprise is reduced to zero." © Exercise Of Warrants For Common Stock.—Notwithstanding subsection (a)(2)© of this section, upon the enactment of this Act, the Department of the Treasury shall exercise the warrants for the purchase of common stock of the enterprises provided to the Department under the Senior Preferred Stock Purchase Agreements. (d) Capital Restoration Plan.—(1) REQUIREMENT.—Not later than the expiration of the 45-day period beginning on the date of the enactment of this Act, the Director shall prepare and submit to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate a capital restoration plan for each enterprise that complies with section 1369C(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4622(a)). (e) Termination Of Conservatorships.—The Director shall terminate the conservatorship of an enterprise under section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) at such time that the enterprise attains, as determined by the Director, an amount of capital that is equal to or exceeds 5 percent of the risk-weighted assets of the enterprise. Pollock 2017: https://www.americanbanker.com/opinion/time-to-reform-fannie-and-freddie-is-now "The answer is easily determined. Take all the cash flows between Fannie and Freddie and the Treasury, and calculate the Treasury’s internal rate of return on its investment. When the IRR reaches 10%, Fannie and Freddie have sent in cash economically equivalent to paying the 10% dividend plus retiring 100% of the principal. This I call the “10% Moment. Freddie reached its 10% Moment in the second quarter of 2017. With the $3 billion dividend Fannie was previously planning to pay on December 31, the Treasury’s IRR on Fannie would have reached 10.06%. The new Treasury-FHFA deal will postpone Fannie’s 10% Moment a bit, but it will come. As it approaches, Treasury should exercise its warrants and become the actual owner of the shares to which it and the taxpayers are entitled. When added to that, Fannie reaches its 10% Moment, then payment in full of the original bailout deal will have been achieved, economically speaking. Any real reform must address two essential factors. First, Fannie and Freddie are and will continue to be absolutely dependent on the de facto guarantee of their obligations by the U.S. Treasury, thus the taxpayers. They could not function even for a minute without that. The guarantee needs to be fairly paid for, as nothing is more distortive than a free government guarantee. A good way to set the necessary fee would be to mirror what the Federal Deposit Insurance Corp. would charge for deposit insurance of a huge bank with 0.1% capital and a 100% concentration in real estate risk. Treasury and Congress should ask the FDIC what this price would be. Second, Fannie and Freddie have demonstrated their ability to put the entire financial system at risk. They are with no doubt whatsoever systemically important financial institutions. Indeed, if anyone at all is a SIFI, then it is the GSEs. If Fannie and Freddie are not SIFIs, then no one is a SIFI. They should be formally designated as such in the first quarter of 2018, by the Financial Stability Oversight Council —and that FSOC has not already so designated them is an egregious and arguably reckless failure. When Fannie and Freddie are making a fair payment for their de facto government guarantee, have become formally designated and regulated as SIFIs, and have reached the 10% Moment, Treasury should agree that its senior preferred stock has been fully retired. Then Fannie and Freddie would begin to accumulate additional retained earnings in a sound framework. Of course, 79.9% of those would belong to the Treasury as 79.9% owner of their common stock. Fannie and Freddie would still be woefully undercapitalized, but progress toward building the capital appropriate for a SIFI would begin" Mnuchin 2017 https://www.bloomberg.com/news/articles/2017-01-28/mnuchin-dims-banks-hopes-he-will-allow-a-prop-trading-revival Additionally, Mnuchin offered further details on his thoughts regarding housing finance reform, including the role of GSEs. Mnuchin wrote in response to questions from Senator Sherrod Brown that "any solution will be dependent upon the GSEs being capitalized properly and other such controls that eliminate risk to taxpayers." Mnuchin 2017 https://www.wsj.com/articles/trump-administration-could-support-government-backstop-for-fannie-and-freddie-mnuchin-says-1495137047 "If we end up with a scenario where we need some type of explicit guarantee, I would expect that it would be paid for and I would expect that it would hopefully never be hit,” he said. The Treasury secretary said such a system would be no different than insurance programs operated by the Federal Deposit Insurance Corp. and the Federal Housing Administration. OMB Budget 2018 - Mulvaney https://www.whitehouse.gov/wp-content/uploads/2018/06/Government-Reform-and-Reorg-Plan.pdf "This proposal would reorganize the way the Federal Government delivers mortgage assistance and go beyond restructuring Federal agencies and programs by transitioning Fannie Mae and Freddie Mac to fully private entities. Both Fannie Mae and Freddie Mac, as well as other competitive entrants, would have access to an explicit Federal guarantee for mortgage-backed securities (MBS) that they issue that is only exposed in limited, exigent circumstances. Such a guarantee would be on-budget and fully paid-for The proposal would remove the Federal charter from statute and fully privatize the GSEs. A Federal entity with secondary mortgage market experience would be charged with regulatory oversight of the fully privatized GSEs, have the authority to approve guarantors, and develop a regulatory environment that is conducive to developing competition amongst new private guarantors and the incumbent GSEs, ensuring they would all be adequately capitalized and competing on a level playing field. Under this proposal, which would also involve entities outside the Executive Branch of the Federal Government, guarantors would have access to an explicit guarantee on the MBS that they issue that is only exposed in limited, exigent circumstances. Taxpayers would be protected by virtue of the capital requirements imposed on the guarantors ... The projected cost of this guarantee and other fees charged would be on-budget and accountable, resulting in reduced implicit taxpayer exposure. Phillips 2018 https://www.housingwire.com/articles/47122-mnuchins-top-housing-advisor-says-gse-charters-should-be-removed “The administration advocates ending the conservatorship of Fannie Mae and Freddie Mac and returning them to private ownership,” Phillips said Monday. “Their charters should be removed from statute and their operations should be overseen by the primary regulator that has the authority to approve additional guarantors to introduce competition into the secondary mortgage market “Guarantors should have access to an explicit federal guarantee for MBS (mortgage-backed securities) that they issue which is on budget and fully paid for, designed for use only in exigent circumstances and designed and overseen in a manner that protects the interests of taxpayers by their primary regulator,” Phillips continued..” Mnuchin 2018 "Watt's term ends in early 2019. That will be an opportunity to “make sure we have someone in that job that supports the agenda,” Mnuchin said." Otting 2019 Otting: ‘A lot’ can get done during acting FHFA tenure “There’s a clear mission that’s outlined by the Treasury and the White House, what they want to accomplish,” Otting said in an interview this morning inside the building that houses both the OCC and FHFA. “If I can move that down the rails before Mark is confirmed, there’s a lot of things I think we can get done, and then Mark could come in and continue down the path of the mission that’s been laid out,” he added. “We have to look at the capital and liquidity requirements of the GSEs,” he said. “But by all accounts … I think the GSEs can be commended for the way they have repositioned their business models and the way they are serving the market.” He said he was still getting his bearings in his new role, but added: “Our goal is to be able to complete the release of the GSEs but at the same time make sure that it supports the U.S. housing market.”

I've always hated the term privately owned given ambiguity. Why not publicly owned? Shareholder owned? You wouldn't call Berkshire a publicly owned company in common parlance.