SnarkyPuppy

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

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders? Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... So why...?

Is it possible (maybe unlikely?) that the government is doing this to solidify a future political response to the "enrich hedge funds" onslaught? i.e. they are likely aware that SCOTUS won't take the case given remedy hasn't been decided - but being able to say "we appealed to SCOTUS and they denied and therefore we have no choice but to settle"?

Three developments: 1. Congress is told that Libra is critical to US dominance of the blockchain space which is a breakthrough technology - crypto does not budge 2. Xi gives speech saying blockchain is a breakthrough technology and China must dominate - Bitcoin rises 41% and shows who has more influence 3. yesterday ZeroHedge article points out the risks to bank deposits due to bail in and says there are $17T bank deposits in the US. Presumably similar in EU. What if 10% moves into crypto? If banks are no longer safe there will be sudden mass adoption in crypto. The result will be BTC $100K. I find psychologically dollar cost averaging is the best way to deal with the volatility. I am comfortable with volatility if the trend is up long term with higher lows. Obviously you can buy more on lows but I find it is difficult to do. Those that put 10% into crypto early will gain the most. The derivatives mean that many banks are already swimming naked. The models obviously will be shown useless when counterparties fail and sudden massive recapitalization will be required. The longer they are bailed out by QE the worse the pain will be because QE does not fix anything it only keeps zombies alive and erodes the economic structure by preventing capital from being allocated to better uses. It is the banks preventing the US from dominating the new system and the blockchain is a technological revolution waiting to be exploited. And yes it means the end of the current banking model. The countries that get this first will suffer least. Suck it up and deal with the pain then move to the new system. Felix Somary's book from 1951 predicted this derivative problem and said that the desire of the bankers to make return without risk would destroy capitalism. If capitalism ends remember that it was the bankers greed that did it. I think Crypto is Satoshi Nakamoto's aka Alan Greenspan's attempt to save capitalism by preventing the collapse of trust caused the banks as Somary predicted by creating a system based on an NSA paper that creates trust by its inherent design. That is why it is a breakthrough. There are not many other people with the brains, wisdom and who are known to read everything and the position to implement this saviour. If not Greenspan there could also be a Jack Ryan type character in US military intelligence. Accordingly, buying crypto is how we all can contribute to saving capitalism. The other choice starts with a ruthless dictatorship and ends in atrocities like cannibalism. We all know it but do not like to think about it. As Thatcher says the problem with socialism is that eventually you run out of other people's money. Likewise all tyrannies in history have collapsed badly. I'm long bitcoin. You sound like a psychopath.

Midas - thank you very much for posting your thoughts on the capital requirements. I think the housingwire article makes one decent point although I think it's moot given the obvious move towards a re-IPO and the requirement to eliminate the lawsuits to facilitate new capital. "This is an issue to watch as the argument could be that Fannie and Freddie would have to be compliant with the new capital standard by a certain date. If they are not compliant by that date, then it could be possible to trigger receivership. We don’t see this as a desired result as it would likely result in a decade of litigation and it could disrupt housing finance." With that said, what is stopping Calabria from stating that the GSEs are currently "Critically Undercapitalized" and therefore "insolvent". Or are the two terms not synonymous under the statute? I just did a quick search under HERA and it's not clear how "insolvency" is defined. If "Critically Undercapitalized" ~= "insolvent" - then why is everyone adamant that receivership is technically not possible? Again from a practical perspective I don't see the value in moving them to receivership. But I see some people stating that it's not technically possible and it's not clear where that's coming from.

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. I'm curious why any attention is still on the 10/22 mandatory hearing when the 10/23 interview Calabria chose to be on resulted in: 1) 19:45 minutes: CALABRIA CLARIFIES THAT HIS COMMENT TO WIPING OUT SHAREHOLDERS IS ONLY WHEN A COMPANY BECOMES INSOLVENT. THIS IS THE LAW. 2) 24:30 minutes: CALABRIA SAID FANNIE WAS INSOLVENT IN 2008-2012. FANNIE IS HUGELY PROFITABLE NOW. 3) 27 minutes: THE LAW SAYS THERE ARE ONLY TWO CHOICES...FIX AND REALEASE OR RECEIVERSHIP. SINCE RECEIVERSHIP CANNOT HAPPEN DUE TO POINTS 1 & 2, THE ONLY OPTION IS FIX AND RELEASE. refer to I just looked at each timestamp in your video you posted - and your notes don't really align to what he actually says. Not sure what I'm missing here / the point of this?

I haven't looked at the capital level question in much detail because I don't think it's material to the thesis - primarily because Calabria will be required to recognize reality if he expects to re-IPO $100-200bn. With that said - is everyone's analysis taking into consideration the fact that part of a 4% capital requirement may be met through credit risk transfers? Reducing the effective hard capital requirements down to an amount < 4% and much more reasonable for recapping?

Why? Shareholders will have to agree to any discount, whereas congress has no practical ability to insert if there is no discount. many reasons. there is still geniune hope to work with congress and so their opinions matters a small bit at least. whether fair or not there is a visible conflict regarding paulson and his admin relationship. mnuchin's responses and tone today suggests a serious negotiating posture. and (hopefully) the large power players aren't greedy and would accept some discount to par to help the process move along. This was one democratic rep who wants to wipe out shareholders. Yawn the market's not yawning with some jr pref @ 40pct of par. Even with all of the justifications offered, the market is clearly saying -- despite the en banc ruling and a major pause in the sweep -- that the potential upside target price during this administration is somewhere below par. The market is not always efficient in the short term. Either that or you're correct - but you have to acknowledge the fact that the market has been wrong on this to date and here's plenty of reason at this point to suggest Par is coming in the next 1-3 years.

Why? Shareholders will have to agree to any discount, whereas congress has no practical ability to insert if there is no discount.

+2 I have an exactly opposite view than most of you here. I had a tight stop and was stopped out of my big 20% position last Thursday and since then I've been flat. I was gonna post this yesterday but was too busy. I think a major top is right here. $14 is the key resistance for FMCKJ. The market reaction has never been worse. A positive court ruling only caused a false break out. Then this Monday's 20bn capital retaining news only caused a big volume down day, followed by another big volume down day yesterday. If you look at the daily chart since the positive court ruling and count how many down days you get vs the up days, and the volume on the only 3 up days, you'll see how little buying there was. This is the one of the few classic topping actions. I don't see any reason to continue holding this stock. It will either go flat or go down. This will be my last TA post here. I don't like being taunted over and over by lots of you. Thanks! This is certainly one way of viewing a court victory deeming NWS illegal and an agreement to suspend the NWS....

It's less about the substance (obviously a fee above the unfunded liability is ridiculous), it's more interesting his 180 given he came up (at least made popular) the concept of the 10% moment. Why suddenly is this coming into play? Only reason I care is this guy clearly has a relationship w/ Calabria and Craig Phillips. Pollock has written articles together w/ Calabria in "thinktank" clown land and Phillips referred to him has his "hero".

Alex Pollock - https://www.realclearmarkets.com/articles/2019/09/20/have_fannie_and_freddie_paid_the_taxpayers_back_yet__103920.html Didn't this same clown write about the 10% moment?

No because plaintiffs wouldn't settle w a new letter agreement similar to dec 2017

On the Investorsunite call the lawyer said that in the event of a plaintiff win, the companies (not the government) is liable for paying the remedy. Is there not a risk that the government converts its $200bn in preference to convertible debt (above junior prefs) to recapitalize (in addition to exercising warrants) and if the Collins case is won by P's the companies have to deal with it (issue more equity). No longer govt problem? Obviously inconsistent w IPO comments from Calabria and would be weird to do relative to the easy solution. But basically couldn't the govt just push the contingent liability to the companies?

Downside risk: Buffett takes 51% of post govt warrant common stock + govt keeps 49%. Government and Buffett split settlement payment to large private litigating shareholders and we expire worthless. Thoughts?

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems. Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending. But of course, everyone knows this and yet the market prices some of these as low as 40% of par today. And we have the government in plain English saying they are going to stop the NWS and recapitalize. So what is the market missing? Or what are we all missing? Is the major risk that this gets delayed past the election and Trump loses? Say Biden wins, he will probably bring back most of Obama's people (fellow traveler's) to the job. And this whole thing is dead and back to status quo. Is that the only major risk here? I'm sure Mnuchin is well aware of this. So why wouldn't he rush to get this done within a year? Is it even possible to raise $100 billion from start to finish that quickly? Either the market or we are very very wrong here. Can we literally list out all potential downside scenarios here? I share similar sentiments - this at the top of highest conviction trades I've come across. - Trump + Mnuchin and or Calabria are removed from office unexpectedly - Entirely private recap with Berkshire etc where the litigation risk is accepted as a liability as part of the deal - Status quo maintained - Calabria/Mnuchin do not do anything. Trump loses election and obama-esque admin takes over - Near term acute drop in housing, economy, and/or stock market causing GSE Incone losses and inability to recap - Appeal and loss at Supreme Court + status quo argument - Recapitalize with Junior pref and conv debt senior to existing junior preferred. Plus government decides it doesn't care about $100bn warrant value What else? Going to be annoying but I'd like to crowdsource this more w/ the collective board who provides consistently stronger analysis than myself. How do we lose here?

That would be assuming a symbolic fixed rate for the Srs. set at 0.1% and a minimal commitment fee for the 240+ bill not drawn. this assumes that the senior preferred are deemed paid in full. There can be no capital raise without that. fnma has a line of credit of $114B from treasury. So in the hearing today, Mnuchin said that the tax payer needs to be compensated going forward and that he doesn't want to wipe out the liquidation preference when ending the sweep. He even suggested increasing it in exchange for stopping the dividend. What are your thoughts? Mnuchin continues to play poker - stating things in a factually correct way without telling the entire story. It's likely that we are about to see an agreement between FHFA and Treasury to allow for an increase in the current $6bn buffer - this increase will also result in a 1 for 1 increase in the senior preferred stock liquidation preference (same approach as December 2017 - https://www.fhfa.gov/Media/PublicAffairs/Documents/GSEletteragreementfnm12-21-2017.pdf) Separately, and subsequently (looking like Q4), FHFA and Treasury will formally amend the SPSPA which will end the net worth sweep and restructure the senior preferred stock to allow for 3rd party capital to be raised. This might result in removing some or all of the senior pref (deeming repaid) or it might result in keeping the senior preferred liquidation preference and converting it to common stock in conjunction w/ a settlement of the lawsuits. Consistent w/ Mnuchin's testimony.

I agree, will likely give another opportunity to add if so inclined. Estimating roughly that the lions share of reform/recap done by next fall its very likely that still at these prices there is nearly a double for some of the preferred in 12 months time. Is there another option to lever this up outside of margin? Even at the most egregious margin rates alot of money can be made in 1 year here it seems. Buffett, Munger, Druck, Soros talk about that fat pitch and swinging for the fences. This seems like a pretty juicy one over the middle with a planned negotiation on paper from the counterparty regarding the security, a favorable court ruling, a motivated administration who just got the blessing of congress and pretty good chance captialization is kicked off by the end of the month with the NWS ending. But of course, everyone knows this and yet the market prices some of these as low as 40% of par today. And we have the government in plain English saying they are going to stop the NWS and recapitalize. So what is the market missing? Or what are we all missing? Is the major risk that this gets delayed past the election and Trump loses? Say Biden wins, he will probably bring back most of Obama's people (fellow traveler's) to the job. And this whole thing is dead and back to status quo. Is that the only major risk here? I'm sure Mnuchin is well aware of this. So why wouldn't he rush to get this done within a year? Is it even possible to raise $100 billion from start to finish that quickly? Either the market or we are very very wrong here. Can we literally list out all potential downside scenarios here? I share similar sentiments - this at the top of highest conviction trades I've come across. - Trump + Mnuchin and or Calabria are removed from office unexpectedly - Entirely private recap with Berkshire etc where the litigation risk is accepted as a liability as part of the deal - Status quo maintained - Calabria/Mnuchin do not do anything. Trump loses election and obama-esque admin takes over - Near term acute drop in housing, economy, and/or stock market causing GSE Incone losses and inability to recap - Appeal and loss at Supreme Court + status quo argument - Recapitalize with Junior pref and conv debt senior to existing junior preferred. Plus government decides it doesn't care about $100bn warrant value What else?

Appreciate the timely insight cherz. Cheers to all. Yet another foot forward in the right direction. Just a matter of time.

Basic question but who initiated this hearing? Calabria/mnuchin or congress? Assuming the former

I believe there is a piece of new information in this article: "Privately they have said they would like to reduce Fannie and Freddie’s loan footprint to between 30% and 40% of the market, according to people familiar with their discussions." Additionally, quite amazing if you take a step back 1-2 years and see how drastically the narrative has changed. Could argue that Mnuchin has done a great job at "boiling the frog" in terms of creating sentiment shift (rather than doing everything at once), but that could be confirmation bias.

Thank you both, appreciate it.

Did you ever receive any closure on this issue?

BI says the plan of the re-IPO is imminent, not the execution of said plan. I know there's plenty of hair on the execution (as there is with any IPO), but I was simply pointing out the release of the plan itself and the BI saying it will include an IPO. An IPO being part of the plan isn't news to anybody on this board (at least it shouldn't be), but BI saying it's imminent at this juncture bodes very well for prefs. I wouldn't read into this - I think we are having some confirmation bias w/ Bloomberg "Intelligence". As an example, they missed Calabria as potential successor in this mid-October report: http://www.timelessinvestor.com/wp-content/uploads/2018/10/GSEs_Bloomberg-Intelligence-20181019.pdf

Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb): I think one of the more likely options is: -The plan is done (Phillips left) and the govt is waiting for en banc decision. For this to be the case, the govt plan would have to differ from a reversal decision en banc. Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally. How can this be viewed as anything other than negative? The other two likely alternatives: - Someone on the inside is a roadblock. Either Calabria or Kudlow. Both have spoken favorably towards shareholders in the past but at the same time would wipe us out in a heartbeat. Both seem to lack a sense of realistic constraints - but nonetheless this presents an issue in moving to the next step. I think it's unlikely Calabria is the problem - why signal so strongly off the bat? - Bankers when pressed to begin working on IPO mechanics expressed hesitation on execution risk - and one way of reducing that risk is to retain earnings and build a buffer for a couple of years + giving congress time to act prior to IPO