Flynnstone5

+1. boards are an echo chamber; people are wired to derive psychological comfort out of making bias confirming statements we are still in highly speculative mode in terms of trying to understand what mnuchin/trump's intentions are.. some caution is in order agree with caution statements. sometimes, the less you know about something, the more convinced you are. in this case, i must say that the more i read (briefs etc) the more convinced i am, but lamberth told me that i might be emphasizing the wrong thing, such as the rule of law. i reread mnuchin's tv statement, and i want to ask this board whether you guys think this is an interesting tell. whenever someone is generally antaganostic to GSEs, they talk about "reforming" the GSEs...that they should be wind down and replaced, or reformed to the core. here is the convo: “Maria: Would you move to have these privatized? Mnuchin: Absolutely. We gotta get Fannie and Freddie out of government ownership. It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe; so let me just be clear we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again but we gotta get them out of government control.” notice mnuchin used the word "restructured". now when i think a finance guy uses the word restructured, he is talking about a finance fix, a fix to balance sheet, not a fix to the core of the enterprise that would involve reform. financial restructuring falls far short of reform, in other words. am i reading too much into this distinction? (ie confirmation bias). frankly, i think it is telling what mnuchin's current mindset is...doesnt mean we can tell with any specificity what he and trump admin will do, but i don't think it was just a meaningless word choice. I posted the comment below on Tim Howard's blog in hopes that he might offer an opinion. I agree that when he says "when their restructured" , "out of government ownership" certainly doesn't imply wind down, but I question if it could somehow be agreeing with so many Republican opponents. The reassuring point that I always seem to come back to is that there doesn't seem to be a workable solution proposed by opponents; and the new admin. can't afford any solution that increases the cost of home ownership given the impact on the economy. Certainly tough as for every friend or member of the admin. who are pro FnF, there are two in major committee's who are clearly not. I assume that you know Sean Duffy (R-Wis.) will chair the housing and insurance subcommittee, which will now include oversight of Fannie Mae and Freddie Mac. His op-ed from March 2016 clearly shows that he is not pro FnF. When I look at the members of the Senate Finance committee and the members of the Senate committee for Banking, Housing and Urban Affairs, it is striking how many members are anti FnF. When I couple this with the all of the other opposing forces, I have to really question the cause for optimism as a shareholder. What if Mnuchin’s comments regarding “out of government ownership/control” are actually agreeing with these forces? And if not, how is he and the Trump admin. going to convince these forces to support them? When a guy like Sean Duffy has had years to gain knowledge on the crisis and FnF, but still writes less than a year ago that they caused the crisis and taxpayers had to bail them out, it really makes me question how someone like him can be converted to supporting recap and release. Worse, what if Trump is convinced by FnF opponents that their line of thinking is correct? Nov 4, 2011 Trump Tweet: Malfeasance at Fannie Mae and Freddie Mac helped cause our current financial meltdown.

Sean Duffy (R-Wis.) will chair the housing and insurance subcommittee, which will now include oversight of Fannie Mae and Freddie Mac http://bankingjournal.aba.com/2017/01/hensarling-announces-house-subcommittee-chairmen/ https://votesmart.org/public-statement/1068872/where-the-big-short-fell-short#.WG-4_pJlD4U

If Corker/Crapo and the anti-GSE Senators vote YES to confirm Mnuchin, then I may go 100% long (assuming the shares don't jump too much), because that would be a clear indicator that they're giving this one up, not that it's their choice to begin with. But at that point, the only entities that can stop us are the Courts - assuming they throw the cases out before Mnuchin can inform the judges that he wants to settle, and Mel Watt (lol). I'm not so sure that it means that much to have Corker/Crapo vote YES because they are not going to go against the admin. this early. Once confirmed they and every other anti-FnF person, entity, lobby, etc. are sure to continue to fight given $$$. For every piece of info. that I read that supports my bias, I just continue to ask myself what could potentially happen out of left field, i.e. Mnuchin meant something different than what everyone assumes when he said out of gov control, the admin stalls and keeps the NWS in place, Mnuchin/Trump pursue a Corker/Crapo or similar scenario, they restructure in a way that crushes shareholders, etc. I'm heavily invested in common/prf'd and am betting on favorable probability, but when I read other boards, articles, etc. that act as if this is a sure thing, it literally puts a pit in my stomach. As aside here's the link to listen to confirmation hearings: http://www.capitolhearings.org/

Isn't the U.S. Senate Committee on Banking, Housing and Urban Affairs the one that will conduct Mnuchins confirmation hearing? If so, it appears many of the current members are not pro FnF. http://www.banking.senate.gov/public/index.cfm/membership I count at least 8 that supported Corker-Warner or Johnson-Crapo. Has anyone else looked at this?

Could be as early as next Friday or following week. Here's a link to check: https://www.senate.gov/committees/committee_hearings.htm

Question for the attorney's here. If the writ of mandamus is denied prior to inauguration, how likely do you think it is that an en banc or whatever tactic available is actually pursued given the time frame? And, if it were filed with only 1-3 weeks left before a new DOJ, how easy would it be for the new admin. to drop or stop the process?

I read this recent comment from Tim Howard in response to a particular proposal. There seems to be a lot more talk lately regarding congressional approval. Isn't it clear that Trump/Mnuchin don't need any congressional approval to implement a plan for recap and release or am I mistaken on this? Also, given the Republican control of Congress, is it really that likely that his own party would oppose him so early in a new administration? This doesn't make sense to me. They are going to want to be united and get as much accomplished as possible within the first two years IMHO. jtimothyhoward December 29, 2016 at 12:07 pm I think most of the elements identified in this plan could be useful as components of a negotiated settlement between the government and the plaintiffs. But I also think your plan would greatly benefit from having an identified objective (for which this plan is, in your opinion, the best way to achieve it). Many proposals I’ve seen have the implied objective of maximizing the values or prices of Fannie and Freddie’s preferred and common stock (which is why they all include cancelling the warrants). I understand why the companies’ current shareholders might have this objective, but that won’t be enough. If Fannie and Freddie are to be released from conservatorship and restored as private companies, the Trump administration will need to have a reason to make it happen, and Congress at a minimum will need to accept that plan, and not seek to counter it with legislation. I still do not know what the Mnuchin Treasury will set as its objectives for settlement talks with plaintiffs. I’m hopeful it will realize that releasing and recapitalizing Fannie and Freddie is the best alternative for ending the eight-year impasse on mortgage reform, but I can’t rule out the possibility that it might decide to settle the lawsuits as cheaply as possible, then throw its support behind the forces in Congress that want to liquidate Fannie and Freddie and replace them with some mechanism more to the liking of the large banks and Wall Street interests. If the latter choice is made, your plan obviously is dead. But even if the former is made, I believe your plan would need to be tweaked in some ways to give the Trump administration (and Congress) some reasons to go along with it (other than that it’s the right thing to for consumers, which unfortunately in politics seldom is enough).

You must see a sweetened conversion as most likely settlement with divs maybe a couple years out? I think the major prfd litigants are going to demand a juicy conversion to not only agree to such a scenario, but also to basically be willing to wait until a div is restored for highest pps. This would certainly align well with gov increasing exercise price on warrants should they go that route.

+1 More likely that the junior prefs will be converted to common as the dividend rate on some of them is way too high for current rates, and it also helps recap. Not only does this make the most sense, but it's also most beneficial for Mnuchin's buddies Berkowitz and Paulson. I also think they'll reverse the NWS and assume all excess payments were for repayment of Sr. preferred. That will bring the 10% senior dividend to a small, manageable amount for which the principle they can pay off rather quickly. All this will be great for the value of the warrants and ultimately result in a quick solution as per Mnuchin's words. This is my personal utopian outcome as I'm 50/50 common/prf'd right now. Some have floated a conversion of 2:1 based on historical price ratio's, but to me that doesn't seem sweet enough for Berkowitz/Paulson. What do you see as likely?

If they choose to maximize value of the warrants, why would they issue so much common? Why not reinstate divs and issue new jr prf'd? There's enough cash flow and you wouldn't dilute the common. Recap easier with a higher pps and max their own position.

Thanks for pointing out. Here is the link: http://www.msnbc.com/rachel-maddow/watch/ethics-questions-loom-over-trump-hhs-pick-rep-tom-price-839983683992

i've been thinking along these lines but i'm not sure how far this dog will hunt. mnuchin will need cover from the attacks that he is favoring his hedge fund buddies (and trump assuming he is an LP of paulson). the simple fix is for mnuchin to release (or at least threaten to release) all privileged docs and say this was a terrible mess and he is just trying to do right, fix the mistakes of the last administration (which will be a recurrent theme for the trump administration). in this way, a denial of mandamus is not even necessary, though i expect it to come. this is a powerful defense available to mnuchin, i just hope he is thinking along these lines Completely agree with merkhet's line of thinking here. Trump has been masterful at baiting his opponents and this would be a beautiful setup to let the media go crazy only to drop the hammer. @cherzeca - I've been thinking about the confirmation hearings as well. I wonder if he needs to bring up docs so early as opposed to saving them for the media surprise. Wouldn't it make more sense to refer to the NWS as completely unjust, make the point that the gov has been paid back and has taken billions extra, bring up comparisons of Citi, GM, AIG, and then address the Brown letter questions by saying he believes in the rights of all shareholders regardless of the class of share held.

fwiw - checklist under landing teams http://presidentialtransition.org/timeline/agency-review/2016-11-post.php

I wasn't talking about using warrants as way to recap. I think that by raising the strike, they can foster greater confidence in the pps allowing for easier recap going forward. I think they look to reinstating divs and new issuance of prf'd as a way to recapitalize. They use a 1-2 year window and sell their position over time (exit ownership) into market moving forward. I guess the main issue is that, why are people talking about diluting common so much, when there seems to be alternative scenarios that are favorable to shareholders and the gov while achieving the desired end point? What's the benefit to effectively screw shareholders if there's an alternative win - win solution? And, how would that end the litigation so that "we can get this done relatively quickly"?

certainly possible. i would note however a general trend among regulators to prioritize common over preferred for capital adequacy purposes. on a separate topic, there is a large block of nearly 700k shares on the ask in freddie mac, which is a lot in a low volume day like today. Wouldn't treasury be the primary regulator in this case....lol Saw that block. Just disappeared.

flynn, there are so many assumptions involved, making any forecasts on your question educated guesses at best. a simple solution is to raise the warrants exercise price to a value where the capital injected is equal to the 70bn of (combined from F+F) interest payments the govt has received. and then convert the jr preferred to common at some ratio. that would create about 7bn shares outstanding. if income was 12bn per year, that's 1.71 of eps x 12 = $21 expected value. perhaps a little higher target price if the preferred doesnt convert but instead just gets divvy's turned back on. the drawback to this idea is the govt would need to front the 70bn, even though they would likely get much more on the back side from share sell downs. if they dont want to send 70bn back over to the GSEs right away then you're just going to have to make some big assumptions on common / preferred mix and the price at which the new capital is raised. i believe if things get rolling the shares will rally in advance of any share sales, making dilution more manageable. at current prices, i would not overthink things. most importantly need trump + mnuchin + mulvaney confirmed and in their seats to execute their plan. court rulings could be a major bump or tailwind. it appears, with recent price action, that investors would rather be late and risk missing material upside rather than be early and get exposed with bad news coming out in the mean time (which unfortunately is still a possibility). I know this is difficult with so many unknowns. Just trying to establish some kind of base on what I expect as a probable outcome. Why couldn't the gov reinstate divs and then issue new prf'd as the primary way to raise capital? There's enough cash to pay dividends and there's no dilution to common, which benefits their own position.

Has anyone run a common pps scenario with the assumptions that 1.) senior prf'd are adjusted from the NWS over payment on original deal to show approximately $10 billion outstanding balance, 2.) jr. prf'd balance of $30 billion outstanding and 3.) a new capital requirement of $70 billion. Assume that warrants are kept and that the exercise price is raised. Use a goal of a 2 year recap window and some combined new issuance of prfd and common or a conversion incentive where dividends remain suspended for a period of time. I'm ok with rough calculations, but I don't have the expertise to know realistically what the level of prfd issuance would look like, in addition, to what the "right" price is for a new exercise price. I do think the assumptions of 1,2,3 and the warrants being kept with a higher exercise price is the most probable outcome. Please post if anyone has formulated a rough pps based on this methodology. I welcome any feedback positive or negative, but am focused on this methodology.

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus? This is getting beyond my general knowledge, but I think that's theoretical mostly true. I suppose there are interlocutory appeals or something procedural that can be done once the wait gets egregious. In general, I think you just asssume judges will do their job...eventually. But I could be wrong on this, so I'll defer to someone who has more knowledge than me on this matter. Like, someone who clerked federally or something. My focus is currently on whether the EC ends up voting for Trump on Monday. Appreciate your feedback. If you don't know, I'm not sure anyone does! I think there's virtually no chance that EC overturns Trump. Question I asked a while ago that you might know the answer to: assuming mandamus is rejected and gov eventually is forced to turn over the 56 docs to P's council, can Sweeney decide to release those docs to the public?

So Millet could potentially just stall indefinitely and P's would simply have no recourse and/or same with other court handling mandamus?

perry is a tough and momentous case. If one judge wants to stall on producing a dissent nothing goes forward. This is what I think may be happening here. Only reinforced if that judge thinks the issue will go away through eventual settlement. How long can a dissenting judge stall? Is there a certain time frame where the other judges will intervene and/or the judge is forced to issue?

i think in a settlement there are incentives that favor each of the junior preferred and the common. i think the pie can be large enough for both to do well. i was looking for reason for slight selloff today, and noticed that watt is reported to have told fhfa employees that he plans to stay on for remainder of his term (2019). what a joke. there will 50 ways to tell watt to get lost. I dont know about price movements any given day but theres belief in some of the DC circles that Mnuchin may be hard to get confirmed. From CNBC a couple days ago: http://www.cnbc.com/2016/12/12/2017-wake-up-call-how-hard-it-will-be-to-confirm-tillerson-and-mnuchin.html The Trump team surely vetted Mnuchin knowing the attacks he would face. Hopefully his confirmation is early on with republicans united and my guess is push come to shove Tillerson is the one they really want to stop. Also filibuster is gone so that makes confirmations easier as well. Typically it is pretty rare to block a cabinet pick, but the dems of today will surely try anything and everything.

i think in a settlement there are incentives that favor each of the junior preferred and the common. i think the pie can be large enough for both to do well. i was looking for reason for slight selloff today, and noticed that watt is reported to have told fhfa employees that he plans to stay on for remainder of his term (2019). what a joke. there will 50 ways to tell watt to get lost. Agree. Or he stays and executes exactly what Trump/Mnuchin want him to do.

Curios if anyone has given thought to the probability that prfd shareholders are offered a very attractive conversion to common under a settlement? I initially bought about 40% of my position in prfd's primarily as a hedge on the common. We all know the pro's and con's of the shares. I have planned to add another substantial position in common, but for the last couple of weeks, I keep coming back to the idea that prfd's may be offered a very attractive conversion ratio with some sort of incentive to remain invested. If this turned out to be the case, the prfd's could not only be a safer play, but could also yield a greater upside. Like to hear others feedback.

Question I asked Tim Howard with his response. Question: Tim – In your opinion would you say that given it may be impossible to settle every single suit depending on certain controlling P’s rationale, i.e they are looking for an outcome deemed to simply be unreasonable, Mnuchin will hammer out a deal with the key litigants and major shareholders, as well as reach out to smaller cases once the parameters with larger have been agreed to? Assuming they choose to take advantage of warrants with the possibility of altering the original deal, isn’t the pps of common shares a key to a successful transition, i.e. most suits are settled/dropped, ability to raise capital increases, treasury maximizes it’s own interest, prf’d may be convinced to a conversion and remain invested for a longer period, etc.? I ask as many still put forth the notion of shareholders being wiped out, new issuance, etc. This to me doesn’t seem like a reasonable probable outcome when the opportunity exists for a win-win scenario. Am I missing some key element short of an unrealistic capital buffer, say 3% or above? Answer: The way these multi-plaintiff settlements typically work is the “big dogs” negotiate the terms, and the smaller plaintiffs then decide whether to accept those terms or opt out, and continue to sue on their own (with their own money). Knowing that, the large plaintiffs try to structure the terms to maximize the chance that both the defense and the smaller plaintiffs will accept them, so as to end the lawsuits for everyone. And you’re right about the common shares. If the government views a reformed, released and recapitalized Fannie and Freddie as the best available alternative for the secondary mortgage market of the future–as I argue in this piece that it is–then the government and the plaintiffs have a mutual interest in maximizing the long-term value of those common shares (the government because of its ownership of the warrants). Another important mutuality of interest in a negotiated settlement is “getting the capital right.” Yes, the government wants Fannie and Freddie to be, in Mnuchin’s words, “absolutely safe,” but it also would want to achieve that safety with a minimum of unnecessary excess capital. Capital that’s not needed to meet the government’s safety and soundness standards either extends the time to achieve full capitalization via retained earnings (which requires negotiating regulatory forbearance, and limits or prohibits junior preferred and common dividends in the interim) or requires additional equity capital raises (there is a limit to the percentage of its capital structure a financial institution can have in preferred stock), which dilutes existing owners of common (including the government via the warrants) and lowers its price.

@cherzeca @hardincap Thank you for your replies!