Midas79

I wish I could share your optimism here, but this piece actually gives me a sinking feeling. My investment thesis has started to coalesce around the idea that everything (full recap and release) needs to be done before the end of the year so as not to affect the campaign and election cycle. But here, Calabria makes it sound like getting FnF released ASAP is not really a goal. He also keeps mentioning Congress, which should be a non-starter. It's a lock that Calabria will be able to be fired at-will by Trump, or the next president if Trump is not re-elected. The en banc decision will include this, and that part won't be appealed by either side. That means if Trump gets voted out, the incoming president could fire Calabria (and Mnuchin, of course) and derail the entire thing. I have therefore thought that if Trump really wants FnF released, it has to be done before the end of his term, and more likely much sooner due to the aforementioned campaign and election cycle concerns. To me, these are the concerning parts. I do wonder if the negotiations over the PSPAs could move up if Treasury submits its plan earlier than expected. Waiting until September or October could be too late, unless Treasury has already lined up the big money for the capital raise. The key dominos seem to be the en banc decision, Calabria issuing actual binding capital standards, and Treasury's plan. Once those are all done the PSPAs can be amended and then it's capital raise time. This line sounds like a regulator speaking, not a conservator.

What does "reduce risk at the FHFA" even mean? It would have made far more sense to say "reduce risk at Fannie and Freddie" or "reduce risk to taxpayers", but I don't know if that's what Mnuchin meant. I don't see what risks FHFA itself poses. reduce the risk at fhfa means telling calabria not to grant any more interviews ;D This seems to point to a very fast recap, then, because I believe release can't happen until all capital requirements are met. We should see Calabria's capital requirements in about 3 months, according to Otting. Bill Ackman's "largest private capital raise in history" comment is looking quite prescient. One post on iHub says that perhaps Mnuchin wants all this done in time for the end of the government fiscal year on September 30. That's an intruiging possibility, though it only leaves 5 months to work with.

What does "reduce risk at the FHFA" even mean? It would have made far more sense to say "reduce risk at Fannie and Freddie" or "reduce risk to taxpayers", but I don't know if that's what Mnuchin meant. I don't see what risks FHFA itself poses.

On another subject, the government's reply brief is due in Sweeney's court in 13 days. Should we expect anything different than past briefs, given that Otting had a few months in office and now Calabria has been confirmed and sworn in? And is there any more to the briefing schedule, or is this the last one?

I can't understand why FMCKJ trades below FNMAS. They both have call protection in that they can only be called once every 5 years, but FNMAS's call date is at the end of 2020 and FMCKJ's is at the end of 2022. Perhaps it's the same reason that FNMA trades above FMCC, even though I don't think there's a reason to prefer one over the other at the moment. What we're seeing here is a flight to quality, and higher dividends in particular. The Fannie 25s are starting to distance themselves from the Freddie 25s and Fannie 50s, at least compared to the compression we have seen recently. FNMAT had been trading near parity with FNMAJ a few months ago, too. FNMAI and FNMAJ trading at parity right now still confuses me, though. FNMAI trades above the Fannie 50s, ostensibly due to its higher dividend rate. Therefore FNMAJ should be a clear preference, but it isn't. If I had any FNMAI shares, I would sell them to buy FNMAJ easily.

I don't know if this has any significance, but FNMAS and FMCKJ are right at their 52-week highs, while the less liquid prefs are around 10% under, and the commons 18% under.

How soon do the various NWS plaintiffs start filing briefs to change the defendant to Calabria, and then immediately cite his white paper saying that he believes the NWS is illegal? I would expect it very soon, those things were probably written up months ago. I don't see how the government's case can continue to stand.

So cloture passed. Confirmation should follow? Sorry, I do not understand how this works... Yes, the confirmation vote should happen this afternoon. I tuned in to Toomey's time as he was talking about the unrealized gain tax, I guess he had already talked about Calabria. Did anyone here hear what Toomey had to say about Calabria?

https://twitter.com/SenSherrodBrown/status/1113577615141502977 .@senatemajldr is changing the rules, and giving us less time to debate nominees who will have tremendous power over people’s lives—like @FHFA nominee Mark Calabria. (I'm borrowing your tweet-posting style, Luke. Imitation is the sincerest form of flattery!) This makes me wonder if McConnell invoked the nuclear option specifically to get Calabria in office quickly. The timing seems a bit suspicious.

I agree with that part, which is why Treasury would exercise its warrants, for 7.2 billion shares, before the equity raise. At around $10 per share, that gets them to $72B. And if they were content with around $40B then the offering price would be a more palatable $5.56.

That would explain the 3% or so move in the final half hour of trading. Still, "privatization" can mean a lot of different things, not all of them good for current shareholders.

Good article, cherzeca. Thank you for posting it. I largely agree with the legal aspect and that the presidential memo is inherently contradictory. However, I think your recap method is unnecessarily complicated. If Treasury just exercises the warrants before the capital raise and holds onto the shares, it can recover quite a bit of value. Also, you have them selling 60% of their 80% stake for $30B, but said that the warrants are valued at around $100B. Wouldn't 3/4 of that have to result in Treasury getting preferred shares in the amount of $75B instead? That might change the calculus some.

What's the purpose of this proposed order? https://gselinks.com/wp-content/uploads/2019/04/13-cv-01053-0097.pdf Is the information in these documents really that sensitive? Or is it just standard procedure so Lamberth can use the documents from discovery in Sweeney's court?

I think it will reduce objections Sustained.

A thought on the difficulty of drawing in enough investors to recap the companies that Tim Howard mentioned. One path forward is to implement the second remedy that the Collins plaintiffs have asked for in the Fifth Circuit. Treasury sends $122B back to the GSEs, which restores things to where they would have been if the NWS had never happened but the 10% dividends had been paid every quarter instead. This also leaves the seniors intact. That amount is (coincidentally?) enough to recap the companies in the blink of an eye. Treasury could then convert its seniors into common shares and sell those to whoever will buy them for whatever price they will pay, alongside a release from conservatorship. It remains to be seen if Treasury could recoup the entire $122B from those sales (actually unlikely, otherwise they could raise the $122B in the market instead), but their shares, which I presume would represent at least a 90% stake, would be worth quite a bit. Taking a $30B or so loss on those (selling them for $92B) still means that taxpayers made over $70B in total profit at the end of the day. If this takes the form of a settlement for the Collins case, Treasury wouldn't have to send the full $122B back, only enough to meet the capital requirements. Those won't be released until late July according to Otting, but he can give Mnuchin a ballpark figure right now. They had better hurry in this case, at least telling the Fifth Circuit to hold off on releasing their decisions while settlement talks happen. You're still having to placate buyers for the shares, but this way it is done after release or alongside it, instead of before. The risk of another conservatorship will always be on the table, but it will be much more difficult to put the companies back in rather than keeping them in.

Is anyone tempted to sell some shares now in anticipation of a big drop tomorrow if the NWS payment is made? I find it unlikely that the payment won't be made, the letter agreement from late 2017 was made 10 days before that sweep payment was due. Still, I don't like just guessing and would feel foolish if the payment actually wasn't made, or if it is and the price goes up anyway.

I agree that it's starting to look like legislation is possible after all. It just won't be all that close to Crapo's outline. Mnuchin said a while back that he wants comprehensive housing finance reform, including changes to FHA and Ginnie. This can only be done by Congress. With Corker gone, the Congressional impetus to destroy FnF is also gone. Congress just might give Trump what he wants here, with the possible exception of the additional guarantors. One way to interpret 1© is "do as much of what's in this memo as legally possible administratively". I wonder if that's how Trump and Mnuchin will do things? I think the idea of a fee for an implicit guarantee, as contradictory as it sounds, is to have it function the same as one for an explicit guarantee. FHFA and Treasury can calculate by how much FnF benefit (in terms of borrowing costs) due to the implicit guarantee, and charge them some or all of that amount. The crucial thing about this is that it can be done administratively, while an explicit guarantee requires Congress. This memo just hammers home that Trump wants the companies out of conservatorship by the end of his term, as Mnuchin and Phillips promised. Releasing before a full recap just doesn't make sense from a taxpayer safety perspective, so the recap will probably be quick and dirty. Therefore I won't worry much about timing for now.

wow this is thorough and professional. and fairly direct. one question - does the use of the words 'successor entities' on page 4 bother any of you? does this mean receivership is actually still an option? That's odd. I had glossed right over the "successor" part on my first read-through, but you are correct that it is a pretty important addition. Since that is the only place in the document that mentions successors, it might just be that someone forgot to delete that part. If that's really what Trump meant, shouldn't every mention of the GSEs include that language? It could also mean that if the GSEs somehow burn through all their capital and go bankrupt after all, Treasury would provide support for whatever takes their place (probably through receivership) and that the support would be paid for. Part (iv) doesn't mention successors directly, but I think it essentially does because the GSEs are the secondary housing finance market, or at least the part of it that would potentially need government support.

Here is a more detailed version of the memo. https://www.politico.com/f/?id=00000169-c0a9-d90f-a16b-f7bbf24f0001 Several of these things are in the bailiwick of the FHFA director, not Treasury. Trump ostensibly doesn't have direct authority over Otting or Calabria. What are the chances Calabria chooses not to play ball on one or more of these things? Small, I would hope.

Certainly possible. I just wonder what type of competition-promoting things the administration (including FHFA) can do without legislation. Might be a good question for Tim, though he won't read the memo until late today at the earliest.

I wonder how fast "as soon as practicable" is? Treasury should have been working on this for months by now, if not years. Promoting competition could be as easy as just trying to shrink FnF's business line by refusing to securitize mortgages above a certain median home price-to-income ratio, perhaps. Those mortgages would have to go somewhere. I think this part finally takes receivership 100% off the table, at least from an administrative perspective. Why improve oversight over something that doesn't exist? The emphasis on "protect[ing] taxpayer dollars", to me, means getting FnF recapped ASAP. Every day that passes is a new risk of a housing decline that would deplete FnF's miniscule capital buffers. This goes well beyond not taking this week's NWS payment (which they might be hinting at given the timing of this memo), it means raising a ton of private capital (probably by selling new common and preferred shares) very quickly.

this has been my concern since otting's 2-4 wk timeline failed to materialize. The same thing that happened with Jumpstart, most likely. I wonder how far back this really sets the administration? If Katy O'Donnell is correct then it might not take long at all to write this report. Treasury and FHFA could also continue to work together in the meantime.

That's not the administration skirting around the letter of the law, it was Watt. I don't think this is a good thing if it catches the attention of Congress and turns into a media narrative. Some there already think that FnF are too powerful, and this only reinforces that view.

I hope it never makes it to the Senate floor. Time is of the essence. If the bill barely makes it out of committee with only 1 or 2 Democrat votes, it is dead in the House anyway. Still, I share your fear that if this whole process takes too long, we run into election season and the whole thing gets shelved. Then we have to pray that Trump gets re-elected, and even then he could put it all off until 2023.

Except that it already happened once in December of 2017. I don't see anything inconsistent about another similar letter agreement in the next two weeks. All increasing the liquidation preference of the seniors does is stop the $16.1B overpayment, past the 10% moment, from going any higher. I also don't see why Treasury wouldn't just insist on a huge instant capital raise, to get the companies recapped as fast as possible. Then no government backstop is necessary, beyond a catastrophic one that would only kick in if FnF lose more money than they did in 2008.