Midas79

Thank you, Chris. Not a guarantee but this opens up the possibility of a more lenient approach when you looking at Fannie and Freddie. Agreed. I think this is an excuse to not designate FnF. And I agree with you as well, Chris. Prior to yesterday's meeting, I don't know if there would be a path to avoid the designation for FnF based on their size alone once they are released.

FNMAS is only around 8% off its recent high in the low $10s, while FNMA is also around 8% off the recent high of $3.00. The YTD performance looks quite divergent because it's YTD. Extend it back a few months and they're about even. What we have seen in 2019 is FNMA outperforming FMCC and FNMAS, while FNMAS has been outperforming FNMAT and FMCKJ. Before that, FNMA and FMCC traded at near parity, while the same was true for those three pref series. That tells me that the money coming in is mostly uninformed, all they hear is FNMA for the commons and FNMAS for the prefs. They choose the commons for the potential upside, not realizing that the litigants will capture much of it, if there is any to be had, in a settlement. The last time the commons outperformed by this much was in the aftermath of Lamberth's first decision in 2014, when many of the pref holders just plain sold. This time it's most of the incoming money going to commons. There was also a short burst of the prefs outperforming the commons in late 2017 when Corker-Warner 2.0 came out, with rumors that prefs would be made whole while the commons wouldn't do so well.

I'm staying away from them. I don't see a reason to own the commons over the prefs. If the pref-holding plaintiffs end up with negotiating leverage over the lawsuits, and they think the commons are going to appreciate in price by more than the prefs will, they will likely push for a conversion to common. I can't see why Treasury or FHFA would object to this. The conclusion here is that the juniors would then have a de facto call option on the commons, capturing the upside without being exposed to the downside (like dilution risk). The fact that the commons are up so much against the prefs recently makes my belief even stronger. Less room to run.

Her post was dregs-of-IHub bad. Thanks for the details on how to do this. CoB&F doesn't make this option easy to find!

Net worth is just balance sheet assets minus balance sheet liabilities. Core capital is a very specific statutory formula, including only non-cumulative pref stock, common stock, additional paid-in capital, and retained earnings. Fannie's recent 10-K doesn't have an additional paid-in capital line, I assume that's zero. Adding up the other three things on the balance sheet, and adding in the -$7.4B of Treasury stock (I'm not quite sure why this is included), gives core capital of -$114.918B. This is within a rounding error of the -$114.916B they report on page F-50.

I did get a response from Tim, and as always it was very helpful and on point. It does sound like Calabria could choose to change the minimum capital standard back to 2.5% of all assets, undoing the 2010 decision Tim refers to. This corresponds to the higher of Watt's two alternatives for minimum capital. Since Calabria has called for "bank-like" capital standards for FnF in the past, and Watt said on page 2 of the fact sheet that the higher (flat 2.5%) alternative is "consistent with Basel leverage capital requirements for banks", I think it is quite possible that Calabria resets the number up to the $137.5B (for FnF combined) that I calculated. At the very least, the possibility should not be ruled out. https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Proposed-Rule-Enterprise-Capital-Fact-Sheet.pdf

I made a post there, but it got removed. Perhaps I am persona non grata over there; my last two or three posts have been removed as well, including one asking why Treasury would not insist on a fast recap and/or a full recap before release (in response to Tim opining that the companies might be released before they are recapped). All I did was ask why my calculation of Fannie's statutory minimum core capital ($85.5B) differs from that in their filing ($22.2B). If you really want to know, you will likely have to ask him yourself. You have much more latitude on that site than I, it appears.

@cherzeca "I dont believe cancelling senior prefs releases or creates any capital...it is not debt." I think Tim addressed this before, but while you're right that it's capital neutral, it adds to core capital. Canceling the seniors would involve the seniors going from 193B to zero on the balance sheet, and retained earnings rising by that amount. Since the seniors don't count towards core capital (because they're cumulative) but retained earnings do, that's why core capital would rise by $193B. This is also why the companies' core capital is so far negative in the first place: all those NWS payments drove retained earnings through the floor and into the giant hole (accumulated deficit) we see now. "now Tim will know this, but I am not sure you can read GSE's current capital position from B/S" I thought we could because of how core capital is defined. All of the components are balance sheet items. But yes, it is worth asking Tim, and as I will say below, I could very well be wrong here. "re fnma 10k, p f-50 table, why wouldn't $137B deficit be the minimum required new capital raise?" This has me thinking that I made a mistake somewhere. 2.5% of Fannie's balance sheet assets are $85.458B ($3,418.318B * 0.025, from the balance sheet on page F-3), which I thought would form the basis for their minimum capital standard. But the table on page F-50 lists it as $22.216B, and says below it That last part must make up the difference. I thought "on-balance sheet assets" meant just the total asset number in the balance sheet, but Fannie seems to disagree. This is another thing I will ask Tim. I may have gotten ahead of myself here, it wouldn't be the first time! Thanks for the thoughts on this.

I might post a condensed version of this on Tim Howard's blog, just the part relating to minimum capital standards, but I will try it here first to see what everyone thinks. While there was a lot of wrangling and hand-wringing over the risk-based capital levels that Watt proposed (and were the subject of Tim's previous blog post), the companies have to meet another capital standard in addition to that one in order to be classified as adequately capitalized. That's the minimum capital standard, and can only be met by core capital. This is by USC 4614(a). https://www.law.cornell.edu/uscode/text/12/4614 Core capital is defined in USC 4507(7). https://www.law.cornell.edu/uscode/text/12/4502#7 This minimum capital standard is set out by statute in USC 4612. https://www.law.cornell.edu/uscode/text/12/4612 It looks like the lowest this could go is 2.5% of around $5.5T, or $137.5B. That assumes the second and third parts are zero. Looking at page F-50 of Fannie's 2018 10-K report, page 239 of the pdf, they list core capital of around -$115B. Freddie's is -$68B on page 337, page 341 of the pdf. http://fanniemae.com/resources/file/ir/pdf/quarterly-annual-results/2018/q42018.pdf http://www.freddiemac.com/investors/financials/pdf/10k_021419.pdf This means that by statute, FnF combined are at least $320.5B short of the minimum capital standard. If the seniors are canceled or converted to some form of equity that actually counts towards core capital, this will make up $193B of that gap, but that still leaves a shortfall $127B. By the definition of core capital, the only way to make up this deficit is by selling non-cumulative preferred shares, selling common shares, or adding to retained earnings. In Calabria's oft-cited white paper, where he denounces the NWS as illegal, he also had this to say on page 5. https://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf Calabria believes it is the conservator's job to restore the companies to a "sound and solvent condition", and that part of that is making sure they meet minimum capital standards. Thus I must conclude that he will not release the companies before that standard is met, otherwise he (FHFA) hasn't fulfilled the role of conservator. Mnuchin has said that he wants the companies released by the end of Trump's term in early 2021. If Calabria is going to make that deadline, the $127B in core capital must be raised before then. Two years of retained earnings might add $50B, and that's if FnF get to keep it all (and if the administration waits all the way until the last minute). The remainder must be sold as new shares. Calabria has also commented that FnF's capital should be largely common equity. https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-reform-incubator/mark-calabria-coming-full-circle-mortgage-finance The part about non-risk-adjusted, to me, says that he's talking about minimum capital standards, which apply to FnF even though they aren't (and won't be) BHC. This rules out the possibility of recapping with only new non-cumulative pref shares. Also, it's much easier to sell a bunch of commons now and do prefs on an as-needed basis later, compared to the other way around. In addition, if Calabria decides to implement some sort of bank-like capital standards anyway, perhaps by using his FSOC vote to try and get FnF designated as non-bank SIFIs, we could see CET1-type capital standards, which set a minimum amount of capital FnF would have to have only in common equity. Calabria can even invoke 4612(d) to increase the minimum capital standard temporarily, which would also increase the size of the equity offering. The conclusion I am forced to come to is that FnF will be issuing a very large amount of common shares in the next 18 months. Note that none of this discussion even touches on the warrants or a possible conversion of the juniors (or even the seniors if Collins gets remanded and a settlement leaves the seniors intact). The share base is going to expand greatly, and perhaps enormously. I believe this puts severe downward pressure on the commons' upside, enough to keep me completely away from them.

The theory is that nobody in the administration expected Calabria's nomination to proceed so quickly, meaning that Otting would have to do some of the work himself to get things done in the administration's timeline. Now that Calabria might be in place soon, likely before the March 31 NWS payment, it's better to wait because he will be the full Director, avoiding potential problems from having an Acting Director take large-scale actions. Of course, Otting also just plain shouldn't have been as specific as he was. I think he made an error in judgment when he gave as much detail as he did. There's a reason that the administration has been rather vague so far, this is a politically delicate process.

Calabria's nomination makes it out of committee, but only barely. 13-12 along party lines. Is there any fear of a few Republican Senators breaking ranks? It would only take 3 or 4 to deny Calabria's nomination, and who knows what would happen after that.

Spot on. There has been no Congressional will to tackle the problem while the companies are in conservatorship and on the brink of needing another bailout, so I can't see anything drastic happening once they are well-capitalized and released.

This is why the warrants, or a senior-to-common cramdown, would have to happen before the equity raise. I'm also pretty sure that Treasury can structure their transactions to avoid the 80% threshold. Piecemeal sale of pre-raise common share to a buyer who knows they will be diluted later, etc. It doesn't maximize Treasury's potential take, but the new commons won't even buy while the warrants or seniors exist at all. I don't think Treasury has a realistic path to anything close to $100B in warrant value, actually. Moelis is too optimistic.

Can't Treasury convert their seniors to common first and cancel the warrants, then allow themselves to be diluted by the equity raise afterward? They wouldn't get 80% of the companies in the end, but nobody really expects that to happen anyway, not even Moelis. The seniors and warrants have to be gone before anyone will help recap the companies.

According to this document, https://www.scribd.com/document/13339335/Citi-Tarp-Conversion, Citi prefs were converted either at par or more. However, I don't know enough else to tell you how it all went down. This article, https://baselinescenario.com/2009/02/27/citigroup-arithmetic-explained/, says that the $3.25 number was likely the product of negotiation, and that the share price immediately prior to the conversion being made public was $2.46, which dropped to $1.57 following the announcement. Again, I don't know how many strong parallels we can draw here, but it fuels my thesis that the juniors have an embedded call option on the commons, which they can exercise by agreeing the settle the lawsuits. As for Glen contemplating other investments, I see that as less of him looking to get out soon, and more of him doing early research on where to put his $3M or so in par value once the juniors get there.

At first I thought that meant warrant money, but the bigger omission is the NWS money. That alone would make up most of those costs.

How do the court cases get affected once Calabria is confirmed? Having a FHFA director - who believes that the NWS is illegal - defend it in court seems odd. Wouldn't something have to give? It's like Otting changing FHFA's mind about the constitutionality of its leadership structure, only much more profound because the NWS is the central issue in all the cases.

I think he still would prefer bank-like, but he said that he won't let the perfect be the enemy of the good. Now we will see if he'll address how we get from here ($6B) to there (~$175B). He said that the GSEs should be well-managed, well-capitalized, and well-regulated, and that they were none of those before the crisis.

Just guessing here, but it looks like Calabria will go last.

DR is right about the 8-K quick fix. The actual dividend isn't scheduled to be paid until March 29, plenty of time to do another letter agreement or more. Though no change in the 10-K language would be quite disheartening.

Not me, but if Trump is serious about getting FnF released then he can just veto any bill that has Jumpstart-like language in it. He can get administrative reform done before Congress gets a chance to override the veto, if they can even get enough consensus to do so. And that's why Corker inserted it in the end of the year omnibus bill. Any chance they throw this into the omnibus education bill being considered now? I'd say the big difference now is that Obama wanted the Jumpstart language, or at least didn't mind it. He had no reason to veto the spending bill because of it. Trump, on the other hand, both has different goals for the GSEs and is more willing to engage in brinksmanship. I don't think he would blink at sending the spending bill back to Congress, telling them to take out the Jumpstart language and otherwise leave it intact. I don't think there's enough will in Congress to defy Trump over something relatively minor like this. Not to say that it can't happen, but the circumstances are different enough this time around that I don't see it as a threat. If I remember right, Corker tried this same tactic in 2017 and it didn't work. The fact that Corker himself is no longer around is another reason I don't expect Jumpstart language to pop up. http://www.valueplays.net/2015/12/16/corker-slips-jump-start-act-in-omnibus-bill-its-irrelevant/ In addition, the language of the last Jumpstart bill allowed for trickery like changing the dividend rate on the seniors to 0.000001% and the liquidation preference to $1. It only stopped Treasury from getting rid of the shares themselves.

Not me, but if Trump is serious about getting FnF released then he can just veto any bill that has Jumpstart-like language in it. He can get administrative reform done before Congress gets a chance to override the veto, if they can even get enough consensus to do so.

I defer to your expertise and judgment on how courts work. The Collins plaintiffs have a stated preference for the cancel-the-seniors route, without even asking for the extra $16.1B back if I remember right. And you're right, Treasury writing a 12-figure check would raise more than just eyebrows. I was just thinking out loud, thanks for showing me that that line of thinking isn't valid.

I agree that Moelis laid out the most likely path. But if Treasury writes a giant check, it will be because the Fifth Circuit ordered them to. I believe that qualifies as a curveball, because none of us would see it coming. It could also be the basis of a settlement, if Treasury somehow preferes writing that giant check and keeping the seniors over the inverse.

It's even simpler than that. Check section 5.3 of the SPSPA. https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FannieMae_RestatedAgreement_N508.pdf Treasury has direct veto power over any release. So while Treasury can't release the companies, they can stop FHFA from doing so. Treasury doesn't just have the de facto power that you claim, they have direct contractual power too. I think this will be moot, as the seniors will be dealt with prior to release. My original point is that the "Treasury writes a $122B check to FnF" route allows for a recap without having to appease outside investors. Then they can impose whatever crazy capital standards and footprint reduction they want, then deal with the seniors, then allow the companies to be released.