Midas79

@cherzeca This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there. My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

Just a wild thought, and apologies if it has been posted before and I missed it. What if Trump is willing to recap and release FnF, and add good money to affordable housing funds and such, in return for getting funding for a border wall, as well as things like new charters from competitors and a security-level MBS guarantee? He could threaten to gut FnF otherwise if he wants to play hardball. Is there any amount of affordable housing goals that Trump could give ground on to get the border wall funding, or is that the Democrats' line in the sand?

I ignore it mainly because it's (well) outside my circle of competence. I can't wrap my head around why it should work. That's not to say that it can't, just that my lack of understanding leads me to focus my efforts elsewhere. I echo Luke's statement: I am not at all trying to chase you off or stop you from posting anything. You provide great value to the board.

My view on technical analysis has always been that it only works if enough other people think that it works. That's priceless.

This brings up another idea. I heard somewhere that a key Senator on whatever committee is in charge of confirmations is a friend and supporter of Calabria, and would presumably push to have Calabria confirmed quickly. I wonder if that same Senator, or another group with influence, wants Calabria's hearing to come before FnF's earnings, so that any announcement by Otting around that time can't be brought up at the hearing (because it won't have happened yet)?

Wow, that would be much faster than many, or even any, of us expected. Still, Otting will have to do or say something very soon due to FnF's earnings coming out. If there is no change and the "we expect to pay Treasury a dividend" language remains, it will take a lot of wind out of our sails. Otting's comments could also mean that he didn't expect Calabria to be confirmed this quickly either, so he might not have time to do everything he thought he needed to do before May, or whenever it was he expected Calabria to be confirmed.

Thanks for posting this. It's refreshing that the narrative has turned from "what is housing finance going to look like once Fannie and Freddie are wound down?" a few years ago to "how are we going to recapitalize these companies?" Mayopoulos repeated Otting's $150-200B number. I wonder if that has just become the accepted capital standard now? However, when Watt came up with his $189B capital requirement, that was just the risk-based one. I don't think the entire $189B (minus the $6B that the companies have now) would have to be raised by issuing new shares, just the shortfall to his minimum capital requirement ($103.5-139.5B).

you can have reversal and remand. could happen with collins APA claim; reverse the granting of motion to dismiss and either order motion to dismiss is denied or order P summary judgment, and remand to district court to either hold trial (former) or to implement the remedy (latter) I see. Is there any reason to believe that the former or latter is more likely based on the previous en banc decisions?

Did Thompson say that all 13 of those cases were actually reversed, or does that number include remands?

It seems that, like me, you spend too much time on iHub. 8) It is impossible to convince anyone there that the commons actually have downside from here via a low offering price, following an appropriately-sized reverse split. Then again, I think that the prefs have around zero downside from here too, but there must some be because otherwise they would be priced higher. Contrary to all the "price will spike when the NWS is ended!" posts, I don't see any way that the administration would announce an end to the NWS without announcing everything else, including at least some mechanics of the capital raise. As for the $2 part, the commons lose relative to the prefs if they come out anywhere south of about $7 (assuming all prefs go to par), and that's without a conversion. 25 / 8.64 = 2.89 (FNMAS closed at $8.64 today so they have a factor of 2.89 to gain to get to par), 2.35 * 2.89 = 6.77 (FNMA closed at 2.35 today, so the breakeven point is FNMA at $6.77). Using other series can get the point even higher: with FNMAM as a reference the breakeven point for FNMA is $7.58. That means the $6.77 is the lowest breakeven point possible. Of course those on iHub think $20 is a "conservative" estimate, but there is never any logic behind it.

Has anyone here actually seen Otting's letter yet? I'm sure it's nothing groundbreaking, but I'm having a very hard time trying to find it. I would like to read it for myself.

On a side note, the correlation between % of par and dividend rate has almost completely collapsed. Whoever is buying the prefs is doing so only with an eye for par value. Right now you can buy FNMAG for $16.00, or FNMAT for $8.10. Even FNMAS is down in the $8.50s. Insanity. The "smart money" appears to be banking on a resolution that awards something based on total par value, either cash or a conversion. They seem to highly doubt that the dividends will ever be turned back on. I had always thought that one possible resolution involved converting some or all of the juniors at a rate of par + X years of dividends, to compensate the big money holders who predominately own the high-div series. However, it appears that the market is pretty heavily discounting that possibility.

If I'm the one doing the screwing, obviously yes. As a matter of principle your argument seems valid, but when I dig into the specifics I see a much different picture. The ones who truly got screwed here are those who held in 2008 and those who held in 2012, regardless of it they sold since then. The conservatorship and NWS were both blindside attacks, devastating whoever held shares at the time. On the other hand, right now we know that the companies need to raise a lot of money quickly, and that new common shares is a key part of that. Can you truly say that a hurricane "screws" someone who sees it on the radar and decides not to evacuate? The argument of "who says the government can't do another conservatorship/NWS?" also fails because those events already happened and cannot be undone. There can never be a guarantee that something similar will never happen again. This argument won't keep the new money away entirely, it will just drive the IPO price down even more to compensate the new buyers for that risk. If your idea of "making shareholders whole" involves a payout to only those who currently held shares, you're paying off those who bought recently and shafting those who were hit by the conservatorship or NWS and sold (especially those who were forced to sell). I see this far too often: clamoring for "justice" but then also invoking the "everything travels with the shares" argument. The first is a moral claim, the second legal, and they actually conflict with each other. Conflating the two is what leads to this particular cognitive dissonance. Put it this way: what do you think it would take for current shareholders to not feel screwed? And why would that make the new buyers feel better enough to overcome the fact that they are getting a smaller stake in FnF? Diluting the commons into the ground (with a $0.25 IPO price) while getting the prefs to par can also be twisted around as promoting justice: the (preferred) shareholders were made whole! Dilution is always a threat to a common shareholder.

Would you mind being more clear here? As I said above, the government exercising the warrants dilutes the commons 5x no matter what the offering price is. If you think it's the low offering price that screws the commons, remember that a lower IPO price directly benefits the new buyers because they end up with more of the companies (by percentage) in the end. In that case, screwing the existing commons is actually an attractant to new money, not a deterrent.

If the big junior holders are willing to settle for 60% of par, I won't really have a choice but to follow along. I thought one lawyer team called their clients "par-seeking missiles" though. As for the squeeze on the existing commons, that comes from three sources: junior conversion, warrants, new buyers. However, the government's squeeze factor against the existing commons is the same no matter what the IPO price is, so any "bad optics" from the common price dropping is solely attributable to the junior conversion and the IPO itself. Those parties probably don't care how badly they squeeze the existing commons, they have no reputation to preserve here. If this truly is clutter I will stop after this as well.

About the share count: if the juniors all convert at $10, that's 3.3B shares. Added to the 1.8B current shares it's 5.1B. Then the warrants can be exercised for 4x that amount, or 20.4B shares. Why would the juniors agree to a conversion that only gets them 60% of par? And why would the new buyers accept a $10 price? If the companies need to raise $100B, that price only gives them 10B shares out of a total of total of 35.5B (3.3B converted juniors + 1.8B current + 20.4B Treasury warrant + 10B new money). If I were a new buyer I would never accept less than 1/3 of the companies when I'm putting in essentially all of the capital. Instead, IPO the shares at $2. Convert half of the juniors at par: $16.6B of total par divided by $2 = 8.3B new shares. Treasury gets 40.4B shares (1.8B current + 8.3 converted juniors, then times 4), worth $80B in cash. Then the other $100B is raised at $2 a share. The new buyers get 50B out of a total of 100.5B shares, about half the companies. Even that might not be enough! To take it to the extreme, IPO the shares at $0.25. Convert half the juniors at par: $16.6B divided by $0.25 = 66.4B new shares. Treasury gets 272.8B shares (1.8 current + 66.4B converted juniors, then times 4), worth $68.2B in cash. The new buyers get 400B shares for their $100B. Now they get 400B out of a total of 741B shares, for a 54% stake. I don't think we can do offering price estimates like this. A conversion plus warrant exercise just adds too many shares, when you add the condition that the junior conversion price is the same as the IPO price. Maybe we have to start with asking ourselves what percentage of the companies the new buyers will want for their $100B. If it's too high then Treasury starts getting squeezed; will they let that happen? In any case, I wouldn't want to be in the common shareholders' shoes when all this goes down. They're the one party that nobody will be looking out for. Imagine if the warrants actually were cancelled. Then the price could get driven down to a few pennies. The same is true if Treasury lets FnF buy back the warrants for a certain amount of money. That has the advantage of guaranteeing Treasury that amount, regardless of where the market sets the price of the commons later.

These are both highly plausible. Otting might not have recognized the possibility of his comments being made public because they were made in an internal meeting, so he perhaps was more direct than was prudent. As to b), I actually don't think it will even be possible for Mnuchin to start down any road without knowing the Collins verdict. If the Fifth Circuit reverses the district court and rules the seniors redeemed, that could drastically change the calculus of the recap. However, if the Fifth Circuit affirms then Mnuchin might feel pressure to get something for the seniors rather than writing them off.

The disruption part, perhaps, and perhaps probably! I always thought it wouldn't be too hard to just re-brand the companies and transfer nearly all the assets and liabilites over wholesale in a short period of time, only changing the equity structure. But it's likely much harder than I would think. I think I am falling victim to the "anything I don't understand can't be that hard" fallacy. https://dilbert.com/strip/1994-10-17 As for the warrants, though, couldn't FHFA and Treasury just agree to give Treasury warrants for 79.9% of the commons in the new companies?

This doesn't comport with Otting's statement about going from $6B in capital to $150-200B. While yes, the new companies would have to be capitalized after receivership, they wouldn't start with $6B because that money would flow to equity holders in the current companies. All it would take is setting capital standards and then declaring FnF critically undercapitalized. I agree in that it's not completely off the table yet. Just about all of Mnuchin's and Otting's words can be twisted to support a receivership narrative. A Moelis-like plan, though, fits with all of them, especially Otting's $150-200B capital requirement. The prefs are still at least worth 2/3 of par in receivership by a back-of-the-envelope calculation: $6B in capital now plus $16.1B from overpayments past the 10% moment. If there is a Moelis-like resolution the pref plaintiffs won't bother contesting the $16.1B (they would get around par anyway), but in receivership the gloves will come off. What has me frustrated here is the announcement that the White House will work with Congress. When will this administration ever learn?? There is absolutely zero point in talking about a plan that the White House, Treasury, Otting, and Calabria have signed off on if they're going to bother to get Congress involved. What can Congress even do, short of passing a law that might not give Trump exactly what he wants? Craziness.

doubtful otting is at liberty to reveal details of the plan before white house is ready to release it But is he at liberty to ignore the request in this letter? Maybe by a letter-of-the-law argument, but this isn't the time to be making enemies unnecessarily. It sounds like the plan is mostly hashed out, otherwise Otting wouldn't have mentioned it with the "few weeks" timeline. February 1 is two weeks after that meeting, so it might be as good a time as any to release whatever details they were going to release anyway, and have that be the response to this letter.

This story resolves a lot of the uncertainty. The NWS is effectively over. Otting's comment about getting from $6B in capital to $150-200B means a recap, and that can only happen if the NWS stops. Does this mean no settlement for the court cases because the plaintiffs are going to get what they want anyway? If so that would be ironic, that all the cases get dismissed anyway, but due to them being moot instead of more tortured readings of HERA by judges. Capital requirements will be in the vicinity of Moelis/Watt (3.25% risk-based), unless Otting somehow meant $150-200B as the minimum capital requirement. This sure seems to point to Moelis. And that, in turn, opens the door to an above-par endgame for the prefs if they are offered a nice conversion, be it partial or full. The recap will not be done with retained earnings alone. The last Otting statement in the article makes that clear. Even though he understated the GSEs' net income, it still isn't nearly enough for a full recap in his timeframe. The recap process will not be very easy or straightforward, otherwise it wouldn't involve "really heavy lifting". That tells me that either no or very little money will be coming from Treasury to assist. I believe a lot of this "heavy lifting" will be polling the potential secondary offering buyers to see what their total appetite is, and what portion of the company they would want for their money. A delicate process to be sure, and complicated by the existence of the warrants. Of course, there are still several outstanding questions: How long will the companies have to recap? Will they have to be fully recapped before release? Tim Howard thinks not necessarily, but I actually disagree because a faster recap is better than a slower one for both Treasury and FHFA. What will be the fate of the seniors and the warrants? This is one instance where the outstanding court cases still matter: Treasury would likely prefer to convert or sell the seniors, but if the Fifth Circuit sides with the plaintiffs, the seniors will be extinguished. I think the warrants will be exercised, and before the equity raise(s). It wouldn't be like Treasury to leave that money on the table, and I'm not aware of a solid legal theory as to why exercising the warrants would be illegal. (nevermind those on Seeking Alpha claiming that it would result in a huge damage award to shareholders via a Fifth Amendment takings claim, which always leaves out the specifics of the legal argument) Will the juniors be offered a conversion? If so, at what rate? A victory in the Fifth Circuit would give the juniors much more leverage. How does the administration's plan conform with, and diverge from, Moelis? Do any of the foaming-at-the-mouth common shareholder lawsuits have any teeth once the NWS is removed from the equation? I'm discounting Washington Federal due to the limited scope of relief asked for. At this point, what's left to kill the "prefs-to-par" thesis? The (perhaps wildly) optimistic side of me wonders how the prefs don't get par, let alone drop in value from here.

Whoa. Am I allowed to say "holy s***" on here? This might be the single most important piece of news, in terms of its specificity and impact, that I have seen in a long time. It's the first time I can remember that an important player even implied a recap. That line about going from $6B to $150-200B has to mean a recap, right? At the same time, there is something in the back of my mind saying that I should sell some of my shares. I cannot explain it, so for now I'm going to ignore it. I will, however, pay very close attention to every detail we hear from Otting and Mnuchin.

If I wasn't bullish, I wouldn't own either class of shares! I'm still afraid that if the timeframe for the recap is too short, and if the capital standards are high enough, the commons are potentially subject to heavy dilution from equity raises. Personally, I don't own any commons and I don't regret my decision at all, even after yesterday's action. I think many of yesterday's buyers have been lured by the siren's song of 1000+% returns on the commons, but I don't see that as being possible at all.

If you don't mind me asking, what's your preferred vs common allocation? And what made you decide on it?

Trying to spin this as a giveaway to hedge funds was a bad idea with this administration in place. The tax cuts were a far bigger giveaway, and didn't even fully close the carried interest loophole (if I remember right).