Midas79

Given Lamberth's strong pro-transparency language in his Judicial Watch memorandum ordering discovery, it seems likely that he will be even tougher than Sweeney when it comes to discovery. That can only be good for the plaintiffs. Especially look at the last sentence before "II. Conclusion" on page 9. Lamberth is not going to leave any stone unturned, though I would hope that the extensive discovery already done in the Sweeney case will give him a head start. I would recommend reading this, to anyone here. At 9 pages, it's a short read. It's a veritable transparency-gasm, and has several very strongly worded sentences denouncing the actions of the State Department, among others. I would copy and paste the juicy ones, but the document appears to just be a scan and my alt-tab transcription speed is terrible. http://www.judicialwatch.org/wp-content/uploads/2018/12/JW-v.-State-Dept.-14-1242-Lamberth-ruling-1.pdf I suppose one could rightly ask why Lamberth dismissed the Perry case in the first place, but at that point Lamberth didn't know the extent of the government's lies regarding the "death spiral", among other things. He seems to be quite displeased with what he deems State's deliberate obfuscations. Similar reasons, after seeing Sweeney's discovery documents, might have led him to finding a way to get this case to proceed.

I'll admit, this made me chuckle some. But should we really believe that Otting didn't know anything about the cases or briefing deadlines before he took office? Was he really caught by surprise when Arnold and Porter showed him a copy of their brief yesterday? That seems a stretch to me. If we see a different tone in FHFA's briefing on Monday, it might be because Otting asked to see the brief last Monday or Tuesday, then spent part of the week with Arnold and Porter trying to change it to fit his (Otting's) views; when they couldn't finish the changes by Friday they asked for an extension to work over this weekend.

Not quite. If people had any idea that an NWS-like event was eventually going to happen, they would have challenged the conservatorship within the 30-day window provided for by HERA back in 2008. I'd bet anything that if FHFA tried that again they would be flooded with lawsuits, discovery requests, etc. Now, the risk of another huge downturn and shares going to zero is still clear and present, but all that's going to do is lower the share price of the secondary offering, not keep everyone away entirely.

Good post. None at all, and that's where a lot of the risk comes from. Much of the "value" in the legacy shares comes in the form of the lawsuits, giving FHFA and Treasury an incentive to at least carve out something for them. However, that power lies almost entirely with the preferred shareholders. Buying shares in the market won't be an alternative for the new buyers because buying the existing shares doesn't add to the companies' capital, while buying newly created shares does. What the new buyers would push for, though, is the lowest possible secondary offering price because it gives them a larger proportion of the companies' shares for the same amount of capital raised. The new buyers' incentives are directly opposed to those who hold common shares now. The junior preferreds are mostly agnostic to this unless a conversion is offered. A full wipeout of old shareholders is neither probable nor necessary. Dilution can accomplish nearly the same thing. Also, not only will the new buyers not care about the fate of the old shareholders, they will have an incentive to dilute them as much as possible. Any money that accrues to those holding commons now is less money that will be available to the new buyers. I don't think this will apply to the FnF recap. Instead of raising as much money as possible, I think FHFA and Treasury will raise a set amount and let the market decide what total percentage of the common shares they would demand in return. Overcapitalizing the companies is actually a problem because it makes it harder for them to produce a decent return on equity. What do you believe is "fair"? Or "unfair", for that matter? Yes, Otting's words yesterday show that FHFA and the adminstration don't consider FnF to be failed business models. But the big money knows that FnF are extremely valuable outside of consevatorship. I don't think Treasury or FHFA needs to convince them of that.

Seems like yuge news to me. The administration has a clear plan and they trust Otting and Calabria to implement it. They also think that the GSEs are mostly okay as-is, and want the companies released by the end of 2020. I doubt Calabria is too allergic to the administration's plans, otherwise I don't think he would have taken the job. I still think Calabria's past views are important because there are any number of yes-men Trump could have picked instead. He doesn't like the NWS, the companies need to be recapped before they can be released, and a recap can't happen while the NWS is in place. Thus the NWS's days are numbered. Still, what's the downside thesis for the prefs from here? I'm really struggling. Seniors remain in place even after the NWS is gone? Government tries to force through an unfavorable conversion?

Two of the series I follow, FNMAI and FMCKM, had trades above the 52-week high today, and another, FMCKO, traded at the 52-week high. I have seen a consistent breakdown in the dividend/price correlation within each of the four classes I follow (Fannie $50s, Fannie $25s, Freddie $50s, Freddie $25s) in the last few days, though the overall correlation is somewhat strong at 0.84. The last few days have been a good chance to move up the dividend ladder, with FNMAT being the weakest. Selling FNMAI and buying FNMAJ would have also been a great idea, if I actually owned any FNMAI! This has me a bit worried: am I getting on the wrong side here? I had always assumed that the big-money players, who hold mainly the high-div series, would push for dividend rates to matter in a settlement/conversion/whatever scenario, but at some point I feel like I should be concerned that the higher-div series (other than FNMAS and FMCKJ) will be called as part of the recap, rendering the div rates moot. Does anyone else have that apprehension? If so, why does FNMAT still trade at such a premium to the other fixed-div series? Disclaimer: I can only buy fixed-div prefs, so I only follow FNMAS and FMCKJ out of curiosity. I also don't factor those two into my correlation calculations.

High volume in a few of the less liquid preferred series: 150k shares of FNMAG, 90k shares of FMCCT, and even 48 shares of FMNFO, the first two at prices above the ask and the last near it. Good volume in many other series as well. These buyers are in it for at least the medium term; 150k shares of FNMAG is pretty hard to dump. The overall dividend-price correlation is still strong at 0.884 on the bid and 0.890 on the ask, but FNMAT is being a bit of a laggard. I sold some other series to buy some FNMAT today on that weakness. FNMAS and FMCKJ also didn't share in the strong volume and price action in the other series, which makes me think that at least some of the money out there believes that the low or medium divs are a good investment compared to the high divs. That puts me at about 50% Fannie 50s, 20% Fannie 25s, 15% Freddie 50s, 15% Freddie 25s.

What does that part mean? A sufficiently negative event will make him sell off at any price, sending FNMAS/FMCKJ (and the rest as a one-off effect) crashing down?

Tons of action in the lower-liquidity prefs today. Delayed reaction to Mnuchin's comments, or actual reaction to the naming of Otting as the interim FHFA director? Or something else entirely?

Good find. I still wonder what "reform" they are talking about. A no-frills recap and release doesn't seem like reform to me. I know that the companies have been reformed while in conservatorship, but this language makes me think that Mnuchin and company still believe that they need to make changes, and I can't think of what form those changes could take.

What concerns me about Calabria's pieces is that if receivership is possible without disrupting the housing finance market (as he seems to believe), he can find a way to do it. He sure does talk about receivership a lot for it being solely a retrospective opinion. I don't think receivership is likely to happen at all, for the record. I just can't shake this feeling that it's still a possibility.

The dividend calculation appendix, pages 51-54. Fannie's remaining senior liquidation preference after the Q4 2018 payment is -$7.1B, and Freddie's is -$9.1B. I assume that those are the amounts of money due back to the companies if the past NWS payments are recharacterized and the seniors extinguished as the plaintiffs ask for. Fannie's total junior pref par value is $19.1B, so $7.1B represents 37% of that. Freddie's total junior pref par value is $14.1B, so $9.1B represents 65% of that. If the courts do extinguish the seniors but don't require Treasury to return the overage, we start at zero but gain each quarter.

Here is where I got the idea from. https://www.cato.org/blog/receivership-does-not-end-gses It sounds like there would be little real disruption to the GSEs' business while in receivership, and they could even survive the process if they are reconstituted later. In other words, receivership does not necessarily imply total liquidation. I think this addresses points 1 and 2. As for point 3, FHFA and Treasury could agree to grant Treasury a stake in the reconstituted and released companies in whatever amount they choose. While the existing warrants would die, there's nothing saying that Treasury couldn't get compensation in some other form. What's left is to figure out why they would bother with receivership rather than just recap and release the companies. I believe the answer is in the SPSPA, section 6.2. https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FannieMae_RestatedAgreement_N508.pdf It says that Treasury's funding commitment, the major source of risk to taxpayers, would not transfer to the LLREs or the companies reconstituted under the charters. This fits with Mnuchin's desire for taxpayer safety. Finally, Mnuchin's desire for "lots of private capital" comes in once the companies are reconstituted under the charters and released from receivership. It ends up being a recap and release, but with a run through receivership put at the beginning. That eliminates all the pesky legacy shareholders. If the Collins case results in a victory, the juniors would get around 50% of par in receivership ($16.2B according to the table at the end of their brief), though it's not evenly split: Fannie prefs would get 37% of par while Freddie prefs would get 65%. If appeals and such drag things out it gets even better: if the companies earn enough money prior to receivership, the juniors could get par and the commons could even get a small recovery. Of course, if the seniors remain outstanding then both the juniors and commons get nothing in receivership.

This makes it sound like there were things Mnuchin wanted but Watt stonewalled. I suppose we will soon see what those are, because ostensibly Calabria will be on board with what Mnuchin wants, otherwise Trump would not have picked him. Still, since Calabria has written that the GSEs could survive receivership, then it can be seen to conform to TINA. What is receivership if not a restructuring? One that keeps taxpayers safe because the funding commitment would not transfer to the LLREs. I think the price action has much less to do with what Mnuchin said, because he has said the same thing many times before, and much more about the visibility of Bloomberg.

Notice that Joe Light didn't write it or contribute.

I was glancing through the defendants' answer document in the Arrowood case. http://www.glenbradford.com/wp-content/uploads/2018/12/13-cv-01439-0104.pdf Paragraph 28 caught my eye I don't remember FHFA ever admitting that they would have forced the companies into conservatorship even if the boards didn't consent to it. Which of the grounds for placement into conservatorship in HERA would FHFA have invoked if not for the consent of the boards? All of the accounting shenanigans leading to them being undercapitalized didn't happen until after FHFA appointed itself conservator.

Perhaps I am overreacting here, but there might be a hidden bombshell in the footnote on page 8. This is to refute the prospect that Treasury could just refuse to take a NWS dividend. If this holds, it would mean that Treasury actually cannot just deem the seniors repaid. It would take a court recharacterizing the past NWS payments to get rid of them cleanly like that. Instead, it appears that Treasury would have to be allowed to convert the seniors into another type of share to fulfill the requirement for a compensatory benefit. If that ends up being commons, and the seniors are converted in their full par amount of $193B, that essentially brings the current commons to zero (a fraction of a penny).

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out. I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership. I do agree with Calabria that increasing the housing supply is the best way to promote home ownership. I don't share your optimism about the commons, though, for many reasons. Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering. Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic. You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario. Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

Many parts of Calabria's paper, written with Krimminger, directly contradict positions that FHFA has taken in the various lawsuits. What does that mean for the lawsuits? We already saw some of this when the DoJ refused to defend CFPB as a constitutionally structured agency, and thus had to take the same stance with FHFA (or did I remember wrong)? http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf An example from page 5 Watt's name on all the lawsuits will be changed to Calabria's, right? If Calabria himself had the opinion that preserving and conserving the assets are actually required (and not optional, as FHFA and Treasury have held so far), would he have to either change his stance or stop defending the lawsuits?

As the Joker would say, "Here. We. Go." I'm not sure how to feel about this. Calabria is certainly no fan of the status quo, and I think we will see changes very soon. Whether those are good or bad for current shareholders, who knows. I feel even more comfortable about my 100% preferred allocation (no commons) than I ever have before.

Section 1367 of HERA actually gives the FHFA director several ways to impose receivership. Once capital standards are actually put in force, (K) will almost certainly apply immediately, as will (J)(i), (J)(iii) and (J)(iv): with the NWS in place, how can the companies build capital and what possible capital restoration plan could they submit? Ironically, (H) could be twisted around to describe the NWS as an "unsafe or unsound practice or condition" that results in a "substantial dissipation of assets or earnings" and "weaken(s) the condition of the regulated entity". Calabria could also try to strongarm the boards into consent and invoke (I), though I think it's unlikely that tactic will work again. I'm afraid that receivership would be not only possible but rather easy for Calabria to unilaterally impose.

Looks like a two thirds vote to change terms of the certificates, so it'll come down to institutional ownership. Any way to find which hedge funds own what? I don't want to end up holding preferred that don't get a juicy conversion offer. According to this iHub post https://investorshub.advfn.com/boards/read_msg.aspx?message_id=144033836 big money holds the high yielders like FNMAS, FMCKJ, FNMAT, as well as the $50-par series. That last group includes FNMAG, FNMAK, FNMAL, FNMAM, FNMAN, FMCKP, FMCCK, FMCCO, FMCCP. I would imagine that the conversion offer will take either or both of two things into account: the dividend yield and the then-current price ratio vs commons. I believe there is a reason the high-divs continue to trade at a premium to the low-divs.

This is one of the many reasons I own no common shares. A restructuring that screws the commons is not hard at all, but one that screws the junior preferreds is much harder. Add in the fact that the junior preferred shareholders represent nearly all of the plaintiffs in the major cases and the fact that FHFA took all of the common shareholders' voting rights and I can't imagine buying commons, even at these depressed levels.

Crafting a response that does so while giving lip service to affordable housing takes time, you know.

You're right that conversion, instead of cancellation, doesn't help build capital, but neither does it hurt the capital rebuild. I disagree that cancellation is the only way forward. Conversion just allows Treasury to suck out even more money than they already have while letting the companies out of conservatorship. Given Treasury's past actions, would you really be surprised if they insisted on a conversion? I'm starting to think that cancellation would only happen if a court forces it, and that would be years away because any court-enforced recharacterization would be appealed all the way up to SCOTUS.