Midas79

I disagree that ending the NWS but leaving the seniors in place (though changed to non-cumulative) accomplishes Calabria's (or even Mnuchin's) objectives. Retained earnings alone will take around a decade to hit the full capital levels. Calabria is guaranteed not to be in office for the last half of that, and might not be past next summer. Calabria knows he could be replaced by a do-nothing like Watt or an anti-conservator like DeMarco. He will need to do FHFA's part towards recap and release (most prominently consent orders) quickly. Raising private capital while the seniors are in place is equally impossible. Any newly-issued shares, which would have to be commons to conform to the capital rule, would have zero economic value due to the seniors' massive liquidation and dividend preferences. Even if FnF are allowed to pay down the seniors, they will lack the regulatory capital buffers with which to do so for the next decade. Then it would take another decade or so to actually pay them off. Only then could private capital be raised, though at that point not much would be needed. I maintain that if Mnuchin wants third-party capital to be raised, as his words suggest, he knows that the NWS and seniors have to be gone so that the newly-issued shares will actually have value. As to rose-colored glasses, those without them are unlikely to own shares, and therefore post in this thread, anyway. I'm not sure what you are expecting here.

To paraphrase the old joke: If he says "no" he means "maybe". If he says "maybe" he means "yes". If he says "yes", he's no poker player.

Very important excluded quote from Mnuchin from the original Bloomberg article that Victoria Guida added later in a Twitter thread... The only thing missing here is that on SCOTUS he said: “It’s not the only issue but obviously to raise third party capital that issue has to be resolved.” Yesterday Mnuchin comments were very bullish IMHO. The question now if PSPA happens before or after Christmas, I would bet that this will come close to deadline (20 jan). I agree, there are things he will "likely" agree to, "wants to set them in the right direction". What does he likely have to agree too, to set them in the right direction that will allow them to raise 3rd party capital? This is probably the same thing Calabria has been "urging" as part of an agreement to raise capital to meet the capital levels in the capial rule. Can't accumulate capital while the NWS is in place. Can't raise third-party capital while the seniors are in place. Both have to go. Mnuchin knows this. Also, my read on the definition of taxpayer protection is putting more private capital in front of Treasury's backstop, not maximizing the value of the warrants. That would mean Treasury wants third party capital raised ASAP.

1) The late hour means that actions taking away the pie from current commons and giving it to others becomes more likely, not less. 2) A slow recap benefits absolutely nobody other than current commons, who have no voice and no say in the process. 3) By contrast, a fast recap benefits Treasury (taxpayer gets protected sooner), FHFA (safety and soundness is maximized by FnF having more capital sooner), and the FAs (they get paid when capital is raised, so they want it to be sooner). Fast recap is the base case, not the alternate case. 4) In what scenario do the commons gain more than the prefs from here but there is not both a stepping out of the picture by Treasury and a consent decree? I'm struggling to see how both of those things not happening is good for any class of FnF shares, let alone the common in isolation. 5) If the seniors are converted to non-cumulative prefs, the juniors and commons are both economically worthless. Treasury would get just about all of FnF's earnings going forward ($19.3B, or 10% of the $193B senior pref liquidation preference). Retained earnings then all go to Treasury and FnF never get recapped at all, unless Treasury is willing to forego their dividends in favor of existing commons, which makes no sense whatsoever. 6) The juniors have a better seat at the recap table than existing commons, that's for sure. Raising capital is much easier when FnF are allowed to issue new non-cumulative prefs (only possible if the juniors are converted to common) and immediate dividends are available (meaning junior pref dividends paid in full). 7) Losing love for the prefs is fine. But if the juniors do badly, the commons will do far worse. That's just how capital structures work.

From Joe Light's Bloomberg piece: The stars appear to be aligning...

Update: source is telling me capital rule might get pushed to next week. No update on timing of PSPA. Thanks for the update. I take it that no news is good news on the PSPA timing?

I am listening to Richard Baris's show from this morning, and he said something interesting. A little after the 1:59:00 mark, he said that the DOJ has been "totally dominated by liberals", as an explanation for why Barr isn't doing more. Is it possible that this is (at least part of) why the DOJ has been fighting back so much in the NWS lawsuits? How much control over them does Mnuchin have in those cases? Though I suppose this doesn't explain why FHFA has also been fighting back, at least during the tenures of Otting and Calabria, because they use private law firms.

ok. i went off track in your first question - I thought the Collins 5th Circuit en banc decision goes on 'hold' when the SC decides to review the case. no? I went off track on the first question too. I didn't know whether or not the en banc decision would still be in effect if Collins was settled or dropped. I was under the impression that it had already been vacated by SCOTUS's granting of cert, but it appears I was wrong. Thanks for the explanation, Chris.

@cherzeca A question from the Twitter chat: if the Collins plaintiffs either settle or drop their case (due to getting what they want from a PSPA amendment), is the Fifth Circuit en banc panel's ruling in force or vacated? My understanding was that it was vacated the moment SCOTUS granted cert, so Calabria would still enjoy for-cause removal protection if Collins is settled or dropped. Is that correct?

This is from three years ago, but hopefully the Trump administration hasn't changed its mind on this: The article is here, though you have to quickly Ctrl + A and copy/paste it. https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship/

All the more reason to settle Collins. If Calabria can entrench himself for at least another 12-18 months he should be able to get all the dominoes lined up and tip the first one over. I do wonder if this is also a tell that Mnuchin is on board, because FHFA cannot release FnF while the seniors still exist: core capital is still hugely negative right now and would trigger an immediate "critically undercapitalized" designation under HERA.

no. you have to eliminate it not convert it. if it were to be converted to common, common will go to $.10. good luck raising >$200B of equity then. I would posit that raising equity, in any amount, is easier the lower the common share price is. At the very least the new investors should be agnostic to the market price because they are going to want (at least) a certain portion of the overall equity for the money they are being asked for. That would reset the market price to the offering price, no matter what the market price had been before. Commons at $0.10 is not an issue in and of itself anyway because a reverse split can bring the share price up to whatever new investors want it to be. I still think my idea to convert the seniors to convertible (but only by anyone but Treasury) zero-div non-cumulative prefs with a $193B total stated value is the best of all worlds in which Treasury sends $125B to FnF. 1. It fixes the final share count, allowing the market to accurately price the commons, in turn allowing Treasury to start selling their shares immediately. Multiple common equity raises, on the other hand, leave the final share count unknown until the last one, making them much more difficult to conduct. 2. FnF instantly become "adequately capitalized" under HERA, hitting core capital of 2.5% of adjusted total assets and removing all restrictions and authorities in HERA for lower capital classifications. The consent agreement would likely be restrictive in its own way, but avoiding the lower capital classifications in HERA is a nice bonus. 3. As a corollary, the leverage ratio drops to 40:1 overnight. 4. Treasury can unwind its position over time by just listing those preferred shares on the market and letting whoever wants to buy them do so. No need for large, structured offers. 5. FnF's total common equity should be worth at least $200B, so if Treasury gets 99.9% of it (no reason to leave anything for the existing commons) they will come out way ahead. Even further than canceling the seniors and exercising the warrants. 6. If Treasury can negotiate with outside investors quickly, they could privately place a portion of those new prefs and lessen the total cash outlay. If there is enough appetite (>$125B worth) they could eliminate the outlay entirely! 7. No worries about Treasury having voting rights because they would never own any common shares at all. Also no worries about balance sheet consolidation (at 80%) or majority shareholder duties (at 50%). 8. As the shares are converted by buyers, CET1 capital would rise. The total rise would be $193B by the time all shares are bought and converted. The purpose of the zero dividend is to not give Treasury an incentive to hold the shares, and give investors an incentive to convert upon buying, building CET1 capital. I'd rate #4 as the most important one. No need for one huge all-at-once equity raise that the market might not have an appetite for in such a short time period. Treasury would have to do a mini road show in advance to make sure there are enough interested buyers to get the ball rolling, but after that the market gets to take over. I'm not sure what would happen to the lawsuits at that point. The plaintiffs could be dealt with individually because none of the cases have been certified as class actions. The derivative suits in Sweeney's court would go poof, right? The constitutional case plaintiffs (Collins, Rop, Bhatti) are small enough to be bought off separately. The wild card is Perry, where (if I understand correctly) the companies themselves are the defendants. Still, the NWS ending and the seniors being gone would give few plaintiffs a reason to keep fighting, even if it's not enough on its own to allow the defendants to successfully get the cases dismissed as moot.

I don't think it's an either/or at all. Raise enough capital to get to 2.5% ASAP then let retained earnings, plus more small capital raises if necessary, complete the journey to 4%. The problem with allowing the capital raise to go slow is that it defeats the entire purpose of wanting FnF to have substantial capital at all. The longer that FnF have little capital, the longer that taxpayers and the housing finance system are at risk, and the severity is tied directly to the capital amount. Elsewhere I have said that Calabria not pushing for his regulatory minima ASAP is a dereliction of his safety and soundness mandate, and I still believe that is true. Something else to keep in mind is that if Calabria ends up finalizing the rule largely as-is, it could very well mean that he is following the advice of the FAs rather than ignoring it, and that investors with substantial capital really are willing to put up their money for FnF equity in these circumstances. Calabria doesn't need to attract all investors, only enough to get the job done. I still think that propsective FnF investors might care more about ROIC than ROE, and on a ROIC basis FnF's current earnings are enough.

It's really starting to look like 4% come hell or high water, and that Calabria really does see 4% as the de facto requirement rather than 2.5% with some buffers being nice. The question becomes "can FnF raise their g-fees enough to provide a competitive RoE on 4% without driving away a substantial amount of business?" Tim Howard thinks the answer is "no", and if he's right then all of recap and release is in jeopardy. Calabria has said in the past that one way FnF can meet their capital requirements is to shrink their asset base and market share. Heck, this might have been his goal all along.

I sure hope he is doing this on the advice of, rather than in spite of, advice from the financial advisors. I also hope he is in contact with JPM and MS rather than only listening to HL; no disrespect to HL but this has to be a team effort and JPM/MS's experience and clout are invaluable.

Calabria actually did address this in the hearing. He said the rule was supposed to be out in March and was delayed by the pandemic. In a late February interview he said that the rule would be released "in the coming weeks, months" so while he did cover his bases there, it does sound like he was ready to release it earlier. To be fair, that is still 3 months after the end of 2019, and the delays are certainly frustrating. At this point, you either trust the administration to get things done in the lame duck period or you don't. And if you don't, it probably isn't worth holding. I think the shares will take a moderate to large short-term dip if Biden wins, but will have a similar-sized rally if Trump wins, so I'm just going to hold through the election. Edit: this doesn't take into account the lopsidedness of Biden and Trump's respective chances of winning, but if there's anything I learned from the 2016 presidential election it's that I have become very hesitant to ever give a major-party presidential candidate a less than 45% chance of winning no matter what the polls say.

Okay, this makes sense. Would the first of a series of offerings be priced lower than a large, single one would be? The "punishment" effect might more than cancel out the effect of an overall smaller amount of dilution. On another note, I am reading through the Collins brief and the part about this still being at the stage of the motion to dismiss, where all the plaintiffs' allegations must be taken as true, stuck out to me. It's section 2 on page 57. Does that mean that SCOTUS could potentially just overturn Judge Atlas's dismissal and remand the case back down to her, while refusing to rule on anything else? That would be a rather anticlimactic result. Or is that not how things work at this stage?

I see it this way: if FnF's market cap based on earnings and a P/E multiple is $Y and new investors are sold $X worth of new commons (combined over all raises), they will demand at least X/Y of the total share count. That won't change no matter how the raises are spaced; I think investors would be buying for the long term so they would care much more about what the P/E ratio is down the road than what it is at the first capital raise. The problem I have always seen with multiple raises is if the total amount of dilution from all raises is known in advance, why delay, and if it isn't known, how do you convince anyone to participate in the first one when they don't know how much they will be diluted later? The only answer I can see to the second question is to have it occur at a really low price, which does agree with what you said after all. That would also answer the age-old question about whether it's better to invest in the commons or prefs now; if the first raise happens at a sub-$5 price (quite likely in the "punishment" scenario) then the juniors clearly win without a share exchange. I don't know how you would get the juniors to agree to a share exchange when the future dilution is unknown, though. So future raises happening at ever-higher prices would be because there is more certainty over the final share count after each one, not solely due to the timing. Along with some amount of retained earnings, but even a series of raises can't be stretched out too far; Calabria has expressed a sense of urgency in building capital. Why would spacing out the raises keep g-fees more stable? I thought the idea was to meet a certain return on final equity (after all raises are done, i.e., based on the capital requirements, not FnF's actual equity on the books), not each year's ROE (which will shift over time as more capital is built). That would require any g-fee increase to happen all up front and at once.

what do you interpret by this? lower capital levels to start/raise capital then raise requirements over time? Calabria did not explain, but recall that the proposed rule release asked for comment on many questions, one of which was whether the final capital rule should be implemented in stages. if the required capital level percentages are phased in, then the GSEs might be able to meet the increasing hurdles in a deliberate manner...which would mean offerings over a longer timeframe, with some offerings conducted after the GSEs' capital levels have already increased...less risk for new investors Calabria also said that FnF are currently operating on the edge of insolvency. Since his base capital requirement is 2.5%, if he really is going to keep 4% as the top-line number, I think he will want FnF to do capital raises ASAP to get to 2.5%, then take it slow from there. So on a 5-year track, instead of FnF's capital going 0.8%, 1.6%, 2.4%, 3.2%, 4%, I see something like 2.5%, 2.875%, 3.25%, 3.625%, 4%. He also said earlier in the year that the sum total of FnF's capital raises, whether done all at once or over time, will be equal to the last 4 or 5 years of IPO activity. That's $110-130B. This is about right; with a top-line 4% capital "requirement" of $240B, around half will come from capital raises, $100B from retained earnings, and $20B from what they already have. What's important to note here is that stretching out the timeline won't materially reduce overall dilution if the same proportion of overall capital comes from capital raises.

The Collins opening brief is out too, but I haven't had a chance to read it yet as I am still listening to the House hearing. https://www.supremecourt.gov/DocketPDF/19/19-422/154153/20200916135926128_19-422%20Brief%20of%20Patrick%20J.%20Collins%20et%20al..pdf

@cherzeca I think it's better to continue our discussion here rather than Tim Howard's blog; I think I got off-topic over there. When I referred to problems under 4616, I meant only section (b). I'm afraid that a future FHFA director could use those authorities to mess with a consent order by saying that no consent order a previous FHFA director (Calabria) signed could prevent the new director from exercising his/her statutory authority under 4616(b). The only way around that would be for FnF to hit $152B in core capital, thus exiting "significantly undercapitalized", before Calabria leaves office. I could be wrong, though; can Calabria really sign away some of his statutory authorities in such a way that a future director couldn't get them back without the companies' consent?

Next Wednesday should be interesting at the House FS committee. Maybe some one can get through to Mr. Calabria that padding bank mkt share and interest spread profits on the back of lower / middle income Americans by setting capital levels @ 6x his own adverse stress test levels is not the preferred policy. Today's session wasn't all that informative. I didn't catch the whole thing, but it seemed to me to be mostly a rehash of what was in the comment letters. This might have been FHFA's token effort to "extend" the comment period by allowing the talkers to feel like they are being heard. I'm not expecting much from next Monday's session either, though I will still listen. I am far more interested in what Calabria says, so I agree that his hearing should be interesting and I plan to listen to every second of his part of it.

Unfortunately, this is what we're up against here. The judge's opinion is completely nonsensical. The agreement which secured "unlimited funding" (though there's a clear limit in the contract and amendments), the original SPSPAs, is not the same agreement (the NWS) which gave Treasury all of FnF's future profits. Do you have a link to the full opinion? It looks like this is the Rop case, which I thought challenged the constitutionality of HERA. Bhatti is still alive and kicking, and we all know how far Collins has advanced.

@WB_fan82 The spirit of CET1 and tier 1 capital in Basel III is that they are loss-absorbing in case of a downturn or crisis. Receivables don't absorb losses. In the capital rule Calabria went on and on about capital quality (in addition to quantity). So while he might be able to choose to make receivables count towards the risk-based standard I don't think he will. @cherzeca Perhaps my creativity is exceeding my knowledge here. I hadn't considered appropriations, but all Treasury would be doing is redirecting money, not writing a check. Is that a distinction without a difference? Treasury would still have to go to the capital markets, though. My route doesn't bypass the capital markets, it bypasses the companies.

Calabria can only redefine CET1 and tier 1 if he breaks from Basel III, which defines those terms. Core capital is defined by HERA, though; Calabria's hands are tied there. A receivable cannot count as core capital until it is actually received. In my scenario, Treasury would have to unwind its position relatively quickly to send the $125B to FnF so they can actually be fully capitalized. This is also why, if Treasury returns any overpayment as a tax credit, it will only count towards core capital as it is earned (around $5.3B per year). @cherzeca I don't think 99+% ownership by Treasury will be a problem because there are many ways to structure the senior conversion to avoid it. The easiest one I came up with was to convert the seniors to non-cumulative zero-div convertible prefs with a clause that Treasury cannot convert them, then Treasury sells them to outside investors who do the conversion. Just like a common stock conversion and sale but Treasury never even has a 0.1% stake let alone 80% or 99+%.