Midas79

Indeed very interesting. Agreed. A specifically risk-based capital standard both refutes the idea that FnF should hold "bank-like" levels of capital like Corker was asking about. It also would only matter after release from conservatorship, so Watt is at least partially paving the road for that. In addition it shows that Watt doesn't consider Treasury's backstop to be capital, not that he hasn't implied that before.

I heard it too. It shouldn't be too surprising, right?

Thanks for posting this. This lawsuit is a strange bird. It's nothing like any of the others. It seems to hinge on the idea that the junior pref dividends were actually obligations when the company had the ability to pay them (starting January 1, 2013) because of something called the "FG Implicit Guaranty" that I still don't quite understand. The complaint doesn't seek an injunction against the NWS, just the payment of back dividends starting January 1, 2013 plus interest and compensatory damages. I don't see how the case won't simply fall apart by the judge saying "well, the junior pref stock certificates do say that they're non-cumulative, why should you get back dividends?" The complaint tries to have things both ways, saying that the junior pref dividends are obligations, but that the NWS dividends were declared by the boards in their sole discretion, implying that they were optional. Or maybe he means that both types of dividends should have either been considered mandatory or optional, instead of Treasury getting the best of both worlds? What's even stranger is that all Angel had to do is copy and paste from the original document, which didn't have the typo. https://www.occ.gov/topics/licensing/interpretations-and-actions/2002/int931.pdf

If you want an article that attempts to kill the rally, look no further than this. Ideologically fueled nonsense that starts with the assumption that FnF were a cause of the financial crisis, and manages to assert that the proper way to run a federal conservatorship is to shrink the companies' footprint. https://www.forbes.com/sites/norbertmichel/2018/05/22/is-mel-watt-setting-up-another-bailout/#2e174f861572 I thought Joe Light's piece was actually rather informative, and not slanted against shareholders as he sometimes is.

i do not have a high regard for treasury counsel, based solely on what i heard in the oral argument. she was unprepared for the nationalization question, and countered it by saying the shareholders may eventually get value without offering a cogent explanation why...a big booboo for an appellate litigator. if that judge is seriously perplexed that a conservatorship/receivership statute was converted into a nationalization statute without clear statutory language to that effect (and that is a big if, sometimes judges make comments in oral arguments and then apparently say never mind in conference), nothing that treasury counsel said will assuage him In your experience, how common is this? We have already seen it more than once in FnF shareholder cases.

Thanks for posting this. For some reason it kept crashing my browser and I got tired of having to find my place, so I went here http://media.ca8.uscourts.gov/cgi-bin/oaByPa.pl?last_name=saxton&first_name=thomas&getOA=Search and downloaded the file. At the beginning Cooper said that he was making the same arguments in front of a different court, hoping for a different result. Where do appeals panels fall in the spectrum of hearing the case anew, even to the point of disagreeing with established decisions, to following precedent from the other courts?

I just can't resist, shameful as it may be. That's what she said!

The Rafter and Fairholme plaintiffs asked Judge Sweeney to add Fannie and Freddie themselves as defendants. FHFA/Treasury opposes the motion. http://www.gselinks.com/Court_Filings/Fairholme/13-465-0403.pdf What's the angle here? I don't see how this changes anything, but I don't have a law background so I could be missing any number of things.

Thanks for posting this. Yes, the situation is almost 100% political. Outside of politicians, only the courts potentially have a say and waiting for them would try the patience of Job. Parrott and Zandi actually acknowledge that FnF's affordable housing mandates did not contribute to the financial crisis, even showing links to independent studies in footnote 8. And yet immediately afterward they still argue that a conservative FHFA director would ignore that and continue the false narrative to justify shrinking the GSEs. They don't think Treasury can amend the terms of the SPSPAs to cancel/redeem/etc the seniors because of restrictions on the government's ability to “compromise a debt”. But the seniors aren't debt, they're equity! Box 2, criticizing the Moelis plan, has a few errors. It assumes that Treasury's backstop would remain in force in perpetuity, while Moelis actually provides for new equity capital to stand in front of Treasury while winding the backstop down over time. It also assumes that the duopoly of FnF is an inherent problem, not mentioning why it's bad. The paper also talks about Treasury selling its interest in the companies, but it confuses the senior prefs (which would be gone) with the warrants (which would be exercised). Box 3 says that in another crisis, 2/3 of FnF's losses would be borne by private investors, but the next paragraph says that the companies are transferring just over 1/4 of the risk. How do those numbers reconcile? They don't address current shareholders at all. Not that I expected them to, just noting the continued insistence that we don't matter.

I think there is no question this is premeditated. Not sure I could give a good answer for it though. I agree. Trump says/tweets so many things without thinking, he has to have a reason for de facto radio silence on the issue. While I struggle to think of plausible reform scenarios that wipe the companies out, I find it even harder to imagine one that involves this level of silence beforehand.

The short answer is that mutualization requires Congress, and I think there is basically a 0% chance they can get something like that passed and signed. Even just focusing on the administration, mutualization requires receivership or liquidation of the existing companies. That is, FnF = dead. I have seen no comments from any administration official signaling such a desire. On the contrary, Mnuchin has said that he wouldn't go so far as to say that he wants the GSEs eliminated. And his agreeing to the most recent letter agreement allowing each company a $3B capital buffer is much more conducive to keeping the companies around than trying to kill them. If the administration wants receivership so badly they had a simple path: Don't do the December 21 letter agreement Let the companies operate on zero capital throughout 2018 Appoint a new FHFA director January 1, 2019 who wants FnF dead Have the director use accounting discretion to make sure FnF book losses in Q1 2019 Director refuses a draw June 30, 2019 Mandatory receivership kicks in due to 60 consecutive days of negative net worth It could happen even earlier if the new director fudges with Q4 2018 numbers during January 2019. That still leaves the Trump administration almost 2 years to craft as much of a new system as they can without Congressional approval.

I agree here. But Mnuchin is on record saying that the companies will not be in conservatorship by the end of Trump's term. While the status quo is comfortable for the major players, the person with the most authority to effect a change has said that something will happen within 2.5 years. I can't see Congress agreeing on sweeping housing finance reform that kills FnF: the Republicans have just about run out of time and the Democrats, who are likely to take at least one chamber of Congress in November, don't want them dead. A fair point, but also a potentially good one for existing shareholders. Somebody other than the government has to own the companies when it's all said and done, and it's hard to argue that existing shareholders won't be among them. Dilution to common is all but inevitable in my eyes, making the prefs a safer investment. Thanks for drawing my attention to this specific case. I will read the complaint more carefully; I skimmed through it the first time. If it can avoid claims that are barred by 4617(f) then it has a fighting chance. I can see a clear reason that this won't happen. Nationalizing the companies would make the GSEs essentially government agencies, and at that point they would have to consolidate FnF's assets and liabilities onto the country's balance sheet. That would add $5T to the national debt overnight, political suicide for Trump. The way politicians spin things, it won't matter than the overall net worth of the country would remain unchanged (because assets would also go up by $5T): they just focus on the debt number. The most recent presidential budget confirms this. On page 104 (page 116 of the pdf): https://www.whitehouse.gov/wp-content/uploads/2018/02/spec-fy2019.pdf

I would need a better understanding of the different claims made by the different plaintiffs to know how the Roberts appeal affirmance affects other cases. The Roberts opinion, to me, boiled down to another re-affirmation that the NWS was the act of a conservator and not ultra vires, and thus 4617(f) bars claims. Same as all the other cases I have seen so far. It also said that plaintiffs' claims were, by and large, derivative and also thus not applicable. Graham-style valuations are naturally going to be zero because shareholders don't participate in any of the companies' profits. The thesis most of us preferred holders have is that i) there is no (plausible) alternative to Fannie and Freddie, meaning that they will eventually be released and the junior prefs will either be redeemed or have their dividends turned back on, and ii) the cases have largely been brought by junior pref holders. If a court awards damages then ostensibly any other junior pref holder (who held since before the NWS) can also sue for the same damages, right? I don't know where this leaves people who bought junior prefs after the NWS. I disagree that "forcing" action must necessarily be bad for junior pref holders. If getting out from under those contracts was that easy, FnF/Treasury would have done so long ago.

Evidence in the real world of what? I don't follow. Given that Mnuchin cannot unilaterally implement two of the core parts of the Milken proposal, how do you expect that to be a plausible downside scenario? I don't see how the Milken plan could be amended into something Treasury can do by itself. It begins with amending the charters, something only Congress can do. It can't be. Hence why I'm worried that he's waiting for another Congress & a new FHFA director to stand behind him. If he wanted to go the route of Moelis, he can do that today. Doesn't need a new congress. Doesn't need a new FHFA director. With respect to your legal argument, all of the legal arguments to date have passed every basic common sense test (and seemingly the opinion of some attorneys), yet we've been absolutely blindsided by the judicial branch opining that it does not have the authority to review. How does that argument not also apply to the liquidation preference in the event of receivership? You're acting like its a probable event that we win a liquidation preference suit and I just don't see how you're optimistic on the legal front at this point. To be clear- I remain cautiously optimistic and am playing devils advocate. It only takes one win, and we're not close to the point of all outstanding cases being dead right now. I just meant that receivership opens a whole new can of worms for the government because it breaches contracts (wrt liquidation preference) with all current junior pref holders, giving them all standing to sue. Right now only those who have continuously held since before the NWS have standing. This is where I differ from the Seeking Alpha crowd that shouts "the government can't exercise the warrants because it will be a taking!" in that the liquidation preference rights have been explicitly recognized by the court, and FHFA/Treasury are trying to argue that they aren't ripe yet. Receivership certainly would ripen those claims along with creating a bunch of new ones. To be sure there is still plenty of downside: the cases would take years to resolve and might only result in a return of cost basis, perhaps with interest. On a side note, this might be why we have seen only one major case (Washington Federal) challenge the conservatorship itself: the set of people/companies who have held shares since before the conservatorship and are willing to spend the time and money to drag it out in court is likely vanishingly small by now.

Evidence in the real world of what? I don't follow. Given that Mnuchin cannot unilaterally implement two of the core parts of the Milken proposal, how do you expect that to be a plausible downside scenario? I don't see how the Milken plan could be amended into something Treasury can do by itself. It begins with amending the charters, something only Congress can do.

This paper involves two things that Mnuchin and Watt (or Watt's successor) cannot do without Congress: amend the charters pass the companies through receivership So if Mnuchin is going to do any purely administrative action, he won't be able to come close to what the Milken Institute wants. Even then, a pass through receivership will prompt a whole wave of lawsuits from junior pref holders, unless said holders are made whole anyway (which involves deeming the seniors repaid). The longer FnF build capital and/or make NWS payments (i.e. the further past the 10% moment FnF get), the stronger the case gets for the junior holders.

I have a core position that I hold on to. I just use the rest to jump around and hopefully take advantages of the sways of the market. The correlation directly reflects the market's opinion of the probability that dividends ever get turned back on. I leave out FNMAS and FMCKJ on purpose to avoid liquidity premiums tainting the data, but I include FNMAT when I perhaps shouldn't.

From my model, R^2 coefficient of "% of par vs dividend yield" hit 0.85 last week, pretty high. It's still at 0.77 now, so I have been selling high divs and buying low ones. If it gets back down to the 0.5-0.55 range I'll do the reverse. For now I'm mostly in the low-divs like FNMAL and FMCKM. (btw I can't buy or sell the variables. They would kind of break my model anyway)

Only if it means gutting or winding down the GSEs, probably. I wonder if Mnuchin is more likely to act if he gets calls from enough members of Congress to do so, even if they can't pass any legislation. He has said he wants to work with Congress: would this scenario count? Since Treasury "is not allergic" to the utility model put forth by FHFA, ostensibly administrative reform would result in FnF continuing to be owned by shareholders, and perhaps even without competition. Utility models lend themselves to monopolies rather than lots of competitors.

Watt cannot unilaterally get out of the NWS and he didn't agree to it. What exactly is it that you expect him to do? Your anger would be much more justified if it were directed at Mnuchin.

Another lawsuit was filed today. It looks like it was sent to Sweeney along with a bunch of the other NWS-related cases. http://www.glenbradford.com/wp-content/uploads/2018/04/18-cv-00529-0001.pdf I skimmed through the complaint but I can't see any real differences between the arguments made here and in other cases. If that's true wouldn't this case just get lumped in with others? And if so would the only purpose of this lawsuit be to participate in any damages awarded? This suit actually doesn't ask for injunctive relief (suspending or voiding the NWS). Instead it only asks for cold, hard cash (B,C,D,E in the prayer for relief at the end). I wonder how that will affect things?

Not necessarily. If the senior pref liquidation stays in place, then it will absorb up to $193B of net worth (far more than would actually exist) before junior prefs or commons see anything, so juniors and commons would be zeroed out. Even if the seniors are declared repaid, the companies have only just passed the 10% moment so their capital levels would still be very low. Enough to give maybe 10-20% of par to junior holders right now, and we are trading at the top end of that range. Receivership benefits noone.

I agree that it all basically needs to happen at once. An end to the NWS, a recapitalization and (eventual) release plan, the fate of the warrants, a potential conversion to common offered to junior pref holders, settlement of lawsuits, etc. As to the last statement, it brings up an intriguing idea: what if part of the reason Mnuchin is stalling is that he doesn't want to be seen as enriching his hedge fund buddies? Politics and optics are such a big part of the FnF saga that Mnuchin (and by extension Trump) could lose a lot of political capital if releasing FnF is successfully painted as a favor to hedge funds and some donors. If this is true then we could see administrative action after the midterm elections if the Democrats gain control of either chamber of Congress. That would severely limit Trump's ability to get his policy wishes passed into law. While Trump still has the nominal ability to get legislation through with no Democrat votes he has to step lightly around Republicans, including those who want FnF dead or kept in their current neutered state.

close to 0% odds Also that both the 180 billion and 350 billion numbers are quite inflated. According to Moelis the potential profit from the warrants is $75-100B, and the total dividends paid so far have been around $276B. Subtract the $187B that Treasury gave to FnF and their total profit right now is only (!) $89B. The headline is also poorly written and wouldn't make it close to the editor's desk let alone past it.

Plaintiffs in Perry trying to nip defendants' talk about non-ripeness in the bud. http://gselinks.com/Court_Filings/misc/13-mc-01288-0078.pdf Does anyone have a link to the Perry briefing schedule? I can't seem to find it; my only real resource is gselinks.com and I didn't see a schedule ordered by Lamberth there.