Midas79

link? Tweeted by Joe Light, but I don't have the actual document. https://twitter.com/joelight/status/935271444782702592

I doubt it. Reducing the headline corporate tax rate is the R's signature tax reform objective; delaying it for a year for such a relatively trivial reason (to most Senators) would make it harder to get the R votes needed. At one point Corker had tried to taunt Watt into taking a draw for no reason at all. One would think Corker would try to increase the probability of a draw and have it be sooner rather than later. I'm speculating that its not trivial to Corker, and with such a thin majority, Corker may be in a position successfully demand 2019 or he votes no. But if the FnF DTA issue was the only reason he wants the delay he could just try to insert special language just for the GSEs. Something like keeping their tax rate at 35% while in conservatorship. I don't think that would trigger a write-down because FnF don't know when the conservatorship will end and thus wouldn't know how much to write down? It could also be seen as a show of good faith towards Mnuchin, even though it certainly wouldn't be one in reality. The one-year delay also might be enough of a dealbreaker to some Senate Rs that Corker would end up cutting off his own nose to spite his face. If the tax reform bill goes down because of him he might get a ton of blame from Rs (especially Trump) and might lose some political capital for his last year in office. From the (admittedly little) reading I've done, there is a Senate rule that allows them to pass the tax reform with a simple 51-vote majority as long as it is not projected to increase the deficit by more than $1.5T over 10 years, and that the one-year delay in cutting the corporate tax rate is designed to "save" money that will be used for other tax cuts. That seems more plausible to me than a one-man crusade on Corker's part. You're right that Corker holds a lot of power even though he has but one vote due to the R's slim majority in the Senate.

I doubt it. Reducing the headline corporate tax rate is the R's signature tax reform objective; delaying it for a year for such a relatively trivial reason (to most Senators) would make it harder to get the R votes needed. At one point Corker had tried to taunt Watt into taking a draw for no reason at all. One would think Corker would try to increase the probability of a draw and have it be sooner rather than later.

How many lawsuits are pending with FHFA, Fannie, and/or Freddie looking for relief due to bad loans and such? The RBS/Freddie settlement is the most recent one to conclude that I know of. If there is still significant money to be made, I could see the administration wanting to keep the NWS money flowing so that private shareholders don't gain from any settlements or lawsuit victories.

Thanks for finding that. It is pretty clear. I highly doubt Mnuchin wants receivership. He just said that he would not go so far as to eliminate the GSEs completely and receivership would cause a huge hiccup (at best) in the 30-year fixed mortgage market which goes against Mnuchin's wishes to maintain liquidity. I also don't think Mnuchin can force receivership, even if the companies' net worth is negative. From section 2.2 of the original SPSPA (I don't believe this was ever amended): All Watt has to do is request enough money to keep the companies' net worth above zero in a timely fashion. I don't know if Watt can trigger receivership voluntarily in a negative net worth scenario, but I don't think he would do it for the same reasons Mnuchin wouldn't want it.

I don't know how much discretion Watt has over the timing of the DTA writedown once the tax rate gets cut. FHFA has had quite a bit of accounting latitude in the past and Watt really wants to avoid a draw, so if he can push the writedown into Q1 2018 he likely will. That would then give Mnuchin an incentive to make dividend payments annual (giving FnF time to build up profits against the DTA losses) before March 31, 2018 or do something more dramatic.

Pros to Mnuchin wanting to work with Congress: A Congressional solution will be (semi-)permanent, while an administrative fix is subject to Congress pulling out the rug later Corker's retirement puts a deadline on the process I don't think enough Congresspeople are out to deliberately screw shareholders so the shares should retain some value Purely administrative reform will cost (perhaps significant) political capital and could be seen as Mnuchin catering to his "hedge fund buddies". In contrast a Congressional solution cannot be blamed on anyone in particular Maybe the RNC resolution actually means something? And some Congresspeople might actually care what it says? Cons: Mnuchin might do nothing administratively in the meantime and keep taking the NWS payments until Congress acts Tax and healthcare reform are higher administrative priorities There is a large ideological divide over whether there should be an explicit government guarantee or none at all; Hensarling is in the latter camp and has a lot of pull in the House, though his retirement could affect his decisions I would really, really like to see a SPSPA amendment postponing the 2018 sweep payments until the end of 2018. By then there should be enough done that the payment never actually gets made, hopefully.

The market seems to be discounting the idea that the junior prefs will ever pay dividends again. The correlation between dividend rate and price as a % of par is under 0.35, while it was over 0.9 a year ago. In particular, the series FNMAM, FNMAK, FNMAG, FNMAN, FNMAL (listed in order of decreasing dividend rate) are basically trading at parity while having the same liquidity, as well as FNMAJ and FNMAI, whose prices have recently come down much faster than the 5 aforementioned series. The same is true for FMCKI, FMCKL, FMCKO, FMCKN, FMCKM which are nearly at parity and have similar liquidities. Perhaps the market is also discounting the warrants being exercised, as commons are stronger against a weighted average of the preferreds than any point in the last 6 months, and almost as strong as a year ago (their post-election high point).

This is a hard question to answer, but my best guess is that Mnuchin is still trying to walk the razor's edge. If he comes out in support of shareholders he will lose political capital with those in Congress (and elsewhere) who want hedge funds to not make a "windfall" profit, while if he comes out against them then the "respect shareholder rights" types won't like it. He will naturally have to make his intentions known eventually, but if he is trying to keep Congress working towards tax reform, not to mention housing finance reform, he is better served as appearing agnostic. I still wish that I knew more about the possible ramifications of the RNC resolution. It is hugely positive language from the ruling party, yet it has not been talked about at all by the major players, so it is hard to tell what impact (if any) it actually has. So far it has been lost in the shuffle. It does provide the administration some cover if they do reform without Congress; they could say "hey, we put up a resolution months ago! We're just following it!"

I just wish someone would hold Mnuchin's feet to the fire and ask "if taxpayer safety is such a concern, why do you keep taking the NWS payments and draining the GSEs' capital?" This is the one significant area where Mnuchin's actions are at odds with his words.

FNMA commons were $67.30 on 10/5/07 and $18.78 on 7/3/08, only to fall to $0.30 on 11/21/08. Is there that big of a difference between wiping out 99.5% of equity value over a year, or 98.4% over 4.5 months, and actually getting rid of all of it? The shareholders were already punished nine years ago. It's the government's fault that they allowed the equities to continue trading, right? Of course, these arguments will not sway those like David Stevens who use "don't let the hedge funds have a windfall" as a talking point against current shareholders being allowed to realize any value, regardless of the large percentage of shares held by retail investors, community banks, pension/retirement funds, etc.

Bad news without a doubt. No capital buffer unless Watt decides to withhold and increase liquidation preference. Heck, no administrative-only reform at all given that the executive branch isn't bipartisan. Seems to me like Mnuchin is saying that he isn't going to do anything at all until Congress passes something forcing him to.

The utility model checks a lot of boxes: Pre-conservatorship FnF were criticized for having a government backstop but were run with the aim of maximizing shareholder returns, the "private gains, public losses" model Utilities work best as highly regulated monopolies. No new charters would be needed and FHFA can act like a utility regulator to FnF There would be no point in aggressive lobbying if returns are capped by FHFA Current junior preferred shareholders could get a stake in the new utility, enough to satisfy the litigants The 30-year fixed-rate mortgage stays The process of converting to a utility model can be started administratively Of course a utility model has points against it: TBTF banks would be shut out of the secondary market It is anathema to those in favor of less government control and/or more competition (in general and specific to housing finance) A full conversion to this model would take legislation

But how does this jive with the RNC resolution? The resolution means there is at least some support in Congress for actually respecting shareholder rights. What remains to be seen is how much Trump and Mnuchin actually care about what the resolution says, and in Trump's case how much input he had into actually crafting it.

Sure you can, the same way they were put in conservatorship in the first place. It only takes a fudge factor of a few billion to turn the equity portion of the balance sheet negative. A small DTA write-down (anticipating "adverse effects of tax reform") at the direction of FHFA would do it. As to your point about Watt's potential removal without cause, it isn't nearly the big deal you think it is. Mnuchin could have been refusing the NWS payments all along, and he really is removable by Trump at will.

Which bill? Is there a link to the bill itself? I assume it is the Financial CHOICE Act of 2017 that passed the House. https://www.congress.gov/bill/115th-congress/house-bill/10/text?r=1 This little gem is in there: allowing Trump to fire Watt at will if this bill becomes law. I searched "Fannie", "Freddie", "GSE" and found nothing. Then again, this bill passed the House in June so it is nothing new. I'm guessing that the Senate is debating it and that's why Corker is commenting. But there is nothing in there about privatizing the GSEs. In the past Hensarling has talked about that, and I believe his version of privatization involves running Fannie and Freddie through receivership and eliminating them entirely. As things stand the full senior preferred liquidation preference is on FnF's balance sheet, so receivership would zero out all common and junior preferred shares.

If memory serves me correctly, yesterday was the deadline for Perry to petition the Supreme Court. Carney's piece: http://www.breitbart.com/big-government/2017/10/16/hedge-fund-perry-capital-asks-supreme-court-to-revive-fannie-mae-lawsuit/ Aside: Perry Capital has basically unwound all of its non-FnF positions, right? And the Fairholme Fund that owns GSE preferreds is a mutual fund and not a hedge fund. Are there any actual hedge funds that own FnF shares at this point? Pershing Square is the only one that comes to mind and they are not party to any of the lawsuits. Potential "windfalls" to "hedge fund billionaires" has been a point of emphasis for those who are anti-shareholder (David Stevens et al), so it would be at least humorous if it wasn't technically true.

And yet Trump kept making the ACA payments up until this EO even though they were successfully challenged in court. This could also be a parallel to the GSEs where the NWS payments keep going through even though Mnuchin (via an order from Trump) could refuse them. I just hope Trump takes less time with the GSEs than he did with health care, though the 9 years of conservatorship and inaction in Congress is plenty of excuse.

The $64,000 question: were there any emails related to the imposition of conservatorship? The GSEs can say that they were unaffected by the hack, but that could just mean with respect to day-to-day operations and current client data security. It's a true longshot but if FHFA accounting directives from 2008 were hacked, I don't think that is inconsistent with the language used in the articles.

If Trump decides that he really wants to spite Corker and have the last word, he can come out on the side of the GSEs. I find this quite unlikely but it adds to the list of potential positive black swan events.

Another 750,000 shares of FMCKM posted just now, half at $5.30 and half at $5.33. Still just this one series with abnormal volume as far as I can tell. That's 8.75M in volume over the last week or so. Last I checked, Fairholme owned around 5.75M shares in that series so this volume isn't all them. Someone said earlier that Tilson might be unloading but I can't find his series and share counts anywhere.

https://www.fhfa.gov//Media/PublicAffairs/Pages/Statement-of-Melvin-L--Watt,-Director,-FHFA,-Before-the-U-S--House-of-Representatives-Committee-on-Financial-Services.aspx Mel Watt's prepared statement for today's meeting.

I'm not one for following price action, but the common stock of Fannie is up something like $0.26-$0.30 since the payment was made mid-day on Friday. It's hard to see how the payment going through is a positive. It could be gambling on Watt saying something positive tomorrow in his meeting with the House. Another 1.2M shares of FMCKM volume posted today. What is up with that one series?

You know, I'm rather glad you asked this. Until now I have been assuming that Mnuchin can unilaterally end the NWS (actually the entire SPSPA). But that came from this paragraph in the original SPSPA: It appears Mnuchin would need some court (any court!) to rule that any part of the agreement is either illegal or unenforceable. To my knowledge this hasn't happened yet. But I think rescinding and unwinding the entire agreement would entail a reset to before it was signed. Does that mean that Treasury would have to send back all dividend payments in excess of the original draw? I will need to go back and read the agreement and amendments with a fine-toothed comb to get a better idea of this. I thought I had done so in the past, but in that case I would have been able to answer your question more thoroughly! Mnuchin could always refuse the NWS payments, but it will take Watt's cooperation to actually end the conservatorship and declare the companies adequately reformed and capitalized. This won't be an entirely administrative solution because as of right now, Trump cannot remove Watt and thus Watt (who isn't part of the administration) will need to be on board too.

As an aside, I have noticed a big compression in the junior pref prices over the last few weeks. As recently as a few months ago when doing a linear regression using dividend yields to predict pref prices (as a % of par), the r^2 value was almost 0.9. It is now around 0.41. I have joined the crowd somewhat; I have sold out of some of the higher dividend series (FNMAJ, FNMAT) in favor of the lower ones in search of more stated value for the same price. Does anyone see a material difference between Fannie and Freddie preferreds? I have been treating them as basically equal so far, though the Fannie ones (especially the $50 par series) trade a bit higher relative to their dividend yields.