Midas79

Good point. The narrative has come a long way (in fits and starts) from winding them down.

An off-the-wall thought: Could Watt direct the GSEs to use their profits to start retiring/redeeming the junior prefs? Any money used to do that is out the door and is no longer part of net worth, meaning that the GSEs wouldn't have to send any money to Treasury. It could help with a restructuring of the balance sheet and maybe even undercut the lawsuits; perhaps Berkowitz and others would drop their suits if they're paid at par. High-dividend series like FNMAS and FMCKJ are Fairholme's main holdings and also the most prudent to pay off first. Of course, this doesn't address Watt's concern with the lack of capital for short-term fluctuations. But it would help with a post-conservatorship future by not having dividend obligations. Watt might see this as a better use of money than just sending it to Treasury for no consideration. I believe the chances of this happening are very small, but are they non-zero? Or would this violate the PSPAs in some way?

What's yet to be seen is if the Trump administration considers a return to the pre-conservatorship status of the GSEs to be enough of an unwinding of the federal government's role. Even out of conservatorship and with no government guarantee (which has always been the case, as the GSEs filings state numerous times), the market could still price GSE debt as if there was an implicit guarantee, the GSE charters would still be in force, and the GSEs would have to have a regulator. A far worse interpretation means the Trump administration wants the GSEs (and subsequently FHFA) wound down and completely dissolved, and damn the consequences.

seems to me these stress test loss numbers can serve as the total minimum amount of capital the GSEs should have going forward...and this indicates about 2%, which is way less than most peopl have been pulling out of their most convenient orifice. Yup, "capital requirements" was the first thing that came to my mind as well. These results present a pretty good argument that $100B is sufficient. This is far less than the "level playing field" proposals. If the scenario where Treasury exercises the warrants at a higher strike price comes to fruition, and if the strike price is high enough, we could get an instant full recap. This would likely be immediately followed by a release from conservatorship. Wishful thinking to be sure, but it's at least kind of plausible?

I forgot who said it in this thread, but I'll paraphrase: "Righteous indignation is a poor investment thesis."

I usually don't listen to these but I should make it a point to listen to this one (and Thursday's Fannie Mae call). The encouraging point is that (iirc) Watt has distinguished between housing reform, which is in the purview of Congress, and GSE reform, which is his job. The GSEs are much different companies than they were nine years ago, and by your comments Layton seems to think so as well.

I suppose this means that Watt has until September 29 to decide if he wants Freddie to actually pay the dividend. It does emphasize that Watt is the one who will make this decision, no mention of Treasury. My guess is that Watt will withhold at least part of the $2.0B NWS dividend, but that he will wait until mid to late September to do so. This is wishful thinking in a way; I see it as part of an administrative plan to make sure that Congress doesn't pull the rug out from under them with another Jumpstart-like rider. Then again, actually paying the full Q2 dividend and waiting until the end of December to withhold would support my idea further.

Hensarling hates the MBA proposal. MBA wants explicit guarantee on all MBS, Hensarling wants no guarantee on any of them. I think too much of the debate has centered around there being three types of guarantee (none, implicit, explicit) and the desires of the different sides to change the status quo (implicit). This is a false choice, though. There aren't three guarantee types, only two. Either there is a government guarantee or there isn't. There has not been in the past; this lack of guarantee is clearly stated in every Fannie and Freddie annual filing I have read. Nobody in Congress or Treasury can force the market to not assume there is an implicit guarantee. MBA's proposal is clearly bad for FnF shareholders. For a while I thought Hensarling's no-guarantee plan would be bad as well because it would eliminate a historical FnF advantage (lower borrowing rates), but now I think that Hensarling's plan is fine. It doesn't actually change anything.

Thanks for posting this. Since Ginsburg made the "salt the earth" comment and still affirmed Lamberth's dismissal, I am not going to try and guess what the judges will do based on what they say. Thompson was just a ball of energy, which didn't seem to go over too well but I'll give him points for enthusiasm. I'll admit that Stern and Cayne also did a good job presenting their case. One judge (sorry, I can't tell which voice belongs to which judge) points out to Stern that the central argument turns on whether actions by the FHFA that don't actually benefit FHFA or the companies are subject to judicial review. At 15:40 Stern equates the interests of the agency with the interests of taxpayers. While Thompson did address this point during his rebuttal, I'm surprised he didn't hammer Stern for conflating those. Cayne mentions a whole laundry list of powers that HERA grants to FHFA, including broad powers of discretion that he claims are the basis for it being able to lawfully enter into the 3rd amendment. My counterpoint: given that the NWS runs counter to all previous definitions of conservator, why would the FHFA bother with conservatorship at all? Couldn't they have just released the companies from conservatorship and then agreed to the NWS anyway? Cayne himself brought up that the language in HERA that requires FHFA to act in the best interests of the companies and FHFA itself is taken from FIRREA. But if the "best interests" clause must be the same as in FIRREA, why not also the accepted definition of conservator, which in the case of FIRREA has been well-defined? Thompson recognizes that he needs to show that the NWS hurt the companies (easy) and was at best neutral to FHFA (the crux). I would hope this fits the definition of ultra vires. Stern brings up the numbers showing that in 2015 and 2016 the GSEs paid less in dividends than they would have under the 2nd amendment. Does this kind of retroactive justification matter at all here? Or are the judges supposed to only consider what was known at the time of the imposition of the NWS?

Seems plausible, but could argue he's had enough info for a while and has stayed silent I don't feel too strongly about this one way or another, but there is a very LARGE difference in the motivation to do so once the information is public. Did Trump have this all along and stayed silent? Maybe. Will he continue to remain silent on it now that the information is public? I do not know, but the prior silence is not a guide since the playing field is changed with the public dissemination of the info. Yes, this is what I was thinking. If the public outcry gets large enough, I think we will see at least a tweet by Trump. Publicity is what we have needed all along.

While a Clinton presidency would have contained many negatives for us, mostly due to a continuation of Obama administration policy and anti-GSE personnel being put in key places, there are also specific positives to Trump being in office. He does not hesitate to attack Obama policies for political gain, so if he sinks his teeth into the GSE issue we will have public, vocal support from the most powerful player possible. These documents seem to hand him that opportunity on a silver platter.

How recently were the documents that Gretchen Morgenson referenced released?

A highlight of the difference from last year's budget. https://twitter.com/Alec_Mazo/status/887399470752714752 I see good and bad here. Good: this is the second time that we have seen a major player remove mention of eliminating FnF (the Presidential budget and now this House budget) while maintaining that the status quo should not continue. Release back to shareholders is by far the easiest outcome of those that remain. Bad: they are still using the $5 trillion number as scare-mongering; there is no way the government would ever be on the hook for anything close to that full amount, even as things stand with zero capital buffer. They also mention the $187 billion in initial bailouts while leaving out that the government has turned a handsome profit. One would think that the FnF situation would be the least objectionable bailout ever to fiscal hawks, by whom this budget was clearly written. The 2016 budget also mentions that FHA had not maintained its congressionally mandated 2% capital ratio, putting taxpayers at further risk. This isn't mentioned in the 2017 budget; has it been addressed? I don't know anything about the FHA and its capital buffer. But it does tell me that perhaps the House would approve of a released FnF with an appropriate capital buffer.

I don't think this is as good as it sounds. Hensarling wants all guarantees - implicit and explicit - done away with for FnF. It is kind of strange to have the libertarian and some tea-party types advocate for no guarantee, while other Republicans and many Democrats want a fully explicit guarantee. Thus far we have ended up in the middle with an implicit guarantee, and I think that's where we will stay because neither the no guarantee nor explicit guarantee sides have enough pull to overcome the other. I do see this as good news in that a large-scale housing finance reform package will be very difficult to get to Trump's desk before January. This budget reinforces the belief that a Senate bill including an explicit guarantee will likely die in the House, and the House might even push back against a Jumpstart-style rider if they see it as an undesirable continuation of the zero-capital conservatorship that keep taxpayers on the hook.

The danger is that Corker doesn't have to get an entire reform bill passed to screw shareholders, he just needs to sneak in another Jumpstart-like rider in a bill that only needs 51 votes. We might have an opportunity here. Painting Corker's efforts to kill Fannie and Freddie as being beholden to Wells Fargo and the rest of the TBTF banks could be an effective strategy. Corker would then have to choose between continuing his anti-GSE efforts and actually trying to get re-elected.

I didn't think Corker's stated stance was "let's work together" as much as "don't do anything at all, we'll handle this." I agree that Corker trying to insert such a rider might prompt Mnuchin to act quickly. Hopefully he has enough connections to find out as soon as something like that is attempted.

What are the chances Corker and others try to slip a rider into any debt ceiling bill to quash administrative GSE reform? They have to be at least somewhat spooked by Watt's hearing and Carson's language about shareholders. I would think the chances are pretty high. A rider can tie Watt and Mnuchin's hands pretty tightly.

Makes me wonder how Stevens, Carney, Light, etc. would argue against this proposal if hedge funds didn't own any shares. It wouldn't really change anything of substance.

I have been assuming that there won't be a dividend holiday if there is going to be an equity raise via issuing new commons. Offering a dividend on the common can allow for more aggressive pricing, probably gaining more capital for the companies even with the expense of paying the junior preferred dividends.

It turns out that yes, Moelin & Company do suggest that the government exercise the warrant to maximize taxpayer returns while moving on from the unsustainable status quo. https://www.scribd.com/document/348785021/Restoring-Safety-and-Soundness-to-the-GSEs#fullscreen&from_embed I hadn't realized that their proposal had been released like this. Found the link on iHub.

Ever? I don't see how there can be any path to re-privatization while the senior preferreds exist. Side note: I wonder if Moelis & Company's "win-win" proposal involves the warrants being exercised, having the government make more money by keeping the current capital structure intact than if they wipe out the commons.

Not yet. But we could easily see an administrative solution come out soon after Jan 1, 2018 because at that point: Fannie and Freddie will have repaid all the draws (at the 10% dividend rate) The Jumpstart bill language expires, so Treasury can do anything they want with the senior preferred The zero capital scare is political cover for action, especially if Congress is still spinning their wheels We might have favorable news from the Perry or Fairholme cases Given all this, I'm more surprised that Watt "went rogue" concerning the next NWS payment rather than Mnuchin saying that he expects it to continue. Of course I am making many assumptions here. Mnuchin's words and actions have been consistent with my list, but they are also consistent with other potential courses of administrative action, hence the risk involved. That said, I don't expect anything major to happen in the next 7 months unless we have favorable verdicts for shareholders or Congress really makes a push on their end.

http://www.glenbradford.com/wp-content/uploads/2017/05/13-465-0376.pdf 3500 documents have been produced to plaintiffs' lawyers.

A few gems from the Analytical Perspectives part of Trumps FY2018 budget: (apologies if these have been posted) https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/spec.pdf p. 96 (110 of 292 in the .pdf), bottom of left column: p. 212 (226 of 292 in the .pdf), top of right column: These exact phrases were also in Obama's FY2017 budget so they aren't really indicative of the Trump administration's priorities for the GSEs. I just found them ironic. https://obamawhitehouse.archives.gov/sites/default/files/omb/budget/fy2017/assets/spec.pdf

I haven't read the opinion yet, will try to do so soon. I thought the Collins case was another angle of attack, so how does the Perry appeal opinion factor into this? It seems to be yet another lazy decision based on Lamberth.