Midas79

this is a very sensible scenario. but when have you seen USG writing a >$125B check to settle litigation? I guess there is always a first time. your next question should be whether treasury needs congressional appropriation in order to write that check. your answer is...? One possibility I had thought of in the past is that instead of Treasury writing that check, they could pledge to send the first $125B of the proceeds of the sale of all that common stock to FnF. Treasury can't keep a 95% position (which I think would be more like 99+%) anyway. Then there is never a net cash outflow, though Treasury wouldn't see a "profit", on top of what it has already gained off the seniors, until after it sells the first $125B. Since the market cap of FnF is likely to be $200-250B, Treasury shouldn't have any trouble recouping its $125B if it just drops the share price low enough to clear the market. If I understand the court cases correctly, converting the seniors, pledging that $125B, and amending the NWS out of the PSPA should be good enough to get all the cases mooted, except Collins/Bhatti (constitutional defect) and maybe Perry (junior pref contract claims). This part is out of my wheelhouse though.

Yes, it's fake. Check the name of the organization carefully. It's still funny, though.

Awesome news imo, at the very least in the sense that him extending the comment period would have been a pretty bad sign. I like his use of the 103-day period from May 20 (public release of rule) to August 31 (end of comment period). I put those exact numbers and dates in my comment letter when I made the recommendation not to extend the comment period.

I disagree. The opportunity cost argument assumes two things: that one should have been able to predict what actually happened (both with this investment and the alternatives), and that what actually happened had a 100% chance of happening. Both of these are questionable at best, and in my opinion both are completely fallacious. Could I have made more money elsewhere in the last few years? Sure. That's going to be true of just about every investment ever. Should I have seen what happened coming? Not necessarily. If the future was that easy to predict there wouldn't be a market at all. Seeing other investments take off while mine languishes used to bother me, but not anymore. Beating myself up over "opportunity costs" and such only leads to despair. If other people make more money than I do, good for them.

https://twitter.com/NickTimiraos/status/1293986044057182209 JP Morgan: At the GSEs current level of roughly $150 billion a month in refi loan guarantees, this new fee will incrementally increase the GSEs' revenue by $9 billion a year That is significantly higher than I thought. The $9B should almost all go straight to pre-tax income because I doubt there is much marginal cost associated with the fee increase. More significant is the fact that it's JPM saying this. Freddie's financial advisor. Let that sink in a bit. I doubt this $9B is sustainable, but it shows me how easily FnF can tweak their income, ostensibly for the purpose of attracting private capital.

after oral arg, very rarely. after cert grant but before oral argument, rarely. there was recent case involving NY gun laws, where NY passed a revision to litigated law that mooted the case after cert grant but before oral arg. some judges get pissed (Alito), most just roll onto next case The reason I ask is because if settling after oral arguments is difficult or impossible, there would be a de facto deadline for settlement. That could even be before the election if Collins gets scheduled for oral arguments in October. Of course, we're already at the "rarely" stage since cert has been granted. I just like to brainstorm on here, this line of thinking could be a longshot or just flat-out wrong.

How often do cases in front of SCOTUS get settled after oral arguments but before an opinion is issued? Do the Justices frown on this given their vast caseload and limited resources, or is it similar to lower courts where they are glad it happened so they can devote said resources elsewhere?

@cherzeca I thought a market cap calculation excluded preferred shares. Doing so with your numbers changes $40.9B to $60B and the final share price to $3.88 at a 6 P/E and $6.47 at a 10 P/E. However, I think there's a simpler version given your market cap and cap raise numbers. If the market thinks FnF's total common stake is worth $100B, and they are being asked to contribute $100B to buy common shares, they will demand 100% of the total commons. Maybe they will leave a token amount for existing shareholders, pennies per share max. This also leaves basically nothing for the warrants, and the juniors would refuse an exchange because they wouldn't get anywhere close to $19B in value. The same happens if they only think the total common stake is worth $60B and they're asked to buy $60B worth of commons. In fact, due to the certainty equivalent ($60B in cash is worth more than 100% of companies perceived to be worth $60B), it might not be possible to do a capital raise as large as the common market cap estimate. Either the raise needs to be smaller or the market has to place a higher value on the total common stake. My working estimate for FnF's combined market cap is $180-216B ($18B in annual earnings, P/E of 10-12). Fannie's assets and income are around 60% of FnF's combined, so that leads to a $108-127B market cap for Fannie. Using $120B, there is enough room to raise $60B in commons (who will want a 2/3 stake or so; 1/2 is too little due to the certainty equivalent) and still have $40B of valuation to split among the warrants, converted juniors, and existing commons. Treasury's warrants (for FnF combined) are probably not worth close to the $60-80B that Craig Phillips said they internally value them at, though. Maybe half that.

I agree. May 22, when the rule was released, to August 31, when the comment period is set to end, is over 90 days already. What good would an extra 30 to 60 days do? The rule isn't that complicated. In order to get things done during lame duck the rule needs to be finalized in November. How much time will need to pass between the end of the comment period and finalization of the rule?

This route does result in FnF being instantly recapped. It also requires Treasury to write a $125B check to FnF, and they can only recoup that money by converting the seniors to commons (conversion to prefs, even if they are non-cumulative and mandatory convertible, leaves CET1 capital negative) and selling them. That has the side effect of squishing the existing commons into almost nothing, and any share exchange of the juniors would have to come from the goodness of Treasury's heart. I think it's the giant check that stops this from happening. That's hugely negative political optics, and while I do expect Trump to go scorched-earth in a lame duck session, I don't think even he would go that far. That's why I brought up the idea of Treasury sending FnF $125B but then selling the seniors back to FnF for the same sum. It accomplishes the same thing (mooting the cases, removing the need for settlements) and allows Treasury to claim they got "something" for the seniors.

If the seniors are either converted to common or straight up extinguished, $193B gets added to both CET1 and Tier 1 capital instantly. That might sound like a lot, but the problem is that FnF's Tier 1 capital deficit (current Tier 1 capital minus Calabria's standard, no buffer) is $322B and it's $279B for CET1. Raising those amounts is essentially impossible, especially with the seniors in place. This just reinforces the fact that the seniors have to go one way or another. Also, the extra liquidation preference doesn't get added to capital because it that amound has already accrued to capital through the retention of earnings. The dollar-for-dollar increase of the seniors' liquidation preference has not shown up on FnF's balance sheets. It's the amount of the seniors on the balance sheets ($193B, not the current liquidation preference of $210B) that would get added to Tier 1 and CET1 capital upon cancellation or conversion of the seniors.

A train of thought I have had (crossposted from Twitter chat): A footnote in a court case I read recently (I wish I could remember which one!) cited an older court decision basically saying that UST is not allowed to give up something for no consideration in return. Assuming this is true, UST won't be able to straight up forgive the seniors, regardless of if they consider them "repaid" because the seniors are equity, not debt. Also, a court cannot order the seniors extinguished as the result of any current case because FnF never had the ability to pay them off per the terms of the contract. That means UST giving up the seniors must be voluntary; they lack the "well the courts were going to take them away anyway" excuse. If UST is not legally allowed to forgive the seniors, they can still sell them to FnF. Every year UST releases an internal valuation of the seniors, and that tends to be between 50% and 60% of the liquidation preference. The last valuation was around $110B on $193B of liquidation preference. Currently the seniors' liquidation preference is more like $210B due to the increases caused by last September's letter agreement and FnF retaining their earnings. Proportionally, UST's internal valuation of the seniors would then be around $120B. The other thread to tie in is that if UST gives $125B to FnF (the amount of excess cash FnF paid to UST due to the NWS compared to if it had never happened) and ends the NWS, all cases except WF (now dismissed) and Perry get mooted. No settlement would be necessary, which would be a huge time saver as well as not allowing holdouts to complicate the process. Putting these two together, UST can "return" $125B to FnF and simultaneously negotiate the PSPA amendment to include a sale of the seniors back to FnF (who would then extinguish them, raising core and CET1 capital by $193B) for $125B, a slight premium to the internal valuation. This ticks a ton of boxes: UST gets a fair price for the seniors, quelling Warner's concerns about what UST would get in return for giving them up. All lawsuits but WF and Perry go poof instantly. This fits what Calabria said about the lawsuits "going away". Allows recap and release to go forward. UST avoids the possibility of a ruling more adverse to them than this outcome, most likely being something similar but with a return of $25-30B. UST can claim "victory" (or at least not a total loss) in the lawsuits because they save $25-30B over what the Collins plaintiffs want from a court order. Functionally this is the "Collins 1" remedy (seniors gone, NWS gone, $25-30B returned) but without the overpayment return. It shouldn't complicate the recap process because if the overpayment was returned as a tax credit, it only would have accured to capital at around $4B per year anyway, so the size of the re-IPO would only increase by that $4B. Please tell me if I am missing something or if the logic doesn't hold up somewhere, especially the part about the lawsuits disappearing.

@cherzeca Great analysis of the Supreme Court proceedings, kudos. I do disagree with one thing you said on Tim Howard's blog: "and maybe, without a severability provision in HERA to hang FHFA’s hat on, the existence of the fhfa itself." From my read of the SCOTUS Selia opinion, Roberts justified his change of Dodd-Frank's CFPB director removal clause even had there been no severability clause. This is the bulk of the discussion on pages 33-35. If the existence of a severability clause is all he needed, I don't see why he would have included such an in-depth discussion at all. The main quote I use to justify my argument is on page 33: While Dodd-Frank does have a severability clause, the statute in Free Enterprise didn't, and SCOTUS decided it was able to sever parts of it anyway. I also don't see how any parts of HERA necessarily fall (other than 4511(a)) if "for cause" removal is changed to "at will". I could be missing some, but I don't think they would cause the whole structure of HERA or FHFA to collapse, or invalidate any previous decisions made by then-Directors or Acting Directors.

Someone in the Twitter chat asked what we thought the chances were of SCOTUS just straight up overturning the NWS rather than just denying cert on the APA claims or upholding the Fifth's decision to remand that claim. Here is a repost of my response: Is this line of thinking valid or have I made a mistake somewhere? I suppose I haven't accounted for the possibility that SCOTUS overturns the Fifth majority's APA claim decision, which would solve the circuit split in the other direction (a final ruling that the NWS is not ultra vires). That's a chilling possibility.

Hannah Lang wrote an interesting article with some things I hadn't thought of. https://www.americanbanker.com/news/fhfa-leadership-structure-on-shaky-ground-after-cfpb-ruling Let's say SCOTUS goes the GVR route on Collins and Biden is elected, but when he takes office the Fifth Circuit hasn't ruled yet. What would the ramifications be if Biden just tells Calabria "you're fired"? If Calabria just extends the middle finger and says "you can't do that", wouldn't recap and release be in trouble anyway because investors would have no idea what to expect from FHFA going forward? Presumably all this would happen before any re-IPO.

Thanks for the confirmation and clarification. If SCOTUS delays taking up Collins, i.e. neither denies nor grants cert and just pushes consideration into next year, that just extends Calabria's time in office under Biden, right? Is this likely at all?

Just to make sure I'm understanding things correctly: If SCOTUS decides to take the GVR route for Collins, the Fifth Circuit would have to re-decide Collins using Selia as guidance. Until they do, Calabria can only be fired for cause. Since that decision could take a while, Calabria really could stay in office under Biden, maybe even long enough to get recap and release done, as long as he doesn't do anything stupid enough to get fired for cause. Then all we really need is for Mnuchin to get UST's part out of the way before the end of January. Cancel/convert seniors, PSPA amendment (end the NWS, remove UST's ability to veto release, plus whatever else they need to do), exercise/cancel/sell back warrants, and settle/moot the cases. I know you have said all this before, I just want to see if I am putting the pieces together correctly. Three questions: 1) How long do you think it would take before the Fifth Circuit issues another decision? 2) Could Biden fire Calabria the day after that happens or would he have to wait until SCOTUS either denies cert or upholds the ruling? 3) Is anything missing from my list of what UST needs to do?

I'm starting to wonder if SCOTUS might issue a final ruling on the NWS after all (over the APA claims, not constitutionality) because there has already been a circuit split on that issue. Perhaps they might wait until Atlas actually strikes down the NWS due to it violating the APA, but she would be doing so at the Fifth Circuit's direction. Would SCOTUS have to wait for what basically amounts to a couple of rubber-stamp rulings (Atlas striking down the NWS because the Fifth Circuit said so and the Fifth Circuit upholding it because they have already ruled on it)? Can they?

...and the almost immediate correction because I messed up when reading Table 4: Correction: the $167B Peak Cumulative Losses number was Fannie only; $98B was for Freddie, $265B combined. This $265B number is what should be reduced by $61B, to $204B. The point stands, though: if Calabria’s justification of the huge buffers was to cover Peak Cumulative Losses, he should substantially reduce the size of those buffers in light of the circular draws and PLS settlements.

Cross-posting from Tim Howard's blog, in response to ROLG and Mark's comments about the "Peak Cumulative Losses" figure of $167B in the proposed capital rule including losses from fraudulent MBS that were lated sued over: Also, FnF paid a combined $36.3B in dividends to Treasury between the start of conservatorship and the end of 2011. These were all the result of circular draws, ones made against Treasury’s funding commitment that were immediately paid back to Treasury as 10% cash dividends on the seniors. The final figure on settlement money received in PLS cases was $24.9B. https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Final-Update-on-Private-Label-Securities-Actions-9172018.aspx As such, shouldn’t the $167B “Peak Cumulative Losses” number in Table 4 on page 28 of the proposed capital rule be $106B instead? Calabria might be able to justify keeping the baseline capital requirements ($135B risk-based, $152B minimum/leverage as of the end of September 2019) in place, but correcting the “Peak Cumulative Losses” number should allow him to reduce the size of the buffers considerably. That, in turn, would both make it easier/possible for FnF to provide a market-based ROE with little or no increase to g-fees, as well as grease the skids for earlier dividend payments to facilitate the equity raise.

Exactly. Also, Zandi's long-deserved putdown by Calabria shows that Calabria isn't going to listen to clowns. They will bluster and piss and moan, and Calabria will do exactly what he would have done if they had never said anything.

60 days from publication in federal register When will that be? Whenever Calabria feels like it? Or does he have some restrictions to adhere to?

there is a possible timing issue "(2) If Seila rules CFPB unconstitutional, then FHFA unconstitutional as well, and CFPB/FHFA directors can be fired at will." well, as a legal matter if CFPB director can be fired at will, so can FHFA director...but suppose calabria fights the application of Seila to Collins tooth and nail? he will lose...but maybe as late as a year after Seila comes down. This is a great, and I believe heretofore overlooked, point. Calabria might not be fired on day 1 of a Biden presidency if he can drag things through the courts long enough. In the past I thought this wouldn't matter because a Treasury Secretary that is hostile to recap and release could just refuse to allow release, but Calabria and Mnuchin can do enough in the lame duck period to cut Treasury out of the loop entirely. Amending the SPSPA to get rid of the seniors and finally kill the NWS for good, along with releasing FnF under consent decree, should be enough that Biden's Treasury Secretary wouldn't be able to get involved, and Calabria could do as much as he is able to while fighting to keep his job.

I didn't say I don't think g-fees will increase. I said they don't necessarily have to, depending on whether the re-IPO investors care about ROIC (return on invested capital) versus ROC (return on capital). The former will easily exceed 10%, and the latter won't dip below 10% until FnF get more than $180B in capital, which is enough to pay 20% of income as dividends. It is these investors who will determine whether or not g-fees go up and by how much. I also said that a g-fee increase could be phased in rather than occurring all up-front.

But $175B of capital, the threshold at which dividend payments can start (without a special exception granted by FHFA), needs $17.5B of earnings to get that same 10% return. FnF's earnings are already there. All money not paid out as dividends would be retained, allowing a slow build to the top-line $243B number. So while ROC would go down if earnings stay flat and capital increases, ROIC should remain constant. Which do you think is more important to those who would participate in the re-IPO? The upshot is that I don't think g-fees will necessarily have to increase. And if they do, it wouldn't have to be all at once. For example, if FHFA wnats FnF's earnings to go up to $25B per year and a 20 bps increase is needed to get there, but FnF are given 5 years to reach full buffers, they would only need to increase the g-fees by 4 bps per year. That's much more politically palatable than a huge 20 bps increase all up front.