Midas79

I was assuming that Pagliara's speculation was based on said contact with the plaintiffs' counsel, i.e. he is sharing what their goals are. But perhaps his podcast was more of a "keep the faith" message than actual inside knowledge of just how things are going to happen.

Thanks. I don't see why it isn't applicable now, though. Most of my post was a list of why it makes sense for there to be an eventual exchange of prefs for commons, which doesn't really have anything to do with the unemployment rate.

1) Given the post just above mine, I don't think the current environment will affect the timeline much if at all. Calabria tweeted a link to his Bloomberg interview titled "Fannie, Freddie Conservatorship Exit Not Impacted by Virus"; I'm going to consider that a big tell. https://twitter.com/MarkCalabria/status/1242953955447013376 2) Some clowns on iHub seem to think that Pagliara was not referring to a pref-for-common share exchange when he mentioned a 10-15% haircut, but that's really the only thing he could have been talking about; FnF don't have the capital to do a subpar redemption. I do believe an exchange is quite likely, for reasons outlined in the post you replied to. Or were you not referring to a share exchange? 3) I believe there are three things we must have before any share exchange and re-IPO: seniors gone (either cancelled or converted to commons; this also kills the NWS), remaining lawsuits where FnF are liable settled (I think this is only Perry, please correct me if I'm wrong; also, killing the NWS should moot many of the cases), and a finalized capital rule.

Yes, an exchange (thanks cherzeca, I will start using that term instead of conversion) is core capital neutral. Core capital = non-cumulative preferred stock par value + common stock par value + additional paid-in capital + retained earnings, by statute. The exchange just moves the $33B of junior pref par value from the first category to the third because common stock par value is zero for FnF. As for how FnF's capital stands now, core capital, the only one that matters for us imo, was -$170B at the end of 2019. Cancelling or converting the seniors to common adds $193B; the amount on the senior pref line on the balance sheet (doesn't count towards core capital) would move to retained earnings (does count). This gives the $23B total equity you see on the balance sheets. That still leaves us around $100B short of what I expect Calabria to require (the midpoint of Watt's two alternatives of $103.5B and $139.5B). There are still plenty of reasons for exchanging the prefs for commons: 1) It removes $33B of liquidation preference and $2B of dividend preference from in front of the re-IPO commons. That is a huge, huge deal imo. If I were a big-money investor interested in participating in the re-IPO, I would insist on this, and I wouldn't care about the exchange ratio because it wouldn't affect me. It is also $33B cheaper than redeeming the prefs (which accomplishes the same goal). 2) It allows FnF to tailor the weight preferred shares have in the post-release capital structure. $33B might already be too much for Calabria's liking, and given the rather high dividend rates on many series, it would make sense to convert at least those. Perhaps it would leave the really low-div series in place, though. 3) In times of stress FnF might need to raise additional capital. It will be much easier to do this with prefs than commons (using commons means open-ended dilution fears forever), so having fewer prefs in the capital structure to begin with makes this more feasible. This is also why I think the equity raise will be either all or mostly commons. 4) It's a way to placate junior pref plaintiffs in the lawsuits. 5) Both Calabria and Sheila Bair, albeit several years ago, defined a financial institution's safety and soundness in terms of its common equity. While an exchange is neutral from the perspective of statutory core capital, it does add $33B to common equity. https://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf Page 44: "the safety and soundness of institutions, which is defined as common equity" Bair's comments about common equity were about banks and Basel III, not FnF, but she has long been outspoken about wanting big banks to specifically have lots of common equity. Calabria choosing her as one of the directors was very telling to me. The directors will be in charge of the capital restoration plans, and if Bair holds true to form, she will both recommend a junior for common exchange and an equity raise involving all or mostly common shares.

Here is the post that I analyzed the C conversion deal. It should answer your questions. https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg382592/#msg382592 Short version: yield somewhat mattered (the 6.5% series got 85% of par, the >8% ones got 95%) and the market clearly didn't see it coming.

This just reads like a common shareholder wishlist. 1) Paying $50B for the warrants defeats the entire purpose of exercising them, especially in conjunction with retiring the seniors 2) Raising capital with mostly or all common shares makes far more sense than using more prefs: 2a) Both Calabria and Sheila Bair have said in the past that common equity is the best measure of a financial institution's financial health (this is another argument for why there will be a conversion, incidentally) 2b) Too many prefs in the capital structure (there are already $33B there!) seriously devalues the commons anyway 2c) If FnF need to raise capital in pieces at later dates, as capital requirements change, it is much easier to do it with pref issuances (FnF are no strangers to pref issuances, as evidenced by the many different series in existence); doing piecemeal common raises is hard because each one makes prior holders worse off, lowering the offering price. That means issuing commons now and prefs later as needed 3) Reinvesting the $100B of profits means another equity stake (that's what "investment" means), but that runs counter to retiring the seniors

It doesn't spell it out, but it does say forbearance and not modification. Forbearance = lump sum payment. Modification = extend the loan by a year (so your 30-year loan would become 31-year loan) or adjust your interest rate or spread the missed payments out over the duration of your loan. There are certain situations that after the fact you can apply to modify it, but the lenders can say no. So, the only guarantee for homeowners is that they can avoid paying their mortgage for 12 months. Odds are the vast majority will have to pay lump sum, but some might qualify for modified terms but that's a huge gamble for the homeowner not knowing if they'd qualify. Edit: With that said, there is an opportunity for savvy investors to skip their mortgage payments, invest the cash, earn some/any return, and have the discipline to pay the lump sum in 12 months. Most Americans aren't that savvy nor have that level of discipline. They'd likely blow it on a new luxury car or dining out 4 times a week at nice restaurants with the end result being they lose their home. This could turn out really ugly. Hopefully the wave of delinquencies gets pushed off far enough that Calabria has had enough time to get FnF fully recapped and weather the storm, but what investors would buy in seeing this wave on the horizon? Edit: actually, maybe it would just lead to a deluge of refinancings, not necessarily delinquencies. And FHFA could certainly direct FnF to be lenient on granting those if the alternative is a collapse of the whole system. Credit to seysmont on the Google Groups board for bringing up the refi possibility.

To me, receivership/insolvency seems to be the elephant in the room. Calabria said in his November Fox News interview, twice, that if FnF go insolvent he will wipe out shareholders (3:00 and 13:30). https://video.foxbusiness.com/v/6100433182001/#sp=show-clips It seems quite possible that FnF could sustain losses greater than the $23B of capital they have (combined). Then they would have to draw once again on Treasury's support to avoid mandatory receivership under HERA, which is triggered by 60 consecutive days of balance sheet insolvency (liabilities exceed assets). Calabria could choose to not draw the money if receivership is his goal. However, his interview makes it pretty clear that receivership is not his goal at all, and that he would only invoke it if HERA requires it. His quotes at 13:40 "If we are in a condition where the statutory requirements of receivership are met, then we're gonna do receivership and that would result in shareholders being wiped out. But it's my intention that we don't find ourselves in that position." and 14:00 "Even in receivership, if there's value then shareholders will get something, but if there's not value the shareholders get wiped out. So again if we find ourselves in a situation where they are insolvent, that's the path we will be taking." That last part is telling imo because Calabria ties receivership to insolvency, as opposed to the rest of the list given in 12 USC 4617(a)(3). https://www.law.cornell.edu/uscode/text/12/4617 Insolvency is covered by (A), (F), and (G), though this last one is tied to capital classifications that Calabria has refused to apply to FnF. While a wave of missed mortgage payments seems like exactly how FnF can deplete their thin capital margin, Calabria declaring receivership is fraught with danger. For one, 4617(a)(5) allows challenges to FHFA appointing itself receiver. You can bet your last dollar such challenges would immediately come from multiple angles. The more important consideration, though, is the court cases. If the NWS had never happened, then instead of FnF having $23B of capital to absorb losses they would have at least $148B, and more if any penalties or interest are applied to the overage (Treasury received $125B more in dividends than they would have if the NWS had never happened). As long as FnF sustain losses less than $148B, then a court victory or settlement that unwinds the NWS means that the receivership would have to be unwound as well, because the conditions for it being imposed would not have been fulfilled. This is where Calabria's refusal to stick capital classifications on FnF matters because if he did, they would certainly be critically undercapitalized: FnF reported core capital of negative $170B at the end of 2019 and receiving $125B from Treasury still doesn't bring that positive, therefore FnF would be critically undercapitalized because their core capital is negative. Unless the boards consent to receivership, but that's a whole new can of worms because not only would it be immediately challenged, this option isn't related to insolvency, while Calabria's interview makes it clear that he would only (?, correct me if I'm wrong) impose receivership in connection to insolvency. There's also the possibility that a settlement involves the seniors being retroactively wiped out (treated as if FnF could have paid them down at any time). This is problematic for two reasons, though: 1) The original PSPAs don't allow FnF to pay down the seniors any time they want. 2) Treasury would only return $25B in this case, and not necessarily all at once. If FnF sustain losses greater than $23B (or $48B if Treasury does return the whole $25B at once) then it justifies receivership after all. The plaintiffs would not agree to a settlement with this end result, though with the seniors gone and FnF with $25B in capital, the juniors get around 75% of par ($25B / $33.2B ~= 75%). In the end, I don't think receivership is a credible threat, at least as long as we assume that the plaintiffs end up prevailing in Lamberth or get granted backward relief in Collins. Another good point from seysmont (from the Google Groups board) is that if FnF end up sustaining enough losses to wipe out their $23B in capital, that means all holders of CRTs get zeroed out. Will Calabria and Mnuchin go the receivership route when this is a consequence? I doubt it. For all the bellyaching over the lack of economic sense that the CRTs make for FnF, it would be ironic if those are what keep FnF out of receivership.

swapping the sr pref for common would involve some arbitrary exchange ratio whereas the warrants were set in place 12 years ago and thus less random and more clean. Converting the seniors to commons gives UST around 99% of the commons ($205B of liquidation preference of the seniors vs $2.5B of market cap of the commons right now). If the seniors get converted, UST can name its ratio. They can also structure the transaction to convert piecemeal and avoid ever having a controlling stake, let alone the 80% that would trigger a balance sheet consolidation.

Or, more likely imo, another hedge fund is selling out. I believe this happened on Wednesday also, if this post is correct. https://investorshub.advfn.com/boards/read_msg.aspx?message_id=154435948

I have to admit, doing what the other party would have done is a pretty effective way to avoid their criticism.

In a recession the incumbent very rarely wins re-election. But given what was said at the Goldman meeting 2-3 weeks ago (source: Managing Director at major inv bank), and corroborated with what ACG is hearing (I know, I know, not everybody trusts them), the actions will be irreversible even if Trump loses. And they expect some of those actions to take place after the election, but during calendar year 2020. I verified with 3 lawyers that agencies can, in fact, take irreversible actions in a lame-duck period. So I don't think the election is all that big of a deal anymore. At the very least, it is only a fraction the importance it would be if irreversible actions didn't take place. The main thing we need is for the seniors to go away, whether by conversion to common or cancellation (could be some of both, i.e. partial conversion). That would truly be irreversible; the seniors cannot be reinstated once they are gone. This also ends the NWS, because NWS payments have been to holders of the seniors.

How do JPS holders agree to a conversion without a capital rule? I agree that the ideal kitchen sink PSPA negotiation, conversion and lawsuit settlement is coming up, especially with the favourable news cycle. Perhaps make the offer optional (but based on the common market price as of the day of the offer), with a deadline of some time in the fall to accept or reject? I agree that the capital rule is needed first, and the conversion would have to be completed before the re-IPO.

The perfect time to convert the juniors to commons might be coming up soon. In a couple of weeks, the 20-day average price for the commons should be somewhere between $1.50 and $2.00. Offering a conversion at 80% of par at that price both gives the optics of a haircut to the prefs, but also gives them a huge conversion ratio because while the common price has crashed, the par value of the juniors hasn't. Citi's prefs were converted when they traded around 20% of par, by the way.

I know who you're getting this from, and that same poster (who posts on Google gropus, Twitter, and SA) thinks that the recap will be handled just like a Ch 11 bankruptcy. If I can come around to agreeing with that (I'm nowhere close to an expert on restructurings, and the FnF recap might or might not be Ch 11-like), I will pour even more money into the prefs. That poster thinks the prefs will be money good very soon, as soon as FnF hit $33.2B in capital, maybe with a discount for time, and also thinks the commons are wildly overvalued right now, at least relative to the prefs. As for the actual content of your post (see, I got there eventually), I will do some research but yes, if Hindes has this level of influence over Biden then election risk is all but off the table. Hindes might even be able to talk Biden into keeping Calabria around until at least the re-IPO is done, assuming both that Biden beats Trump and that Calabria's removal is changed to be at-will by the president.

Thanks for posting. CNBC's take, FWIW: https://www.cnbc.com/2020/03/03/supreme-court-looks-to-weaken-consumer-financial-protection-bureau.html thanks. if Roberts sympathizes with liberals regarding cfpb but doesn't like the solution kavanaugh advocates, should we root for a punt (and take up collins) or deeming cfpb/fhfa constitutional (lose our case but calabria theoretically more entrenched)? I was about to start pontificating on how Calabria can't really do much towards recap and release if the Treasury Secretary is hostile to the process, which is what I have thought for a long time, but now I am not so sure. Assuming that Trump is voted out, if Mnuchin can get Treasury's part done before Trump leaves office (cancel seniors, exercise warrants, agree to release FnF or amend the PSPA to remove Treasury's release veto power) then Calabria could conceivably do the rest himself (the actual recap and release part). If that is the case, we really should be rooting for the CFPB's leadership structure to be ruled constitutional after all, giving Calabria some tenure protection. Of course, a new president could just fire him anyway and deal with the consequences later. For a while I thought Trump would do that with Watt. It would be ironic if the Collins case ends up being what scuttles recap and release rather than being what allows it, if it gives a new president the ability to fire Calabria immediately. That's somewhat of a parlay, but a plausible one imo.

If they do as you suggest, grant backward looking instead of forward looking relief, what's to stop every party going forward who gets targeted by cfpb/fhfa to make a timely legal claim against the agency? would ruling as you suggest effectively strip the agency of all powers going forward? thank you. My understanding (though someone please correct me if I'm wrong) is that once one plaintiff has received a remedy for a particular constitutional violation, no future plaintiff can receive a different remedy for the same violation, kind of like double jeopardy.

Perhaps the inexplicable Perry appeal loss in February 2017 was much more of a setback than we thought. Mnuchin might have been counting on that, and a subsequent denial of cert by SCOTUS, to give him the cover he needed when he made his now-infamous comment about getting FnF out of government control "reasonably quickly" in November 2016. Watt might not have cooperated though.

Perhaps these are better questions for Tim Howard; he might have a better idea as to how much of this comes from Calabria as opposed to Layton just spitballing. https://twitter.com/midas79_/status/1229833530789646336 "The two GSEs, assuming they come out of conservatorship ... will be subject to rigorous capital requirements (akin to what the largest banks have)." Is this a prediction, a desire, or (formerly) inside info from Layton's dealings with Calabria?

Good stuff! If SCOTUS really does find in favor Seila and grants retroactive relief (vacating the CID), I agree that this gives the Collins plaintiffs a ton of ammunition to get the NWS retroactively vacated, whether by court judgment or settlement. However, could someone else come in later and try to argue that the entirety of the PSPAs/conservatorships should be voided for the same reason? That would open a whole can of worms that I don't think many want to mess with.

As long as the search doesn't take too long I'm not worried about it not having been started yet. We're still 6 weeks away from the capital rule and there is little, if anything, FnF's advisors can do until then.

Speaking of my Twitter posts, the President's Budget appears to be giving a tell that they want FnF's footprint reduced by artificially increasing g-fees, with the extra proceeds going to Treasury so shareholders wouldn't benefit. https://twitter.com/midas79_/status/1227314350106578946

I eagerly await Chris's analysis here. For me, this might be the government's last gasp before starting settlement talks, with the government trying to figure out where they stand in case they need political cover for settling.

Actual news: FHFA hired Houlihan Lokey as its financial advisor. Next up: capital rule. https://twitter.com/hannahdlang/status/1224444959173931010 Breaking: FHFA has picked Houlihan Lokey as its financial adviser with a $45 million contract as the agency works to develop a roadmap for Fannie Mae and Freddie Mac to exit conservatorship

What's the next step for Judge Atlas in the Collins case? Issuing summary judgment, or are there other steps before that?