Midas79

I say that Calabria will be offering the conversion because he, and not the boards of directors, will be the one making the final decision. I certainly agree with your two reasons. Another one is that if FnF's capital requirement happens to rise in the future, it's much easier to sell new preferred shares than new common shares on a piecemeal basis. The first time you try to raise commons for that purpose it works, but any time after that each potential group of investors won't know if the same thing will happen to them again. All the more reason to clear out the existing prefs, especially in a way that doesn't cost FnF any cash.

The main problem is that we don't really know how much capital Calabria will insist on before releasing FnF under a consent decree. The common knowledge seems to be the current statutory minimum (around $23B for Fannie and $17B for Freddie), but I don't think this is necessarily true. That's still a leverage ratio of 137:1, and with Calabria continuing to mention that ratio, I don't see something higher than 100:1 being enough. 1. I don't think the capital rule has to spell out the release threshold. It will only determine the levels for FnF's capitalization standard (Adequately Capitalized, Undercapitalized, Significantly Undercapitalized). The fourth (Critically Undercapitalized) is half the statutory minimum by HERA, and is not subject to Calabria's determination. 2. Correct. We can be certain that the release threshold will be lower than Adequately Capitalized, but not which level below it. It won't necessarily have to be right at one of those levels, but I would be surprised if it wasn't. Calabria's oversight over FnF changes form at each level. 3. I think the "statutory min of $40B for release" narrative came from the $45B earnings cap in the September letter agreements. But in my opinion it's a coincidence. Also, the PSPA amendment needs to come before the consent decree, as do resolutions to the lawsuits. The seniors represent such a drag on core capital that they cannot remain in place, otherwise FnF remain stuck in Critically Undercapitalized. I know you didn't ask this, but I still would rather hold at least 90% prefs (vis a vis the commons) because even if release is granted at the statutory minimum, I believe that a conversion is highly likely, which would cement the juniors' outperformance. There are plenty of reasons for Calabria to offer a conversion, and no good ones for him not to.

I think the selloff is happening because Calabria opened the door to release with consent decree happening after the inauguration. That means at a roughly 50% chance that it never happens; the Dems seem to be okay with the status quo. I mean really, 2022 or 2023? Wtf. I'm rather tempted to just sell a large chunk and wait, but unfortunately I don't have any other compelling investment ideas at all. It's this or cash for me.

When it comes to raising capital, will it be the boards of directors or FHFA that chooses the form of the capital raise? I see a lot of conflicting points about who owes what duties to existing shareholders, etc. I ask because Brickman prioritized speed in hitting capital mileposts, but that might mean more dilution to existing commons compared to taking things slower. Is he allowed to do this?

Yes, those are the right numbers if Calabria adopts Watt's rule as-is.

Going further along this line of thinking, Calabria and FnF has different authorities and obligations depending on whether the companies are classified "undercapitalized" or "significantly undercapitalized". Undercapitalized: https://www.law.cornell.edu/uscode/text/12/4615 Significantly undercapitalized: https://www.law.cornell.edu/uscode/text/12/4616 A big one, in my opinion, is 4616(a)(2)(B), which would make it difficult (if not impossible) for junior pref dividends to be paid while FnF are still classified "significantly undercapitalized". Perhaps Calabria could find a way to weasel out of this, but it would be much easier to pay dividends if FnF were just "undercapitalized" instead. Furthermore, if Calabria does allow release at "significantly undercapitalized", he will still have pretty tight control over the rest of the capital raise process. Anyone with the idea that FnF will be released at "significantly undercapitalized" and that the boards of directors will have control over how to build the rest of the capital is sorely mistaken. Calabria would remain in control.

There are three different capital levels to consider, and perhaps four. Full, top-line risk-based Full, top-line minimum Capital needed for release with consent agreement (this last one might also be split into minimum and risk-based) When we hear things like 4%, that's generally referring to the first of these. But it's really the third, and the core capital needed for it, that should be concerning us and new investors. Lots of things can mitigate risk-based capital, the same cannot be said for minimum capital. There are four capital classification levels in HERA. https://www.law.cornell.edu/uscode/text/12/4614 Adequately capitalized: Meets both risk-based and minimum capital standards Undercapitalized: Meets minimum capital standard but not risk-based Significantly undercapitalized: Meets neither standard, but has core capital above the critical capital level (half the statutory minimum) Critically undercapitalized: Meets neither standard and has core capital below the critical capital level FnF's core capital is hugely negative right now, but getting rid of the seniors brings it back to positive. With the retained earnings FnF have now, they should have enough to get to "significantly undercapitalized" once the seniors are gone. One bit of speculation I saw is that the trigger for release with consent agreement might be moving from "significantly undercapitalized" to just "undercapitalized". If this is true, note that "undercapitalized" requires meeting Calabria's minimum capital standard in full. If he sets it near Watt's, we are looking at a minimum capital requirement of $100-140B that must be met prior to release. For a while it was looking like FnF might not need to raise that much capital in a stock offering, but Calabria asked a couple of times if anyone has $100B lying around to recap FnF. Release at "undercapitalized" supports a $100B equity raise.

Thank you for this, it has brought me back from the ledge. That last sentence is particularly good.

Here's a link I got on Twitter. https://www.fbo.gov/index.php?s=opportunity&mode=form&id=0c268c2f435189a7d727ecbd5c87a8a8&tab=core&_cview=0 I just can't shake the feeling that this is rather bad news. The timeline has been slowed considerably. Phase I, which is basically building the roadmap, will take 12-18 months and Phase II, implementing it, will take 1-4 years. That's far, far slower than I thought this would go. Too many things can go wrong the longer this takes. I had assumed that the amendment and capital rule would be done by March at the latest, setting the stage for a summer IPO as Mnuchin said that he wanted. Now it looks like the IPO might even be pushed beyond Q1 2021, which introduces the election risk that I thought this administration was trying to avoid.

Replace "upside" with "downside" and I would agree with you on the commons. I think there is a very high chance that the juniors are converted to commons at a ratio better than that in the market, so they will share any upside the commons have. I think the price action is explained by the typical money flow of commons to liquid prefs to illiquid prefs. The commons are always the first to overreact to anything.

assuming Mnuchin celebrates jewish high holy days, today is the day. unless the deep state at WH scores another victory Unlikely as it is, is there anything preventing them from releasing news about a letter agreement over the weekend or even later on? All that matters is that it is signed before the end of the day on the 30th, not that the public is told about it. I know I'm grasping at straws here, though. There really is no reason to wait this long if this is really what they're going to do.

Good point. I must be severely underestimating the political and logistical difficulties of the recap and release program, because it seems very easy to just amend away the NWS, issue Watt's capital rule as-is (with Calabria using his statutory to impose greater standards if he wants), and do a massive equity raise in January or February followed immediately by release. That should be early enough that it will be out of the news cycle by the time campaign season really gets going.

No kidding. The letter agreement in December 2017 came out on the 21st, and all indications are that this is just a copy of that with bigger numbers. Maybe there's something more to it, but rushing negotiations on a 4th amendment is not necessary; the 30th of this month is not a hard deadline for that while it is for the letter agreement.

I finally got around to doing my analysis of the Citi conversion. Citi's official announcement: https://www.citigroup.com/citi/news/2009/090227a.htm Citi's summary of the terms: https://www.citigroup.com/citi/news/2009/090227a.pdf?ieNocache=262 Series AA, E, F, and T were offered conversions. According to this link (https://preferredstockinvesting.blogspot.com/2009/09/citi-preferred-stock-conversion-rare.html) the conversion was voluntary, and it appears that each shareholder could choose which shares to convert. Another story I found (https://www.forbes.com/sites/dividendchannel/2014/10/30/citigroup-non-cumulative-preferred-stock-series-aa-ex-dividend-reminder/#666b206069c6) shows that C.PRP (Series AA) traded at $28.60 on 11/3/14 and was still paying dividends, so evidently it wasn't called before then. This series pays 8.125% dividends, and given the low interest rate environments prevailing at the time and now, I would expect the high-div FnF series to similarly trade above par post-release. I misplaced the link that said this, but it said that series T (6.50% rate) was converted at 85% of par at $3.25, and the other three (AA 8.125%, E 8.4%, F 8.5%) were converted at 95% of par at $3.25. This link also calculated $3.25 as a 20-day average; the closest I could get was $3.24 as the average of the 20 closing prices up to and including Feb 25. But HoldenWalker on Twitter said that the 22 days up to and including Feb 26 average to $3.2495, so I think this is more accurate. That means that the market was not given a chance to react to the conversion at all. On Feb 27, the day of the announcement, the prefs spiked and the commons tanked. Of course that hurt the converted prefs, but the commons eventually got back to the $3.25 mark after a few months. Also, they still came out way ahead even in the immediate term as shown below. On Feb 26, Series AA ($25 par) closed at $5.48. Historical prices on these are really, really hard to find. The only source I found was this page (https://www.preferredstockchannel.com/symbol/c.prp/), and the only way to get Feb 26's closing price was to put in 2/26/09 and 2/28/09 in the Performance part on the top right, and then click "Chart $10K invested in C.PRP". Citi commons closed at $2.46 on Feb 26, for a ratio of 2.3:1 the day before the conversion. At 95% of par at $3.25, Series AA holders ended up with 7.31 commons for each $25 in par value, more than 3 times the previous day's ratio. For Series T ($50 par, https://www.preferredstockchannel.com/symbol/c.pri/), the Feb 26 closing price was $10.54, for a ratio of 2.14:1 (normalized to $25-par). The conversion ratio was 85% of par at $3.25, or 6.54:1. This again represents a bit more than 3 times the previous day's ratio. I couldn't even find price data for Series E and F, but I would imagine that their conversion ratios were similar. This means that if Treasury and FHFA follow this playbook, current junior pref holders can expect to receive roughly 3 times as many commons in a conversion than they would by converting in the open market by selling the prefs and buying commons. And the commons wouldn't necessarily have time to react to the possibility, given the relative price movement immediately following Citi's conversion. I think Dick Bove has it exactly right, that owning the juniors now is a (potentially much) cheaper way to own commons in the future, compared to owning commons now. Of course the current litigation complicates things, but a payout to common shareholder plaintiffs plus a generous conversion (perhaps really generous) could get things done pretty fast. It appears that Treasury is no stranger to really generous pref-to-common conversions.

I'm going to respond to your post on Tim Howard's blog here, the one about why Treasury never charged a commitment fee, because I'm not sure my post will survive over there. I believe that the commitment fee wasn't charged before the NWS because FnF didn't have the money to pay it, and wasn't charged after the NWS because Treasury was getting all the income anyway. FnF have never been in a situation where they can afford to pay a separate commitment fee. Pollock's use of the entire liability base of $5.5T when calculating the fee is asinine and indefensible, but if the NWS had never happened and the seniors were paid down (and able to be paid down), I could see Treasury restarting the commitment fee once the seniors were paid off. But that is 1-2 years of back fees, not 11, and only calculated on the $250B outstanding. I also made my own spreadsheet to calculate the 10% moment and overages based on different dividend rates (if the 10% were to ever be recharacterized for some reason) and commitment fee rates. While Pollock, as far as I know, coined the "10% moment" term, anybody could do the calculations based on FHFA's Tables 1 and 2. https://ethercalc.org/r9ddbdfjw46x

A few of the cases in front of Sweeney seek to be certified as class actions. Does anyone know if Sweeney ever actually certified them? If not it should make settlements easier, right? Were there any other class actions in other courts?

The liquidiation preference had already hit $187B when the NWS was put into place. It has only increased twice since then, due to the 2017 tax bill forcing a DTA writedown, and the December 2017 letter agreement. In a world where the NWS never happened, FnF would have most likely kept all the extra cash they made over the 10% cash dividend. I say this, rather than pay down the seniors, because I don't think the SPSPAs even allow the seniors to be paid down at FnF's (or FHFA's, in this case) discretion. The only two ways I remember seeing to pay down the seniors were if either the funding commitment was pulled (never happened) or FnF issued stock (the proceeds of which would have to go towards paying down the seniors). In fact, in a world without the NWS, Treasury would have likely reinstated the commitment fee on its funding commitment because FnF would have been able to pay it. That means that the $131B that FnF would have had (total dividend payments over the 10% rate) is somewhat less. Extinguishing the seniors is a way to get the cases settled without Treasury having to send out 12 figures worth of cash, but I don't think a court would have mandated that because I don't think the paydown clauses were ever challenged by the plaintiffs.

The 6-12 month period seems excessive. It's even worse when you consider that Calabria pegged the IPO date at Q4 2020 or Q1 2021. Pushing things out that far is really risky. It's not like investors need some sort of track record of earnings. They know exactly what they are getting. 6 months of retained earnings could be Q2 and Q3 2019, putting a Q1 2020 IPO in play, if not for the Q4 2020/Q1 2021 comment. Election season is going to take more and more of Trump's attention as 2020 goes on. I bet he wants this done ASAP. If investors are willing to put in $100B after 12 months of retained earnings, why would they not be willing to put in that same money in Q1 2020?

Further thought on the seniors. Calabria said today that the letter agreement will increase the seniors' liquidation preference by 1.5-2 years of earnings. That's right around $30B. Adding that to the seniors would bring FnF back to the 10% moment, give or take. Then Treasury could just straight up keep the $25B in question, no tax credit at all.

Killing the seniors and the $25B putback is what the Collins plaintiffs wanted. Is it really a settlement if FHFA and Treasury just knuckle under and give them everything? I don't know if the plaintiffs would really hold out if Treasury offered to kill the seniors and NWS but keep the $25B, or part of it. It's a tense negotiation. The plaintiffs have a lot to lose too if this doesn't all get done by the end of 2020. If I were them I would be leery of taking too hard a line at the negotiating table.

That tweet is wrong about one thing: the juniors already do count towards core capital. If you go look at one of the 10-K forms they show their core capital amount on one page, and if you go to the balance sheets and add up everything in the equity section other than the seniors and AOCI, it adds up to exactly that number. As of the last 10-K, FnF had a combined core capital of -$181B, but that includes the juniors. Calling in the juniors, for example, would drop that by $33B to -$214B. That's why calling them is not going to happen. Converting them to commons keeps core capital the same by contrast. Either extinguishing the seniors or converting them to something that counts as core capital (commons or non-cumulative prefs) would add $187B to core capital instantly. That's why this is such a necessary step.

What exactly is a consent decree? https://twitter.com/HoldenWalker99/status/1172302913227522048

I took it the other way: instead of retaining earnings for a while and then doing an IPO to build the rest of the capital, it would be the reverse. Do a large IPO soon, though not large enough to get all the way to fully capitalized, and release FnF upon its completion. That's how you get the money to invest, by promising them voting rights immediately. Then FnF would build up enough capital via earnings to meet the requirements over time. We did hear both Mnuchin and Calabria say that third-party capital was going to be needed. It can't be all retained earnings. My assumption had been that there is enough investor appetite to do both at once, as in a $150B one-shot IPO that completely fulfills Calabria's capital requirements with release happening immediately after. It appears that assumption was incorrect for one reason or another.

Calabria might allow release before all the capital is built? That is a huge game-changer if true. https://twitter.com/KatyODonnell_/status/1172262431671881743 Calabria talked next steps in an all-staff mtg today -- raising capital buffer in a limited way and having GSEs operate under a consent agreement at point where they have enough $ to leave conservatorship but not enough to fully comply w/ new capital rules

$31?? That's piss poor He probably meant on the $25-par shares. 125% of par would certainly be fine with me but I'm not going to hold my breath.