DocSnowball

Indeed very interesting. Agreed. A specifically risk-based capital standard both refutes the idea that FnF should hold "bank-like" levels of capital like Corker was asking about. It also would only matter after release from conservatorship, so Watt is at least partially paving the road for that. In addition it shows that Watt doesn't consider Treasury's backstop to be capital, not that he hasn't implied that before. Page 13 Moelis explains why they are different from banks in capital requirements "Dedicated mortgage insurers In assessing capital requirements, we should recognize the unique nature of Fannie and Freddie as single-purpose mortgage guarantors. Nearly 90% of Fannie’s and Freddie’s assets are effectively match-funded through issuance of MBS by consolidated trusts. As such, the GSEs are not dependent on deposit funding that can be withdrawn and are far less dependent on short-term funding (such as commercial paper) when compared to other financial institutions. In other words, unlike banks, the GSEs have limited liquidity and interest rate risk, instead operating under a proven insurance company model which precludes the possibility of financial “runs.” Given the unique nature of Fannie Mae and Freddie Mac’s businesses, and particularly the scale of their mortgage guarantee businesses, FHFA may elect to implement a more nuanced risk-weighting system for mortgages, as compared to the fairly simplistic (e.g., 50% RWA) approach applied to multi-product banks. Such an approach would be consistent with FHFA’s more granular Private Mortgage Insurer Eligibility Requirements (PMIERs).17 Doing so could also enable FHFA to encourage product innovation by recognizing the true economic impact of offsetting factors in determining the quality of a mortgage, as well as the risks associated with risk-layering (e.g. combinations of lower FICOs with higher LTVs or DTIs). A more nuanced approach to determining RWAs could also help to broaden the “credit box” that has historically excluded large groups of deserving Americans from obtaining a mortgage. Multi-product banks may themselves migrate towards such an approach, as proposed Basel IV rules now contemplate more granular mortgage risk-weights (including differentiation based on LTVs)." And page 14...once FHFA sets capital standards, Moelis can do the rest... "Role of FHFA in setting minimum capital standards The FHFA, which HERA endowed with broad discretion and authority to implement capital standards for the GSEs, will have the ultimate responsibility for designing and implementing final capital requirements.18 This authority, which has not been used or tested since the crisis, allows FHFA to impose a safe and sound regulatory regime tailored to the unique nature of the GSEs’ businesses and, designed to prevent the undercapitalization which led to their initial conservatorship. FHFA should be strongly encouraged to exercise this authority. While we have sought to provide credible assumptions in designing and testing this Blueprint, the architecture of the Safety and Soundness Blueprint can be applied to lower or higher minimum capital requirements.iv iv. There is an implicit trade-off between safety and soundness, on one hand, and the cost of guarantee fees and timeline to building capital, on the other. Imposition of more conservative capital requirements (e.g., 4% to 5% capital minimums) would require higher guarantee fees, in order to provide a sufficient market return to the larger amount of private capital that needs to be raised from third parties, and/or would necessitate a slower capital build. FHFA as safety and soundness regulator has the ultimate responsibility for assessing and evaluating this trade-off."

Page 262 from Fannie Mae's annual report talks about capital requirement framework. This possibly indicates how much capital will eventually be needed? Core capital ($121,389M) 1 Statutory minimum capital requirement $23,007M 2 Deficiency of core capital over statutory minimum capital requirement ($144,396M) and...core capital is ..."1 The sum of (a) the stated value of our outstanding common stock (common stock less treasury stock); (b) the stated value of our outstanding non-cumulative perpetual preferred stock; © our paid-in capital; and (d) our retained earnings (accumulated deficit). Core capital does not include: (a) accumulated other comprehensive income or (b) senior preferred stock." 2 Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and © up to 0.45% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances. Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (2) 0.25% of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be adjusted by the Director of FHFA under certain circumstances. ADDENDUM: Page 11 of Moelis blueprint http://gsesafetyandsoundness.com/wp-content/uploads/2017/06/Safety-and-Soundness-Blueprint-1.pdf "Pre-crisis, the GSEs were subject to minimum (core) capital requirements of 0.45% on their mortgage guarantee portfolio, plus 2.5% on their on-balance sheet loans and securities. While these requirements have been suspended in conservatorship, they continue to be calculated by FHFA and currently equal approximately $43 billion of core capital under the pre-crisis regime. This amount of capital is woefully inadequate, representing less than 1.0% of the total asset values and guarantee notional amounts at the Enterprises.ii At present, under the constraints of the Net Worth Sweep, the GSEs’ capital falls far short of even this low minimum. Setting new standards Our Safety and Soundness Blueprint targets $155 to $180 billion in permanent capital at the GSEs, equivalent to over 8.5% of risk-weighted assets or 3.0% to 3.5% of total balance sheet assets (including unfunded guarantees). This equates to approximately four times the pre-crisis GSE capital requirements and is equivalent to approximately 150% of the existing capital requirements the Federal Housing Administration (“FHA”) is subject to, despite the substantially higher quality portfolios guaranteed by Fannie Mae and Freddie Mac. Furthermore, this permanent GSE capital would be augmented by a reduction in risk-weighted assets provided through the issuance of CRT securities (projected to reach nearly $100 billion, or approximately 2.0% of total assets, at 2020 year-end). Including the use of CRT and loan loss reserves, the Enterprises would achieve total private claims paying resources in the range of $280 to $305 billion (or 5.5% to 6.0% of total assets).iii" FNMA_Capital_Requirements_Page_262_Annual_report_2017.pdf

And thank you Senator Toomey for summarizing the true status of the loans repayed by Fannie and Freddie in a minute. If R hold the Senate, a big if, he may end up being the chair of the Banking committee. https://www.americanbanker.com/news/hatch-retirement-paves-way-for-makeover-atop-banking-panel "If Crapo gives up the Banking Committee gavel next year and the GOP holds the Senate in midterm elections, Sen. Pat Toomey, R-Pa., would stand in line potentially to become chairman of the banking panel." "...the biggest impact of a possible GOP changing of the guard on the Banking Committee would perhaps be on housing finance reform."

I have been invested on this for close to 8 years, probably done more research than you and may even have more shares than you. Where is your sense of humor? After so much time and struggle a bit of humor can offer relief and a laugh is what I aimed for. But if you insist on being manly we can discuss our differences in person. I live in Miami Beach, FL. Unrelated to this - rros: Your comments are always so insightful and educational to me. Thank you!

also talks about releasing some papers in the near future related to capital requirements Mel Watt Full written statement https://www.banking.senate.gov/imo/media/doc/Director%20Watt%20Written%20Statement%2005222018.pdf

also talks about releasing some papers in the near future related to capital requirements

What about one where HERA is challenged as unconstitutional? Haven’t seen that discussed yet, only judges saying HERA lets FHFA do what is it wants.

Very sorry to hear about your divorce. Hoping and praying for things to work out for you and your family

I was going through CoBF welcome page and noted Sanjiv's write up about the coordinated short attacks on Fairfax in 2002 and SAC capital being involved in that. I've been a shareholder of a little biotech called Achaogen for the last two years. Share prices peaked mid 2017 going from 2.70 the year prior to 27, matching along with peak long ownership of Point72 to 5.5% of the company. Then on, Point72 has been selling, magically knowing when to call the top, and now has only put options on the company per last 13F filing end of March. Share prices have come down to $12 despite the company executing on its milestones at every step. It is now among the most shorted biotech stocks with >50% short selling. I'm assuming all this is perfectly legal, to buy, sell and short a stock. But boy, what a coincidence? https://fintel.io/soh/us/akao/point72-asset-management "Corner of Berkshire & Fairfax On February 20, 2002, I launched the predecessor to this investor forum. In that incarnation, it was named the “MSN Berkshire Hathaway Shareholder’s Board”. Originally created as a gathering place for myself and a few friends from Omaha, it attracted a small group of shareholder’s in another insurance company called Fairfax Financial. In December 2002, Fairfax listed on the NYSE, where within a month it had been targeted by short-sellers in a coordinated attack. A flood of Fairfax shareholders joined the investor forum, as there was a limited amount of information available about the company, as a cabal of analysts, journalists and hedge fund managers started disseminating both accurate and inaccurate information. Shortly thereafter, we contacted the company to inform them that a number of shareholders felt that there was a coordinated attack being perpetrated against the company, preying on recent vulnerabilities from insurance losses and troubled acquisitions. That there were anonymous message board posters on various sites, including this one, who were discussing company issues and indicating a specific new tactic would be taken very soon in the attack against the company. Within a day or two, the new attacks against Fairfax would become apparent, and either the poster was part of the cabal, or had information related to it. In July 2006, Fairfax filed a massive lawsuit against the alleged cabal, which included one SAC Capital and its notorious founder Steve Cohen. The very same Steve Cohen who was subsequently indicted by the U.S. attorney general, alleging a massive cultural deficiency at SAC Capital, where Steve Cohen purportedly ignored blatant acts of insider trading. In a sense, the illegal activities of SAC Capital and the other alleged members of the cabal, helped build the membership base of this investor forum. In February 2009, after 7 years, we shut down the old “MSN Berkshire Hathaway Shareholder’s Board” and transitioned members over to the new “Corner of Berkshire & Fairfax” investor forum. The name chosen by our two major influences, Berkshire Hathaway & Fairfax Financial. Today, with over 3,000 members, the CofB&F investor forum is one of the more vibrant, moderated, investor forums on the web. Members, who come from very diverse backgrounds with an enormous knowledge base, sharing with each other, building wealth and perpetuating the teachings of Ben Graham. I thank you all for your contributions! Sincerely, Sanjeev Parsad Founder of Corner of Berkshire & Fairfax"

My computer screen and headphones shed tears listening to the argument and reading the draft of the arguments. Judge comments that the Third amendment effectively nationalized the companies. He also questions "So what value is left for shareholders after the Third amendment?". Defense argues that the companies were already worthless at the time of the third amendment...Judge comments "its worth nothing then, and its worth nothing now - zero then, zero now...zero in the future"..."they are investors and they are crazy enough to keep doing that..." Judge "Could you give me a scenario where there could be value (for the shareholders) under the third amendment?"...@31 minutes...listen to the response for what it's worth

This is now in the too hard pile for me. Legal thesis is all but disconfirmed. Administrative action thesis is too hard to predict. Will look to reinvest when the companies offer shareholder rights again in the future and are available at a margin of safety. Good luck to everyone, and very sincere thanks for sharing your thoughts and feelings on this journey for the last few years.

https://www.bloomberg.com/news/videos/2018-05-01/fannie-mae-ceo-says-conservatorship-wasn-t-long-term-solution-video Wondering again after watching this from Fannie CEO - isn’t Fannie Mae turning into a platform company, connecting buyers and sellers of secondary insurance?

Circling back - thank you to all those who commented in the past. I’m almost done with Professor Damodaran’s Valuation course, and as a non finance person (of the storyteller kind), have found it really really helpful to become more disciplined in my storytelling. In the same vein as the comments, having a coherent model helps one of identify the key drivers of intrinsic valuation. Just lays it out to crystallize thinking and minimize biases. Having anarrative laid out helps to see going forward how the story is unfolding vis-a-vis the intrinsic valuation Finally, this great post and the model I used to valuea young growth small biotech Achaogen was very eye opening when looking at young growth companies - perhaps one of the hardest areas to value! http://aswathdamodaran.blogspot.com/2013/09/many-slip-between-cup-lip-from-forward.html

Also asset allocation, matching cash liquidity with major life events, and risk management (occupation specific disability insurance, umbrella insurance) if that is on topic

Email them ahead of time to ask what they are most interested in. How to find a good financial planner. Lay out your own conflicts and how you make money clearly up front. State your objectives and take home message early on. Talk about financial planning to them in context of their lives where they settle down much later and catch up on their investments, and talk about minimizing taxes. Also any areas where their investments will be safe from litigation claims. Rolling over after leaving employers. If they are active investors, discovering their investment philosophy and circle of competence. Happy to look at your material if you’d like (I’m an MD MBA employed with a University)

What is not simple about this? Goal: create a secondary liquid market for mortgages to stimulate housing. 1. borrow at the lowest possible low rate (from Fed). 2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%). 3. pool them to securitize. 5. issue securities (mbs) backed by the pool. 6. guarantee payments of principal and interest on the mbs in exchange for a fee. 7. sell the securities to institutional investors. 8. hedge interest rate. 9. make coin. risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring. Thank you - yes well laid out. When I made the investment I believed that some of the profits legally belong to us as part shareholders - with time I am learning to be patient and wait out rebuilding of capital and restructuring. I don’t know what the ultimate business model will look like when we get there. Perhaps not too different from what you’ve laid out. When I compare this to my own circle of competence areas in biotech, it is not simple for me. Thanks for sharing your insights

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business, run by honest and competent people, with a durable competitive advantage, available at a wide margin of safety? Probably fails all four filters. The only way this works is - you know your initial price, you know par, you figure out odds of success and realize the market is under weighing the odds because it hates this investment- then you discount par for time value of money and how long you are willing to stay in the speculation. You weight your portfolio to how much you can lose to zero (2% for me). Then you wait and wait and wait, or preferably do something else and forget about this. I think someone deciding to get out of this investment cannot be faulted. If I hadn’t seen some gains and had house money as the 2% I would have too. And I cannot see the logic in owning commons, sorry Ackman. And I have a lot more than Emily to learn! In fact the education from this investment has been totally worth that 2% I have in it.

The entire post is saddening to read. If the companies are being steadily weakened over time, this turns into a one off gamble rather than a long term investment where they dominate the market after release from conservatorship. Hard to say how much of what he writes is true wrt CRT - maybe someone who has competence in that area can comment. Do Fannie and Freddie make money by selling CRTs? If yes, then aren't they transforming into a platform for secondary mortgage, which is not a bad thing long term if they are derisking themselves and acting more like a marketplace. Or does the risk still stay with them and only the profit margin shrinks?

lol there are people here who actually think the wall is a good idea? amazing. Well said

Would be so lovely if GSEs can pay for the wall and all this ends happily

Thank you rros.

Do we know which hedge fund or mutual fund owns pre NWS preferred shares? Would appreciate the reply and how I can verify that. Have been considering buying more pre NWS preferreds this quarter. TIA

The nws has not been upheld in any court, as far as my limited legal understanding goes. Instead, courts have upheld Lamberth who said there is no possible judicial review of what has been done stopping right before looking into the nws. So not the same. Lamberth ruled "go talk to congress". In a way, the Supreme Court has done the same. And in an strange way, so has Mnuchin. Although he appears to be changing if Paolo -who has never been right- is right. Thanks, appreciate your thoughts, as always - it may just be my problem then, that understanding the situation is outside my circle of competence!

However, with the NWS being upheld by the courts so far, shareholders are dependent on the kindness of Mnuchin now and legally the companies have not even paid back a cent of bailout money. Are these not the fundamentals? I cut my position down to 2% of portfolio given the increased risk of zero, or a long delay in getting paid back, or not getting close to par if you’re an optimist.

A question for the legal experts here - What does the Supreme Court decision really mean to the legal question that was asked - that it agrees with the lower courts that FHFA can do whatever it wants per HERA? Does it also mean that legally the companies have not paid down a cent of the original bailout amounts yet to Treasury? Feels like I got the legalities completely wrong here...or at least so far. Thanks in advance for sharing your thoughts, much appreciated