Cox022

Another possible take on Calabria's 'roadmap with mileposts' could be: step 1 would be to renegotiate the pspa/stop nws/retain earnings/other tweaks. Step 2 would be let congress react and let the dust settle, then step 3 would be continue with an earnest capital raise. I fail to imagine another way Treasury threads this needle to fully recapitalize the companies while on the other hand saying congress should act. According to Calabria's comments, step 1 is going to happen. If congress doesn’t do anything soon after step 1, I think they'd be less likely to do anything at or after step 3, because at this point, risk aversion will be an even bigger factor than usual and any big action congress could take could be easily be perceived as hurting the housing market. I don’t say this with a lot of confidence but it seems logical.

short twitter thread from the author of the AB article just posted.

https://www.nytimes.com/2010/09/29/business/29aig.html Just a small tidbit from an article just a few days for the public announcement of AIG's recapilization. The principle contained in the last sentence was the interesting part, imo, not necessarily the details about warrants of preferred conversion. Treasury took steps necessary to protect the value of its common shares. AIG recapitalized by Treasury converting all its commitments to AIG into AIG common equity. Treasury owned 92% of AIG after these conversions. AIG issued $3B of stock, and warrants to all existing shareholders (if i have that right), and Treasury started its process of selling down its shares over the next 2-3 years.

I dont sub to seeking alpha pro +. I wonder if the contents to this article are interesting/relevant? https://seekingalpha.com/article/228665-treasurys-surprise-follow-up-on-aig

I am not super confident in the following, but here are some thoughts: I think an administrative approach that takes into consideration how politically palatable any changes are reduces this uncertainty. The impetus for future legislation is lower the more political consideration is put into administrative reform. Administrative reform that protects the 30-year mortgage, supports low income mandates, protects taxpayers, and makes at least a small attempt at creating competition seems like a palatable package. I can't think of anything in that package that a large enough group of lawmakers would dislike so strongly to overcome inertia to legislate change. The banking lobby would prefer something else, but decision makers in the administration seem to be acknowledging TINA. Also, there is a 90 year history that shows how difficult it is to legislatively change the housing finance system. I would guess, in lieu of getting congress to act, the administration/treasury would instead make changes that lawmakers wont care enough to do anything about. I think the halo effect of being 'government sponsored' will go along way for incremental capital providers. Buffett would think twice and ask the same question you are, but not many others.

Otting's letter looks like he is outlining all the authority FHFA has and he has as director. No mention of congress. At the end, he merely said, paraphrasing, 'I intend to accomplish the FHFA's mission. As we develop a framework to end conservatorship, I welcome your insight and perspective.' I dont like reading too much into things, so those are just merely observations.

The figures I am referencing were the result of a hasty google search and could be wrong. The biggest corporate bond issuance to date is $50B, and in 2018, across the entire globe, IPO proceeds were $200B. The largest single IPO in history was Alibaba, raising $25B in proceeds in ~2014. These figures make me think that for the GSE's to raise the capital they need, they require all the help they can get. In my view, this makes it more likely Treasury treats their preferred stock in such a way to help raise as much capital as possible. I dont know exactly how they do that, but in my view - whatever that action is - is favorable to our position. Maybe that's too much a leap in logic but it makes sense at the moment.

Sorry for the long post, but I thinking through his has been helpful to me. Someone smartly asked about downside. The following line of thought, which has bugged me for years, concerns what happens to legacy common and preferred shareholders. Negative: What benefit do current common and preferred shareholders provide to these institutions which need to raise capital? What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared? Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal. After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? Therefore, as an issuer, if you felt like your legacy shareholders would limit the attractiveness or potential of your capital raise, it might seem like it would be in your interest to dispose of them. Positive: -As an owner of the business, like Treasury is with their warrants, it seems like if you were issuing equity to raise capital, it would be in your interest to have a pre-existing market for your shares, and you would additionally prefer that those shares have a healthy valuation to help you raise capital. On the flip side, as the issuer, you may be at risk if the market for your securities was really depressed or too volatile-which could raise the preference for a clean slate. [We havent discussed re-listing the securities on the NYSE but I’m curious if the timing of any re-listing implies what may come next.] -If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay. Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower). [i sense these last two points which are pro shareholder are stronger than the points I made which are negative to legacy shareholders. The reason is that Treasury has skin in the game with the warrants and I have a hard time thinking that the capitalists and bankers-turned-politicians just throw that away. I think it’s fair to expect them to protect their position in the warrants just as it was in their interest to vigorously defend all the litigation.] - The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required. Now one would think Treasury has to play fair. It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it. Weird analogy but I think it makes the point. A side note as food for thought…One has to wonder: is treasury worried about raising capital in institutions where the general perception is that these institutions ‘failed’ and how does that shape Treasury’s decision making? It is also worth keeping in mind that to raise capital is essentially to ‘sell’ the companies to investors. So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money. Perhaps that is what we have been witnessing lately. Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

Petrou on Mnuchin's comments this week and GSE reform. http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance

From Twitter. Maybe Tim and other knowledgeable people can expand on this, if accurate. I didn't click through to the link so no comment.

sorry snarky, idk. I think Joe Light has the quotes right in a twitter thread.

did i hear a somewhat shareholder-friendly tone from corker? Was he implying he recognizes fair treatment for the parties involved? What did you guys hear? Maybe I was just hearing what I wanted to hear. I'm referring to the Senate Banking Committee hearing going on right now with Mnuchin

Seems like Joe went out of his way to avoid writing the sentence, 'FHFA's regulator wants Fannie and Freddie to become recapitalized and turned into shareholder-owned utilities.' If that sentence was not true, I'm sure he would be quick to point that out. I'm just speculating for fun. Joe's work is much better than past coverage by his peers, imo *ducks for cover*. As with everything else, we will just have to wait for source material to know for sure.

Big picture, these developments are very favorable and congrats to those who saw this development coming (finally something common-sensical happened! We've waited a long time for decision makers to become aware of economic realities that support continued existence of GSEs). Still a long way to go but odds on average seem to keep improving. With regards to 'backing up the truck', or how to update the odds of a good outcome, I found that Mr. Howard's Comment on his blog (Dec. 19th) helpful. Here it is without comment since I'm still digesting it: I have only owned and still own the Jrs. So I am biased. Two -humble- thoughts on T.H.'s post. Jrs. aren't equity as in common equity. Lower sales, reduced market share, reduced earnings and diminished growth prospects will not affect the Jrs. so long as there is enough retained earnings for the payouts. As for continued conservatorship, once private capital smells the money it will not take long before there are numerous participants in the market and the companies are let free. Money will not wait a century and the housing market is about to leap forward. Good points. It's hard to judge a future competitive landscape without the details of how C-W plans to promote competition. It is not obvious to me how one promotes competition without negatively hurting the housing market (which I'd speculate would happen if GSE activity was constrained). Yet another detail to wait-and-see. Supporting rros' point: if the anti-GSE crowd finally gets a fair shot in the mortgage market (a war they've been waging for decades), then I suppose you could assume they will anxiously enter the playing field.

Big picture, these developments are very favorable and congrats to those who saw this development coming (finally something common-sensical happened! We've waited a long time for decision makers to become aware of economic realities that support continued existence of GSEs). Still a long way to go but odds on average seem to keep improving. With regards to 'backing up the truck', or how to update the odds of a good outcome, I found that Mr. Howard's Comment on his blog (Dec. 19th) helpful. Here it is without comment since I'm still digesting it:

Thanks cherz.

The board was discussing risks that some of us see on the horizon. I’m an enthusiastic owner of these securities but here are some items that I worry about. My lingering worry is that old shareholders are left behind in any restructuring/reform plan and are left with the court cases for resolution. Really strange things happen in bankruptcies and reorganizations that seem hard to predict beforehand. A related worry is that the government warrants are not attached to the hip of the common stock (not pari passu)…meaning the warrants become valuable to the Government in a new structure with the common stock left behind for some different fate. I don’t have strong footing on this issue to know how likely it is. If we ask nicely, maybe Merkhet & cherzeca can tell us if they have updated their views on this issue since commenting on it a long time ago. I don’t post much, so since I’m here: 2 other thoughts. Here’s a thought I have about the common stock since the Moellis plan debuted. As a logical exercise, should a common holder reasonably expect a better outcome from the common stock than the one demonstrated by the Moellis plan? I think all common holders should contemplate that question. RNC Document. If the principles in the RNC document take hold that would be an extremely favorable shift in momentum. I’m stating the obvious but with added color. That the cornerstone of any discussion on the future of the GSE’s starts with ‘these entities are worth $100B to us’ is a huge shift in psychology. Any plan for the GSE’s that hurts us has to then answer the question: why is your proposal so good that we should forego $100B? As we have all discussed since the beginning: it’s in these fools’ interest to capture the value of the GSE’s, and many of us have wondered if they would figure this out. Is it too hopeful to expect the words on this document permeate into the thinking of the GOP? Maybe but the fact that they were written is a lot more signal than it is noise!

Now it's just a matter of playing the GOP Congress against Mel Watt & vice versa. Fat lady hasn't sung yet, but she's warming up. I always thought these comments from Watt in January of 2015 were very telling, but I dont recall it being reported on or discussed. Watch the 2 minutes beginning on 1:44:00, ending 1:45:29 https://www.c-span.org/video/?324024-1/hearing-sustainable-housing-finance&start=11007 He basically says, 'when i got to FHFA, the organization had many visions to lead to the wind down of the companies but I stopped that since that isnt our job. Our statutory mission is to ensure safety and soundness in the market in the present ' So I'm tempted to think that Watt wont put himself out of a job, he did leave congress for it, and I further think he is a fan of the GSE's. He doesnt seem like a fighter to me, I think he wants to be told what to do, either by congress or by the Tsy. However, the extent to which D's want to use him to fight anything coming out of the Trump admin is unknown.

Thanks for your thoughts and numbers. I am more skeptical than you (and most of this board). I realized that I'm getting close to negative Kelly's. Will probably sell (part or all) if we get more runup. Within some model perturbations Kelly's at current prices goes positive/negative at ~0.4 probability of success. Jurgis, Can you share some of the items which you are skeptical about? I think that would be helpful information for those of us who want to pay attention to downside risk. Dont feel like you have to write an essay or defend it. But I think it would be helpful to listen to another view. Thanks

Great discussion. Very intelligent to wonder 'what are we missing?' Sometimes it's easy to get too locked in with the magnifying glass and miss a bigger picture. This short vid is great on Mnuchin, shared by no_free_lunch: https://www.bloomberg.com/news/videos/2017-02-09/how-steven-mnuchin-got-the-treasury-job-video Basically Trump took a liking to Mnuchin because Mnuchin made a killing off of OneWest. Some part of Mnuchin's incentives must be to deliver a great deal for POTUS. As we've previously discussed, this ought to be good for GSE investors as well. We cant know for sure, but I'm curious how Mnuchin's purchase of IndyMac might influence his thinking. There he made a good deal that worked out well for him, but arguably also well for the FDIC. Now, Mnuchin is on the other side of the deal. Does that shed light on the possibilities? And how does that influence him? I dont know. I can see it both ways. One, he knows there's plenty of value to be created to please everyone. Or two, he's the former wolf that is now the shepard.

Been thinking about the common a lot lately. [Following applies to both GSEs but I use FNMA in my examples] I. In my opinion, most discussions on the common under-appreciate the risk of the common being worth zero. This is still a small possibility, but there's still a big difference between a small possibility and an impossibility. II. However, the typical bearish comment on the commons is the 'extreme dilution they are likely to face'. Some estimates on this suggest the common could be worth $5 in this scenario. III. On the upside....It's reasonable to think Mnuchin wants to balance the following objectives: maximize money for the Tsy, attract new capital to capitalize FNMA, protect the taxpayer, and deal with the old shareholders/plaintiffs of FNMA/FNMAS. All of this balancing requires a middle of the road approach which I think ends up being good for FNMA/FNMAS. I see a way for Mnuchin to reduce the quantity of the warrants, raise a partial percentage of the new capital desired, and let FNMA retain earnings to fulfill the remaining percentage. If they take this balanced approach, the government can still retain the majority the warrants' dollar value even if they cancel a big portion of its underlying shares [ill avoid explaining the math but I'll say they would end up owning less warrants but the individual value of each one would be much higher]. I'm not saying this is the most likely outcome, but there's a reasonablel chance of it. The other options Mnuchin has are on the extremes and do not fulfill all his objectives, though some are better than others. For instance, keeping all of the warrants as they are is an obstacle to raising new capital, but cancelling them altogether would leave the Tsy with nothing. Also, the more new capital raised would dilute the Gov's own stake, but not raising any capital defeats the purpose altogether. IV. All in all, if the chance for the common being worthless is small but meaningful, the bear case is they are worth $ mid single digits, and the bull case is there is a decent chance there is less dilution from warrants and new capital...add all that up and the common still looks like an attractively priced option.

Mnuchin Delayed until Monday. From The Hill:

I've followed you and the board for a while. I think it's reasonable to suggest you are more informed than the average person regarding this investment. So what you are seeing may truly be irrational (I think so). I'll speak for myself. Uncertainty is a factor. I woke up one morning not knowing what could happen with FNMA, whereas the day before all I had to know was Fannie Mae probably wasnt going to be liquidated. Figuring out what is going to happen to the common now is much more unpredictable versus predicting if Fannie Mae was going to be wound down or not. Psychologically, some interesting things might be in play. The pain of regret may be an influence- and wouldnt it be painful to be a common investor and do poorly while the preferred did well? Like a gambler might feel if he lost the lottery by one digit or something ('I was soo close' hah). Anywho, I see your point and seem to feel the same way you do.