DRValue

These things are still so insanely cheap. Heck, some at 41% of par (FMCCL)! Are they liquid enough to buy though? Is that the ask?

Mnuchin says compensation required for retaining capital as part of pspa. Specifically mentioned commitment fee an option. I'm now not expecting an increase in liquidation preference.

Mnuchin says more like 100b capital needed. That's 60b for Fannie and 40b for Freddie. This is the alternate bifurcated standard that they advocated for in their capital level comments.

"Watch the IU website today as we will be posting details of a conference call with David Thompson of Cooper and Kirk. He will update us on the 5th Circuit EnBanc opinion. Wednesday afternoon!"

Gotta say the easiest way to clear all lawsuits is to give back all pspa dividends above repaying principal, recap with dividend payback, then exercise warrants to make the govt money. That doesn't sit with raising 3rd party capital though...

Could anyone kindly offer a summary of the outstanding lawsuits and how they are impacted by the Collins ruling? A big ask I know... What I'm getting at is calabria said what they do will get rid of all the lawsuits. Would plaintiff relief in Collins close all the other lawsuits? It may mean a different approach to recap, entirely. Also, I can't see how paying dividends to treasury in conservatorship is possible, unless hera allows it specifically. It doesn't seem to have featured prominently in any suits I've seen, save the one court hearing video I've seen featuring it. Unfortunately, I can't recall the suit. I think we've done that one to death but I still don't like it...

Thanks Chris, I was imagining a scenario where Treasury avoids paying cash, so "gifting warrants" based on the current share price at the time, would seem a possibility. Assuming plaintiffs would accept a "thing" that expires in value...

Chris, could treasury give preferred holders some warrants to make up any difference between par and the necessary relief?

I know it's just going to sound like I'm talking my book here, but I am of the opposite opinion. The biggest uncertainty behind the prefs gaining value is whether or not the NWS will end and how quickly. The timeline for that seems to have been accelerated by yesterday's opinion. The commons, on the other hand, have a lot of uncertainty as to how much they will be diluted as part of the recap and release process. The opinion does nothing to alleviate this. In fact, I would go so far as to say that the remand, as opposed to an outright reversal with remedy, is bad for them because it allows Treasury to monetize the seniors, most likely by converting them to commons as they did with AIG. I don't think they can convert seniors to common without refunding the cash paid by GSEs because if they don't that would mean the govt gets paid twice. Lawsuits mean seniors are paid down. It should be better than that for plaintiffs as dividends shouldn't be allowed but I don't think that'll happen.

No tweets re en banc from gasbag... I wonder what side of the fence he's on?

This decision may make an appearance at the hearing on Tuesday. I'd expect treasury and fhfa to lean heavily on it when they get the inevitable accusations of shareholder windfalls and crony capitalism. The timing of the release of the decision irks me a bit. They waited to see what treasury said in the plan to decide what to release (based on cherzeca's analysis, which I agree with). Isn't justice blind?

Hopefully I get another buying opportunity before the NWS PSPA renegotiation is announced.

Well, maybe. But the stock going down is quite expected. I said yesterday "Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth." Whenever that happens, the stock goes down on a disappointing quarter. No difference here. There is effectively no change for shareholders at the moment. Bit of a let down to be honest.

For what its worth... I've now read through and thought about the most important parts of the plan (to me). A few observations and comments. Section E: ENDING THE CONSERVATORSHIPS Pre-Conditions: FHFA has prescribed regulatory capital requirements for both GSEs; COMMENT: In progress, expected Q4. FHFA has approved the GSE’s capital restoration plan, and the GSE has retained or raised sufficient capital and other loss-absorbing capacity to operate in a safe and sound manner; COMMENT: The Treasury qualifies the amount of capital needed as not fully capitalised, but sufficiently capitalised. They could have easily said, "FHFA has approved the GSE’s capital restoration plan, and the GSE are considered fully capitalized under that plan. The PSPA between Treasury and the GSE has been amended to: (i) require the GSE to fully compensate the Federal Government in the form of an ongoing payment for the ongoing support provided to the GSE under the PSPA; (ii) focus the GSE’s activities on its core statutory mission and otherwise tailor Government support to the underlying rationale for that support; (iii) further limit the size of the retained mortgage portfolio of the GSE; (iv) subject the GSE to heightened prudential requirements and safety and soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability; and (v) ensure that the risk posed by the GSE’s activities is calibrated to the amount of the remaining commitment under the PSPA; COMMENT: Commitment Fee, expected as compensation for support. Implication of PSPA is quasi-Treasury control of GSE activities. This safe guards Treasury losses, guarantees support, and maintains some (read a lot) of control from Treasury as a very important stakeholder. FHFAs regulator may change positions overtime, but the PSPA terms wont allow too much shift. Appropriate provision has been made to ensure there is no disruption to the market for the GSE’s MBS, including its previously issued MBS; COMMENT: Expected. FHFA, after consulting with the Financial Stability Oversight Council (“FSOC”), has determined that the heightened prudential requirements incorporated into the amended PSPAs are, together with the requirements and restrictions imposed by FHFA in its capacity as regulator, appropriate to minimize risks to financial stability; and COMMENT: Maintains Treasury control as mentioned. So you pay for the commitment of capital in two ways; 1) fee compensation. 2) tight limit of activities. No issue, expected. Any other conditions that FHFA, in its discretion, determines are necessary to ensure thatthe GSE would operate in a safe and sound manner after the conservatorship, including asto the GSE’s compliance with FHFA’s directives or other requirements and also as to the build out of FHFA’s supervisory function. COMMENT: Allows FHFA to have final say before release from conservatoship. Treasury recommends: Pending legislation, FHFA should exercise its authority as conservator to begin the process to end each GSE’s conservatorship in a manner consistent with the preconditions set forth in this plan. (administrative) COMMENT: Start Now! Recapitalizing the GSEs: Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred shares or exchanging all or a portion of that interest for common stock or other interests in the GSE; COMMENT: Elimination of preference expected following Collins opinion. Converting to common prior to Collins opinion would lead to a refund of cash to the GSE and immediately recap them. Outside of this, conversion or elimination of some seems unlikely as it all has to go, I'm not certain of the benefits of not eliminating all the of liquidation preference. Adjusting the variable dividend on Treasury’s senior preferred shares so as to allow the GSE to retain earnings in excess of the $3 billion capital reserve currently permitted; COMMENT: Retaining capital with a payment in kind principal increase is effectively the end of the NWS if the Collins opinon finds the GSEs have repaid the principal and interest at the 10% moment. That's likely IMO and the NWS stops now in practice. Issuing shares of common or preferred stock, and perhaps also convertible debt or other loss-absorbing instruments, through private or public offerings, perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock; COMMENT: Raising capital through offerings is expected, the issue is how much and how. I expect a junior conversion to common. Issuing preferred or convertible debt (CoCo bonds in the UK) is a positive for common, good to see CoCo's are on the table. Private offerings... Buffett or similar? The line "perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock" is difficult for me to interpret. It could mean that Treasury would like to maximize the Governments return, or perhaps allow FnF to buy them, or sell them off. Could be anything. Negotiating exchange offers for one or more classes of the GSE’s existing junior preferred stock; and COMMENT: All Juniors will all be offered a conversion to common, which would; increase earnings, or give more capacity for further junior preferred issuance, or allow dividends to be turned on ahead of a capital raise. Placing the GSE in receivership, to the extent permitted by law, to facilitate a restructuring of the capital structure. COMMENT: Many people have said that Receivership is now not legal but with the PSPA outstanding with the current terms there is no prospect of becoming adequately capitalized and therefore a restructure is technically justifiable IMO. This is not easy though and would likely disrupt demand for FnF backed MBS which the plan must not do as well as cause all sorts of legal issues outlined in the Moelis plan. I don't expect a receivership. the prospect and commitment to it could give FHFA / Treasury leverage over junior pref holders or give FHFA leverage over Treasury in PSPA negotiations. However, Treasury wouldn't write a paper that negotiates against itself, so this is unlikely. Each of these options poses a host of complex financial and legal considerations that will merit careful consideration as Treasury and FHFA continue their effort, already underway, to identify and assess these and other strategic options. COMMENT: Legal considerations could cover current lawsuits amongst other things. Recap planning is already underway. Treasury recommends: Treasury and FHFA should develop a recapitalization plan for each GSE after identifying and assessing the full range of strategic options. (administrative) COMMENT: This is already underway. Pending that recapitalization plan, and as an interim step toward the eventual PSPA amendment contemplated by this plan, Treasury and FHFA should consider permitting each GSE to retain earnings in excess of the $3 billion capital reserve currently permitted, with appropriate compensation to Treasury for any deferred or forgone dividends. (administrative) COMMENT: The NWS is dead assuming Collins goes our way. A commitment fee is a compensation, but so is a principal increase. CONCLUSIONS: [*]The GSEs may not need to be fully capitalized to leave conservatorship. [*]Receivership is extremely unlikely IMO. [*]The NWS has ended, in practice. [*]At least some Juniors to convert to common. [*]Common dilution will happen. It definitely will happen, and meaningfully so (just to get ahead of the common holder death squads...) but it appears by reading the plan Treasury / FHFA is open to skinning this cat in a number of ways. Issuing CoCo bonds or more prefs is a plus. [*]Juniors will either get par at conversion or take a hair cut but ultimately receive par through common appreciation. Although I would hold out for par myself.

Found.

Can't find the tweet now but Josh rosner seems to think conservatorship can end if the companies aren't critically under capitalised. Senior conversion, cash refund from Collins and warrant buy back, for an instant recap on the table imo.

"Issuing shares of common or preferred stock, and perhaps also convertible debt or other loss-absorbing instruments, through private or public offerings, perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;" In connection with warrants? What could that be?

Skimmed. Not expecting stocks to move.

"There is nothing in the administration’s plan to address the holders of Fannie and Freddie common shares. The expectation of this plan, however, has sent those shares soaring in the past few weeks." It's 53 pages...

I'd have to say this is Bove, yes. Would certainly fit his writings.

Funnily enough, that's the only view I care about when I decide if my shareholder value has been destroyed. Would an offer to convert be accepted if the warrants weren't exercised first? Well Calabria has said they could be in conservatorship until 2024, so... Agreed. The point I was making is that they don't have no capital. Which references an excess of capital. I don't necessarily disagree here, but it may not mean an excess above the capital rule as they wouldn't hold more than they need, unless they have a management buffer. i'm inclined to think this is Calabria using the wrong words and could mean fully capitalized.

i think this is fair, it must be at least partly true or i wouldn't own common. But like I've said before , on balance, i think the reward outweighed the risk.

Shareholder value transfer IS value destruction. Why would the FnF boards offer a low conversion price to Pref and dilute the Gov? The thing for the board to do is... wait. They could have til 2024 to raise capital. It makes no sense to me for the boards to go begging to the market when Fannie is sitting on c.$25b of capital and Calabria leaves it to them. Point being they're basing conversion prices on current prices. They could be anything by the time they actually raise capital. There could be a capital standard that isn't fully recapitalized but allows them to be released from conservatorship, for example capital above critically undrcapitalised. Assuming being critically under capitalized is the trigger for conservatorship (if they can't recover), would not being critically under capitalized be the trigger to leave consrvatorship?

I read boves common share analysis on junior preferred conversion. I feel like people think the treasury or fhfa will turn round and tell the GSEs to convert preferred at silly common prices. I don't see this at all. It'll be left to the companies to raise capital as they see fit, which was indicated by calabria. Treasury and fhfa controlling private company recap leads to more lawsuits imo. Unless that would be within fhfa remit and not ultra vires (see, I do listen to the court hearings). Why is $2-4 dollars a share silly prices when treasury owns an 80% stake, preferred conversion builds capital faster and capital levels should be robust which is the whole point of all of this? I don't see how you can sue knowing the risk before the restructuring? It isn't like common holders are going to be blind sided. Whats the argument? I didn't make as much as I thought i would so i will sue you? The obligation is to recap the companies not a target price based on speculation and ones purchase price. As hashed out many times before Preferred has capital structure preference and contract value. Again who has commons seat at the table and fiduciary duty? My question would be how do you settle the lawsuits in your opinion? I just don't see the point of needless shareholder value destruction by raising capital at depressed common prices that would be much lower than projected by moelis. I'm not saying moelis is gospel but I just don't see the need. It feels like projections are all based on current share prices rather than what the business are actually worth. Re lawsuits for common shareholders, I see lawsuits raised all the time against management when the price falls. Largely these are frivolous imo and I'm no legal expert (how did you know?) But If I'm bill Ackman I'd throw everything at it if they diluted me unnecessarily. I know we've been through this before and no one s view will change until capital is raised, but I'm still commenting on boves analysis. I wonder if boves capital raise price changes when the commons hit 5? The good thing is these questions are closer to being answered than ever. I should know this already but I wonder whether they can leave conservatorship and turn dividends back on, once they aren't critically under capitalized? That would be a game changer imo.

That's how I see it and what calabria has hinted at. Hopefully it goes that way.