allnatural
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Posts posted by allnatural
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Since people are beginning to worry about a recession, I figured FHFA's / Calabrias stress test from late last year will come in helpful to illustrate the impact to the GSEs, which highlights the GSEs are much more resilient businesses today than they were pre-2008.
Link: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019_DFAST_Severely-Adverse-Scenario.pdf
The stress test assumes a "severe global recession" that lasts for 2 years in which GDP declines by 8%, unemployment spikes to 10%, and housing prices declines by 30%. In this scenario, the GSEs have a combined loss of $18b, which increases to $43b when including the "impact of establishing valuation allowance on deferred tax assets". Keep in mind the GSEs DTA balance has since decreased to $18b, so looking at a total loss of $36b over 2 years.
For reference, the GSEs currently have ~$24b of combined capital, projected to increase to ~$28b after Q1, with expectations for a weak Q2 as of now. The big unknown is what does 2H 2020 look like?
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They mostly didnt recover with market Friday bc they are OTC and are not in any index funds, so when you have SPY rallying ~10% friday they don't really participate in that to the same extent. But when there is liquidity event where the whole market is fleeing to cash you will feel pain as you have seen. The GSEs should have a decent enough Q1 bc of record low rates/refis + Jan/Feb data were both record months for home purchasing. But Q2 could start to see spillover effects and into Q3 as well. If this turns into full blown recession there is obviously risk to the administrative recap path.
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You're asking if FHFA, which to date has been "legally" allowed to take all of the capital out of the enterprises they are claiming to conserve, is required to "legally" release a capital rule? Until courts definitively step in they are "legally" allowed to do whatever they want and answer to no one.
Does anybody know if FHFA is *legally* bound to re-propose the capital rule because they have publicly stated they will do so? If I'm Houlihan Lokey, I'm getting nervous about the markets and want to get the capital rule in place as quickly as possible.
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As far as i'm aware, there are currently no lawsuits that would result in the GSEs themselves having to pay monetary damages to plaintiffs (other than the Sweeney direct claims which was dismissed and pending appeal).
Collins and Sweeney derivative claims would require the Treasury to either wipe out the senior pfds or write a $130b+ check for the excess NWS payments above the 10%. Lambert contractual claims would require the Treasury to write a $30-$40b+ check (par + interest) to shareholders directly.
If any of the dozen different lawsuits might require a payment of assets out of the GSEs, then it will be difficult to raise outside capital. Other than r-ship (bad side effects) and global settlement (very hard to pull off, imo), what are the other options?
Treasury indemnification of the GSEs?
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If you care to learn more, the answer to your question can be found in both of these well written amicus curiae:
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.
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Whether or not consent decree is allowed to be rolled back by new FHFA director, a PSPA amendment / settlement that wipes out the snr pfds liq balance is not. At that point Jr pfds will sit atop of the cap structure with close to $40b of built of capital (total jr pfd principal is ~$33b).
my take on the pace of developments is that the administration wants to appear thoughtful and deliberate. be able to defend process in front of congress. while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight. so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone. what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)
your last sentence is key and to date I haven't heard a conclusive rationale as to why any potential consent order executed during the lame duck is permanent when a new FHFA head takes over in 2021 (if Dem wins). I wonder if a moderate bank friendly Dem president would keep Calabria. Doubtful Bernie would.
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Interesting for Calabria to highlight the overpayment of ~$100b. First time i have seen FHFA publicly acknowledge this to my knowledge. Boy who cried wolf strikes again.
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Only silver lining is if we get the ruling we desire in Seila, shareholders get the remedy we want and it wouldn't be subject to any more appeals as its coming from SCOTUS. So pending further administrative action, the Seila ruling could be the "moment" we have been waiting for.
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I believe he said APA case is proceeding via Judge Atlas and is NOT pending SCOTUS. They are in discussions to move forward. Expects summary judgement later this year after they set the administrative record straight.
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@cherzeca
SCOTUS - best to worst case (my personal views)
1) rejects APA, accepts CONSTITUTIONAL REMEDY
2) rejects both
3) delays case until 2021 term (same effect as rejecting as it increases urgency to address before election)
4) accepts both
5) accepts APA, rejects CONSTITUTIONAL REMEDY
4 is most likely, 5 would be net negative, 1-3 would be nice surprise
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Bove has it backwards, for common the only thing that matters is the courts. A favorable judgement = less dilution cramdown = better for common and vice-versa. As PFD holder you should get par any which way (legal route, admin route, or organic recap).
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@cherzeca
Do you know where we can see the all the various counts Sweeney mentioned at the conclusion of her opinion (that can proceed or were dismissed)?
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Mnuchin has always said his main two priorities for housing finance reform is 1) reduce taxpayer risk and 2) preserve liquidity for the 30 year mortgage Increasing taxpayers equity exposure contradicts #1
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Walk through the scenarios. If SCOTUS declines to hear the case at this stage, admin probably can accelerate a settlement with proper cover (their own briefing says they cant proceed w/ housing reform with the litigation outstanding). If SCOTUS takes the case and shareholders win by the summer, admin has the cover to settle and accelerate the recap via a ~$30b tax credit for the overpayment. If shareholders lose SCOTUS i'm guessing worse case a) there is no overpayment credit and b) its possible (but unlikely in my mind) that the admin will try to monetize a portion of the snr pfds in settlement. My takeaway is I don't see a horrible outcome in any 3 of those variations for PFD shareholders, outcome would more materially alter the common valuation.
I am not sure whether it is "better" for scotus to take cases...probably prefer they put a hold on them until collins district court enters a final order. I dont like the way Alioto was so antagonistic against insurance companies in ACA oral argument
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Q1 should be fun... Off the top of my head we have
- Sweeney unsealed ruling should be released by Jan which will make for great press i'm sure
- SCOTUS decision to take case Jan 10 (with oral arguments in March/April if accepted)
- FA should be announced in Jan (with the FA road map looking to be delivered by end of Q1)
- Capital rule to be released Early Q1 (im guessing more like Feb/Mar after FA is on board and can review)
Meanwhile the GSEs continue to build $5b-$7b of capital every Q.
Entering 2020 GSE pfds are up ~70% (~15% off the highs), with 2020 being make it or break it for "irreversible" admin action, and SCOTUS/lambert/sweeney trials all on deck (imagine this time last year saying shareholders are favored in not one but three separate cases!).
- Sweeney unsealed ruling should be released by Jan which will make for great press i'm sure
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Assuming Sweeney's decision holds on direct claims, the only other case pursuing monetary damages for shareholders is the Lambert case which is progressing favorably.
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Looks like ACG's view is that the admin will do the "irreversible administrative steps" ahead of the election (settlement + pspa amendment) while leaving the heavy lifting / politically hairy steps (IPO) to post election. As Jr PFD holder our day will be those 2 key events in 2020. On a settlement with defined conversion terms / PSPA amendment to write down the snr pfds I would think jr pfds at the very least break 2019 highs of ~$14/shr, more likely $16-$20 range.
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last few trading days the ratio between common and pfds are widening (from ~3x to over ~4x). could it be guys shorting common in anticipation?
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@cherzeca - if the above is true, does SCOTUS delaying the decision to accept/reject the petition to Jan change the Collins timeline at all (oral arguments expected March/April with decision to follow in June/July).
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I think she is right. The case is more of a battle for the common dilution and how fast a recap will take. If plaintiffs win Collins (best case), admin has cover for a settlement that would include paydown of pfds + tax credit of ~$30b for overage payments which helps common dilution and accelerates recap. Pfds are money good here. If plaintiffs lose, admin doesn't have the cover to be as aggressive and may look to monetize a portion of their snrs which hurts common with more dilution. But again as pfd holder you are fine as any residual value for common means money good for pfd. If SCOTUS rejects the case you are probably somewhere in the middle (write down snr pfds but no tax credit).
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According to David Thompson during the Sweeney oral arguments, Dec 13.
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Plaintiffs have asked SCOTUS to take the APA claim, and rightfully so using the same rationale ask that they take the constitutional remedy claim. https://www.supremecourt.gov/DocketPDF/19/19-563/123839/20191127103429028_USSC%2019-563%20Brief%20for%20Respondents.pdf
Judge Sweeney transcript attached...
Big day today, our SC filing is due. Should be interesting to see if the lawyers indirectly ask for the SC to take up the APA given Calabria and Mnuchin shockingly defend the NWS day after day in court and publicly.
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That vulnerable to future administrations argument is just as bad. Congressional action is not permenant and also equally vulnerable to future congress coming in and changing the status quo. That risk will always be there (in all industries not just housing).
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If a direct treasury credit line of $250b (backstopping $150b+ of potential first loss equity) isn't considered "explicit" i'm not sure what is. Especially considering gses have been operating under that model with no market issues since conservatorship began with no equity infront of it, and pre 2008 with no explicit credit line. This straw man argument has been beaten to death at this point.
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
Posted
The "public assistance from Congress [or] from the Fed" answer was in response to question on liquidity to pay MBS holders, not regarding having sufficient capital levels at the GSEs (which is what the PSPA credit line allows for). MBS investors have to get paid or else system may unravel. Maybe they are able to pass an explicit MBS gtee at a time like this when bipartisanship is roaring!