allnatural

To put Phillips comments into prospective, the architect of the plan believes: a) receivership is impractical b) shareholder rights should be respected c) treasury should write down in FULL it's SNR pfds d) convert JR pfds to common e) warrants will be exercised Sounds like Moelis

Phillips continuing to make appearances lately No Longer at Treasury, Former Counselor Phillips Stands Up for GSE Shareholders dhollier@imfpubs.com Craig Phillips, the former Treasury official who served as Secretary Steven Mnuchin’s point man on housing issues until departing for the private sector in June, has come out in defense of Fannie Mae and Freddie Mac investors. Speaking midweek at a conference in Washington, the man widely credited as the author of the Treasury’s plan for housing-finance reform said the recap and release of the GSEs should “really respect the rights of the current shareholders.” Phillips’ comments were couched in a how-we-got-here description of “the role of capital markets and the pesky nature of the existing shareholder.” “When a company fails,” he said, “the capital structure is typically eliminated and there are no shares left. But when these companies were put into conservatorship, for a variety of reasons, the interests of the common stock holders and the preferred stock holders were not eliminated. So those shares continued to exist. They trade freely. It wasn’t a bailout or a sweetheart deal that got them there.”

Ah i see where the confusion is coming from. In the collins case, remedy (APA or unconstitutional) would result in either wipe down of senior pfds or excess payments >10% going to GSEs. No payment to shareholders. He must be confusing Thompsons comments re: the Lambert case. the damages there would be that shareholders receive a check from the GSEs themselves. Plaintiffs will argue that that the potential damages should be PAR + carried interest every year (i think its 6% simple in Delaware) since the NWS. that's how he gets > PAR but along shot if you ask me. Give us new common equivalent to $20-25, and no cash needs to change hands.

@orthopa you are overthinking it i think. the simple mechanism to achieve > par is to issue a common conversion option to pfd shareholders where they receive $20-25 worth of new common shares (or via rights)... and if common becomes an attractive investment on the back-end, you can appreciate in value beyond the original conversion terms (or lose value if common goes down).

Calabria last month also said this: Re-proposal would delay final rule until "spring" and "closer to May;" also said that capital rule & PSPA would be done "hopefully middle of next year." "Capital rule... on its own timeline... changes to PSPA... on its own timeline... hopefully be done by the middle of next year" So capital rule and PSPA to be completed by middle of next year and are independent of each other. Now whether you want to take his word at face value is up to you as he is losing credibility by the day.

W/ Sweeney there are two separate claims being made. 1) Derivative claim, if Ps win that it would be the same as winning the APA claims, excess payments would flow back to the GSEs or a write down of the senior pfds. In this situation the claims traveling issue isn't relevant. 2) Direct claim, if Ps win here, whether claims travel or not matters. Luckily for us I believe this is already established law w/ securities, and if she asks the district court to opine, Lambert already ruled on this issue last year. He made it clear all claims travel (see bottom of page 17 from last years ruling, https://gofile.io/?c=z5mtXw). Ps can further argue that every NWS payment since 2012 is a new takings if it really comes to that. I wouldn't lose sleep over the claims question. thanks for posting allnatural. if this comes to pass, very favorable. as to whether subsequent-to-NWS stockholders acquire litigation standing when they acquire shares, it is not surprising that this might be undecided in ct of fed claims in the takings area, as there haven't been many transactions affecting stock like the NWS, to say the least. Sweeney "should" be able to handle that question as the injury done by the NWS is done with respect to the share rights that the shares confer on the shareholder so that the identity of the shareholder should not matter, but she may feel better if the appeals court handles it (I mean, trial courts should be able to handle novel questions in the first instance knowing there is opportunity for review). so either way, there is treasury exposure going forward, but much more damages potential if all current shareholders have standing.

Bloomberg analyst attended the Sweeney hearing yesterday. He thinks shareholders are favored and the case will most likely proceed on multiple claims (flipped his view from last time) and we could see a ruling as soon as year end as Sweeney said she already had a draft ruling ready. https://m.imgur.com/a/ek0S9Q8

Looks like its just that time of the year -

A simple workaround is to simply announce what the commitment fee would be, but not activate it until all conditions of exiting conservatorship are met so no fee is required in interim. Also rosners point is you can't direct the GSEs to come up with a capital restoration plan without knowing the status of spspa so this needs to be addressed sooner rather than later.

Full video https://video.foxbusiness.com/v/6104597630001/#sp=show-clips

Craig Phillips back in the spot light! He is a keynote speaker next week to talk housing reform... https://nextdc19.splashthat.com/ "Keynote Speaker: Craig Philips 09:00 AM 09:45 AM What to Expect from Treasury's Housing Plans and Nonbank Financials, Fintech and Innovation"

https://www.autonomous.com/

If anyone is wondering why the GSEs got slammed this week.. case in point: Charles Gasparino @CGasparino 2m SCOOP-Major hedge funds experiencing large losses @Chesapeak @PGE4Me and @intelstat implode over past month. Shares and bond prices of these companies hit lows over a variety of issues impacting major hedge funds, causing hedge fund route even as mkt average move to new highs Charles Gasparino @CGasparino 2m (cont) PointState Capital is said to be one hedge fund long Intelstat positions, suffering losses but is said not to be liquidating major positions. Other hedge funds appear to be puking @FannieMae preferred to make up for losses contributing to lower prices more now @FoxBusiness Charles Gasparino @CGasparino $FNMA $I $PCG $CHK

Rosner believes there will be a q1 pspa amendment to write down the senior pfds as precursor to capital restoration plan...

In the last month we have seen 2 "political" investments blow up in investors face. First PCG, now Intelsat (down over 50% in 3 days). The distressed / credit investor crowd has been involved in all 3 of these situations all year. It isnt rocket science to figure out why the GSEs PFDs have been getting smoked during the same week as the Intelsat blow up. The shareholder overlap is enormous and after 2 political blowups they are de-risking and taking one of their only winners for the year (GSEs) off the table. There is a reason PFDs are down almost 2x as much as common in the last few days as most of these funds are weighted towards the PFDs. Calabria being wishy washy on timing only adds salt to the wound at this point. Check out the share price performance of the PFDs during the week of the PCG blow up as well.

Good luck muscleman, you are more brains than muscles these days

I never understood the notion that the government would try to monetize a portion of their senior pfds. If i'm their financial advisory i am telling them you can either: a) retire the seniors in full and maximize the warrants via monetization. this would be most market / shareholder friendly and path of least resistance + builds some good will. or b) you can attempt to monetize some of the seniors by converting them to common, but that would add dilution, and lower the value of your warrants ultimately... so net net you are probably receiving the same $ proceeds.. and as a bonus there will be a lot of angry shareholders if you go down this path that may frustrate the efforts. bottom line a monetizing a portion of snr pfds lowers ur warrant value. you are taking from 1 pocket and putting in another and is a path of more resistance for no reason.

Full quote:@CGasparino on @FoxBusiness: @MarkCalabria in response to question on potential of Pres. Warren directing no release: "I'm an independent regulator... we're going to get them out of conservatorship; if you don't like it, change the law." Unfortunately for Calabria SCOTUS is going to rule this term that he may be fired @ will going forward. So Warren doesnt have to change the law, just replace Calabria. He has to be aware of that correct? Hopefully he has a sense of urgency with that in mind. It is nice to see he upped his exit timeline from "5 years" this summer to "by 2021" as per this interview.

https://www.americanbanker.com/news/gses-need-to-shape-up-if-they-want-to-leave-conservatorship-calabria?feed=00000158-baad-d32b-adfa-bffde31c0000 “Do I know what I’m going to be able to negotiate with Steven Mnuchin? Not yet because I don’t control that part of the timeline,” said Calabria. “[but] I believe that we should be able to make considerable progress by then.” However, he did add that he hopes in the next couple of months "to be able to lift [the $45 billion retained earnings] cap altogether."

If anyone still pays attention to these, here are some interesting CEO quotes from Freddie's earnings call this morning. There appears to be a sense of urgency on timing. “On September 5th, the Treasury Department released its plan for reforming the nation's housing finance system ... without a question, the most important among these for Freddie Mac, the way to the proposal to end conservatorship.” “From our perspective, exiting conservatorship will put Freddie Mac in a position to do a better job of providing liquidity, stability and affordability to the single-family and multi-family housing markets. It will allow us to combine our industry expertise with the competitiveness of a private company to bring down costs for borrowers, create more opportunities for renters, and better serve lenders and investors.” “Earlier this week, the Federal Housing Finance Agency published our 2020 scorecard and strategic plan, which instructs us to work with the agency in developing a road-map with Milestones, to facilitate our exit from conservatorship. Those milestones will include raising capital and further enhancing our overall risk management framework.” “Let me be clear, our top strategic priority will be meeting those milestones. We will remain steadfastly focused on doing so quickly and responsibly. We have already taken an important first step. Late in September, FHFA and Treasury agreed to permit the GSEs to begin building capital beyond their existing $3 billion capital reserves. In Freddie Mac's case, the agreement will allow Freddie Mac to retain capital up to $20 million.” “I won't forecast when we will reach a point where we have sufficient capital to exit conservatorship. But I will tell you, it will be as soon as we responsibly can.Until then, our speed to exit will remain top of mind. Another important milestone will be the finalization of FHFA's capital rule for Freddie Mac. We look forward to seeing that rule and better understanding the specific capitalization target, we will need to hit to exit conservatorship and start our next chapter.” “I will close by saying that more so than any time in the past of 11 years, we at Freddie Mac, we -- our fate is in our own hands. Director Calabria has made clear that FHFA will set out the milestones, but how fast we achieve them is up to us. Freddie Mac employees are committed to ensuring we achieve them and achieve them quickly, serving our mission demands it.”

Treasury appealing Collins APA to SCOTUS. http://www.supremecourt.gov/DocketPDF/19/19-563/120380/20191025201313249_Mnuchin%20FINAL.pdf Not 100% SCOTUS will agree as this wasn't a final judgement, but Treasury claims that "... the court of appeals’ decision is of immense practical importance. The decision below raises the possibility that the Third Amendment will be set aside, with significant financial implications for the federal government, the enterprises, and market participants. In addition, legal uncertainty resulting from the decision may frustrate the federal government’s proposed And ongoing efforts to reform the housing finance system and to end the ongoing conservatorships of the enterprises. The government therefore respectfully requests that the Court grant this petition for a writ of certiorari and resolve this case this Term." ^Seems like a good reason to settle as the government is admitting they can't move forward with housing reform with this case outstanding. First time they are openly acknowledging shareholders leverage here. Immediate implications would be accelerating the Collins case timeline (wouldn't have to wait for lower court ruling which may take a year). Curious how both FHFA (after yesterdays language) and plaintiffs (SCOTUS is where they want to end up) respond to this petition.

I thought we were all assuming the snr pfds are wiped out, GSEs get a $30b tax credit that counts as capital, final capital rule is 1%, the government generously decide to wipe out their warrants, and the GSEs get back into the arb business. $18.50 is conservative Not to be a debbie downer (I am bullish on preferred), but I don't think his reported price is so meaningful since it is unclear what his assumptions are and the time frame he sees. As we continue to move down the road of R&R it is clear that the range of outcomes is beginning to narrow, however, without capital rule, other FHFA adjustments to F&F's business, settlement, and understanding of TRSY plan on Warrants, IMO we still have a pretty wide band of potential outcomes on what to value common.

Calabria throwing in the towel on Collins APA claim today? This is more in line with his previous views on the NWS / HERA. From the FHFA 2019 Strategic Plan (https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2019-Strategic-Plan.pdf): On page 8, he discusses why the NWS policy in theory violates the statue of maintaining "adequate capital" at the enterprise level, which is in essence the lynch-pin of the Collins APA majority decision that ruled the NWS violated HERA. He is not shy to defend the GSEs in this respect and criticizes the NWS policy created by the previous leadership. "The Enterprises, by themselves, cannot be blamed for these results. Fannie Mae and Freddie Mac have been operating under government control throughout the conservatorships. As such, their performance is determined, at least in part, by the government policies under which the conservatorships have been managed. For instance, the so-called net worth sweep required the Enterprises to pay out any excess capital beyond a modest cushion as a dividend to the senior preferred shares. Fulfilling HERA’s statutory duty to maintain “adequate capital” at the Enterprises necessitates a different policy path that enables the Enterprises to build and earn a reasonable return on capital. Generating that return by charging adequate guarantee fees aligns with statutory mandates. Taken together, (1) FHFA’s statutory mandates, (2) the adverse impacts of continued government control of a very large segment of the U.S. housing finance system, and (3) the enormous financial risks taxpayers continue to face from backing Enterprises with very limited capital cushions, compel a fundamental shift in the implementation of the conservatorships. FHFA will act on its statutory mandate to put the Enterprises back into operation in a safe, sound, and solvent condition." Right before that on page 7, he discusses FHFA's statutory duties under HERA (reads similar to Judge Willets delineation of conservator vs receivership functions). "On September 6, 2008, the Director of FHFA exercised this authority and placed Fannie Mae and Freddie Mac into conservatorships. HERA identifies only three lawful purposes of FHFA as either conservator or receiver – namely, “reorganizing, rehabilitating, or winding up the affairs of a regulated entity.” The Agency’s powers as conservator include taking “such action as may be (i) necessary to put the regulated entity in a sound and solvent condition; and, (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” By contrast, the powers of receiver are designed to achieve the Agency’s two other purposes – “reorganizing” and “winding up” – in the event that a regulated entity is unable to return to financial viability... ... By that same logic, HERA envisions that restoring the Enterprises to safe and sound financial positions would be chief among the conditions necessary for FHFA to end the conservatorships and effectively release the Enterprises from government control." Would be interesting to see Calabria testify in the Collins case if we don't have settlement by the time trial is required (especially considering that Calabria's 2015 paper is cited 3x in the majority ruling).

In case anyone was still worried Calabria/Mnuchin wouldn't pursue admin actions absent Congress, Calabria spoke at an event today ( - starts @ 14:30 mark) and offered some insight. When asked if pursing admin action w/o congress is risky, he responded ... "nothing im doing isnt what congress already told me to do (implying via HERA, as Congress already told him what to do) ... endless limbo is not in the statute ... i'm not gonna wait around to do, what congress has already told me to do"

Although the government giving up some or all of its equity would simplify a capital raise effort... i don't believe its in the cards. I think its conservative to assume the government will monetize its 80% warrants b/c no pending litigation that has legs is currently challenging the warrants, but only the NWS arrangement. And the government was able to realize its equity investments on the other TARP investments. Thanks for that information...given 1) no receivership and 2) no elimination of senior preferable shares...do we know what will happen to the governments 80% interest right now or is that part of what is being drafted?