FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[allnatural]

1.  Mnuchin has already reversed his commentary to date on the timing of when the GSEs would be released.  What's stopping him from reversing his commentary to date that he wants to end conservatorship?  Is this in legal writing?  Will he be personally punished if he keeps the status quo or go against what he said publicly?  His boss quite literally lies daily...? 

 

Other than Mnuchin missteps on timing, I can't point to any commentary to date that Mnuchin has said which is anti-GSEs. In fact most of his comments continue to remain pro GSEs, pro private capital, pro government guarantee, and in an interview just a few months ago, he said point black he would not go as far as to get rid of the GSEs. His stance has always remained the same, he wants to end the conservatorship of the GSEs, not replace / get rid of them. If you find any language that he has said to date that implies the opposite, please share.

 

The rationale behind the status quo being unsustainable is quiet simple, we all know this already, aside from a small capital buffer of $3b, there is no capital in place to support ~$5tn of liabilities. There are a few key issues with this status quo, 1) The government bears the full risk of another down cycle due to no capital (read taxpayer bailout)- Mnuchin has acknowledged this point in  the past, 2) It will be difficult to reintroduce new private capital to the market based off how previous legacy investors were treated (Larry Kudlow, Trump’s recently appointed top national economic advisor, agrees- and we know Mnuchin wants private capital back), and 3) No matter how small the odds may be, the government continues to face a $100b+ overhang in litigation (this is a potential $200b+ PnL swing vs government monetizing its stake), and unless I missed it, no court has ruled on any constitutional claims yet. We have continually lost the same APA case over and over. Most importantly the takings claim is where motive (read evidence) matters.

 

2.  "Agrees to forfeit up to $100bn".  Again - this is not money in Mnuchin's personal pocket.  While the $100bn is a great incentive for the government, it doesn't contemplate whether there are other incentives at play which take priority.  As an example, if there is a mechanism whereby large banks are overwhelmingly favored but shareholders are taken out, it's possible that Mnuchin/Trump would see the banks fundraising money for the 2020 election to be a personal incentive which trumps (pun intended) the $100bn for the country.  Color me crazy but I don't see the current administration as a bunch of charitable good guys who are looking out for anyone but themselves.   

 

Not that its part of my thesis, but the same could be said to Trumps largest donors/contributors, Paulson, and more importantly Steve Schwarzman of the Blackstone GSO group. If the admin is truly looking out for themselves, this continues to be a path where Trump can chalk up a political win in addition to pulling $100b+ out of a magic hat as a "deal maker".

 

3.  Also w/r/t the warrants - they could've been exercised by now.  The value of the warrants reduces as each day passes.  The longer the current administration waits to monetize the warrants, the less time they will have to use the money productively.  Why would Mnuchin want to monetize $100bn of warrants to hand over to the next admin?  Waiting longer is coincidentally the same as waiting until closer to 2020 - hence waiting to disclose the solution until a date closer to the election is consistent with my point #2 above.

 

The warrants cant be monetized until a reform plan is put into place.

 

4. Please explain, in detail, why the following plan is a "low probability" event given that it's consistent with everything all key players have spoke to so far?  http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf

 

They weren't able to replace the GSEs back when they had momentum behind their back and were unprofitable. Now that they are more profitable than ever and Corker and Hensarling are on their way out, what makes you think any of the reform plans being presented is anything other than noise at this point? Additionally, the GSEs are the foundation of the U.S. housing market and are too systemically important to be wound down and replaced. It has in the past and remains a risky proposition to replace a functional system that has been in place for over 50 years with a new untested system that may or may not perform as intended. I don't see Trump admin as ones that would want to role the dice on the economy given current state of affairs and deficit issues.

 

Not sure I understand Karen Petrou's argument.  In the article she states "A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse."    A draw just occurred on 3/31/2018 - did you hear anything about it in the news?  A larger draw probably causes just as much noise.  Even if it did, it could be easily PR'd to the average person that fannie/freddie are the problem and need to be killed. 

 

They were able to justify the recent draw due to a one time accounting hit. The combined draw totaled less than $4b due to some earnings and a timely settlement. The same cannot be said if a material draw is needed. Regardless of how PR will spin the GSE failure, the PR will crush Trump and the republicans for allowing that to happen under there watch, especially when one of his first mandates was to end taxpayer bailouts.

 

You are one optimistic soab to have any faith in the legal thesis at this point.  I think we all should acknowledge that this is extremely complicated and at some point become sober to the fact that "lack of judicial review" was not something that was handicapped for when the initial investment thesis was presented. 

 

Again, motive has yet to matter in any of the cases BUT the takings case. This was always a issue of takings and no court has yet to rule on that matter. Unfortunately for shareholders, the discovery process dragged this case out for 4 years. Luckily that's wrapped up now and we are in the briefings stage.

 

I'm still in the trade, but I find myself more and more recognizing that I want to be right about this after spending so much time on it.  It's a clear bias and something that smells trouble in investing - and I'm very close to sizeably reducing my position as I'm worried that there's something else coming that will blindside us again. 

 

I understand the frustration, you are not alone, hence the share price today.

 

The mutualization solution (http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf) plus privately settling the lawsuits with all current large shareholders would not be totally surprising and I don't know how to handicap the odds.

 

Perhaps you are not aware how shareholder claims are treated in courts, but we are all equal. There is no settling with 1 private party loophole here. That has never been a risk to the thesis.

[locutusoftexas]

Okay, I cannot quote all of that, which was helpful and insightful. So I will proceed to a response -- Time and time again, I have read of intelligent and probably honorable people who falter when they rise to very powerful positions which include control of large amounts of money. In other words, when money is involved, scruples and good judgement are often lost. Here we have the Treasury Departments under Obama and Trump with absolute control over a massive money machine - perhaps the greatest ever known. The government really wants money -- Here is ready and continual access to billions and billions (Carl Sagan notwithstanding). We could not trust Geithner, and now we cannot trust Mnuchin, to do "the right thing" or "the intelligent thing." Great force is probably necessary - political or otherwise. In this case, unless the private shareholders win a case in federal court, I am betting that nothing will happen, perhaps for generations, if the corporate officers of FnF are competent and honest. (Okay, that might be a big "if," according to my thesis above.) The best chance to win a court case will be the complaint that the companies have been nationalized in violation of the 5th Amendment (failure to compensate owners appropriately). The plaintiffs (Mason Capital) demand mainly fair compensation for private shareholders. So I am personally done with analysis of Mnuchin's comments or of anything Congress might do. Right now they can bring massive amounts of money into the government by sitting on their hands. They are firmly committed to today and do not wish or intend to think about the future. All we private shareholders can do is sell or wait for a win in court. It is a tough call, especially given that the federal courts are part of the government and, ignoring that paranoid observation, the legal system is designed to delay, delay, delay.

[SnarkyPuppy]

1.  Mnuchin has already reversed his commentary to date on the timing of when the GSEs would be released.  What's stopping him from reversing his commentary to date that he wants to end conservatorship?  Is this in legal writing?  Will he be personally punished if he keeps the status quo or go against what he said publicly?  His boss quite literally lies daily...? 

 

Other than Mnuchin missteps on timing, I can't point to any commentary to date that Mnuchin has said which is anti-GSEs. In fact most of his comments continue to remain pro GSEs, pro private capital, pro government guarantee, and in an interview just a few months ago, he said point black he would not go as far as to get rid of the GSEs. His stance has always remained the same, he wants to end the conservatorship of the GSEs, not replace / get rid of them. If you find any language that he has said to date that implies the opposite, please share.

 

The rationale behind the status quo being unsustainable is quiet simple, we all know this already, aside from a small capital buffer of $3b, there is no capital in place to support ~$5tn of liabilities. There are a few key issues with this status quo, 1) The government bears the full risk of another down cycle due to no capital (read taxpayer bailout)- Mnuchin has acknowledged this point in  the past, 2) It will be difficult to reintroduce new private capital to the market based off how previous legacy investors were treated (Larry Kudlow, Trump’s recently appointed top national economic advisor, agrees- and we know Mnuchin wants private capital back), and 3) No matter how small the odds may be, the government continues to face a $100b+ overhang in litigation (this is a potential $200b+ PnL swing vs government monetizing its stake), and unless I missed it, no court has ruled on any constitutional claims yet. We have continually lost the same APA case over and over. Most importantly the takings claim is where motive (read evidence) matters.

 

2.  "Agrees to forfeit up to $100bn".  Again - this is not money in Mnuchin's personal pocket.  While the $100bn is a great incentive for the government, it doesn't contemplate whether there are other incentives at play which take priority.  As an example, if there is a mechanism whereby large banks are overwhelmingly favored but shareholders are taken out, it's possible that Mnuchin/Trump would see the banks fundraising money for the 2020 election to be a personal incentive which trumps (pun intended) the $100bn for the country.  Color me crazy but I don't see the current administration as a bunch of charitable good guys who are looking out for anyone but themselves.   

 

Not that its part of my thesis, but the same could be said to Trumps largest donors/contributors, Paulson, and more importantly Steve Schwarzman of the Blackstone GSO group. If the admin is truly looking out for themselves, this continues to be a path where Trump can chalk up a political win in addition to pulling $100b+ out of a magic hat as a "deal maker".

 

3.  Also w/r/t the warrants - they could've been exercised by now.  The value of the warrants reduces as each day passes.  The longer the current administration waits to monetize the warrants, the less time they will have to use the money productively.  Why would Mnuchin want to monetize $100bn of warrants to hand over to the next admin?  Waiting longer is coincidentally the same as waiting until closer to 2020 - hence waiting to disclose the solution until a date closer to the election is consistent with my point #2 above.

 

The warrants cant be monetized until a reform plan is put into place.

 

4. Please explain, in detail, why the following plan is a "low probability" event given that it's consistent with everything all key players have spoke to so far?  http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf

 

They weren't able to replace the GSEs back when they had momentum behind their back and were unprofitable. Now that they are more profitable than ever and Corker and Hensarling are on their way out, what makes you think any of the reform plans being presented is anything other than noise at this point? Additionally, the GSEs are the foundation of the U.S. housing market and are too systemically important to be wound down and replaced. It has in the past and remains a risky proposition to replace a functional system that has been in place for over 50 years with a new untested system that may or may not perform as intended. I don't see Trump admin as ones that would want to role the dice on the economy given current state of affairs and deficit issues.

 

Not sure I understand Karen Petrou's argument.  In the article she states "A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse."    A draw just occurred on 3/31/2018 - did you hear anything about it in the news?  A larger draw probably causes just as much noise.  Even if it did, it could be easily PR'd to the average person that fannie/freddie are the problem and need to be killed. 

 

They were able to justify the recent draw due to a one time accounting hit. The combined draw totaled less than $4b due to some earnings and a timely settlement. The same cannot be said if a material draw is needed. Regardless of how PR will spin the GSE failure, the PR will crush Trump and the republicans for allowing that to happen under there watch, especially when one of his first mandates was to end taxpayer bailouts.

 

You are one optimistic soab to have any faith in the legal thesis at this point.  I think we all should acknowledge that this is extremely complicated and at some point become sober to the fact that "lack of judicial review" was not something that was handicapped for when the initial investment thesis was presented. 

 

Again, motive has yet to matter in any of the cases BUT the takings case. This was always a issue of takings and no court has yet to rule on that matter. Unfortunately for shareholders, the discovery process dragged this case out for 4 years. Luckily that's wrapped up now and we are in the briefings stage.

 

I'm still in the trade, but I find myself more and more recognizing that I want to be right about this after spending so much time on it.  It's a clear bias and something that smells trouble in investing - and I'm very close to sizeably reducing my position as I'm worried that there's something else coming that will blindside us again. 

 

I understand the frustration, you are not alone, hence the share price today.

 

The mutualization solution (http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf) plus privately settling the lawsuits with all current large shareholders would not be totally surprising and I don't know how to handicap the odds.

 

Perhaps you are not aware how shareholder claims are treated in courts, but we are all equal. There is no settling with 1 private party loophole here. That has never been a risk to the thesis.

 

I'm exhausted and need to sleep - but I wanted to give a quick response. 

 

I don't disagree with anything you're saying.  In fact, your responses are largely consistent with my responses when pitching the bull thesis.  The problem is your (and my?) refusal to look at alternative downsides as you are basically just assuming that you're right and eventually you will be proven right.  When there's no margin of safety - you have to be 100% confident that your thesis is bulletproof.  I'm skeptical. 

 

The notion that there is no alternative to the current public/private GSE model is a bold statement that gets thrown around a lot by shareholders.  I hope you're not relying on the mix of Berkowitz/Rosner/Tim Howard and crew - these people are financially biased and this is an extraordinarily complicated topic.  There may be no *better* model - but there's certainly many other models.  You still have not addressed the mutualization idea directly - nobody in this thread has - other than vaguely countering with the fact that the public/private model is the best.

 

You took my point on Mnuchin saying one thing and doing another w/r/t timing out of context.  It was more fundamental -

to illustrate the simple fact that there is demonstrable evidence that he says one thing and does another (directly related to the GSEs as well).  Given he is the entire thesis, I'd focus very closely on everything he says and does. 

 

Larry Kudlow is actually anti-GSE.  He simply said in the interview that he agrees shareholders were screwed and that issuing new capital without treating old capital fairly is a difficult task/a good point raised by Rosner.  But he's fundamentally against the GSE's, likely has no say in the matter, and again - assumes there are zero potential alternative outcomes where the housing market changes shape and he's cool with it.  He likely couldn't care less about shareholders at the end of the day. 

 

Contingent Liability of ~$100bn.  This was one of the main reasons I initially got it.  This was the glue that held the entire thesis together.  But again, similar to the warrant point above, the current administration couldn't care less about the liability it places on a future administration.  If the government loses a lawsuit, they'll likely appeal and drag the cases out until the next administration has to deal with the issue.  Even if a payment needs to made the day after, the current administration will take no blame as they can simply put full responsibility on the obama administration who created the liability.  Mnuchin has done sufficient CYA by a) agreeing to a small capital buffer and b) constantly saying its a complicated topic that hes working on.  Obama gave him a difficult hand and he's been trying to figure it out.  Obama stole for Obamacare.  Obama.  Obama.  These guys will PR the fuck out of your worthless shares and these arguments won't be very meaningful. 

 

By the way - what ever happened to Trump/Mnuchin seeing all of the privileged documents and releasing them / going on a rampage highlighting all of the Obama theft? 

 

Surely you are aware that the companies behind anti-GSE legislation (large banks, BlackRock, etc) are orders of magnitude more important in fundraising for an election than Paulson (also - how's the Puerto Rico debt doing that Trump was going to make whole?) and BlackStone lol.  Can Berkowitz afford his own mortgage at this point?

 

The share price is a result of the things you mentioned.  But it is also the result of an administration not acting in shareholders favor when it can quite easily, today, act in shareholders favor. 

 

Regarding private settlement.  Again - I see no reason the government can't settle with all current plaintiffs and end the suits (the plaintiffs at this point happen to be everyone with the actual money capable of suing).  Any residual liability can be passed off to future administrations (new lawsuits seem to take on average ~5-10+ years).  I forget which bailout (citi I think) made certain foreign private shareholders whole while paying fractions to remaining shareholders. 

 

Again - trying to play devils advocate and poke holes in the thesis rather than constantly repeat the same platitudes shared by Berkowitz over and over until the shares go to $0. 

[allnatural]

Thanks for the thoughtful response. I agree with your sentiment that this is not a 100% full proof thesis (nothing is). But I do strongly believe at current share price levels, there is a material mispricing as evident by the market is telling us there is >75% chance that the GSEs are a 0. The probability weighted risk/reward skews in our favor at current levels when attempting to size up the various scenarios / alternatives (imo). My fallback remains the Takings case, while I believe admin action is around the corner (6-12 months). If you have been reading the tea leaves lately, you have noticed for the first time ever Corker himself said the admin can act alone and expects them to. Additionally, Crapo made comments recently saying he is supportive of admin action. This is a 180 when compared to last years comments that admin shouldn't do anything w/o congress. Congress is clearly raising the flag and handing this off to the admin for the first time ever. These are all new developments that IMO have been flying under the radar. Mnuchin has always stated that he HOPES for bi-partisan reform, leaving the door open for admin action, but it looks like he will finally have his cover post midterm elections (maybe i'm just a Mnuchin apologist!)

 

At this point we all know the thesis, its beaten to date. Lets see where we are in 2019.

[SnarkyPuppy]

Aren't you skeptical when crapo and corker are on your side?  Admin action is wonderful if it's beneficial to us.

 

Again - no response to the mutualization model.  I'd place gw odds at 50/50 right now.  Definitely +expected value at these prices but unfortunately only one coin flip. 

[allnatural]

The response to the mutualization model is the same response to any reform plan that involves receivership. "Hey Trump, let's try executing the single largest receivership/liquidation in financial history and cross our fingers / hope it has zero negative impact on interest rates, affordable housing, mortgage market, economy, etc." The idea of beta testing a new housing system is easier said than done. There is a reason that paper is close to 2 years old with zero traction (that i'm aware of?).

[rros]

Okay, I cannot quote all of that, which was helpful and insightful. So I will proceed to a response -- Time and time again, I have read of intelligent and probably honorable people who falter when they rise to very powerful positions which include control of large amounts of money. In other words, when money is involved, scruples and good judgement are often lost. Here we have the Treasury Departments under Obama and Trump with absolute control over a massive money machine - perhaps the greatest ever known. The government really wants money -- Here is ready and continual access to billions and billions (Carl Sagan notwithstanding). We could not trust Geithner, and now we cannot trust Mnuchin, to do "the right thing" or "the intelligent thing." Great force is probably necessary - political or otherwise. In this case, unless the private shareholders win a case in federal court, I am betting that nothing will happen, perhaps for generations, if the corporate officers of FnF are competent and honest. (Okay, that might be a big "if," according to my thesis above.) The best chance to win a court case will be the complaint that the companies have been nationalized in violation of the 5th Amendment (failure to compensate owners appropriately). The plaintiffs (Mason Capital) demand mainly fair compensation for private shareholders. So I am personally done with analysis of Mnuchin's comments or of anything Congress might do. Right now they can bring massive amounts of money into the government by sitting on their hands. They are firmly committed to today and do not wish or intend to think about the future. All we private shareholders can do is sell or wait for a win in court. It is a tough call, especially given that the federal courts are part of the government and, ignoring that paranoid observation, the legal system is designed to delay, delay, delay.

The access to billions and billions was made possible by a mutual agreement between FHFA and Treasury. Not one-sided. The thesis that one party in control receiving all the benefits has no motivation to change has a wrinkle. The second party to the agreement (FHFA in the shoes of Fannie and Freddie) who has received some benefit initially now faces a major conundrum, complete drainage of capital. This comes from the Director himself and the letter of agreement between the two parties is a testimony of Watt's dire warnings.

 

The one exception to no-judicial-review is FHFA initiating a lawsuit against the Treasury. FHFA is the only entity allowed to bring lawsuits by HERA. You have to wonder why this isn't happening -as strange as it sounds- if, according to your thesis, only Treasury is benefiting. If you are correct and the benefit is one-sided, Watt can stop this.

[SnarkyPuppy]

The response to the mutualization model is the same response to any reform plan that involves receivership. "Hey Trump, let's try executing the single largest receivership/liquidation in financial history and cross our fingers / hope it has zero negative impact on interest rates, affordable housing, mortgage market, economy, etc." The idea of beta testing a new housing system is easier said than done. There is a reason that paper is close to 2 years old with zero traction (that i'm aware of?).

 

Recap release has been around for 3x the length of that paper with zero traction

 

And again - no response to mutualization model other than it's not recap/release lol

[Midas79]

Recap release has been around for 3x the length of that paper with zero traction

 

And again - no response to mutualization model other than it's not recap/release lol

 

The short answer is that mutualization requires Congress, and I think there is basically a 0% chance they can get something like that passed and signed.

 

Even just focusing on the administration, mutualization requires receivership or liquidation of the existing companies. That is, FnF = dead. I have seen no comments from any administration official signaling such a desire.

 

On the contrary, Mnuchin has said that he wouldn't go so far as to say that he wants the GSEs eliminated. And his agreeing to the most recent letter agreement allowing each company a $3B capital buffer is much more conducive to keeping the companies around than trying to kill them.

 

If the administration wants receivership so badly they had a simple path:

• Don't do the December 21 letter agreement
  
• Let the companies operate on zero capital throughout 2018
  
• Appoint a new FHFA director January 1, 2019 who wants FnF dead
  
• Have the director use accounting discretion to make sure FnF book losses in Q1 2019
  
• Director refuses a draw June 30, 2019
  
• Mandatory receivership kicks in due to 60 consecutive days of negative net worth
  

 

It could happen even earlier if the new director fudges with Q4 2018 numbers during January 2019. That still leaves the Trump administration almost 2 years to craft as much of a new system as they can without Congressional approval.

[Guest cherzeca]

The response to the mutualization model is the same response to any reform plan that involves receivership. "Hey Trump, let's try executing the single largest receivership/liquidation in financial history and cross our fingers / hope it has zero negative impact on interest rates, affordable housing, mortgage market, economy, etc." The idea of beta testing a new housing system is easier said than done. There is a reason that paper is close to 2 years old with zero traction (that i'm aware of?).

 

hey allnatural, welcome to board.

 

inertia is the greatest force in the universe, and when you are scraping 100% of the profits of two of the largest financial institutions in the world, things have a way of continuing until a strong force affects it.  i would have thought that such a strong force would have been judicial by now, but i think there is still promise in the hindes/jacobs 3rd circuit appeal, the bhatti case in front of judge schlitz, and the collins appeal in the 5th cir...as well as a case in 5th cir that argues against the constitutionality of the cfpb, which would apply to fhfa.

 

but assuming there is no judicial force redirecting inertia, a solution has to be crafted, and it seems like the "replace FnF" crowd has been played out...literally with the prospective leave of corker and hensarling.  mnuchin started out talking about a quick solution, hence administrative, but now talks about bipartisan (involving congress, so likely also involving a cat fed mbs guaranty that will make banks happy).  i still dont see how CRTs can provide enough private capital, and i still dont see how substantial private capital can be raised without some semi-satisfactory resolution of shareholder claims.

 

all this is mushy stuff for investors, hence the risk discount which, i agree, seems too severe. 

 

wonder what the solution will look like if dems capture majority in house...imagine the repubs going bipartisan with maxine waters!

[Eye4Valu]

Let's all just agree to disagree. When something material happens here, please let me know. Maybe 5th Circuit? Maybe next year?

[SnarkyPuppy]

Expected value is indeed very attractive at current prices

[locutusoftexas]

rros,

 

Technically you are correct that FHFA has power here. However, I prefer to follow actions, and as I read the history of HERA and its implementation,  FHFA has supported everything that Treasury has wanted. Further, I follow the money. Treasury is getting all of the money, and according to the Third Amendment agreed to by FHFA and Treasury, Treasury will receive all of the money in perpetuity. I do not understand the motivations of the FHFA administrators, who have agreed to the NWS in violation of standard expectations of a conservator. However, I do not really have to understand the motivations. Rather I can observe that FHFA has done nothing in opposition to Treasury. So I wish that FHFA had proven your argument to have some weight, and sincerely hope that it will in the near future. However, the data say otherwise and I can only make a rational decision based on observations (data) and interpretation of the observations. In the world of forecasting, standard practice is to extrapolate past data to the future. The model of FHFA as a faithful conservator does not match the data and so, practically speaking, is irrelevant as a basis for extrapolating past data to produce a credible forecast of the outcome.

[rros]

rros,

 

Technically you are correct that FHFA has power here. However, I prefer to follow actions, and as I read the history of HERA and its implementation,  FHFA has supported everything that Treasury has wanted. Further, I follow the money. Treasury is getting all of the money, and according to the Third Amendment agreed to by FHFA and Treasury, Treasury will receive all of the money in perpetuity. I do not understand the motivations of the FHFA administrators, who have agreed to the NWS in violation of standard expectations of a conservator. However, I do not really have to understand the motivations. Rather I can observe that FHFA has done nothing in opposition to Treasury. So I wish that FHFA had proven your argument to have some weight, and sincerely hope that it will in the near future. However, the data say otherwise and I can only make a rational decision based on observations (data) and interpretation of the observations. In the world of forecasting, standard practice is to extrapolate past data to the future. The model of FHFA as a faithful conservator does not match the data and so, practically speaking, is irrelevant as a basis for extrapolating past data to produce a credible forecast of the outcome.

Yes, so far knowing that FHFA does have power to overturn the situation has been useless. The best way to understand this failure is by closely looking at the actors. DeMarco was happy to sell FF's soul to the devil under the excuse Congress owns the issue. Watt appears to be an extremely weak agent who -in the best Pilate's fashion- doesn't want to own what he inherited. And I am not even getting into their more obscure motivations.  Since investing is about people, it is correct to disregard the possibility that FHFA could one day surprises us. I agree following actions and money seems to lead to better results.

 

Rather I can observe that FHFA has done nothing in opposition to Treasury.

Actually, DeMarco opposed Geithner when there was a push to raise fees by FHFA. Something DeMarco sought and succeeded in doing. Watt, in turn, somewhat forced Treasury to permanently rebuild a capital cushion. That came after Mnuchin said he expected to continue to receive all dividends. So while Watt seems shier as an acting Director his actions may still count as a precedent.

[allnatural]

Watt's an interesting player in the drama. For any administrative action, you need FHFA to sign off. Although Watt has expressed pro GSEs / pro shareholder thinking (desire to rebuild capital + the FHFA blueprint on reform), he has also stated multiple times that its up to Congress to decide the future of the GSEs, not himself/FHFA. Maybe with Watt so close to the end of the term, he is the one that isn't willing to "dance" and that's why Mnuchin made his comments last week about potentially replacing him with someone else in January (who may be more willing to sign off on an administrative action).

 

Side note, does anyone else find it strange/interesting that Trump has never once mentioned the GSEs or mortgage market during his election campaign/current term, considering he made his wealth in the real estate market and the significant role housing has in the the economy.

[orthopa]

 

Side note, does anyone else find it strange/interesting that Trump has never once mentioned the GSEs or mortgage market during his election campaign/current term, considering he made his wealth in the real estate market and the significant role housing has in the the economy.

 

I think there is no question this is premeditated. Not sure I could give a good answer for it though.

[Midas79]

 

Side note, does anyone else find it strange/interesting that Trump has never once mentioned the GSEs or mortgage market during his election campaign/current term, considering he made his wealth in the real estate market and the significant role housing has in the the economy.

 

I think there is no question this is premeditated. Not sure I could give a good answer for it though.

 

I agree. Trump says/tweets so many things without thinking, he has to have a reason for de facto radio silence on the issue.

 

While I struggle to think of plausible reform scenarios that wipe the companies out, I find it even harder to imagine one that involves this level of silence beforehand.

[Sunrider]

 

Side note, does anyone else find it strange/interesting that Trump has never once mentioned the GSEs or mortgage market during his election campaign/current term, considering he made his wealth in the real estate market and the significant role housing has in the the economy.

 

I think there is no question this is premeditated. Not sure I could give a good answer for it though.

 

I'm not sure that's the simplest explanation (which should be the preferred one in the absence of more data) ... what about him simply never having thought about the GSEs. A poster up-board made a point about him having made his money in RE. Well, that's somewhat debatable (although I think Trump steaks wouldn't have contributed all too much), but more importantly the type of RE he's been dealing in has absolutely nothing to do with the GSEs, so there's absolutely no reason for him to have these on his radar. Most people (especially those that voted for him) do not know what the GSEs are, what they do, and why they are necessary, so why should he care/mention them/otherwise be bothered.

 

Don't get me wrong, I'd like to believe that there's a good reason (for shareholders) for his silence ... but you need to develop rather convoluted theories for that when the alternative is much simpler.

 

... and this ain't X files.

 

Cheers!

 

I agree. Trump says/tweets so many things without thinking, he has to have a reason for de facto radio silence on the issue.

 

While I struggle to think of plausible reform scenarios that wipe the companies out, I find it even harder to imagine one that involves this level of silence beforehand.

[allnatural]

@Sunrider

 

You are probably correct. But it's one thing not to mention the GSEs, but another to not mention the entire housing market at all? Whether or not he had prior affiliation with the GSEs, he has definitely had involvement in the housing/real estate market (and it affects all Americans). It also may be a sensitive issue for him given his affiliation to Paulson / Schwarzman.

[Midas79]

This is 100% political, really sad.

 

https://www.urban.org/sites/default/files/publication/98433/gse_reform_is_dead_long_live_gse_reform_2.pdf

 

Thanks for posting this.

 

• Yes, the situation is almost 100% political. Outside of politicians, only the courts potentially have a say and waiting for them would try the patience of Job.
  
• Parrott and Zandi actually acknowledge that FnF's affordable housing mandates did not contribute to the financial crisis, even showing links to independent studies in footnote 8. And yet immediately afterward they still argue that a conservative FHFA director would ignore that and continue the false narrative to justify shrinking the GSEs.
  
• They don't think Treasury can amend the terms of the SPSPAs to cancel/redeem/etc the seniors because of restrictions on the government's ability to “compromise a debt”. But the seniors aren't debt, they're equity!
  
• Box 2, criticizing the Moelis plan, has a few errors. It assumes that Treasury's backstop would remain in force in perpetuity, while Moelis actually provides for new equity capital to stand in front of Treasury while winding the backstop down over time. It also assumes that the duopoly of FnF is an inherent problem, not mentioning why it's bad. The paper also talks about Treasury selling its interest in the companies, but it confuses the senior prefs (which would be gone) with the warrants (which would be exercised).
  
• Box 3 says that in another crisis, 2/3 of FnF's losses would be borne by private investors, but the next paragraph says that the companies are transferring just over 1/4 of the risk. How do those numbers reconcile?
  
• They don't address current shareholders at all. Not that I expected them to, just noting the continued insistence that we don't matter.
  

[Sunrider]

@Sunrider

 

You are probably correct. But it's one thing not to mention the GSEs, but another to not mention the entire housing market at all? Whether or not he had prior affiliation with the GSEs, he has definitely had involvement in the housing/real estate market (and it affects all Americans). It also may be a sensitive issue for him given his affiliation to Paulson / Schwarzman.

 

Well, the housing market != the real estate market. The housing market is part of the RE market. And you can happily build and sell offices, hotels, casinos and even luxury condos without ever worrying about the GSEs.

 

Not trying to start an argument here ... just saying. The Donald is so self-focussed and absorbed that it would not be surprising at all, not only that he's got no idea about this, but also that he doesn't actually care.

 

[blackcoffee]

@Sunrider

 

You are probably correct. But it's one thing not to mention the GSEs, but another to not mention the entire housing market at all? Whether or not he had prior affiliation with the GSEs, he has definitely had involvement in the housing/real estate market (and it affects all Americans). It also may be a sensitive issue for him given his affiliation to Paulson / Schwarzman.

 

Well, the housing market != the real estate market. The housing market is part of the RE market. And you can happily build and sell offices, hotels, casinos and even luxury condos without ever worrying about the GSEs.

 

Not trying to start an argument here ... just saying. The Donald is so self-focussed and absorbed that it would not be surprising at all, not only that he's got no idea about this, but also that he doesn't actually care.

 

It's also worth noting that no one actually knows what his net worth is since he refuses to disclose anything. Anyone hocking worthless for profit colleges and steaks and simply licensing their name as a brand is unlikely to be a billionaire.. just because a building is called Trump whatever doesn't mean he owns the building, in fact in many cases he just lends his name to the development for a fee. Which maybe is worth more now that he somehow got into the white house but the fact that he's a national embarrassment basically from top to bottom should impair that. But who knows!! People seem to be really stupid.

[rros]

This is 100% political, really sad.

 

https://www.urban.org/sites/default/files/publication/98433/gse_reform_is_dead_long_live_gse_reform_2.pdf

 

Thanks for posting this.

 

• Yes, the situation is almost 100% political. Outside of politicians, only the courts potentially have a say and waiting for them would try the patience of Job.
  
• Parrott and Zandi actually acknowledge that FnF's affordable housing mandates did not contribute to the financial crisis, even showing links to independent studies in footnote 8. And yet immediately afterward they still argue that a conservative FHFA director would ignore that and continue the false narrative to justify shrinking the GSEs.
  
• They don't think Treasury can amend the terms of the SPSPAs to cancel/redeem/etc the seniors because of restrictions on the government's ability to “compromise a debt”. But the seniors aren't debt, they're equity!
  
• Box 2, criticizing the Moelis plan, has a few errors. It assumes that Treasury's backstop would remain in force in perpetuity, while Moelis actually provides for new equity capital to stand in front of Treasury while winding the backstop down over time. It also assumes that the duopoly of FnF is an inherent problem, not mentioning why it's bad. The paper also talks about Treasury selling its interest in the companies, but it confuses the senior prefs (which would be gone) with the warrants (which would be exercised).
  
• Box 3 says that in another crisis, 2/3 of FnF's losses would be borne by private investors, but the next paragraph says that the companies are transferring just over 1/4 of the risk. How do those numbers reconcile?
  
• They don't address current shareholders at all. Not that I expected them to, just noting the continued insistence that we don't matter.
  

I think the most interesting aspect of this paper is the foregone conclusion that administrative action is coming. To find clues on what this may entail focusing on Jerome Powell is a must. He has been explicitly vocal about the GSEs and has been hand-selected by Mnuchin. Jerome Powell and Mnuchin -and the new FHFA Director as a follower- will set the tone. JP wants a smaller foot-print for sure and no duopoly.

[Eye4Valu]

OK, which one of you sent the letter to Judge Sweeney?  ;)

[DRValue]

Sounds interesting.... do you have a link to the letter?