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


twacowfca

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Let them take them to receivership and drop preferreds and commons to zero. That is what Watt, MBA and fellow travelers want for last 10 years. Let their wishes come true (and affordable housing will be completely gone too with it). This Corsi guy has been tweeting again but I agree with you all, it has no meaning and nothing is going to happen, all talk. Venezuela style.

 

I don’t get what  Freddie/Fannie receivership and affordable housing have to do with each either. They are two separate issues.

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Let them take them to receivership and drop preferreds and commons to zero. That is what Watt, MBA and fellow travelers want for last 10 years. Let their wishes come true (and affordable housing will be completely gone too with it). This Corsi guy has been tweeting again but I agree with you all, it has no meaning and nothing is going to happen, all talk. Venezuela style.

Emily... hey, Chavez compensated shareholders in the billions after expropriation of PDVSA. Don't you wish we were a little Venezuela that style?
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Let them take them to receivership and drop preferreds and commons to zero. That is what Watt, MBA and fellow travelers want for last 10 years. Let their wishes come true (and affordable housing will be completely gone too with it). This Corsi guy has been tweeting again but I agree with you all, it has no meaning and nothing is going to happen, all talk. Venezuela style.

 

I don’t get what  Freddie/Fannie receivership and affordable housing have to do with each either. They are two separate issues.

 

On the contrary, I think they are closely related. My view of the situation is that those Republicans that want FnF dead for ideological reasons (Hensarling is the most vocal) is because they think government should not be involved in affordable housing. More specifically, they think that government money should not be involved. See Hensarling going off the rails when Watt had FnF contribute to affordable housing funds in Q1 2018 even as they were taking a draw from Treasury due to DTA writedowns.

 

Affordable housing mandates are in FnF's charters, and a run through receivership would allow Congress to draft new charters for the companies, probably conforming to those of full private-sector companies with no duty to serve low-income people seeking housing.

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Let them take them to receivership and drop preferreds and commons to zero. That is what Watt, MBA and fellow travelers want for last 10 years. Let their wishes come true (and affordable housing will be completely gone too with it). This Corsi guy has been tweeting again but I agree with you all, it has no meaning and nothing is going to happen, all talk. Venezuela style.

 

I don’t get what  Freddie/Fannie receivership and affordable housing have to do with each either. They are two separate issues.

 

On the contrary, I think they are closely related. My view of the situation is that those Republicans that want FnF dead for ideological reasons (Hensarling is the most vocal) is because they think government should not be involved in affordable housing. More specifically, they think that government money should not be involved. See Hensarling going off the rails when Watt had FnF contribute to affordable housing funds in Q1 2018 even as they were taking a draw from Treasury due to DTA writedowns.

 

Affordable housing mandates are in FnF's charters, and a run through receivership would allow Congress to draft new charters for the companies, probably conforming to those of full private-sector companies with no duty to serve low-income people seeking housing.

 

To me it's hilarious that anyone's view would be predicated on ideology and actually believe that the people who are paid directly by the banks to say these things that are bank friendly think they actually care at all AT ALL about some ideology. It's laughable. Why do you think any of these politicians have any shred of credibility left?

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Although I'm pretty certain the warrants will be exercised and almost hesitate to bring this up, take a look at the following from this treasury report at:

 

https://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_GSE_508.pdf

 

Need to maintain the  Enterprises’  and the  FHLBs’  status  as  private  shareholder-owned companies  –  Fannie  Mae  and Freddie  Mac  may  emerge  from  conservatorship to resume independent  operations, or  they  may  emerge  in some  other  form  reflecting  legislative changes  to  their  congressional  charters.  Conservatorship  preserves  the status  and  claims of  the  preferred and  common shareholders.    The  value  of  the  warrants  issued to the government  under  the  terms  of  the  PSPAs  could potentially  increase, thereby  providing enhanced value  to the  taxpayers.  Upon  the  government’s  exercise of  the warrants,  the GSEs  would be  required  under  the  terms  of  the  PSPAs  to apply  the  net  cash  proceeds  to pay-down the  liquidation preference  of  the  senior  preferred stock.

So, for the legal eagles, if the pspas are deemed paid due to the courts or through legislation, how would the companies have to use the funds? Do whatever they want?

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Does this mean no bear market till 2020?

 

"The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020 Wile E. Coyote is going to go off the cliff,” Bernanke said, referring to the hapless character in the Road Runner cartoon series."

 

 

https://www.bloomberg.com/news/articles/2018-06-07/bernanke-says-u-s-economy-faces-wile-e-coyote-moment-in-2020

 

Eh, keep in mind the man saying it missed the last recession even though he was the pre-eminent expert on the Depression and banking crises  ::)

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Although I'm pretty certain the warrants will be exercised and almost hesitate to bring this up, take a look at the following from this treasury report at:

 

https://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_GSE_508.pdf

 

Need to maintain the  Enterprises’  and the  FHLBs’  status  as  private  shareholder-owned companies  –  Fannie  Mae  and Freddie  Mac  may  emerge  from  conservatorship to resume independent  operations, or  they  may  emerge  in some  other  form  reflecting  legislative changes  to  their  congressional  charters.  Conservatorship  preserves  the status  and  claims of  the  preferred and  common shareholders.    The  value  of  the  warrants  issued to the government  under  the  terms  of  the  PSPAs  could potentially  increase, thereby  providing enhanced value  to the  taxpayers.  Upon  the  government’s  exercise of  the warrants,  the GSEs  would be  required  under  the  terms  of  the  PSPAs  to apply  the  net  cash  proceeds  to pay-down the  liquidation preference  of  the  senior  preferred stock.

So, for the legal eagles, if the pspas are deemed paid due to the courts or through legislation, how would the companies have to use the funds? Do whatever they want?

 

Looks like we would have been golden before the sweep.

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Although I'm pretty certain the warrants will be exercised and almost hesitate to bring this up, take a look at the following from this treasury report at:

 

https://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_GSE_508.pdf

 

Need to maintain the  Enterprises’  and the  FHLBs’  status  as  private  shareholder-owned companies  –  Fannie  Mae  and Freddie  Mac  may  emerge  from  conservatorship to resume independent  operations, or  they  may  emerge  in some  other  form  reflecting  legislative changes  to  their  congressional  charters.  Conservatorship  preserves  the status  and  claims of  the  preferred and  common shareholders.    The  value  of  the  warrants  issued to the government  under  the  terms  of  the  PSPAs  could potentially  increase, thereby  providing enhanced value  to the  taxpayers.  Upon  the  government’s  exercise of  the warrants,  the GSEs  would be  required  under  the  terms  of  the  PSPAs  to apply  the  net  cash  proceeds  to pay-down the  liquidation preference  of  the  senior  preferred stock.

So, for the legal eagles, if the pspas are deemed paid due to the courts or through legislation, how would the companies have to use the funds? Do whatever they want?

 

Looks like we would have been golden before the sweep.

 

Not really. The proceeds from the exercise of the warrants is the number of shares (around 7.2B) times the exercise price ($0.00001, or 1/1000 of a cent). That comes out to around $72,000.

 

If Treasury raises the exercise price (strike price) of the warrants, this could add up to extra money that would technically go to FnF but come right back to pay down the seniors. This is one way Treasury can take the seniors out, because that is a prerequisite for any release from conservatorship.

 

But raising the exercise price is not easy because it has to stay below the market price (which Treasury cannot directly control) for the number of issued shares to be a positive number.

 

https://investorshub.advfn.com/boards/read_msg.aspx?message_id=141371252

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Ah well I think you've figured out what I was sub consciously thinking of.

Say that 7.2 billion shares are exercised at 2 dollars, that goes some way to recap.

 

I guess what I really meant was that if spsas are repaid you couldn't give a rationale for exercising at $0.00001 in my opinion. Doesn't recap and the tax payer had already been made whole.

 

I'd hope there would be some kind of law suit against the warrants but unless some very clever people tell me otherwise I'm guessing we're stuck with them. As unfair as I think that is.

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It appears David Stevens is no fan of Trump!  I doubt he'd be publicly bashing POTUS at this juncture if he thought he was going to get his way with the GSE's.

 

Similar to Corker bashing Trump awhile back when he realized his desires weren't going to materialize.

 

https://www.housingwire.com/blogs/1-rewired/post/43640-monday-morning-cup-of-coffee-ben-carson-backtracks-on-plan-to-raise-rents-for-poor

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From the dividend and draw tables kept by FHFA, found here:

https://www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/Table_1.pdf

https://www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/Table_2.pdf

I finally went through and calculated how much the seniors would have been paid down if the NWS hadn't been implemented, if FnF had been willing (and able, by direction of FHFA) to put all dividends towards paying down the seniors, and of course if the seniors had actually been allowed to be repaid.

 

If one column is off by a quarter it affects things, but not significantly at the end.

 

Quarter Year Freddie bal 2.5% int Div paid New bal Fannie bal 2.5% int Div paid New bal
2 2012 71.336 1.783 1.808 71.311 116.149 2.904 2.931 116.122
3 2012 71.311 1.783 1.808 71.286 116.122 2.903 2.929 116.096
4 2012 71.286 1.782 1.808 71.26 116.096 2.902 2.929 116.069
1 2013 71.26 1.782 5.826 67.216 116.069 2.902 4.224 114.747
2 2013 67.216 1.68 6.971 61.925 114.747 2.869 59.368 58.248
3 2013 61.925 1.548 4.357 59.116 58.248 1.456 10.243 49.461
4 2013 59.116 1.478 30.436 30.158 49.461 1.237 8.617 42.08
1 2014 30.158 0.754 10.435 20.477 42.08 1.052 7.192 35.94
2 2014 20.477 0.512 4.499 16.49 35.94 0.899 5.692 31.147
3 2014 16.49 0.412 1.89 15.012 31.147 0.779 3.712 28.213
4 2014 15.012 0.375 2.786 12.602 28.213 0.705 3.999 24.92
1 2015 12.602 0.315 0.851 12.066 24.92 0.623 1.92 23.623
2 2015 12.066 0.302 0.746 11.621 23.623 0.591 1.796 22.417
3 2015 11.621 0.291 3.913 7.999 22.417 0.56 4.359 18.619
4 2015 7.999 0.2 0 8.199 18.619 0.465 2.202 16.882
1 2016 8.199 0.205 1.74 6.664 16.882 0.422 2.859 14.445
2 2016 6.664 0.167 0 6.831 14.445 0.361 0.919 13.887
3 2016 6.831 0.171 0.933 6.068 13.887 0.347 2.869 11.366
4 2016 6.068 0.152 2.3 3.92 11.366 0.284 2.976 8.674
1 2017 3.92 0.098 4.476 0* 8.674 0.217 5.471 3.42
2 2017 0 0 2.234 0 3.42 0.085 2.779 0.726
3 2017 0 0 1.985 0 0.726 0.018 3.117 0**
4 2017 0 0 2.249 0 0 0 0.648 0

 

* At this point Freddie's balance hits zero and there was an overpayment of $458M in Q1 2017.

** At this point Fannie's balance hits zero and there was an overpayment of $2.373B in Q3 2017.

(I left out Q1 2018 because FnF did not pay dividends)

 

What I believe this means is that absent the NWS (and if repaying the seniors was allowed), Fannie would have $3.021B in capital  (the overpayment in Q3 2017 plus the dividend from Q4 2017) plus the $2.4B they were allowed to keep in Q4 2017 due to the letter agreement, for a total of $5.421B pre-DTA writedown. For Freddie it's even better, $6.926B in extra payments plus $2.4B in capital buffer is $9.326B, enough to overcome the DTA writedown completely.

 

Fannie would not have fared so well: they would have had to get money somewhere in Q1 2018 because (in this alternate universe) once the seniors were repaid, Treasury's funding commitment would disappear and Fannie would have to tap private markets. Of course, I don't think they would have any trouble raising the $4.5B difference between the $9.9B writedown and the $5.421B in capital they would have had. But it's still a potential arrow in Treasury's quiver in the court cases.

 

I don't think any of this explains the recent reversal in Fannie and Freddie stock prices: this information has been known for at least 6 months.

 

 

 

Speaking of the funding commitment, I think that is key to the fate of the seniors. Many people, myself included, believe that Treasury doesn't do things out of the goodness of its heart: it wants recompense for everything given. Hence the $3B increase in liquidation preference in the letter agreement, for example.

 

So why would Treasury just make the seniors go poof? Because they can declare victory on the bailout (which only happened in Q4 2017 once Fannie passed the 10% moment), but more importantly they could then get out from under the funding agreement in the SPSPAs, the primary source of taxpayer risk. By the terms of the SPSPAs, if Fannie or Freddie have a net worth deficit and they ask Treasury for money, Treasury must provide it. Eliminating the backstop both provides a ton of taxpayer protection (they would be on the hook for nothing rather than $212.5B as it stands) and sets the stage for a release from conservatorship.

 

Mnuchin has also said many times that he wants the companies to be safe, so a recapitalization would be needed, lest another recession hit and Treasury is forced to either bail them out or let them fail. Since the companies have such little capital, and recessions can be rather sudden (and since Mnuchin said he wants all this done before Trump's term ends), the recap would have to happen quickly. Retained earnings by themselves would not be enough. Still, I don't expect Treasury to send back the "overpayments" on the 10% that no longer applies, so Freddie would be disproportinally hurt.

 

Mnuchin has another reason to have all this done before Trump's term ends: his successor (Trump's re-election chances are already looking grim) could undo anything in progress if the release hasn't happened by January 2021, while if it's all wrapped up by then, the successor would have a very hard time trying to re-establish what is now the status quo.

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Next up: Moelis...

 

Note: attached image stolen from Twitter.

 

 

And page 14...once FHFA sets capital standards, Moelis can do the rest...

 

"Role of FHFA in setting minimum capital standards

 

The FHFA, which HERA endowed with broad discretion and authority to implement capital standards for the GSEs, will have the ultimate responsibility for designing and implementing final capital requirements.18 This authority, which has not been used or tested since the crisis, allows FHFA to impose a safe and sound regulatory regime tailored to the unique nature of the GSEs’ businesses and, designed to prevent the undercapitalization which led to their initial conservatorship. FHFA should be strongly encouraged to exercise this authority.

 

While we have sought to provide credible assumptions in designing and testing this Blueprint, the architecture of the Safety and Soundness Blueprint can be applied to lower or higher minimum capital requirements.iv

 

iv. There is an implicit trade-off between safety and soundness, on one hand, and the cost of guarantee fees and timeline to building capital, on the other. Imposition of more conservative capital requirements (e.g., 4% to 5% capital minimums) would require higher guarantee fees, in order to provide a sufficient market return to the larger amount of private capital that needs to be raised from third parties, and/or would necessitate a slower capital build. FHFA as safety and soundness regulator has the ultimate responsibility for assessing and evaluating this trade-off."

Moelis-FHFA_6-12-2018.thumb.jpg.3f80674c653ac94692d1fa952bae5836.jpg

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Page 3 of executive summary:

" - Proposed risk-based capital requirements: FHFA estimates a combined risk-based capital requirement of $180.9

billion, 3.24 percent of the Enterprises’ total assets and off-balance sheet guarantees. See Table 1.

  - Proposedminimumleveragecapitalrequirements:SeeTable3

 Under the 2.5 percent alternative (Alternative 1): FHFA estimates a combined minimum leverage capital requirement for both Enterprises of $139.5 billion.

 Under the bifurcated alternative (Alternative 2): FHFA estimates a combined minimum leverage capital requirement for both Enterprises of $103.5 billion."

 

https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Proposed-Rule-Enterprise-Capital-Fact-Sheet.pdf

 

 

Next up: Moelis...

 

 

And page 14...once FHFA sets capital standards, Moelis can do the rest...

 

"Role of FHFA in setting minimum capital standards

 

The FHFA, which HERA endowed with broad discretion and authority to implement capital standards for the GSEs, will have the ultimate responsibility for designing and implementing final capital requirements.18 This authority, which has not been used or tested since the crisis, allows FHFA to impose a safe and sound regulatory regime tailored to the unique nature of the GSEs’ businesses and, designed to prevent the undercapitalization which led to their initial conservatorship. FHFA should be strongly encouraged to exercise this authority.

 

While we have sought to provide credible assumptions in designing and testing this Blueprint, the architecture of the Safety and Soundness Blueprint can be applied to lower or higher minimum capital requirements.iv

 

iv. There is an implicit trade-off between safety and soundness, on one hand, and the cost of guarantee fees and timeline to building capital, on the other. Imposition of more conservative capital requirements (e.g., 4% to 5% capital minimums) would require higher guarantee fees, in order to provide a sufficient market return to the larger amount of private capital that needs to be raised from third parties, and/or would necessitate a slower capital build. FHFA as safety and soundness regulator has the ultimate responsibility for assessing and evaluating this trade-off."

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Can this be anything other than a recap now these standards are out?

 

Any one got the cahones to go all in yet?

The proposed rules specifically state this is not an attempt to recap and that FHFA steps aside leaving exiting the conservatorship to Congress/Admin. Also, is it the sum of the risk-based and leverage ratio the total capital required? That would be north of $300 bill. I can't read the 200 + pages.
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Can this be anything other than a recap now these standards are out?

 

Any one got the cahones to go all in yet?

The proposed rules specifically state this is not an attempt to recap and that FHFA steps aside leaving exiting the conservatorship to Congress/Admin. Also, is it the sum of the risk-based and leverage ratio the total capital required? That would be north of $300 bill. I can't read the 200 + pages.

 

I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen).

 

The point of the two numbers is that if the companies start de-risking themselves (holding less risky assets on the balance sheet), the $180.9B number could go down, but the other number (the minimum) wouldn't. FHFA (rightly) says that both are needed: the risk-based number is needed to actually calibrate the capital requirement to the actual state of the companies, and the minimum number is needed to prevent gaming of the system.

 

As for the statement about not wanting this to be construed as support for recap and release, well, Watt has been saying that all along. I just hope at some point he realizes (and is willing to take a stand on) the fact that nothing he does can restrain Congress's powers anyway, and they haven't shown any unified enough political will to do big reforms.

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I am pretty much all in and adding in small increments every month. I think this is a material step towards any reform as it lays how much capital the GSEs will be required to raise / retain in a recapitalization / privatization scenario (and is one of the steps proposed by the shareholder friendly Moelis plan). He can say its not meant for recap/release all he wants but this will guide discussions on capital going forward.

 

Can this be anything other than a recap now these standards are out?

 

Any one got the cahones to go all in yet?

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The capital framework, with numbers, suggested by FHFA is another good fact for plaintiffs and will likely be brought up in future NWS cases.  How can FnF ever have the capital levels the regulator says are appropriate if they can't retain capital?  Another good fact is when plaintiff lawyers are able to allege that the NWS has resulted in Treasury having fully recouped its investment in addition to the 10% dividend.  If Midas' numbers are largely correct, and this 10% moment has been discussed for some time, we are close. 

 

These two good facts will be very difficult to ignore in future judicial decisions. 

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