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

[allnatural]

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).

[Luke 532]

Nice work, allnatural!

[Guest cherzeca]

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).

 

+1

 

"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)."

 

absolutely. and the mandate directing the collins district court to act upon the en banc opinion issues tomorrow.  put Calabria at the top of the witness list...for the plaintiffs!

[buffetteer1984]

Whitney Tilson believes commons are worth 18.50/share

 

https://finance.yahoo.com/news/fannie-mae-warren-happened-robin-152059474.html

[Jcmeg35]

Whitney Tilson believes commons are worth 18.50/share

 

https://finance.yahoo.com/news/fannie-mae-warren-happened-robin-152059474.html

 

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.

[allnatural]

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

 

 

Whitney Tilson believes commons are worth 18.50/share

 

https://finance.yahoo.com/news/fannie-mae-warren-happened-robin-152059474.html

 

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.

[buffetteer1984]

I agree his price target is meaningless.  The more meaningful point to make is he's close friends with bill ackman who reportedly got tilson interested in the investment.  Not that following a hedge fund is smart idea but ackman is well connected and has spoke with congress about the gses.

 

Whitney Tilson believes commons are worth 18.50/share

 

https://finance.yahoo.com/news/fannie-mae-warren-happened-robin-152059474.html

 

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.

[Guest cherzeca]

re common v pref

 

junior pref used to be a hedge against getting wiped out, back when corker was trying to kill GSEs

 

juniors are still a hedge since no one knows what the recap structure/mechanics/values will be.  if they involve an exchange of junior to common, you can still participate as a common after exchange. I see no reason to be in common without knowing what the recap process entails, assuming as I do that at some point junior can become common

[allnatural]

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.

[SnarkyPuppy]

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.

 

Is it possible (maybe unlikely?) that the government is doing this to solidify a future political response to the "enrich hedge funds" onslaught?  i.e. they are likely aware that SCOTUS won't take the case given remedy hasn't been decided - but being able to say "we appealed to SCOTUS and they denied and therefore we have no choice but to settle"?

[investorG]

I guess the SC will take up the APA case, it appears to be their destiny and the time is ripe.  The constitutional appeal from the plaintiffs will probably be denied due to the CFPB grant.

 

At that point, it would likely be up to the plaintiffs to potentially accept a reasonable settlement deal in 1q (in conjunction with a 4th amendment) to keep the train running or let everything ride on the SC.  hopefully greed - on all sides - doesn't get in the way of a great deal.

[Guest cherzeca]

I guess the SC will take up the APA case, it appears to be their destiny and the time is ripe.  The constitutional appeal from the plaintiffs will probably be denied due to the CFPB grant.

 

At that point, it would likely be up to the plaintiffs to potentially accept a reasonable settlement deal in 1q (in conjunction with a 4th amendment) to keep the train running or let everything ride on the SC.  hopefully greed - on all sides - doesn't get in the way of a great deal.

 

if SCOTUS grants this APA cert petition I would expect it to grant P's constitutional cert petition as well...but I expect it to deny both.  but who knows. 

 

treasury makes a big deal about Colins creating uncertainty for the plan to get GSEs out of conservatorship, but exactly what collins does to the plan isn't clear until the district court proceeds with a remedy, which is precisely why interlocutory orders usually dont give rise to cert grants.

 

question is whether Ps call treasury and raises with a reply that argues for cert on APA as well.

[SnarkyPuppy]

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

[Guest cherzeca]

"Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities..."

 

fair question.  usually principals direct attorneys. in a case with the govt, where treasury really isn't a principal in the sense of having real skin in the game, DOJ lawyers seem to be directing the principal...and lawyers hate to lose.

 

I just think that treasury thinks this action serves its interest...and it might if there is reason to suspect that there might be some GSE antagonists who are watching to make sure that treasury and fhfa dont go weak.  but you are right to think that the relief that Ps are seeking is precisely the kind of action treasury has to undertake in any event to implement its plan

 

[james22]

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

 

Optics are sufficient rationale, I think.

[Wiggins]

Mnuchin has said many times that taxpayers need to be compensated for SPS. That's what all the Treasury legal briefs say including the recent cert brief, and it's what Mnuchin has implied publicly. If Treasury wins in court, then the SPS represent the entire value of the enterprises, and selling that interest would make a capital raise that much easier. Don't you all see that as plausible and if not then why not? He may have his own opinions that the NWS is wrong, but then again he is fiduciary of Government.

 

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

 

Optics are sufficient rationale, I think.

[investorG]

Mnuchin has said many times that taxpayers need to be compensated for SPS. That's what all the Treasury legal briefs say including the recent cert brief, and it's what Mnuchin has implied publicly. If Treasury wins in court, then the SPS represent the entire value of the enterprises, and selling that interest would make a capital raise that much easier. Don't you all see that as plausible and if not then why not? He may have his own opinions that the NWS is wrong, but then again he is fiduciary of Government.

 

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

 

Optics are sufficient rationale, I think.

 

Good points but ideally he is looking to monetize 'a portion' of the SPS rather than the full amount bc the latter makes the situation fairly unworkable.  Or he is simply looking to negotiate against any Collins tax credit requests and the plaintiffs are acting unnecessarily greedy.  Or, less likely, purely optics.

 

[SnarkyPuppy]

Mnuchin has said many times that taxpayers need to be compensated for SPS. That's what all the Treasury legal briefs say including the recent cert brief, and it's what Mnuchin has implied publicly. If Treasury wins in court, then the SPS represent the entire value of the enterprises, and selling that interest would make a capital raise that much easier. Don't you all see that as plausible and if not then why not? He may have his own opinions that the NWS is wrong, but then again he is fiduciary of Government.

 

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

 

Optics are sufficient rationale, I think.

 

I always took Mnuchin's "compensation" statement to mean payment of a periodic commitment fee commensurate w the explicit "credit line" guarantee + warrants.  In the scenario you describe where the senior prefs are sold in a secondary to the market - would these not naturally have to convert to common first to avoid a top-heavy capital structure and meet the likely capital rule?  And this scenario does not contemplate whether investors would be willing to buy $190bn of securities that will continue to have a contingent liability attached  (junior pref lawsuits).

 

Whoever occupies the UST seat seems to immediately develop Sweeney's described schizophrenia.    You either want to capitalize them and release them (per admin plan and testimony and FHFA strategic goals or you can keep fighting in court).  With that said, I default to thinking this is purely optics for two primary reasons

1) Mnuchin and Calabria absolutely already have a plan for how this resolves itself.  Public contradictions must be optics related bc these men are extremely calculated and probablistically are on the same page

2) Since Mnuchin's initial press release post election, he has been incredibly calculated in any statements on F&F

[Guest cherzeca]

If the objective of the treasury cert filing was to halt the Collins trial at federal district court then that seems to have failed as the mandate has already issued and been docketed at the federal district court

[Wiggins]

@IG and @SP totally agree, yes. I wasn't addressing the mechanics of how the interest of SPS would be sold (conversion, etc), just that it could be done. I totally agree it could be partial or any variation thereof. Y'all raise great points, it could be any and all of the above, including just pure optics, which makes Mnuchin's actions akin to 4D chess.  An additional argument for pure optics is that if Mnuchin truly did want to play hard ball and squeeze blood out of this stone then he would slow walk this a lot more, and he (they) seem to be pursuing this urgently. An urgent settlement helps plaintiffs, methinks. I like JPS's position at this point, all around.

 

 

Mnuchin has said many times that taxpayers need to be compensated for SPS. That's what all the Treasury legal briefs say including the recent cert brief, and it's what Mnuchin has implied publicly. If Treasury wins in court, then the SPS represent the entire value of the enterprises, and selling that interest would make a capital raise that much easier. Don't you all see that as plausible and if not then why not? He may have his own opinions that the NWS is wrong, but then again he is fiduciary of Government.

 

It is interesting that UST continues to pay its lawyers to fight this in court if there is an imminent settlement coming through a PSPA amendment in the next 2 months. 

 

Does anyone have a stronger rationale as to why they continue to fight in court instead of just signing an amendment eliminating the senior pref balance/settling w/ shareholders?  Other than optics given hedge fund conflicts of interest (Paulson) or strengthening negotiation position? 

 

Strengthening UST negotiating position doesn't hold up IMO, given the plaintiffs are asking for a reasonable remedy which is entirely consistent (and actually helps achieve) the administrations goals of recapitalizing the entities... 

 

So why...?

 

Optics are sufficient rationale, I think.

 

I always took Mnuchin's "compensation" statement to mean payment of a periodic commitment fee commensurate w the explicit "credit line" guarantee + warrants.  In the scenario you describe where the senior prefs are sold in a secondary to the market - would these not naturally have to convert to common first to avoid a top-heavy capital structure and meet the likely capital rule?  And this scenario does not contemplate whether investors would be willing to buy $190bn of securities that will continue to have a contingent liability attached  (junior pref lawsuits).

 

Whoever occupies the UST seat seems to immediately develop Sweeney's described schizophrenia.    You either want to capitalize them and release them (per admin plan and testimony and FHFA strategic goals or you can keep fighting in court).  With that said, I default to thinking this is purely optics for two primary reasons

1) Mnuchin and Calabria absolutely already have a plan for how this resolves itself.  Public contradictions must be optics related bc these men are extremely calculated and probablistically are on the same page

2) Since Mnuchin's initial press release post election, he has been incredibly calculated in any statements on F&F

[investorG]

If the objective of the treasury cert filing was to halt the Collins trial at federal district court then that seems to have failed as the mandate has already issued and been docketed at the federal district court

 

i'd guess we'll know if SC takes the case before anything relevant happens in atlas' court.

[Luke 532]

i'd guess we'll know if SC takes the case before anything relevant happens in atlas' court.

 

Anybody know when we might hear whether or not SC takes the case?

[SnarkyPuppy]

Looking at this by inverting-

 

UST has effectively documented that the 5th circuit ruling has significant and immediate impacts on admins ability to execute housing reform.

 

Therefore, if UST denies cert, UST must eliminate the lawsuit (settle) in order to move forward on housing reform. 

 

If you agree UST is genuine in its desire to enact housing reform, then  SCOTUS cert denial = requires settlement. 

[investorG]

Looking at this by inverting-

 

UST has effectively documented that the 5th circuit ruling has significant and immediate impacts on admins ability to execute housing reform.

 

Therefore, if UST denies cert, UST must eliminate the lawsuit (settle) in order to move forward on housing reform. 

 

If you agree UST is genuine in its desire to enact housing reform, then  SCOTUS cert denial = requires settlement.

 

while we might root for the SC to not take the APA case, there's a good chance they will.  this is what the SC was made for, a huge case with split lower courts in need of timely resolution.  I fear some (plaintiffs laywers perhaps or ultra die hards) will welcome the SC APA case on the NWS but there's likely 4 solid votes against us and it's hard to rely on a clean conservative sweep when so much is at stake -- hopefully there's a settlement.

 

[Guest cherzeca]

I have found counsel for Collins to be excellent attorneys in all domains, technical, strategic etc. 

 

my best guess is that counsel will determine that it is in the best interests of Ps to proceed with the district court proceedings to reach a final order and remedy.  by proceeding in this way, I also expect them to argue to SCOTUS that it should hold off in accepting the treasury cert petition until a final order is issued, at which point treasury would have the opportunity to supplement its petition (treasury makes conclusionary statements in its petition about the effect of the Willett opinion, but there is no reason to jump to conclusions when a district court is proceeding to a remedy that would make the import of the Willett opinion definitive), and then SCOTUS can be in a better position to assess the petition.

 

and I expect SCOTUS to do this

 

as to timing, no one knows.  SCOTUS has weekly conferences to consider petitions, and they can decide to take a case or not quickly, or just sort of let the petition sit and fester