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

[allnatural]

@cherzeca

 

Do you know where we can see the all the various counts Sweeney mentioned at the conclusion of her opinion (that can proceed or were dismissed)?

[Guest cherzeca]

@cherzeca

 

Do you know where we can see the all the various counts Sweeney mentioned at the conclusion of her opinion (that can proceed or were dismissed)?

 

2nd amended complaint

[Midas79]

@cherzeca

 

Do you know where we can see the all the various counts Sweeney mentioned at the conclusion of her opinion (that can proceed or were dismissed)?

 

Here's a link. It's not easy to find now that gselinks doesn't update its Court Filings page.

http://www.glenbradford.com/wp-content/uploads/2018/10/13-465-0422.pdf

 

To find old court filings I do a search on Glen Bradford's site and hope that it comes up in the first page. There's a button to go to other search pages but it never works for me.

[onyx1]

@cherzeca

 

What's your reaction to Sweeney's determination regarding FHFA-C's authority to enter into the NWS? 

[Guest cherzeca]

so the govt can have a taking whether or not it acts legally or illegally...it just doesnt pay for what it has taken.  eg govt may have legal authority to take your property for a public purpose, but it has to pay you for it.  so Ps have to establish that even though govt had statutory authority to enter into NWS, it didn't have statutory authority to take something for nothing. 

 

but also remember, Judge Sweeney is not the final arbiter of this point of law...scotus will determine if it takes APA claim.

[onyx1]

so the govt can have a taking whether or not it acts legally or illegally...it just doesnt pay for what it has taken.  eg govt may have legal authority to take your property for a public purpose, but it has to pay you for it.  so Ps have to establish that even though govt had statutory authority to enter into NWS, it didn't have statutory authority to take something for nothing. 

 

but also remember, Judge Sweeney is not the final arbiter of this point of law...scotus will determine if it takes APA claim.

 

 

In your opinion, will Sweeney influence SCOTUS on this point? 

[Guest cherzeca]

so the govt can have a taking whether or not it acts legally or illegally...it just doesnt pay for what it has taken.  eg govt may have legal authority to take your property for a public purpose, but it has to pay you for it.  so Ps have to establish that even though govt had statutory authority to enter into NWS, it didn't have statutory authority to take something for nothing. 

 

but also remember, Judge Sweeney is not the final arbiter of this point of law...scotus will determine if it takes APA claim.

 

In your opinion, will Sweeney influence SCOTUS on this point?

 

Willett might influence scotus' 5 "conservative" majority...not Sweeney

 

edit:  to be clear this is not so much a question of personality or statute as remit...willett is squarely interpreting HERA and scotus will likely review that interpretation; Sweeney is not so much interpreting HERA as determining that under the tucker act, because she finds that fhfa is the govt for purposes of the tucker act, if it can be said that the govt effected a taking without compensation or (if fhfa is unconstitutionally structured) an illegal exaction, then the ball is in her court to consider damages. 

[ValueMaven]

I've what Sweeney wrote to be more meaningful for shareholders of FNMA then en banc ... personal opinion I know - but all of this really gives us holders of either prefs or common another angel.  Basically speeds up settlement if you ask me. 

[Midas79]

ok, so you are saying treasury writes GSEs a check for $XXXB...which, lets assume, is enough to fully capitalize GSEs.  treasury and GSEs work out a deal by which treasury converts its senior prefs into common, and exercises its warrants to boot.

 

then everyone goes home.

 

I suppose that would be possible, and I suppose the common would be upset, though the juniors would be money good.

 

Yes, this is exactly what I mean. With the caveat that it takes both the check and a senior conversion to reach regulatory (minimum, in this case) capital levels. Neither alone is enough because core capital stands at something like -$170B right now.

 

By the terms of the PSPAs, repayment of the $124B and an end to the NWS (via converting the seniors) constitutes a full unwinding. Can the judges in the injunctive relief cases dismiss those cases as moot at that point? I'm not sure what else the plaintiffs could want that the terms of the PSPAs allow them to get. (Voluntary repayment of the seniors was never technically possible)

 

Also, it's the plaintiffs who claimed that the overpayment amount was $124B, and they didn't include interest. Would Sweeney be able (and willing) to add interest in? If so, what's an appropriate ballpark rate?

 

and I give this scenario about a 1% chance of occurring in the real world.  treasury will be rather long GSEs common with a huge overhang and would have to sell it off in drips and drabs over the next decade.

 

edit:  to summarize, I think this scenario only increases treasury's investment in GSEs rather than reduces it.

 

The more I think about this cramdown, the more plausible it seems to me. It checks all the boxes, and I don't see who says no, other than existing commons who don't have a say anyway.

 

Treasury selling its commons essentially takes the place of the SPO, and there are possibilities like Treasury converting the seniors to non-cumulative convertible prefs that keep them from ever approaching 80% ownership.

 

I also don't think it would take Treasury anywhere close to 10 years to unwind its converted senior position. I don't think the dollar amount of the total common shares sold is going to be hugely different in the two scenarios (warrants + SPO versus senior conversion), and the SPO part of the first one has to be done rather quickly. So while the $124B is a significant outlay to Treasury, it should be able to recoup it without too much trouble. If it can't, the SPO was never all that realistic anyway.

 

One argument against the cramdown is that it results in FnF being fully capitalized nigh instantaneously. This conflicts with the idea of release with a consent decree before full capitalization.

[Guest cherzeca]

@midas

 

I think the path you have laid out is the path of greatest resistance.  moelis and phillips are wall streeters and they have the other side of your argument.  I see mncuhin lining up there as well, and calabria lining up wherever mnuchin tells him

[Midas79]

@midas

 

I think the path you have laid out is the path of greatest resistance.  moelis and phillips are wall streeters and they have the other side of your argument.  I see mncuhin lining up there as well, and calabria lining up wherever mnuchin tells him

 

I suppose I have a blind spot when it comes to this, then. I am not seeing how the senior cramdown option is any more difficult than cancel seniors + SPO + warrants.

 

I'm estimating the value of the warrant shares plus the SPO shares to be $120B; $50B for the warrants and $70B for the SPO. The $70B of SPO shares would all have to be sold at once: investors won't buy before release, and I don't see a path to FnF getting enough capital for release (even with a consent decree) without the SPO.

 

On the other hand, if Treasury converts the seniors to commons they will get somewhere around $160B worth. I don't think this is materially different enough than the $120B above to say that it is only a remote possibility.

 

If you see a flaw in my reasoning please point it out, I won't take it personally. I would much rather be corrected than persist with a fallacy.

[beaufort]

Midas,

Do you think all of the various financial interests involved in the recap and release (ie. investment bankers etc) stand to make as much money in your scenario?

[Luke 532]

Senate Democrats Ramp Up Scrutiny of Trump’s Fannie-Freddie Plan

https://www.bloomberg.com/news/articles/2019-12-17/senate-democrats-ramp-up-scrutiny-of-trump-s-fannie-freddie-plan

 

Letter: https://www.acg-analytics.com/wp-content/uploads/2019/12/Warner-Banking-Letter-to-FHFA-and-Treasury-121719.pdf

[Guest cherzeca]

Senate Democrats Ramp Up Scrutiny of Trump’s Fannie-Freddie Plan

https://www.bloomberg.com/news/articles/2019-12-17/senate-democrats-ramp-up-scrutiny-of-trump-s-fannie-freddie-plan

 

Letter: https://www.acg-analytics.com/wp-content/uploads/2019/12/Warner-Banking-Letter-to-FHFA-and-Treasury-121719.pdf

 

these are all good questions. we have many of them ourselves.

[Luke 532]

https://www.nasdaq.com/articles/exclusive-freddie-mac-offers-early-retirement-to-25-of-workforce-sources-2019-12-18

 

“As is common in many American companies, Freddie Mac is offering employees who meet certain age and tenure requirements a voluntary opportunity to retire early. As we prepare for our next chapter, we anticipate this will help realign our workforce to create a company attractive to outside investors as well as current and future employees," a spokesman for Freddie Mac said in an email statement.

 

In October, Mark Calabria, director of the FHFA, told reporters that he had asked Fannie and Freddie to come up with a plan to boost their return on equity, adding the pair could "can definitely cut expenses," without specifying how.

 

Edit: roughly 25% of workforce is being offered the retire early option. That sounds like a company preparing itself to be sold.  Not saying that's what this is, but sure is interesting.

[Luke 532]

Lamberth trial pushed to March 2021.

Lamberth_Trial_-_March_2021.pdf

[james22]

Court Rules Federal Government Flooding of Homes During Hurricane Harvey is a Taking

 

The decision is significant in itself and has important implications for other cases where the government deliberately damages private property in the process of coping with natural disasters.

 

https://reason.com/2019/12/17/federal-court-rules-that-federal-government-flooding-of-homes-during-hurricane-harvey-is-a-taking/

 

Encouraging.

[Midas79]

Midas,

Do you think all of the various financial interests involved in the recap and release (ie. investment bankers etc) stand to make as much money in your scenario?

 

Both lead to a massive issuance of common shares. If anything, I think the underwriter would make more in the cramdown scenario because the offering would be bigger.

 

This assumes, of course, that there is enough investor appetite out there to buy that many common shares. I believe there is, and if there isn't then the recap process is in jeopardy because it can't take too long lest a new administration decides to change course.

[beaufort]

I think you are right regarding the cramdown scenario and so I hope that will put pressure on the Administration to get this done quickly.  It seems that all major financial interests are still in line with a conversion of JPS and a cramdown to move quickly.

 

Calabria is a wildcard in my view.  If the capital rule as drafted under Watt was unsatisfactory, why wait so long to address it?  One speculation I have is that Calabria believes himself to be very smart.  He has a need to 'fix' the rule with his own process.  It's very complicated and requires his distinct analysis.  Of course this is a subjective speculation based on watching videos with interviews and nothing more.

 

I don't know if I would be happier with the above, or if there was a genuine problem to be fixed. 

 

I have another problem as well with the Admin recap.  Why didn't Mnuchin negotiate with Watt for a higher buffer at the time of the letter agreement?  We could have been further along with the recap, with the letter agreement at approximately the 10% moment, with a much larger buffer that would have been easy, in my view, to justify.  What is the difference between 3B and 12B each, for example?  Everybody knows 12B wouldn't have been enough to recap the enterprises at that time, just as we know that the current buffer won't do it.  Further, the surplus paid to Treasury would not be an issue to fight over now because it largely wouldn't have happened. 

 

On the positive side, 2019 was a very positive year for JPS holders, both from the courts and the Admin.  It's just moving too slow and unnecessarily so. 

 

Edit: 

 

On balance, with all the advances we have seen this year both for Admin action and the lawsuits, the only negative I see is the slow play. 

 

 

[Guest cherzeca]

happy holidays all!

 

been reading Annie Duke's thinking in bets, highly recommended.

 

one of her points is that we shouldn't engage in "resulting"...thinking a bad outcome is the result of bad decision making, or that a good outcome is the result of good decision making.  when making a decision under conditions of uncertainty, where there is some measure of both skill and luck that will affect the outcome, the merits of the decision making process must be analyzed independently of the outcome.

 

another point is that we are belief affirming beings, engaging in "motivated reasoning" so that we seek to find evidence that confirms rather than contradicts our beliefs.  also as ego driven beings, we wish to believe that our narrative is right, so that contradictory evidence (bad outcome) is viewed as bad luck and affirming evidence (good outcome) is viewed as the result of smart decision making.

 

also, we tend to believe in right and wrong, black and white, vs a continuum between right and wrong.

 

all of these concepts apply to an investment in the GSEs.

 

I have strongly believed that the result in Perry was wrong, so I didn't take Perry as evidence that I was wrong...and Collins proved me right...until soctus takes up the Collins cert petition (which I expect it will do 1/10/20)...so will I be proven right by scotus, or be shown to be just an ego driven belief affirming soul? 

 

while there are a lot of other parameters with which to analyze the GSEs (what will be the final fhfa capital rule, are mnuchin and calabria really committed to admin reform, could congress actually get its act together and affect the reform process etc?), this one decision process as to whether the conservator had the authority to enact the NWS is sufficient to affect the outcome.

 

so is the notion that the NWS is ultra vires a narrative that I have constructed that is bound up with my ego?  I have to tell you, I have resisted the notion that the market can tell me if I am right or wrong, or that Perry was the death knell, or that Corker (or now Warren as potus) would be the death knell.  but I cant tell you if it is the result of my best thinking, or my ego speaking.  so none of this is easy.

[ValueMaven]

Buffett Watch: search for Fannie Mae - a lot of interesting comments from Mr. Buffett throughout the years!

 

https://buffett.cnbc.com/

[Luke 532]

Capital, capital, capital by Hannah Lang, American Banker

https://www.americanbanker.com/news/fhfas-focus-in-reforming-gses-capital-capital-capital

[Luke 532]

Capital, capital, capital by Hannah Lang, American Banker

https://www.americanbanker.com/news/fhfas-focus-in-reforming-gses-capital-capital-capital

 

WASHINGTON — Even though Fannie Mae and Freddie Mac are still controlled by the government, 2019 saw some of the first signs of progress in efforts to end the mortgage giants' federal conservatorships.

 

The Federal Housing Finance Agency, which regulates the government-sponsored enterprises, gained a new Trump-appointed director with his sights set on releasing Fannie and Freddie from the government's clutches. Mark Calabria took initial steps to prepare Fannie and Freddie for the private sector, making it a priority to improve the companies' capital position.

 

Capitalizing the GSEs is expected to stay in the focus in 2020, particularly as the agency retools a risk-based capital rule Calabria inherited from his predecessor.

 

“The capital rule is one of the most important rules I will issue as director,” Calabria said in November.

 

“This rule will be re-proposed and finalized within a timeline fully consistent with ending the conservatorships.”

 

Bloomberg News

 

Two months earlier, in September, the GSEs were permitted to retain billions of dollars more in earnings to build up their capital cushions, and in the same month, the Trump administration published a report detailing its principles for an overhaul of the housing finance system.

 

Although many expected FHFA Director Mark Calabria to finalize a post-conservatorship capital framework for the GSEs that was originally proposed by former Director Mel Watt in June 2018, Calabria spent months deliberating the direction he wanted to take with the proposed rule before ultimately deciding in November to re-propose the framework.

 

The original proposal under Watt called for assessing the GSEs' credit risk for different mortgage categories, and would have included market and operational risk components in measuring the firms' capital strength.

 

While it remains to be seen what exact details of the rule Calabria might change or keep intact, he said Dec. 10 that his goal is to be able to issue his own iteration of the capital framework “sometime early in the first quarter.”

 

FHFA is also in the process of hiring a financial adviser to help the GSEs raise capital. After the agency hires its financial adviser, Fannie and Freddie will also hire their own financial advisers, Calabria has said.

 

Calabria has also said that he hopes to formalize various private directives issued to the GSEs during conservatorship as rules sometime next year and plans to enhance the FHFA’s own capability as a regulator. This will include launching a macro forecasting unit that would be able to evaluate Fannie and Freddie’s house price forecasts.

 

He also hopes to be able to lift the $45 billion retained earnings cap, he said in October.

 

But heading into the new year, mortgage policy watchers are zeroing in on how the FHFA will approach risk-based capital requirements.

 

“The final capital rule is going to be about what are the appropriate levels to protect taxpayers when they emerge from conservatorship,” said Scott Olson, the executive director of the Community Home Lenders Association.

 

And that determination will be “very significant,” said Mark Goldhaber, a principal at Goldhaber Policy Services who also serves on the board of the Center for Responsible Lending.

 

“The capital rules lead to pricing, and in this case, it's going to lead to what loans go to [the Federal Housing Administration] versus what loans really are going to go to the conventional market,” he said.

 

One of the major concerns about the original proposed capital framework that various groups expressed in comment letters to the FHFA was that the rules were too procyclical and could leave the mortgage giants severely weakened in a crisis.

 

“It requires additional capital at exactly the wrong time — once stress has already occurred,” said Tom Parrent, a principal at Quantilytic LLC, a financial and biostatistics research consulting practice. “It would not only be very difficult to raise capital under stress and would probably shut down large segments of the market, but it would also mean that the fees charged to the homeowners would increase at that time, reducing demand for new loans.”

 

A degree of regulatory forbearance is an essential tool in an economic downturn, Olson agreed.

 

“That's the way things have been done historically and that's the way it should be here, as opposed to having too strict of an adherence to very high levels of capital all the time and you freak out if your capital gets depleted in a down cycle,” he said.

 

Calabria himself acknowledged the concerns that the original proposal was too procyclical in a December speech at the Federalist Society.

 

“The very purpose of Fannie and Freddie and the Federal Home Loan banks is to be countercyclical, and my belief is that they have been a little too procyclical in the past,” he said. “I think it’s critical as we re-propose the capital rule that how do we make sure that we’re having a capital rule that is countercyclical rather than procyclical?”

 

To combat procyclicality, Parrent suggested that the rule incorporate a contingency reserve that could be built up over time, a device used by some insurance companies. For it to work at Fannie and Freddie, a portion of guarantee fees could be set aside in a reserve that would only be used to pay claims during periods of financial stress.

 

“Once the reserve dollars have been held for 10 years, they can be released and replaced with fees generated on new loans,” Parrent said.

 

In fact, the FHFA should contemplate a capital regime by looking at the GSEs through the lens of insurance companies and not banks at all, Goldhaber said.

 

“You've got to start with a baseline that says nobody wants to see them in an undercapitalized state as they were before the crisis,” he said. “The question really becomes using the right capital framework to achieve the appropriate level of capital, and the reality is, these entities look a lot more like insurance companies than they do banks.”

 

The GSEs’ capital framework could also be a hybrid of a bank and insurance company capital framework, said Pete Mills, senior vice president of residential policy at the Mortgage Bankers Association.

 

“That's where I think there will be differences as a guarantor versus a holder of risk. Banks lay off risk as well, but they retain capital against the risks that they lay off,” he said. “So it won't look exactly like bank capital either, but in terms of overall levels of capital for various mortgage exposures, they're going to try and get some rough equivalency is my guess.”

 

Olson said it’s critical that the capital framework take into account the development of the credit risk transfer programs at the GSEs and the two companies’ risk-sharing activities.

 

“Particularly if it's a utility model that's being used — which we think is the right way — they're more of an insurance company type of operation, as opposed to a risk-based operation,” he said. “It's a pretty vanilla product. It's not that it's not risky at all, it's just that bank capital standards seem inappropriate, because they're not doing commercial loans. They're doing more of an insurance.”

 

If the FHFA developed a capital framework that either required the GSEs to hold too much or too little capital, there could be serious consequences, Parrent warned.

 

“If you had a capital structure that was too liberal, as the market feels that stress is approaching, the reinsurance and transfer trades would stop, and the GSEs would end up holding all of that risk because they would have a beneficial capital position relative to the reinsurers,” he said.

 

But at the same time, “you don't want the GSEs to have to hold a punitive amount of capital where the reinsurers are basically arbitraging that,” Parrent said.

 

In that kind of a regime, not only could people be pushed out of the housing market, but they could be forced into the less-regulated mortgage spaces, like the subprime and nonqualified mortgage markets, he added.

[Luke 532]

Curious of everybody's thoughts on Bove's comments below.  This was in the text of his e-mail this morning...

1. For preferred shareholders the next event will be in mid-January when the Supreme Court decides whether to hear arguments on the many GSE lawsuits. Failure to review would be devastating and but it is widely believed that the court will take up the GSE issues.

 

The rest is in the attached document, but I'm more curious of your thoughts on the quote above.

Bove12-29-2019.pdf

[onyx1]

Curious of everybody's thoughts on Bove's comments below.  This was in the text of his e-mail this morning...

1. For preferred shareholders the next event will be in mid-January when the Supreme Court decides whether to hear arguments on the many GSE lawsuits. Failure to review would be devastating and but it is widely believed that the court will take up the GSE issues.

 

The rest is in the attached document, but I'm more curious of your thoughts on the quote above.

 

He also says:

 

"If one is only interested in the value of the preferred issues in these companies, the only consideration that they need to consider is court decisions."

 

He's way off the mark here, and apparently isn't even considering the possibility of a negotiated settlement.