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

[Guest cherzeca]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

yes $76bn is the most bullish case which would be solid news.  however i think there's also likely a restraint on the leverage ratio side.  they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232.  subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite.

 

well, I am still in the fact summary...it will be a long time until I get to p. 231.  leverage test (p.3) is "The proposed rule would establish a minimum leverage requirement of 2.5 percent of an Enterprise’s adjusted total assets..."  so I dont see that being a problem.  p.9:  "The adjusted total capital requirement of $135 billion would have represented 2.22 percent of adjusted total assets..."

[investorG]

@cherzeca

I did a search in the pdf of the fact sheet for 'consent' with no result.  The numbers you cited may be what gets us to consent decree.

 

Management will want to get paid well, and quickly, which gets us to the buffer numbers. 

 

@InvestorG

Current JPS holders haven't gone through years of waiting, and investing in litigation, to not get a significant amount of the recapped GSEs and start earning dividends. 

 

I believe significant amount is possible, just not par.  regarding dividends they might not be possible until $175bn of common equity is in place on first glance.

[investorG]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

yes $76bn is the most bullish case which would be solid news.  however i think there's also likely a restraint on the leverage ratio side.  they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232.  subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite.

 

well, I am still in the fact summary...it will be a long time until I get to p. 231.  leverage test (p.3) is "The proposed rule would establish a minimum leverage requirement of 2.5 percent of an Enterprise’s adjusted total assets..."  so I dont see that being a problem.  p.9:  "The adjusted total capital requirement of $135 billion would have represented 2.22 percent of adjusted total assets..."

 

spoiler alert:  2.5pct of 6.1trn of adjusted assets is $152bn.

[Guest cherzeca]

p. 11 of fact summary.  table 2

 

ex buffers, total combined GSE capital requirement

Watt proposed rule: $180B

Calabria proposed rule:  $135B

 

management will want bonuses and shareholders will want dividends, but getting out of conservatorship comes first, and this new rule is more lenient re conservatorship exit

 

EDIT:  sorry, 9/2019 watt proposed rule is $137B

[Guest cherzeca]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

yes $76bn is the most bullish case which would be solid news.  however i think there's also likely a restraint on the leverage ratio side.  they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232.  subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite.

 

well, I am still in the fact summary...it will be a long time until I get to p. 231.  leverage test (p.3) is "The proposed rule would establish a minimum leverage requirement of 2.5 percent of an Enterprise’s adjusted total assets..."  so I dont see that being a problem.  p.9:  "The adjusted total capital requirement of $135 billion would have represented 2.22 percent of adjusted total assets..."

 

spoiler alert:  2.5pct of 6.1trn of adjusted assets is $152bn.

 

so I shot ahead to p. 231 and see that for fannie, risk based and leverage capital requirements are $81B and $89B respectively, not taking into account buffers.  this seems reasonable

 

I have read that bonuses and dividends will be limited if buffers are not met...has anyone read in this release where it discusses how limited?

[investorG]

excess buffers = banks > consumers.    not good.   

[genesis01]

Very rough math.

 

CET1 Fannie 110

CET1 Freddie 65

JPS combined 33 - assume exchange face value.

Prepaid expense 20 over contribution from NWS combined tax or commitment fee for line.  Not sure how this unfolds, but assume accounted for, even if current common and prefs don't exclusively benefit.

 

Fannie current common approx 15

Freddie current common approx 10

 

Comprised of

 

Warrant dilution of current common at 80% = 20 for UST

Current common = 5B of re capped GSEs.

 

Total 253 of newly re capped GSEs. 

 

This is close to the headline number of 245.

Assume settlement of litigation etc.

Assume exercise of warrant before raising capital CET1 and JPS exchange.

 

 

My guesstimate is target ROE of 11-12%.

 

p.9 of fact sheet:

 

"As of September 30, 2019, the combined Enterprise CET1 capital requirement would have been $76 billion (4.5 percent of RWA) and the tier 1 risk-based capital requirement would have been $101 billion (6 percent of RWA)."

 

so forgetting about capital buffers for a moment (which restrict dividends and exec bonus payments), why is this stringent?  looks reasonable.  what am I missing?

 

yes $76bn is the most bullish case which would be solid news.  however i think there's also likely a restraint on the leverage ratio side.  they need $152bn (89 + 63) of tier 1 capital for their leverage ratio (excluding buffer), see page 231 and 232.  subtract out a reasonable component for preferred and maybe that minimum non-buffer common requirement is 100-125bn vs the 76bn you cite.

 

well, I am still in the fact summary...it will be a long time until I get to p. 231.  leverage test (p.3) is "The proposed rule would establish a minimum leverage requirement of 2.5 percent of an Enterprise’s adjusted total assets..."  so I dont see that being a problem.  p.9:  "The adjusted total capital requirement of $135 billion would have represented 2.22 percent of adjusted total assets..."

 

spoiler alert:  2.5pct of 6.1trn of adjusted assets is $152bn.

 

so I shot ahead to p. 231 and see that for fannie, risk based and leverage capital requirements are $81B and $89B respectively, not taking into account buffers.  this seems reasonable

 

I have read that bonuses and dividends will be limited if buffers are not met...has anyone read in this release where it discusses how limited?

[Guest cherzeca]

"I have read that bonuses and dividends will be limited if buffers are not met...has anyone read in this release where it discusses how limited?"

 

see table 8, p. 101

 

 

         

 

[Guest cherzeca]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

[Midas79]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

[investorG]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

[Midas79]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

No. This isn't even close. I just did the math: FnF can pay distributions of up to 20% of "eligible retained income" when their "capital buffer" hits 25% of $91B or $99B, depending on which of PCCBA and PLBA is used.

 

The payout table doesn't directly depend on common equity at all. I don't know why you keep bringing that up when page 101 is quite clear.

 

I still need to fully understand the meaning of the quoted phrases, but it points to FnF being able to pay dividends at $23-25B of capital. Not $140B of common equity.

 

Edit: I might be calculating this wrong, if the buffer in footnote 62 is meant to be on top of the total capital standard, rather than standalone. If so, the $140B number could be right, but it wouldn't have to all be common equity.

 

Edit 2: Turns out I was wrong. The "capital buffer" in Table 8 really is on top of the other capital requirements, meaning that FnF would need around $160B in capital before making any distributions ($135B total capital plus 25% of $99B).

 

However, a section at the bottom of page 102 says that these restrictions are not set in stone.

 

FHFA is soliciting comments on whether some or all of the payout restrictions

should be phased-in over a transition period. In anticipation of the potential development

and implementation of a capital restoration plan by each Enterprise, tailored exceptions to

the payout restrictions might be appropriate to facilitate an Enterprise’s issuances of

equity to new investors, particularly to the extent that any tailored exception would

shorten the time required for an Enterprise to achieve the regulatory capital amounts

103

contemplated by the proposed rule or otherwise enhance its safety and soundness. For

example, a tailored exception to allow for some distributions on an Enterprise’s newly

issued preferred stock might increase investor demand for the offerings of those shares.

Similarly, a tailored exception for some limited regular dividends on an Enterprise’s

common stock might increase investor demand for those shares.

 

Divs can turn on at any point Calabria chooses, even if it technically violates the rules in Table 8.

[beaufort]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

 

I don't think this is right.  Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP. 

@midas

Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?

 

Tier 2 capital in my reading defined as preferreds. 

 

Also, page 101:

 

FHFA expects that each Enterprise generally will seek to avoid any payout

restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based

and leverage ratio requirements during ordinary times.

 

I won't get to looking up above definitions tonight.  I don't know where 'ordinary times' are defined yet.

 

 

 

[DRValue]

Have we settled on what the capital requirement is yet?

Could anyone clearly explain this to their boss?

[DRValue]

At the total capital level for unlimited dividends and 100pct of attributable earnings less a growth buffer of 2.5 billion are paid, which rough math may be 6.5billion for Fannie. If the yield on common is where it has been historically at 2.5pct that's about a 260b market cap. 20 billion shares gets you to 13 dollars a share.

 

But these are just numbers which can change wildly.

[investorG]

Have we settled on what the capital requirement is yet?

Could anyone clearly explain this to their boss?

 

The main restraint to reach level 1 (non buffer) freedom is the $152bn leverage requirement.  This can include common + preferred.  I guess the $152bn drops to about $140bn in the final rule and $40bn is preferred so roughly $100bn common equity to hit this threshold. 

 

The buffers are level 2.  The buffers are in the document to satisfy the anti-FnF'rs.  There is wiggle room both in the size and time to get there.  Dividends aren't crucial right away and the exec bonus rules can be massaged per the document's questions.  I guess the $100bn buffers will drop to $80bn so I think about it in four $20bn increments.

 

So the real common equity requirements are somewhere between 100bn and 180bn but the latter is many years out, big phase in. 

 

 

[investorG]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

 

I don't think this is right.  Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP. 

@midas

Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?

 

Tier 2 capital in my reading defined as preferreds. 

 

Also, page 101:

 

FHFA expects that each Enterprise generally will seek to avoid any payout

restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based

and leverage ratio requirements during ordinary times.

 

I won't get to looking up above definitions tonight.  I don't know where 'ordinary times' are defined yet.

 

 

 

 

see page 15 of the fact sheet for what goes where.  Tier 1 capital is basically common + preferred.  I am guessing that any potential asset from Tsy from overage (not expected by me) would count as common.

[investorG]

At the total capital level for unlimited dividends and 100pct of attributable earnings less a growth buffer of 2.5 billion are paid, which rough math may be 6.5billion for Fannie. If the yield on common is where it has been historically at 2.5pct that's about a 260b market cap. 20 billion shares gets you to 13 dollars a share.

 

But these are just numbers which can change wildly.

 

those numbers are likely too optimistic.

 

I think they have a target for what they want common and jr pref to 'get' at the first public or private offering if the virus impact on the economy and/or politics doesn't mess it all up.

 

pure guess here:

 

1.8bn shares currently.  if govt monetizes all their warrants thats 7.2bn more = 9bn total.  jr pref conversion @ 75pct of par and $5 common valuation is ~ 5bn shares so 14bn total.  If they raise $60bn @ $5 that's 12bn more shares.  So guessing 26bn shares @ 5 = $130bn mkt cap at first offering, that should hopefully get them to level 1 capitalization (~100bn common + 40bn fresh preferred).  why so low mkt cap? to allow for lower ROE and also additional capital overhang from the buffer amounts which will likely increase share count further from 26bn.

 

 

[beaufort]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

 

I don't think this is right.  Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP. 

@midas

Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?

 

Tier 2 capital in my reading defined as preferreds. 

 

Also, page 101:

 

FHFA expects that each Enterprise generally will seek to avoid any payout

restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based

and leverage ratio requirements during ordinary times.

 

I won't get to looking up above definitions tonight.  I don't know where 'ordinary times' are defined yet.

 

 

 

 

see page 15 of the fact sheet for what goes where.  Tier 1 capital is basically common + preferred.  I am guessing that any potential asset from Tsy from overage (not expected by me) would count as common.

 

I looked at page 15.  It is consistent with the definitions I cited and specifically says CET1 capital does not include par value  of preferred stock. 

 

Edit:  But I also see I wasn't clear in my original post because I am mixing up terms.  Tier 1 capital includes both common and preferred as you say.  CET1 does not.

 

 

[investorG]

@genesis

 

thanks, you beat me to it.

 

so no distributions if less than 25% of buffer satisfied, and 20% of max distribution payout if 25-50% of buffer satisfied.  max distribution payout is basically annual net income.

 

so if 25-50% of buffer satisfied, a GSE that has $10B annual net income can pay out $2B of dividends...meaning a payout ratio of 2% on a $100B common stock valuation.

 

not great, but not too shabby either, methinks

 

Footnote 63 on page 101 says "An Enterprise’s “prescribed buffer amount” means, as applicable, its PCCBA or its PLBA." The last two tables on page 10 of the fact sheet show that the PCCBA is $99B and the PLBA is $91B (both numbers are for FnF combined).

 

That puts Table 8 into a whole new light. FnF can pay out up to 20% of its eligible retained income (page 100: "The maximum payout ratio is the percent of eligible retained income that an Enterprise can pay out in the form of distributions and discretionary bonus payments during the current calendar quarter.") when it has between 25% and 50% of those buffers above, which is roughly $25-50B of core capital (if I understand the definition in footnote 62 correctly).

 

20% of $17B in annual income is $3.4B, which is enough to pay the full $2B per year on the juniors and have $1.4B left over for common dividends and executive bonuses. FnF will already have more than $25B in core capital once the seniors are gone.

 

This whole thing about "no dividends until $175B in common equity" is way, way off.

 

you are right, it's not all or nothing until 175bn.  but it's important to look at the leverage ratio also.  the minimum leverage ratio excluding buffers is 152bn in tier1 capital.  if you assume 25-50bn for preferred, that's around ~115bn common equity.  throw on 25bn from the initial 25% buffer = ~140bn common equity before any dividends can be paid.  still a lot.

 

edit: for all the over-conservative problems in this document, there is some material wiggle room that may or may not occur as a result of the questions asked inside it.

 

I don't think this is right.  Tier 1 capital is defined at page 312 and my reading is it is defined as common equity or classified as equity under GAAP. 

@midas

Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?

 

Tier 2 capital in my reading defined as preferreds. 

 

Also, page 101:

 

FHFA expects that each Enterprise generally will seek to avoid any payout

restriction by maintaining regulatory capital in excess of its buffer-adjusted risk-based

and leverage ratio requirements during ordinary times.

 

I won't get to looking up above definitions tonight.  I don't know where 'ordinary times' are defined yet.

 

 

 

 

see page 15 of the fact sheet for what goes where.  Tier 1 capital is basically common + preferred.  I am guessing that any potential asset from Tsy from overage (not expected by me) would count as common.

 

I looked at page 15.  It is consistent with the definitions I cited and specifically says CET1 capital does not include par value  of preferred stock.

 

re-read your quote from the original post. you said "tier 1 capital".  not CET1.    "tier 1 capital" includes prefs.  CET1 does not.

[beaufort]

@investorG

You're right.  I corrected myself in my edit. 

[Guest cherzeca]

"@midas

Is a prepaid asset (ie the dividend overage from the NWS) classified as equity under GAAP?"

 

I asked TH once and he said no

[Guest cherzeca]

Have we settled on what the capital requirement is yet?

Could anyone clearly explain this to their boss?

 

The main restraint to reach level 1 (non buffer) freedom is the $152bn leverage requirement.  This can include common + preferred.  I guess the $152bn drops to about $140bn in the final rule and $40bn is preferred so roughly $100bn common equity to hit this threshold. 

 

The buffers are level 2.  The buffers are in the document to satisfy the anti-FnF'rs.  There is wiggle room both in the size and time to get there.  Dividends aren't crucial right away and the exec bonus rules can be massaged per the document's questions.  I guess the $100bn buffers will drop to $80bn so I think about it in four $20bn increments.

 

So the real common equity requirements are somewhere between 100bn and 180bn but the latter is many years out, big phase in.

 

the real question is whether investors in capital markets will get fussed by these div restrictions in the capital buffers...I can only say that they have seen this before re the banks after the GFC.  I also think that for issuers like the GSEs that earn a ton of net income, having even a restricted div bucket permits them to repurchase plenty of stock

[Guest cherzeca]

fwiw mr market seems to like the capital rule

[beaufort]

As I am settling in, I am getting more comfortable with this capital rule.  I like the incentives to get JPS holders to exchange for new common capital and current JPS holders, linked to future distributions.  Also, with the exceptions to distributions while building capital (hat tip:  Midas and Holden Walker), the current JPS holders see a distribution relatively quickly and are not hostage to new common capital or current common.  And I like the high CET1 for the businesses moving forward.  It means there will never be a concern about capital again.  Overall, a balanced effort.  It's early days in interpretation, but that's my current view.