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

[Midas79]

Midas, that's a neat idea.  I hadn't thought of that (or any others) as a path to get $125B from the govt via settlement. 

 

One way is to write the check, but your way might work just as well.  Instead of cash, the GSEs could book a receivable of that amount from the government stock sales.  I think Calabria has the authority to decide what to treat / not treat as Cet1 or Tier 1 and maybe he would be fine counting that receivable.

 

Calabria can only redefine CET1 and tier 1 if he breaks from Basel III, which defines those terms. Core capital is defined by HERA, though; Calabria's hands are tied there. A receivable cannot count as core capital until it is actually received. In my scenario, Treasury would have to unwind its position relatively quickly to send the $125B to FnF so they can actually be fully capitalized. This is also why, if Treasury returns any overpayment as a tax credit, it will only count towards core capital as it is earned (around $5.3B per year).

 

@cherzeca

 

I don't think 99+% ownership by Treasury will be a problem because there are many ways to structure the senior conversion to avoid it. The easiest one I came up with was to convert the seniors to non-cumulative zero-div convertible prefs with a clause that Treasury cannot convert them, then Treasury sells them to outside investors who do the conversion. Just like a common stock conversion and sale but Treasury never even has a 0.1% stake let alone 80% or 99+%.

[WB_fan82]

Why would it have to be received?  A receivable is an asset.  An asset increases equity.  I think the default Basel III treatment would be to include in capital and he would have to make the exception to exempt it.

[Guest cherzeca]

@midas

 

again, high marks for creating a way to capitalize GSEs w/o going to capital markets, but you still have the appropriations question.  big legal difference between writing down senior prefs and writing a check of equal amount.  big difference between the fed which can create money willy nilly and the treasury, which spends only by authority granted by congress.

 

edit:  background discussion

https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/16aug/16aug-ac-cummings-spending-without-appropriations-whos-to-complain/

 

congress argued in this case before scotus, basically, that if an act authorizes the govt to contract, then the govt cannot be prevented from acting by an argument that congress did not also appropriate funds for govt to act...which is the way scotus held in the Obamacare case cited in link.  in case of GSEs, you wold have to make argument that the authority in HERA for treasury to enter into PSPA somehow also authorized the payment that you are positing...would be litigated for sure

[Midas79]

@WB_fan82

 

The spirit of CET1 and tier 1 capital in Basel III is that they are loss-absorbing in case of a downturn or crisis. Receivables don't absorb losses. In the capital rule Calabria went on and on about capital quality (in addition to quantity). So while he might be able to choose to make receivables count towards the risk-based standard I don't think he will.

 

@cherzeca

 

Perhaps my creativity is exceeding my knowledge here. I hadn't considered appropriations, but all Treasury would be doing is redirecting money, not writing a check. Is that a distinction without a difference?

 

Treasury would still have to go to the capital markets, though. My route doesn't bypass the capital markets, it bypasses the companies.

[Guest cherzeca]

I don't see how FHFA could pull off a 4thA/release into consent decree before a Biden inauguration given current pace of developments.  in order to do this, I would think FHFA would need the capital restoration plans from the GSEs, so that they could be reviewed by FHFA (and Treasury) as a reasonable basis for deciding to enter into the 4thA/release into consent decree. I don't see how JPM/MS and GSEs can produce capital restoration plans until the capital rule has been finalized.  I don't see Calabria finalizing the capital rule soon.  he has received substantial comments that will need to be digested and responded to (he may have already done this, but I doubt it) and is on a listening tour for next two weeks. Calabria has never worked in private enterprise where a deadline is a deadline and not an opportunity to kick the can down the road further (as it is in govt and at think tanks).  so I think the whole lame duck conservatorship release idea is lame, not because it is politically improper but because I don't see Calabria being efficient enough to do it.

[sholland]

I don't see how FHFA could pull off a 4thA/release into consent decree before a Biden inauguration given current pace of developments.  in order to do this, I would think FHFA would need the capital restoration plans from the GSEs, so that they could be reviewed by FHFA (and Treasury) as a reasonable basis for deciding to enter into the 4thA/release into consent decree. I don't see how JPM/MS and GSEs can produce capital restoration plans until the capital rule has been finalized.  I don't see Calabria finalizing the capital rule soon.  he has received substantial comments that will need to be digested and responded to (he may have already done this, but I doubt it) and is on a listening tour for next two weeks. Calabria has never worked in private enterprise where a deadline is a deadline and not an opportunity to kick the can down the road further (as it is in govt and at think tanks).  so I think the whole lame duck conservatorship release idea is lame, not because it is politically improper but because I don't see Calabria being efficient enough to do it.

 

I tend to agree with this.  Calabria has repeatedly stated that releasing the GSEs from conservatorship will be process dependent, not timeline dependent. Reading through the comments for the reproposed Capital Rule there is much discussion about CRTs being strongly disincentivized. According to the US Treasury’s September 2019 Housing Reform Plan, CRTs are to be encouraged. I expect this part of the rule to be rewritten. I also expect many other parts of the rule to be rewritten too.  This will all take time.  Government doesn’t do anything quickly.

[orthopa]

I don't see how FHFA could pull off a 4thA/release into consent decree before a Biden inauguration given current pace of developments.  in order to do this, I would think FHFA would need the capital restoration plans from the GSEs, so that they could be reviewed by FHFA (and Treasury) as a reasonable basis for deciding to enter into the 4thA/release into consent decree. I don't see how JPM/MS and GSEs can produce capital restoration plans until the capital rule has been finalized.  I don't see Calabria finalizing the capital rule soon.  he has received substantial comments that will need to be digested and responded to (he may have already done this, but I doubt it) and is on a listening tour for next two weeks. Calabria has never worked in private enterprise where a deadline is a deadline and not an opportunity to kick the can down the road further (as it is in govt and at think tanks).  so I think the whole lame duck conservatorship release idea is lame, not because it is politically improper but because I don't see Calabria being efficient enough to do it.

 

The entire duration of this investment would agree with you but a part of me disagrees. Mainly due to Calabrias recent letter to Brown not extending the comment period. He easily could have extended the comment period and I think the two upcoming webinars are a way for the public to have direct input and hopefully stomp out the notion that the rule was rushed/voices were not heard. FHFA seems to have already narrowed down the sticking points to the rule to two topics. Granted not simple topics but my feeling is other then ironing these out the rule is mostly done IMO.

 

FWIW the conspiracy theorist in me says the capital rule is mostly written, the 4th PSPA amendment has been decided already and JPM and MS have already submitted variations of CRP. Otherwise what have they been doing for the past 3-4 months? I dont think a capital rule finalized by end of October is out of the question. As Calabria has pointed out the rule is a variation of the previous proposal that has been a known entity for years.  After being public for 3-4 months, a webinar in the spring, and an additional listening session after the comment period closed is it out of the question to think 6 weeks is enough to get this finalized?

 

As I said before history would say your right and Im wrong but since this it seems this whole thing was shelved last year due to the election I have to believe the trade off of that was a compressed timeline at the end.

[Guest cherzeca]

"FWIW the conspiracy theorist in me says the capital rule is mostly written, the 4th PSPA amendment has been decided already and JPM and MS have already submitted variations of CRP. Otherwise what have they been doing for the past 3-4 months?"

 

love it!  yes, I want to agree with you

[Luke 532]

The reasoning behind the section below troubles me greatly.  How can a judge write something of that nature?

[Guest cherzeca]

The reasoning behind the section below troubles me greatly.  How can a judge write something of that nature?

 

where is this from?

[investorG]

The reasoning behind the section below troubles me greatly.  How can a judge write something of that nature?

 

imo the APA claim is the appropriate way to address the NWS misdeed rather than the technicality constitutional angle.  Should have been over 3 years ago with ginsburg's about face but it wasn't meant to be.  in addition mnuchin still fighting the APA claim in court post-collins en banc -- esp in light of the CBO report suggesting a 4th amendment sr pref adjustment passes the test -- is an embarrassment on the trump administration and a good indirect reason why they are favored to lose the election.

[Midas79]

The reasoning behind the section below troubles me greatly.  How can a judge write something of that nature?

 

Unfortunately, this is what we're up against here. The judge's opinion is completely nonsensical. The agreement which secured "unlimited funding" (though there's a clear limit in the contract and amendments), the original SPSPAs, is not the same agreement (the NWS) which gave Treasury all of FnF's future profits.

 

Do you have a link to the full opinion? It looks like this is the Rop case, which I thought challenged the constitutionality of HERA. Bhatti is still alive and kicking, and we all know how far Collins has advanced.

[Guest cherzeca]

just scanned opinion.  sort of all over the place. simply disagrees with collins on direct v derivative claim, then says, gee, the sixth circuit hasn't addressed the conflict of interest argument re FHFA suing itself, so I can't rule that way...also a lot of weight placed on Demarco being an "acting" director, and distinguishing Seila in a rather forced way, which all seems like a judge who wanted really hard to get to an end result...again, collins is teed up and nothing this district court judge has said will affect how scotus analyzes collins. 

 

edit:  remember, at scotus, the justices look to circuit court cases (especially where there is a circuit court split...and having collins decided en banc is a bit more definitive than just a 3 judge merits panel).  this Rop district court case may be cited in govt reply briefs in collins, but it is JV material as far as what scotus will concern itself in the collins cert

 

second edit:  just took another look at opinion...p 34:  "In summary, Plaintiffs’ claims can proceed. The claims are derivative but Plaintiffs have prudential standing to bring them. Defendants have not shown that Plaintiffs’ claims are barred by the doctrine of claim preclusion or by HERA’s succession clause." 

 

so I am not sure what this judge did (looks like the const claim fails because DeMarco was acting director, and that even though HERA required an acting director to be chosen from then existing deputy directors it is not clear that the acting director was barred from removal by potus...a strained reading), quite frankly, and I am not that interested enough in the analysis I have read to try to figure this out

 

[Luke 532]

Attached is the full opinion...

17-cv-00497-0066.pdf

[WB_fan82]

The opinion doesn't seem that negative.  He just found distinguishing the director as "acting" was the key pivotal point.  Some of the dissenting Collins judges also raised this issue, iirc.

 

Why is the judge wrong?  Seemed to me like he made a good case.

 

You don't have to read the whole opinion -- just that part.

 

 

[Guest cherzeca]

the Rop district court opinion is instructive only since it lays out the pathway for FHFA (and the amicus arguing in place of DOJ) to argue that Seila should not apply to collins...because Demarco was an acting director when he signed NWS, and while it is clear that the director can only be removed for cause, HERA does not have a specific removal for the acting director...who stays under HERA until he vacates himself or is replaced by a potus nominated and senate confirmed new director.  but HERA makes clear that FHFA is an independent agency, so that in the context of the entire statute, it is absurd to believe that for an independent agency whose director can only be removed for cause, the acting director can be removed at will where there is no specific removal standard in the subclause relating to the acting director...and where Ps argued that if anything the statutory language would indicate that the acting director cannot be removed period, with or without cause, since his tenure lasts until a successor has been nominated and confirmed. see in particular n.9 to p. 45 of Rop opinion.  collins dealt with this argument and judge willetts answered it in the en banc opinion...see p. 48 of the collins en banc opinion.

[onyx1]

I'm not sure what to make of this, but Trump just added two 5th circuit Judges to his SCOTUS short list, Judge Duncan & Judge Ho.  Some may remember that despite the two disagreeing on remedies,  both joined Judge Willett's opinion that the FHFA is unconstitutional and the FHFA exceeded its authority in executing the NWS.

[muscleman]

I'm not sure what to make of this, but Trump just added two 5th circuit Judges to his SCOTUS short list, Judge Duncan & Judge Ho.  Some may remember that despite the two disagreeing on remedies,  both joined Judge Willett's opinion that the FHFA is unconstitutional and the FHFA exceeded its authority in executing the NWS.

 

That probably means they are the conservative judges who don't bend the law backwards to fit their views.

Trump's nomination may be based on review of a lot of cases by these judges rather than just the NWS alone.

[Guest cherzeca]

Ho is great, very conservative (former Gibson Dunn partner, know him a little). Duncan also good.  could have added Willett too and a few others though some are older.  this list doesn't mean much 

 

edit.  trump also said prior list of 25 is still good...now 24 with Kavanaugh appointed.  Willett one of those 24  https://ballotpedia.org/Complete_list_of_Donald_Trump%27s_potential_nominees_to_the_U.S._Supreme_Court

[orthopa]

First public listening session was today. Anyone speak or listen? I looked but couldnt find a link any where to listen when I looked briefly this am.

[investorG]

First public listening session was today. Anyone speak or listen? I looked but couldnt find a link any where to listen when I looked briefly this am.

 

Next Wednesday should be interesting at the House FS committee.

 

Maybe some one can get through to Mr. Calabria that padding bank mkt share and interest spread profits on the back of lower / middle income Americans by setting capital levels @ 6x his own adverse stress test levels is not the preferred policy.

 

[Midas79]

First public listening session was today. Anyone speak or listen? I looked but couldnt find a link any where to listen when I looked briefly this am.

 

Next Wednesday should be interesting at the House FS committee.

 

Maybe some one can get through to Mr. Calabria that padding bank mkt share and interest spread profits on the back of lower / middle income Americans by setting capital levels @ 6x his own adverse stress test levels is not the preferred policy.

 

Today's session wasn't all that informative. I didn't catch the whole thing, but it seemed to me to be mostly a rehash of what was in the comment letters. This might have been FHFA's token effort to "extend" the comment period by allowing the talkers to feel like they are being heard. I'm not expecting much from next Monday's session either, though I will still listen.

 

I am far more interested in what Calabria says, so I agree that his hearing should be interesting and I plan to listen to every second of his part of it.

[Guest cherzeca]

First public listening session was today. Anyone speak or listen? I looked but couldnt find a link any where to listen when I looked briefly this am.

 

Next Wednesday should be interesting at the House FS committee.

 

Maybe some one can get through to Mr. Calabria that padding bank mkt share and interest spread profits on the back of lower / middle income Americans by setting capital levels @ 6x his own adverse stress test levels is not the preferred policy.

 

Today's session wasn't all that informative. I didn't catch the whole thing, but it seemed to me to be mostly a rehash of what was in the comment letters. This might have been FHFA's token effort to "extend" the comment period by allowing the talkers to feel like they are being heard. I'm not expecting much from next Monday's session either, though I will still listen.

 

I am far more interested in what Calabria says, so I agree that his hearing should be interesting and I plan to listen to every second of his part of it.

 

thanks Midas. I will try to make the low income call, but speaker lineup doesn't look that interesting...Pinto doesn't deserve 10 minutes to discuss low income housing.  I agree Mad Max's committee hearing should be fun

[Midas79]

@cherzeca

 

I think it's better to continue our discussion here rather than Tim Howard's blog; I think I got off-topic over there.

 

When I referred to problems under 4616, I meant only section (b). I'm afraid that a future FHFA director could use those authorities to mess with a consent order by saying that no consent order a previous FHFA director (Calabria) signed could prevent the new director from exercising his/her statutory authority under 4616(b).

 

The only way around that would be for FnF to hit $152B in core capital, thus exiting "significantly undercapitalized", before Calabria leaves office.

 

I could be wrong, though; can Calabria really sign away some of his statutory authorities in such a way that a future director couldn't get them back without the companies' consent?

[orthopa]

Anyone have the link to Calabria's house testimony today?

 

 

EDIT: Found it https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406867

 

That is quite an interesting title for the hearing. Oxymoron one would say.