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

[Guest cherzeca]

@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?

 

you have read HERA carefully and I don't disagree that (b) gives the fhfa director significant power.  I just think that the capital markets can swallow these powers, but cannot swallow conservator powers. these powers are very much within a regulated industries risk profile; conservatorship is not.  so I think a release from C into consent decree will open up the capital raising process. now if that process fails miserably, then these powers can be resorted to even if C is off the table.

[Luke 532]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

[Guest cherzeca]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

 

a little more than 2 weeks after briefing ends...expedited. 

[Midas79]

The Collins opening brief is out too, but I haven't had a chance to read it yet as I am still listening to the House hearing.

 

https://www.supremecourt.gov/DocketPDF/19/19-422/154153/20200916135926128_19-422%20Brief%20of%20Patrick%20J.%20Collins%20et%20al..pdf

[orthopa]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

 

I wonder if this even gets argued. Granted the effects are huge money and wide ranging but in light of the comment period ending for the capital rule, a PSPA that can change with the stroke of a pen, why would the gov even want to argue this case? It seems a whole lot of time, money and risk gets taken off the table for all parties involved with a final PSPA amendment.

 

Very tight tight time line here with capital rule comment period ending, election, arguments in SC and inauguration. Crazy 4th Q coming.

[Guest cherzeca]

just a paraphrased snippet from Calabria that I heard:  the capital rule will be implemented over time, so no need to raise g fees

[orthopa]

just a paraphrased snippet from Calabria that I heard:  the capital rule will be implemented over time, so no need to raise g fees

 

what do you interpret by this? lower capital levels to start/raise capital then raise requirements over time?

[investorG]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

 

I wonder if this even gets argued. Granted the effects are huge money and wide ranging but in light of the comment period ending for the capital rule, a PSPA that can change with the stroke of a pen, why would the gov even want to argue this case? It seems a whole lot of time, money and risk gets taken off the table for all parties involved with a final PSPA amendment.

 

Very tight tight time line here with capital rule comment period ending, election, arguments in SC and inauguration. Crazy 4th Q coming.

 

If Trump wins, the case probably goes through verdict.  If Trump loses, let's hope it doesn't even get argued.

[Guest cherzeca]

just a paraphrased snippet from Calabria that I heard:  the capital rule will be implemented over time, so no need to raise g fees

 

what do you interpret by this? lower capital levels to start/raise capital then raise requirements over time?

 

Calabria did not explain, but recall that the proposed rule release asked for comment on many questions, one of which was whether the final capital rule should be implemented in stages.  if the required capital level percentages are phased in, then the GSEs might be able to meet the increasing hurdles in a deliberate manner...which would mean offerings over a longer timeframe, with some offerings conducted after the GSEs' capital levels have already increased...less risk for new investors

[orthopa]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

 

I wonder if this even gets argued. Granted the effects are huge money and wide ranging but in light of the comment period ending for the capital rule, a PSPA that can change with the stroke of a pen, why would the gov even want to argue this case? It seems a whole lot of time, money and risk gets taken off the table for all parties involved with a final PSPA amendment.

 

Very tight tight time line here with capital rule comment period ending, election, arguments in SC and inauguration. Crazy 4th Q coming.

 

If Trump wins, the case probably goes through verdict.  If Trump loses, let's hope it doesn't even get argued.

 

If Trump wins you maybe right, or any settlement goes out way further then before inauguration. F*** me. Looking for some sort of closure with this investment is never ending!

[Midas79]

just a paraphrased snippet from Calabria that I heard:  the capital rule will be implemented over time, so no need to raise g fees

 

what do you interpret by this? lower capital levels to start/raise capital then raise requirements over time?

 

Calabria did not explain, but recall that the proposed rule release asked for comment on many questions, one of which was whether the final capital rule should be implemented in stages.  if the required capital level percentages are phased in, then the GSEs might be able to meet the increasing hurdles in a deliberate manner...which would mean offerings over a longer timeframe, with some offerings conducted after the GSEs' capital levels have already increased...less risk for new investors

 

Calabria also said that FnF are currently operating on the edge of insolvency. Since his base capital requirement is 2.5%, if he really is going to keep 4% as the top-line number, I think he will want FnF to do capital raises ASAP to get to 2.5%, then take it slow from there.

 

So on a 5-year track, instead of FnF's capital going 0.8%, 1.6%, 2.4%, 3.2%, 4%, I see something like 2.5%, 2.875%, 3.25%, 3.625%, 4%.

 

He also said earlier in the year that the sum total of FnF's capital raises, whether done all at once or over time, will be equal to the last 4 or 5 years of IPO activity. That's $110-130B.

 

This is about right; with a top-line 4% capital "requirement" of $240B, around half will come from capital raises, $100B from retained earnings, and $20B from what they already have. What's important to note here is that stretching out the timeline won't materially reduce overall dilution if the same proportion of overall capital comes from capital raises.

[Guest cherzeca]

"What's important to note here is that stretching out the timeline won't materially reduce overall dilution if the same proportion of overall capital comes from capital raises."

 

disagree, you left out price. if stretching out the time line has the effect of lettings GSEs raise some capital later at a higher price then if that capital had to be raised sooner, then the dilution is lessened.  I happen to believe that the early common raises will absolutely punish the common price, in order to make sure that the early deals get done (and the bankers paid), but there will be a normalization of share price after the first few successful raises. the more capital that is raised later at normalized prices the better it is for keeping G fees stable.

[Midas79]

"What's important to note here is that stretching out the timeline won't materially reduce overall dilution if the same proportion of overall capital comes from capital raises."

 

disagree, you left out price. if stretching out the time line has the effect of lettings GSEs raise some capital later at a higher price then if that capital had to be raised sooner, then the dilution is lessened.  I happen to believe that the early common raises will absolutely punish the common price, in order to make sure that the early deals get done (and the bankers paid), but there will be a normalization of share price after the first few successful raises. the more capital that is raised later at normalized prices the better it is for keeping G fees stable.

 

I see it this way: if FnF's market cap based on earnings and a P/E multiple is $Y and new investors are sold $X worth of new commons (combined over all raises), they will demand at least X/Y of the total share count. That won't change no matter how the raises are spaced; I think investors would be buying for the long term so they would care much more about what the P/E ratio is down the road than what it is at the first capital raise.

 

The problem I have always seen with multiple raises is if the total amount of dilution from all raises is known in advance, why delay, and if it isn't known, how do you convince anyone to participate in the first one when they don't know how much they will be diluted later? The only answer I can see to the second question is to have it occur at a really low price, which does agree with what you said after all.

 

That would also answer the age-old question about whether it's better to invest in the commons or prefs now; if the first raise happens at a sub-$5 price (quite likely in the "punishment" scenario) then the juniors clearly win without a share exchange. I don't know how you would get the juniors to agree to a share exchange when the future dilution is unknown, though.

 

So future raises happening at ever-higher prices would be because there is more certainty over the final share count after each one, not solely due to the timing. Along with some amount of retained earnings, but even a series of raises can't be stretched out too far; Calabria has expressed a sense of urgency in building capital.

 

Why would spacing out the raises keep g-fees more stable? I thought the idea was to meet a certain return on final equity (after all raises are done, i.e., based on the capital requirements, not FnF's actual equity on the books), not each year's ROE (which will shift over time as more capital is built). That would require any g-fee increase to happen all up front and at once.

[Guest cherzeca]

the way Wall Street works is that in order to close the deal you price the deal so it can close.  as more offerings are done over a more spaced out amount of time, the higher the price will be that can be obtained from new investors.  the first offering is riskier than the last in the march to obtain the targeted capital amount.  if you tried to raise all of the capital in one year, you will suffer more dilution than if you raised the capital over 5 years.  that's just the way the financial world works.

 

 

[Midas79]

the way Wall Street works is that in order to close the deal you price the deal so it can close.  as more offerings are done over a more spaced out amount of time, the higher the price will be that can be obtained from new investors.  the first offering is riskier than the last in the march to obtain the targeted capital amount.  if you tried to raise all of the capital in one year, you will suffer more dilution than if you raised the capital over 5 years.  that's just the way the financial world works.

 

Okay, this makes sense. Would the first of a series of offerings be priced lower than a large, single one would be? The "punishment" effect might more than cancel out the effect of an overall smaller amount of dilution.

 

On another note, I am reading through the Collins brief and the part about this still being at the stage of the motion to dismiss, where all the plaintiffs' allegations must be taken as true, stuck out to me. It's section 2 on page 57. Does that mean that SCOTUS could potentially just overturn Judge Atlas's dismissal and remand the case back down to her, while refusing to rule on anything else? That would be a rather anticlimactic result. Or is that not how things work at this stage?

[Guest cherzeca]

the way Wall Street works is that in order to close the deal you price the deal so it can close.  as more offerings are done over a more spaced out amount of time, the higher the price will be that can be obtained from new investors.  the first offering is riskier than the last in the march to obtain the targeted capital amount.  if you tried to raise all of the capital in one year, you will suffer more dilution than if you raised the capital over 5 years.  that's just the way the financial world works.

 

Okay, this makes sense. Would the first of a series of offerings be priced lower than a large, single one would be? The "punishment" effect might more than cancel out the effect of an overall smaller amount of dilution.

 

On another note, I am reading through the Collins brief and the part about this still being at the stage of the motion to dismiss, where all the plaintiffs' allegations must be taken as true, stuck out to me. It's section 2 on page 57. Does that mean that SCOTUS could potentially just overturn Judge Atlas's dismissal and remand the case back down to her, while refusing to rule on anything else? That would be a rather anticlimactic result. Or is that not how things work at this stage?

 

the claims are consolidated so scotus must rule on APA and unconstitutional structured.  if Ps win APA, case goes back to Judge Atlas, but with instruction as to what HERA really means.  if Ps win on const claim, Ps can win and get backward relief right here and now.  so then Atlas can go back to sleep

[investorG]

SCOTUS December 9th...

NEW - Supreme Court releases December argument calendar. Big-$$$ Fannie Mae/Freddie Mac case set for Dec. 9.

 

I wonder if this even gets argued. Granted the effects are huge money and wide ranging but in light of the comment period ending for the capital rule, a PSPA that can change with the stroke of a pen, why would the gov even want to argue this case? It seems a whole lot of time, money and risk gets taken off the table for all parties involved with a final PSPA amendment.

 

Very tight tight time line here with capital rule comment period ending, election, arguments in SC and inauguration. Crazy 4th Q coming.

 

If Trump wins, the case probably goes through verdict.  If Trump loses, let's hope it doesn't even get argued.

 

If Trump wins you maybe right, or any settlement goes out way further then before inauguration. F*** me. Looking for some sort of closure with this investment is never ending!

 

Too bad.  It's the house of pain.  Mnuchin (Trump) dropped the ball.  He'd be a near-hero if a better capitalized FnF was handing out relief candy in all directions over the past 6 months.  Instead, Calabria is sticking it to the admin and consumers with an unpopular 6bn fee while mortgage rates relative to Tsy's sit at extra-wide levels. 

 

Even after the pandemic started, Mnuchin could have settled Collins during July-Aug with some private equity monetization of the warrants in Sep for a housing relief pool of $$ pre-election.  But rather he fights us to this day in the Courts and appears to be comfortable with sanctions, PPP giveaways, and a secondary role on tax reform as his legacies. 

 

This inaction and housing's unfulfilled potential may even cost Trump the election if it's tight.

[onyx1]

https://www.c-span.org/video/?475865-1/federal-housing-finance-agency-fhfa-director-testifies-mortgages-covid-19

 

1:34:56

 

Rep asks Calabria if he plans to make any "adjustments" to his capital framework, or "stay the course"?

 

Calabria responds that he plans to "stay the course", and offers an argument for the need of buffers.

 

 

Question:  Is Calabria talking about the form of the capital framework or the proposed levels of capital?

[WB_fan82]

I listened to the whole hearing at 2x speed.  Wrote this part down in caps.  I think he means both.

 

4% capital level will remain.  2.5% core and 1.5% buffers.

 

In other places he discussed CRTs in more open terms.  I think he will very modestly tweak their capital treatment and that's about it.

 

All of this also points to him finalizing the capital rule quickly, which would then officially trigger the next step:  drafting and submitting capital restoration plans.

 

[Guest cherzeca]

I listened to some of the HFSC hearing with part attention.  with respect to aded fees (G fees) that the cap rule will cause, I think I heard him to say that no one will have to pay more fees since the rule will be phased in over time.  this is Calabria's way of accommodating the capital markets.  see above discussion I had with Midas as to why phasing in the rule should put less pressure on the early capital raises than otherwise, putting less pressure on any G fee raises than otherwise.

[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.

 

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.

 

My optimism is starting to wain with speed of things. All it took was to remember the captial rule was supposed to be published for comment by the end of 2019 and here we are ~1 year since Calabria made that comment.

[Guest cherzeca]

I listened to parts of Calabria's testimony at HFSC and I get the impression that Calabria knows exactly what the final rule will look like.  I don't expect the % levels to change, I do expect some more credit to be given to CRTs, and I expect the rule's % levels to be phased in over time.  I think Calabria thinks that this phase in will avoid the necessity of raising G fees while still allowing the capital market offerings spread over time to be successful.  the upside to all of this is that I think Calabria could finalize the rule rather quickly if he wants to. 

[Midas79]

My optimism is starting to wain with speed of things. All it took was to remember the captial rule was supposed to be published for comment by the end of 2019 and here we are ~1 year since Calabria made that comment.

 

Calabria actually did address this in the hearing. He said the rule was supposed to be out in March and was delayed by the pandemic. In a late February interview he said that the rule would be released "in the coming weeks, months" so while he did cover his bases there, it does sound like he was ready to release it earlier.

 

To be fair, that is still 3 months after the end of 2019, and the delays are certainly frustrating. At this point, you either trust the administration to get things done in the lame duck period or you don't. And if you don't, it probably isn't worth holding. I think the shares will take a moderate to large short-term dip if Biden wins, but will have a similar-sized rally if Trump wins, so I'm just going to hold through the election.

 

Edit: this doesn't take into account the lopsidedness of Biden and Trump's respective chances of winning, but if there's anything I learned from the 2016 presidential election it's that I have become very hesitant to ever give a major-party presidential candidate a less than 45% chance of winning no matter what the polls say.

[Midas79]

I listened to parts of Calabria's testimony at HFSC and I get the impression that Calabria knows exactly what the final rule will look like.  I don't expect the % levels to change, I do expect some more credit to be given to CRTs, and I expect the rule's % levels to be phased in over time.  I think Calabria thinks that this phase in will avoid the necessity of raising G fees while still allowing the capital market offerings spread over time to be successful.  the upside to all of this is that I think Calabria could finalize the rule rather quickly if he wants to.

 

I sure hope he is doing this on the advice of, rather than in spite of, advice from the financial advisors. I also hope he is in contact with JPM and MS rather than only listening to HL; no disrespect to HL but this has to be a team effort and JPM/MS's experience and clout are invaluable.

[Guest cherzeca]

I listened to parts of Calabria's testimony at HFSC and I get the impression that Calabria knows exactly what the final rule will look like.  I don't expect the % levels to change, I do expect some more credit to be given to CRTs, and I expect the rule's % levels to be phased in over time.  I think Calabria thinks that this phase in will avoid the necessity of raising G fees while still allowing the capital market offerings spread over time to be successful.  the upside to all of this is that I think Calabria could finalize the rule rather quickly if he wants to.

 

I sure hope he is doing this on the advice of, rather than in spite of, advice from the financial advisors. I also hope he is in contact with JPM and MS rather than only listening to HL; no disrespect to HL but this has to be a team effort and JPM/MS's experience and clout are invaluable.

 

HL doesn't practice in the big public capital markets.  they mostly do financial advisory work (with expertise in bankruptcy) and private placements.  so absolutely JPM/MS are the ones to listen to...but I wouldn't be surprised if JPM/MS talks to HL, and then HL talks to Calabria.  no reason to think HL filters anything, but they are there to provide quality control over JPM/MS, so HL is in the position to make sure that JPM/MS advice sounds right before the message gets to Calabria.