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

[onyx1]

now let me be a bit speculative. you will notice that SCOTUS spent very little time on the merits of the APA claim that the NWS is ultra vires, much more time on the constitutional claim. in his opening the assistant SG mentioned the anti-injuction clause and that the APA itself doesn’t support the APA cause of action, which implicates the APA claim, but there wasn’t much follow up by the justices on the APA claim (and indeed, those provisions implicate the constitutional claim as well). now why would there be so much more focus on the constitutional claim than the APA claim? one answer might be that the justices think the constitutional claim will decide the case. Now if the justices thought the NWS would be validated, either in part because the acting fhfa D was removable for cause, or in whole because the Seila holding doesn’t apply to Collins, then you would think the justices would have spent much more time on the APA claim than it did. now, one may think that the APA claim is so powerful for Ps that no time needed to be spent on the APA claim, but I think that if there was any possibility that the constitutional claim wouldn’t be fully upheld then the APA claim would have garnered more focus.

 

Good point ROLG.  Based on Breyer's argument, I was left with the impression that an easiest way to "unscramble the egg" is for SCOTUS to withhold remedy on both counts and have the P's move forward on their takings claim in Sweeney's venue.

[Guest cherzeca]

now let me be a bit speculative. you will notice that SCOTUS spent very little time on the merits of the APA claim that the NWS is ultra vires, much more time on the constitutional claim. in his opening the assistant SG mentioned the anti-injuction clause and that the APA itself doesn’t support the APA cause of action, which implicates the APA claim, but there wasn’t much follow up by the justices on the APA claim (and indeed, those provisions implicate the constitutional claim as well). now why would there be so much more focus on the constitutional claim than the APA claim? one answer might be that the justices think the constitutional claim will decide the case. Now if the justices thought the NWS would be validated, either in part because the acting fhfa D was removable for cause, or in whole because the Seila holding doesn’t apply to Collins, then you would think the justices would have spent much more time on the APA claim than it did. now, one may think that the APA claim is so powerful for Ps that no time needed to be spent on the APA claim, but I think that if there was any possibility that the constitutional claim wouldn’t be fully upheld then the APA claim would have garnered more focus.

 

Good point ROLG.  Based on Breyer's argument, I was left with the impression that an easiest way to "unscramble the egg" is for SCOTUS to withhold remedy on both counts and have the P's move forward on their takings claim in Sweeney's venue.

 

right, well Breyer has a way of floating dead balloons

[WB_fan82]

Listened to the whole thing.

 

I think the Ps are dead in the water on the constitutional front.  Just like the ROP or Bhatti case (I forget which), they are honing on the very neat and convenient fact that the acting director WAS removeable at will.  So you have an unconstitutional agency, but one that took an action which did not suffer from the same fatal constitutional flaw.  Therefore retroactive remedy not available, and affirm en banc.

 

But I also think the lack of discussion of the APA is telling.  The justices will remand back to S. Texas where we can enjoy trial on the merits and will have to survive the fact that HERA explicitly states that FHFA can act in its own interest, which provision is NOT in the similar FDIC statutes with similar conservatorship structure.  That will takes years to work through the appeals.

 

The legal path here is not a great one, sadly.

 

In Mnuchin I trust.  Kill the NWS, change the sr pfd in a way to remove the cumulative nature so it counts as capital (Tim removed a comment from "Patrick" yesterday on this very idea, but I saw it), and then there are no barriers to private capital and we can do the consent order.  The courts awarding NWS overage then becomes a lottery ticket for newly raised external capital.

 

And now we have the endorsement of the WSJ ed board.  No worry about being excoriated for taking "the least bad option".  COME ON STEVE!!!!

 

 

[undervalued]

Listened to the whole thing.

 

I think the Ps are dead in the water on the constitutional front.  Just like the ROP or Bhatti case (I forget which), they are honing on the very neat and convenient fact that the acting director WAS removeable at will.  So you have an unconstitutional agency, but one that took an action which did not suffer from the same fatal constitutional flaw.  Therefore retroactive remedy not available, and affirm en banc.

 

But I also think the lack of discussion of the APA is telling.  The justices will remand back to S. Texas where we can enjoy trial on the merits and will have to survive the fact that HERA explicitly states that FHFA can act in its own interest, which provision is NOT in the similar FDIC statutes with similar conservatorship structure.  That will takes years to work through the appeals.

 

The legal path here is not a great one, sadly.

 

In Mnuchin I trust.  Kill the NWS, change the sr pfd in a way to remove the cumulative nature so it counts as capital (Tim removed a comment from "Patrick" yesterday on this very idea, but I saw it), and then there are no barriers to private capital and we can do the consent order.  The courts awarding NWS overage then becomes a lottery ticket for newly raised external capital.

 

And now we have the endorsement of the WSJ ed board.  No worry about being excoriated for taking "the least bad option".  COME ON STEVE!!!!

 

https://www.wsj.com/articles/the-fannie-and-freddie-conundrum-11607470249

 

Because they were unable to pay the required dividend or fee, Treasury in 2012 began sweeping their net earnings. Fan and Fred shareholders on Wall Street argue that the government has unfairly appropriated hundreds of billions of dollars in profits. But Treasury still hasn’t come close to being repaid what it was originally owed under the 2008 agreement for rescuing the giants.

 

Any idea why they said the above sentence about it not being repaid? Ah never mind.

 

Some Members of Congress argue that GSEs haven’t fully repaid taxpayers. Fair enough, and a consent order should require the GSEs to pay for their implicit government backstop and Treasury’s senior preferred shares over time. They shouldn’t be allowed to pay dividends until they do.

 

But the risk to taxpayers now of keeping Fannie and Freddie in government captivity probably outweighs that of releasing them with a ball and chain. A consent order, unfortunately, won’t last forever. But if Congress can’t muster the political will to end their guarantee, then Mr. Calabria’s plan is the least bad policy.

[SnarkyPuppy]

Is there going to be a video on cspan?  Or should I just expect audio?

[Luke 532]

Is there going to be a video on cspan?  Or should I just expect audio?

 

Don't know, but here is the transcript: https://www.supremecourt.gov/oral_arguments/argument_transcript/2020

[DocSnowball]

I got the incentives all wrong. I thought T/fhfa would understand that if you are going to do 4thA/settle you do it before scotus argument. question of respect for scotus. turns out that T/fhfa could give a damn about anything else than their precious ego-centric selves.

 

Just listened to the SCOTUS arguments. Pointed questions on both sides.

 

From the forest view, the whole situation is absurd to me. If you were the FHFA director working for years to recap the companies, why would you not settle the lawsuits and move this forward? Only reason I can think of is Treasury not playing ball. Why? IDK!!!

 

If this is not in the too hard pile, I'm not sure what is. Yet, why is this trade so hard to walk away from? It always seems like resolution is just around the corner, and then years go by  :'(

[investorG]

It sounded like they wanted to help us but aren't sure how due to some technical legal points.  There is some risk they go the Breyer route and wish us luck in the takings court.  It appears APA has a greater chance than constitutional backward remedy.

 

The collective group on the call wasn't as 'on point' as I would have hoped in terms of some questions asked and answers, this doesn't appear to be their prime wheelhouse of expertise.    I would have preferred to hear more real-world high level commentary about the money #'s in and out, the Obama admin emails, non-cash resolution options, etc. which cement the obnoxiousness of the NWS. 

 

Neither side should be comfortable expecting a win IMO.  We could lose. 

[investorG]

Listened to the whole thing.

 

I think the Ps are dead in the water on the constitutional front.  Just like the ROP or Bhatti case (I forget which), they are honing on the very neat and convenient fact that the acting director WAS removeable at will.  So you have an unconstitutional agency, but one that took an action which did not suffer from the same fatal constitutional flaw.  Therefore retroactive remedy not available, and affirm en banc.

 

But I also think the lack of discussion of the APA is telling.  The justices will remand back to S. Texas where we can enjoy trial on the merits and will have to survive the fact that HERA explicitly states that FHFA can act in its own interest, which provision is NOT in the similar FDIC statutes with similar conservatorship structure.  That will takes years to work through the appeals.

 

The legal path here is not a great one, sadly.

 

In Mnuchin I trust.  Kill the NWS, change the sr pfd in a way to remove the cumulative nature so it counts as capital (Tim removed a comment from "Patrick" yesterday on this very idea, but I saw it), and then there are no barriers to private capital and we can do the consent order.  The courts awarding NWS overage then becomes a lottery ticket for newly raised external capital.

 

And now we have the endorsement of the WSJ ed board.  No worry about being excoriated for taking "the least bad option".  COME ON STEVE!!!!

 

It was likely removed because it's unworkable if you expect private capital to invest with ~ $250bn of preferred on top of common.

[undervalued]

Interesting to see that we flip flop between court vs Treasury/FHFA depending which one is more favorable to keep betting on this thing.

 

This article seems to point out what is at stake if plaintiff wins https://www.vox.com/2020/12/9/22165338/supreme-court-collins-mnuchin-samuel-alito-housing-fhfa-unitary-executive

[COBFInfinity]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

I get the sense that Mnuchin is willing to amend PSPA, but doesn't intend to settle cases OR write down the Senior Preferred. Of course this would completely counter his claim that he wants "to set them on the right direction" because the cloud of uncertainty will remain and no outside capital can be raised.

[allnatural]

??? "Mnuchin said that case and other issues must be resolved before Fannie and Freddie could raise capital in private markets,"

 

 

[COBFInfinity]

??? "Mnuchin said that case and other issues must be resolved before Fannie and Freddie could raise capital in private markets,"

 

Yes, but is he going to resolve them or let the courts carry it out for years to come? Obviously, we know he didn't just decide today what he's planning to do, so why let the case go to SCOTUS? I think he wants to punt on dealing with the Senior Preferred balance. I hope I'm wrong.

[investorG]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

I get the sense that Mnuchin is willing to amend PSPA, but doesn't intend to settle cases OR write down the Senior Preferred. Of course this would completely counter his claim that he wants "to set them on the right direction" because the cloud of uncertainty will remain and no outside capital can be raised.

 

Perhaps Calabria and Collins should simply take the best deal they can get with Tsy (rather than full compensation with overage) in the next 5 weeks to get this resolved.  After today and the unlikelihood of retroactive compensation on the constitutional angle, Mnuchin's quote seems accurate: a remand -- if we even get it on APA -- would take a good amount of time and further litigation before potential resolution.

[Guest cherzeca]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

I get the sense that Mnuchin is willing to amend PSPA, but doesn't intend to settle cases OR write down the Senior Preferred. Of course this would completely counter his claim that he wants "to set them on the right direction" because the cloud of uncertainty will remain and no outside capital can be raised.

 

Perhaps Calabria and Collins should simply take the best deal they can get with Tsy (rather than full compensation with overage) in the next 5 weeks to get this resolved.  After today and the unlikelihood of retroactive compensation on the constitutional angle, Mnuchin's quote seems accurate: a remand -- if we even get it on APA -- would take a good amount of time and further litigation before potential resolution.

 

seems to me that fhfa/T have not been involving Ps in their discussions. seems strange (as if suing the govt for the NWS makes Ps pariahs) but if Ps get what they want, then as C has said, the litigation will go away

[Luke 532]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

Very important excluded quote from Mnuchin from the original Bloomberg article that Victoria Guida added later in a Twitter thread...

The only thing missing here is that on SCOTUS he said: “It’s not the only issue but obviously to raise third party capital that issue has to be resolved.”

[typicalvalue]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

Very important excluded quote from Mnuchin from the original Bloomberg article that Victoria Guida added later in a Twitter thread...

The only thing missing here is that on SCOTUS he said: “It’s not the only issue but obviously to raise third party capital that issue has to be resolved.”

 

Yesterday Mnuchin comments were very bullish IMHO. The question now if PSPA happens before or after Christmas, I would bet that this will come close to deadline (20 jan).

[orthopa]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

Very important excluded quote from Mnuchin from the original Bloomberg article that Victoria Guida added later in a Twitter thread...

The only thing missing here is that on SCOTUS he said: “It’s not the only issue but obviously to raise third party capital that issue has to be resolved.”

 

Yesterday Mnuchin comments were very bullish IMHO. The question now if PSPA happens before or after Christmas, I would bet that this will come close to deadline (20 jan).

 

I agree, there are things he will "likely" agree to, "wants to set them in the right direction". What does he likely have to agree too, to set them in the right direction that will allow them to raise 3rd party capital? This is probably the same thing Calabria has been "urging" as part of an agreement to raise capital to meet the capital levels in the capial rule.

[Midas79]

"Mnuchin Says He’s ‘Likely’ to Back Changes to Fannie and Freddie"

https://finance.yahoo.com/news/mnuchin-says-likely-back-changes-000854956.html

 

But the quote on SCOTUS case: “If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

Very important excluded quote from Mnuchin from the original Bloomberg article that Victoria Guida added later in a Twitter thread...

The only thing missing here is that on SCOTUS he said: “It’s not the only issue but obviously to raise third party capital that issue has to be resolved.”

 

Yesterday Mnuchin comments were very bullish IMHO. The question now if PSPA happens before or after Christmas, I would bet that this will come close to deadline (20 jan).

 

I agree, there are things he will "likely" agree to, "wants to set them in the right direction". What does he likely have to agree too, to set them in the right direction that will allow them to raise 3rd party capital? This is probably the same thing Calabria has been "urging" as part of an agreement to raise capital to meet the capital levels in the capial rule.

 

Can't accumulate capital while the NWS is in place.

Can't raise third-party capital while the seniors are in place.

Both have to go. Mnuchin knows this.

 

Also, my read on the definition of taxpayer protection is putting more private capital in front of Treasury's backstop, not maximizing the value of the warrants. That would mean Treasury wants third party capital raised ASAP.

[DocSnowball]

Interesting to see that we flip flop between court vs Treasury/FHFA depending which one is more favorable to keep betting on this thing.

 

 

This describes me for sure! It's a bit like being a casino, every time you are ready to walk away a few more coins come your way  ;D

[Guest cherzeca]

when Mnuchin said last week he was contemplating, it probably was likely. when he now says it's likely, it is probably time to make book. 

[Midas79]

when Mnuchin said last week he was contemplating, it probably was likely. when he now says it's likely, it is probably time to make book.

 

To paraphrase the old joke:

If he says "no" he means "maybe".

If he says "maybe" he means "yes".

If he says "yes", he's no poker player.

[DocSnowball]

when Mnuchin said last week he was contemplating, it probably was likely. when he now says it's likely, it is probably time to make book.

 

To paraphrase the old joke:

If he says "no" he means "maybe".

If he says "maybe" he means "yes".

If he says "yes", he's no poker player.

 

Between Mnuchin, Calabria and Crapo's statements and the WSJ editorial opinion, something seems to be brewing.

[SnarkyPuppy]

when Mnuchin said last week he was contemplating, it probably was likely. when he now says it's likely, it is probably time to make book.

 

To paraphrase the old joke:

If he says "no" he means "maybe".

If he says "maybe" he means "yes".

If he says "yes", he's no poker player.

 

Between Mnuchin, Calabria and Crapo's statements and the WSJ editorial opinion, something seems to be brewing.

 

Have to be honest here- something seems off.  The market, while sometimes inefficient when structural/technical reasons exist (applicable here) and therefore can be slow to react to emerging phenomenon, cannot be this stupid to allow for a 50-100% increase in prices at PSPA 4th amendment signing.

 

I think the market is applying some small discount to account for the risk that Mnuchin doesn't sign the amendment, but have to imagine a large portion of the PSPA amendment is already baked into the price at this point.  I could be totally wrong here, given that the details of the amendment are key variables and unknown (simply end NWS?  partial write-down of senior pref?  details of commitment fee?) but I'm not sure I'd expect a 50-100% increase in prices even in a better-case scenario. 

 

I think the market wants closure on the implications of a SCOTUS decision + more specific views on Biden's likelihood of playing nice nice with any consent decree (for example-  could Biden not assign a new FHFA director quickly and dramatically increase the capital requirements to make it near impossible to raise private capital and therefore keep the GSE's as cashflowing entities for the govt?  The SCOTUS decision won't be final until June so a capital raise won't happen until June - and by then a new FHFA director can come into play and quickly raise the capital standards) 

 

Just typing out some random thoughts.  Obviously moving in a positive direction but I'm skeptical that the market is just so obviously dumb that it's missing the upcoming PSPA amendment. 

 

Thoughts?

[typicalvalue]

when Mnuchin said last week he was contemplating, it probably was likely. when he now says it's likely, it is probably time to make book.

 

To paraphrase the old joke:

If he says "no" he means "maybe".

If he says "maybe" he means "yes".

If he says "yes", he's no poker player.

 

Between Mnuchin, Calabria and Crapo's statements and the WSJ editorial opinion, something seems to be brewing.

 

Have to be honest here- something seems off.  The market, while sometimes inefficient when structural/technical reasons exist (applicable here) and therefore can be slow to react to emerging phenomenon, cannot be this stupid to allow for a 50-100% increase in prices at PSPA 4th amendment signing.

 

I think the market is applying some small discount to account for the risk that Mnuchin doesn't sign the amendment, but have to imagine a large portion of the PSPA amendment is already baked into the price at this point.  I could be totally wrong here, given that the details of the amendment are key variables and unknown (simply end NWS?  partial write-down of senior pref?  details of commitment fee?) but I'm not sure I'd expect a 50-100% increase in prices even in a better-case scenario. 

 

I think the market wants closure on the implications of a SCOTUS decision + more specific views on Biden's likelihood of playing nice nice with any consent decree (for example-  could Biden not assign a new FHFA to dramatically increase the capital requirements to make it near impossible to raise private capital and therefore keep the GSE's as cashflowing entities for the govt?) 

 

Just typing out some random thoughts.  Obviously moving in a positive direction but I'm skeptical that the market is just so obviously dumb that it's missing the upcoming PSPA amendment. 

 

Thoughts?

 

Agree, I'm quite perplexed by the fact the market has not reacted to yesterday's Mnuchin comments, pfds still on 34 cents on the dollar. Even does not believe Mnuchin or pricing that Biden admin can derail and undo what has been/will be done till 20th of january. Market is inefficient sometimes but wondering how this high IRR has not ben eaten by mr.Market or at least a bit of it.