investorG

The Doj's letter to the SC from Thursday isn't a great sign. One, it grossly misleads by suggesting the Jan letter agreement addresses the dividend sweep prospectively (final sentence of last paragraph). And secondly, if the SC is even asking this question - did the Jan letter agreement moot the case - then it shows this complicated case is above their ability to fully comprehend, raising the odds for some non-reasoned opinion.

Is Tim Howard correct or not when he says the Lamberth case is derivative? ps: 1000 posts....what a mess this has been.

The common dilution could be far less than expected if a) we win Collins in 1-2 years b) the housing market doesn't crumble c) the Biden admin takes a 4 year view to craft their solution / release and/or d) the capital buffers are reduced in a transition to utility. A lot of "ifs" in the above but the dilution could in theory end with the 80% warrants and slightly also from jr pref conversion (perhaps at a far higher price reducing the new shares issued).

Regarding Tsy's compensation for their ongoing line of credit in the January letter agreement, capital builds faster at the GSEs through the selection of increasing the liquidation preference vs. the alternative of an earnings-reducing graduated commitment fee. Yet another double down on the Sr pref partial / full write down through legal or eventual settlement; but if it occurs, the GSEs will have tens of billions further in capital at that point than if liq pref wasn't increased in letter agreement and instead a commitment fee was installed.

Wondering if it makes sense to add some common to complement the jr pref in case biden takes his full term to to turn them into a utility with lower cap requirements.

Wow. This is good. Thank you. Regarding your conclusions, we'll have to see. I would guess we'll see a curve ball good (perhaps a large majority win on APA) or bad (perhaps they say wait for the takings cases (breyer's comment)) and a ruling in June.

After the shares turnover to a new investor base in days / weeks, the pref will likely drift higher until the Collins ruling imo. With the letter agreement the Tsy is incentivized to move forward because they won't receive cash for decades and they are potentially also on the hook for $125bn / $50bn in Sweeney / Lamberth, even if Collins APA is a loser. Tsy has time to formulate their favored end-state for FnF during 2021 and then execute that plan over the following 1-3 years, economy willing.

2 would be a logistical disaster, doubt they go this route. agree on 1 and 3. most people assume 3 but I wonder if 1 isn't rising in odds (despite the oral arguments) after the SC sees the election / letter agreement. I asked this before but what are you rooting for, 1 or 3, as it relates to our prospects?

Apart from lawsuits, converting the whole sr pref to common is a circular disaster, not really workable due to low current mkt caps of jr pref and public common to squeeze value from combined with the relative ownership demands from fresh money investors potentially putting in well over $100bn. edit: Doubt the 30bn gets returned in any scenario. Govt can keep the $190bn sr pref and just send back the $125bn. Investors don't want this and so if we won Collins we'd negotiate to write down the sr pref instead and would have to give up something. edit 2: The odds of Calabria working out a deal pre-collins are low. why are they going to give up the house in april when they can wait 3 months and get most of what they want with a new fhfa head.

I agree there is a branding problem. That's why a potential write-down needs to be accompanied in conjunction with a large capital raise. Yellen can truthfully say we couldn't have gotten this equity that you see right now in the door without a write down. And this equity can provide a) taxpayer protection, b) actual cash (via warrant monetization and/or some partial sr pref conversion) rather than mark to market gains that Midas says could take 20 years to tap, and c) no material lawsuit liability. The Trump admin was too lazy to move in this manner. So they bunted us to first base rather than hit the home run.

I wouldn't count on this. What Tsy scty is going to drop the equity capital requirement below 3%. This letter agreement took the capital rules out of FHFA head's sole hands.

I agree Doc, we could be misaligned with the litigants. Unless we win constitutional at the SC, which is unlikely, I wonder if Berkowitz holds out for the Lamberth trial (perhaps ~ $40 potential) or if he'd go ahead and settle in 2h 2021 for either a decent deal (if we get APA remand) or any deal (if we lose collins outright). I suspect it will leak out at some point the reason for the prior admin's crunch time collapse.

I am aligned with him position-wise but despite his knowledge his predictions are rarely reliable. This instance should be no different. I see low odds of an equity raise in 2021 because most or all of this year will be filled with debate over the preferred GSE structure going forward. Surely Yellen will give Sherrod and Toomey a chance first. Likely going to be a long year with no visible potential catalysts until June-Sep.

I don't think I said that. I did say that the few preferreds that have low floating rate coupons (some of which would actually be 0% right now) are bad bets. I think everything with a fixed coupon of 4.5-6.0% is where the best values are. It is possible, but I don't think certain, that the even higher coupon issues will get better terms down the line, but you have to pay up for it, which I choose not to do. The interesting question now is should we actually have a preference for Freddie preferreds over Fannie? Based on the $70 billion capital raise limit before SPS paydown is required, Fannie is constrained from exiting conservatorship a lot longer than Freddie. But if the preferreds get exchanged as part of a settlement at the same time, then it may not matter that much as to the actual end date of the conservatorship. Mr. Market didn't make any distinction between the two on Friday, but that was just one day. Does anyone think there will be some price separation favoring Freddie in the near term? Yes this is possible. But Freddie doesn't even have a permanent CEO currently. Given the last bullet in the Treasury Department Blueprint, there is some real chance that the Biden admin's tentative plans are a merged utility and Yellen asked the prior admin to give that concept an initial nudge. edit: Mel Watt formally pushed utility in Jan 2018.

+1 was just going to post this. Michael is smart guy and like most of his thoughts on JPS. I don't see anything happening until after the Collins SC ruling. The Sep30 date aligns with this view.