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

[merkhet]

Well, that depends. The companies can earn about $14 billion after-tax, so do you want $14 billion a year or $168 billion immediately? (80% of a 15x multiple)

 

And, remember, just because the companies are "under conservatorship" and the FHFA has suspended their capital requirements doesn't change the economic reality that the entities need capital. So under the $14 billion a year option, the government is, let's call it, "economically responsible" for $150 billion of capital or $120 billion of capital under the recap situation. The math works out to a 9.33% return in perpetuity or a 40% immediate return and then whatever return you might get from applying those funds to other uses.

 

In any case, on a non-financial level, Watt & co. are correct about the conservatorship being untenable over the long-term. And you can see that from reading the posts from way, way back that I posted concerning Jim Millstein's speeches before the House and the Senate.

 

In that case why not just release them regardless of the courts? Actually I agree that 80% up front is better for multiple reasons and wouldn't be surprised if does just that right before the election. It makes for a great headline number, and if I were a politician I'd rather spend 80% all by myself than share 100% in perpetuity with others. But again, why fight it to death in the courts?

 

Re: the capital, in the Government's hands they have an infinite line of credit to cover any losses so it's not like they need all that capital at all times or any given moment.

 

I didn't read Watt's statements yet but I don't understand why do all these people think that recap and release is essential? From their perspective (non financial) what are they worried about if they have essentially unlimited govt backstop in the situation we have today?

 

Because politics is the absence of reason? Why don't we have an infrastructure bill that will create thousands upon thousands of jobs and increase public safety?

 

I don't think the government has unlimited capital. They have a lot of capital, but you forget that they have to pay for it. You're making the spread between 9.3% and the 2% cost of capital. Alternatively, you can in a very short-term make 40% and tie up your capital for a very short period of time.

 

You should read Watt's recent statements and Millstein's previous statements. It will be a little more clear.

[doughishere]

This one?

 

http://financialservices.house.gov/uploadedfiles/hhrg-113-ba00-wstate-jmillstein-20130424.pdf

[merkhet]

This one?

 

http://financialservices.house.gov/uploadedfiles/hhrg-113-ba00-wstate-jmillstein-20130424.pdf

 

Yes. There's a second one @ the Senate. I uploaded them as attachments somewhere in this thread.

[morningstar]

Well, that depends. The companies can earn about $14 billion after-tax, so do you want $14 billion a year or $168 billion immediately? (80% of a 15x multiple)

 

And, remember, just because the companies are "under conservatorship" and the FHFA has suspended their capital requirements doesn't change the economic reality that the entities need capital. So under the $14 billion a year option, the government is, let's call it, "economically responsible" for $150 billion of capital or $120 billion of capital under the recap situation. The math works out to a 9.33% return in perpetuity or a 40% immediate return and then whatever return you might get from applying those funds to other uses.

 

In any case, on a non-financial level, Watt & co. are correct about the conservatorship being untenable over the long-term. And you can see that from reading the posts from way, way back that I posted concerning Jim Millstein's speeches before the House and the Senate.

 

In that case why not just release them regardless of the courts? Actually I agree that 80% up front is better for multiple reasons and wouldn't be surprised if does just that right before the election. It makes for a great headline number, and if I were a politician I'd rather spend 80% all by myself than share 100% in perpetuity with others. But again, why fight it to death in the courts?

 

Re: the capital, in the Government's hands they have an infinite line of credit to cover any losses so it's not like they need all that capital at all times or any given moment.

 

I didn't read Watt's statements yet but I don't understand why do all these people think that recap and release is essential? From their perspective (non financial) what are they worried about if they have essentially unlimited govt backstop in the situation we have today?

 

I think his acutal concern is basically that in the future, a draw on the Treasury's facility would create a political excuse for Republicans in Congress to break down the GSE system.

 

While Watt and others have also made comments on the future financial stability of the GSEs, I think the status quo is satisfactory from that perspective and that a release/recap would probably be damanging to investor confidence in the enterprises, not supportive. 100% of the creditworthiness of the GSEs is driven by the effective substitution of their credit with that of the US, and the demand for the securities they issue is all created by this fact. To the extent that a release/recap involves reducing any aspect of that support, it would seem destabilizing.

[merkhet]

I think his acutal concern is basically that in the future, a draw on the Treasury's facility would create a political excuse for Republicans in Congress to break down the GSE system.

 

While Watt and others have also made comments on the future financial stability of the GSEs, I think the status quo is satisfactory from that perspective and that a release/recap would probably be damanging to investor confidence in the enterprises, not supportive. 100% of the creditworthiness of the GSEs is driven by the effective substitution of their credit with that of the US, and the demand for the securities they issue is all created by this fact. To the extent that a release/recap involves reducing any aspect of that support, it would seem destabilizing.

 

I suppose it would depend on what a release/recap looks like.

 

If you can release them with access to the CSP which provides a guarantee on the securities but only after some significant equity loss on the part of the privatized entities, that would seem to preserve stability.

[orthopa]

Well, that depends. The companies can earn about $14 billion after-tax, so do you want $14 billion a year or $168 billion immediately? (80% of a 15x multiple)

 

And, remember, just because the companies are "under conservatorship" and the FHFA has suspended their capital requirements doesn't change the economic reality that the entities need capital. So under the $14 billion a year option, the government is, let's call it, "economically responsible" for $150 billion of capital or $120 billion of capital under the recap situation. The math works out to a 9.33% return in perpetuity or a 40% immediate return and then whatever return you might get from applying those funds to other uses.

 

In any case, on a non-financial level, Watt & co. are correct about the conservatorship being untenable over the long-term. And you can see that from reading the posts from way, way back that I posted concerning Jim Millstein's speeches before the House and the Senate.

 

In that case why not just release them regardless of the courts? Actually I agree that 80% up front is better for multiple reasons and wouldn't be surprised if does just that right before the election. It makes for a great headline number, and if I were a politician I'd rather spend 80% all by myself than share 100% in perpetuity with others. But again, why fight it to death in the courts?

 

Re: the capital, in the Government's hands they have an infinite line of credit to cover any losses so it's not like they need all that capital at all times or any given moment.

 

I didn't read Watt's statements yet but I don't understand why do all these people think that recap and release is essential? From their perspective (non financial) what are they worried about if they have essentially unlimited govt backstop in the situation we have today?

 

I think his acutal concern is basically that in the future, a draw on the Treasury's facility would create a political excuse for Republicans in Congress to break down the GSE system.

 

While Watt and others have also made comments on the future financial stability of the GSEs, I think the status quo is satisfactory from that perspective and that a release/recap would probably be damanging to investor confidence in the enterprises, not supportive. 100% of the creditworthiness of the GSEs is driven by the effective substitution of their credit with that of the US, and the demand for the securities they issue is all created by this fact. To the extent that a release/recap involves reducing any aspect of that support, it would seem destabilizing.

 

Then if that is the case the 4-5 trillion in liabilities goes on the gov's balance sheet too. They cant have it both ways. Those liabilities cant just "be separate".

 

What happens to the US credit rating in that scenario?

[merkhet]

Saxton plaintiffs are opposing the Defendants' motion to reinstate the stay on the administrative record. Motion will also be filed under seal.

[Guest cherzeca]

Saxton plaintiffs are opposing the Defendants' motion to reinstate the stay on the administrative record. Motion will also be filed under seal.

 

how would this motion be fully briefed and decided before the admin record production date of 3/10? of course if judge decides after 3/10 to reinstate she can make it retroactive, but this is rather strange procedure

[merkhet]

Saxton plaintiffs are opposing the Defendants' motion to reinstate the stay on the administrative record. Motion will also be filed under seal.

 

how would this motion be fully briefed and decided before the admin record production date of 3/10? of course if judge decides after 3/10 to reinstate she can make it retroactive, but this is rather strange procedure

 

Yea, no idea.

[Luke 532]

Recent post from ValuePlays...

http://www.valueplays.net/2016/03/03/the-9th-circuit-may-have-just-decided-the-delaware-gse-cases-for-plaintiffs/

[merkhet]

Things are looking pretty good right now. I hope the Delaware oral arguments aren't scheduled for while I'm out of the country. I would love to sit in for that.

[Guest cherzeca]

"Things are looking pretty good right now."

 

spit 3 times 

[merkhet]

"Things are looking pretty good right now."

 

spit 3 times

 

I went outside, turned around, spit and cursed.

[doughishere]

Can't be too careful

 

Great show.

[Guest cherzeca]

wsj's carney strikes again with http://www.wsj.com/articles/fannie-and-freddie-shareholders-suffer-stinging-legal-setbacks-1457286903?mod=djemheard_t

 

and i comment on wsj online with https://twitter.com/cherzeca/status/706563517781045248

[Sunrider]

Chris, Merkhet

 

Apologies if this is a stupid question by a non legally trained person - what are the chances that either Delaware Ct. (or another) decides that for the purposes of this question Fannie/Freddie are instrumentalities of the US government? Or, for that matter, that another (higher?) court decides that the 9th circuit judgement that FHFA steps into the shoes of GSEs with rights & obligations, not other way around, is wrong and will be revised?

 

Thank you - I really appreciate your contributions to this board.

C.

 

Can't be too careful

 

Great show.

[tede02]

A number of people ripped the WSJ's Carney in the comment section.  Somewhat entertaining. 

[merkhet]

Chris, Merkhet

 

Apologies if this is a stupid question by a non legally trained person - what are the chances that either Delaware Ct. (or another) decides that for the purposes of this question Fannie/Freddie are instrumentalities of the US government? Or, for that matter, that another (higher?) court decides that the 9th circuit judgement that FHFA steps into the shoes of GSEs with rights & obligations, not other way around, is wrong and will be revised?

 

Thank you - I really appreciate your contributions to this board.

C.

 

Unfortunately, this stuff does not reduce all that well to numerical probabilities . Instead, I'd say that it's likely that the Delaware district court treats Fannie & Freddie as not being instrumentalities of the U.S. government as a result of FHFA's involvement as conservator, and, therefore, the companies are subject to state law when it comes to things like the Net Worth Sweep.

 

Now, the 9th Circuit is not directly controlling because the Delaware district court sits in the 3rd Circuit, but it's persuasive authority for the Delaware district court judges -- and it's something that Judge Sleet will likely take into consideration when thinking through this case.

 

The only higher court than the 9th Circuit Court of Appeals is the Supreme Court, and I don't think that case is going to be argued up to the Supreme Court.

[Sunrider]

Thanks Merkhet

 

Then, assuming that it goes the way you consider likely (Sleet taking 9th into account and ruling not an instrumentality, therefore Delaware law breached), then I guess this is done? I.e. NWS illegal (and not possible for government to retroactively change it. Of course it could put something like a 99% sweep in place but I would think that is more trouble than it's worth politically at this point ... So only a question of time now (under the above assumptions)?

 

Thank you.

C.

[merkhet]

Thanks Merkhet

 

Then, assuming that it goes the way you consider likely (Sleet taking 9th into account and ruling not an instrumentality, therefore Delaware law breached), then I guess this is done? I.e. NWS illegal (and not possible for government to retroactively change it. Of course it could put something like a 99% sweep in place but I would think that is more trouble than it's worth politically at this point ... So only a question of time now (under the above assumptions)?

 

Thank you.

C.

 

The Delaware case isn't just about the Net Worth Sweep being illegal under Delaware and Virginia Law. The case also talks about the conservator having a fiduciary duty, etc. so a 99% sweep would also violate their fiduciary duty, assuming we win on that part as well.

[Sunrider]

Thank you. Fingers crossed.

[Guest cherzeca]

Thanks Merkhet

 

Then, assuming that it goes the way you consider likely (Sleet taking 9th into account and ruling not an instrumentality, therefore Delaware law breached), then I guess this is done? I.e. NWS illegal (and not possible for government to retroactively change it. Of course it could put something like a 99% sweep in place but I would think that is more trouble than it's worth politically at this point ... So only a question of time now (under the above assumptions)?

 

Thank you.

C.

@sun

 

if NWS invalidated, govt will try to argue some sort of "equitable" fix retroactively.  i dont think that would be successful. that means that about $90B will get chopped off its FNMA preference since its excess dividends above 10% have amounted to that for FNMA alone.  anything govt would try to do would be only prospective, and the holding of any case in which plaintiffs win will make it very hard for govt to try to sweep say 90% of net worth in future, as merkhet indicates.  so my view is that after any loss and failure of appeal, winding down GSEs will be not practicable (not that it ever was)

[Guest cherzeca]

new SA article:  http://seekingalpha.com/article/3956304-legal-framing-analysis-points-investment-gain-gses

[Sunrider]

Thank you both

 

[merkhet]

Thanks Merkhet

 

Then, assuming that it goes the way you consider likely (Sleet taking 9th into account and ruling not an instrumentality, therefore Delaware law breached), then I guess this is done? I.e. NWS illegal (and not possible for government to retroactively change it. Of course it could put something like a 99% sweep in place but I would think that is more trouble than it's worth politically at this point ... So only a question of time now (under the above assumptions)?

 

Thank you.

C.

@sun

 

if NWS invalidated, govt will try to argue some sort of "equitable" fix retroactively.  i dont think that would be successful. that means that about $90B will get chopped off its FNMA preference since its excess dividends above 10% have amounted to that for FNMA alone.  anything govt would try to do would be only prospective, and the holding of any case in which plaintiffs win will make it very hard for govt to try to sweep say 90% of net worth in future, as merkhet indicates.  so my view is that after any loss and failure of appeal, winding down GSEs will be not practicable (not that it ever was)

 

That's largely how I see it. If the NWS is invalidated, I expect the government to take the Churchill position of the United States doing the right thing once it's exhausted all other possibilities. Without the company functioning as a piggy bank, there will be no reason to keep it locked up.