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

[rros]

For advocates of wall funding via warrants... From Bloomberg, today.

 

Mulvaney, in an interview with Fox News’ Sean Hannity on Wednesday, said ... “find the money that we can spend with the lowest threat of litigation and then move from that pot of money to the next pot that maybe brings a little bit more threat of litigation and then go through the budget like that.”

 

The administration “would love to work with Congress,” Mulvaney told Hannity, but if that’s not possible, he continued, Trump has the “legal executive authority” to move forward, and that the administration already has identified “substantially more” than the $5.7 billion.

 

 

[Williams406]

New post from Tim Howard:

 

https://howardonmortgagefinance.com/2019/02/07/a-three-year-retrospective

 

An excerpt that concisely sums up the last decade for GSE's:

 

“You abused your regulatory power by taking Fannie and Freddie over without statutory authority and for your own policy purposes, then conspired with a conservator you controlled to run up their non-cash losses, forcing on them senior preferred stock they didn’t need and you wouldn’t let them repay, whose purpose was to transform massive, temporary and artificial book expenses you’d created for them into massive, perpetual and real cash revenues you’re taking for yourself.”

 

 

[Midas79]

@cherzeca

 

This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there.

 

My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

[allnatural]

NAR plan: https://www.nar.realtor/sites/default/files/documents/2019-Working-Paper-A-Vision-For-Enduring-Housing-Finance-Reform-02-07-2019.pdf

[DRValue]

NAR proposal:

 

https://www.nar.realtor/sites/default/files/documents/2019-Working-Paper-A-Vision-For-Enduring-Housing-Finance-Reform-02-07-2019.pdf

 

Mentions putting the gses in llre's and shareholder litigation resolved before then.

This raises capital and could tie in with comments I've heard about liking some elements of the moelis plan.

 

Assuming this would mean the end of the nws and the repayment of spsa, via a ruling or agreement.

 

A couple of things I don't understand. Is there a specific, absolute need to go via receivership to change these entities into SIMMUs or can the charter be amended?

 

Assuming the spsa is redeemed and the only issue is capital, what would be gained by wiping out common shareholders? And I'm not talking about new stock holders getting more shares...

 

A receivership makes this issue even more complicated imo.

 

 

 

 

[allnatural]

It makes things more complicated than necessary (why are we transferring assets down the road in a 2-5 year transition process according to them) and at the same time forfeiting the governments 80% equity... Good luck with that

[DRValue]

It makes things more complicated than necessary (why are we transferring assets down the road in a 2-5 year transition process according to them) and at the same time forfeiting the governments 80% equity... Good luck with that

 

Also imagine the cognitive dissonance in the receivership.

 

1) we had to place them in receivership as they were not safe and sound because of no capital.

2) they were sound enough to pay us $280b in dividends though.

 

Damn statutes!

[allnatural]

FHFA Director Otting commentary from today I thought was very interesting..

 

"He declined to comment on any specifics other than to say that ensuring the mortgage giants have enough capital and liquidity to operate in a safe and sound manner is "the most important thing."

 

Otting is agreeing with shareholders in the Collins case. Capital is required for safety and soundness, and operating with out capital (thanks to the NWS) is not operating the GSEs in a "safe and sound manner".

 

Amazing FHFA can repeatedly defend these actions in court but agree with shareholders outside of court (both Watt and Otting)

[Guest cherzeca]

@cherzeca

 

This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there.

 

My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

 

I take Mnuchin at his word that he wants GSEs out of conservatorship.  once out, the directors are on the fiduciary duty watch and all of the provisions that might get in way (senior prefs cant be redeemed without treasury approval) would not stand against a fiduciary duty obligation to refinance.  you may be aware that merger contracts have an out in the contract if target gets better offer after deal is signed.  same thing here.  the contractual provision that keeps GSEs from refinancing would be voidable if GSEs argue in state courts that their fiduciary duties would be breached if they continued with senior preferred.

[rros]

@cherzeca

 

This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there.

 

My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

PSPAs and Conservatorship are separate issues. FHFA placed them in conservatorship, not Treasury. So Treasury has no say in getting them out. However, Hank Paulson came up with a clever way to obtain leverage through the financing. Termination or any change to the PSPAs requires Treasury's consent. Thus, if Tsy doesn't agree to allow the companies to retain full capital it won't matter that FHFA has the sole authority to terminate the conservatorship. Unless it switches to receivership. Tsy is needed, in the end. Whoever concocted this, including the sweep, was a genius.

[allnatural]

You realize for all intents and purposes, FHFA (Otting) and UST (Mnuchin) are now essentially the same person. Neither will act without the other.

 

@cherzeca

 

This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there.

 

My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

PSPAs and Conservatorship are separate issues. FHFA placed them in conservatorship, not Treasury. So Treasury has no say in getting them out. However, Hank Paulson came up with a clever way to obtain leverage through the financing. Termination or any change to the PSPAs requires Treasury's consent. Thus, if Tsy doesn't agree to allow the companies to retain full capital it won't matter that FHFA has the sole authority to terminate the conservatorship. Unless it switches to receivership. Tsy is needed, in the end. Whoever concocted this, including the sweep, was a genius.

[rros]

You realize for all intents and purposes, FHFA (Otting) and UST (Mnuchin) are now essentially the same person. Neither will act without the other.

 

@cherzeca

 

This board might be a better place to continue the discussion from Tim Howard's blog. I feel that my response might just be clutter there. In fact, my post there is at least somewhat off topic, and was only a hypothetical I thought up, inspired by Tim's sentence that I quoted there.

 

My understanding of the SPSPA is that Treasury has to approve release from conservatorship unless it's receivership. In that case, they can just refuse to let the companies out even if they are fully capitalized, right? If that's true it dodges all the duty problems because FHFA and Treasury could agree to change the seniors to something else before the companies are released. Then Treasury could push to convert their senior shares to some other form of equity worth at least the $122B they had to give up.

PSPAs and Conservatorship are separate issues. FHFA placed them in conservatorship, not Treasury. So Treasury has no say in getting them out. However, Hank Paulson came up with a clever way to obtain leverage through the financing. Termination or any change to the PSPAs requires Treasury's consent. Thus, if Tsy doesn't agree to allow the companies to retain full capital it won't matter that FHFA has the sole authority to terminate the conservatorship. Unless it switches to receivership. Tsy is needed, in the end. Whoever concocted this, including the sweep, was a genius.

Otting said key people are on the same page. If we go by his word, yes. Same plan, same thinking. But technically, UST and FHFA are independent and we just read emails exchanged by DeMarco and Geithner proving this. In some issues, FHFA and UST were in conflict. So we have to hope they remain on the same page, our page.

[Guest cherzeca]

"Termination or any change to the PSPAs requires Treasury's consent." 

 

my point is that once GSEs are out of conservatorship, enforcement of provisions in contracts that require GSE boards of directors to violate their fiduciary duties will be denied.

 

edit:  I do think that some of us have gotten inversion derangement syndrome.  it is always good to invert, but like anything else, should be done smartly.  if the admin develops a plan to raise $150MM in fresh capital, and they are inclined to do it in the most practical manner possible...because that is what investment bankers like Mnuchin and Phillips have been trained to do..., and there is a moelis blueprint out there that has done a lot of the heavy intellectual lifting to get this done, then I think some of these curve ball scenarios are beyond unlikely.

[rros]

"Termination or any change to the PSPAs requires Treasury's consent." 

 

my point is that once GSEs are out of conservatorship, enforcement of provisions in contracts that require GSE boards of directors to violate their fiduciary duties will be denied.

I understand. But how do they get out of conservatorship without capital? And how do they amass capital if the PSPAs aren't changed, which requires Tsy's consent? That is the 1st hurdle. Am I mistaken?

 

I believe HERA says the conservator can only terminate the conservatorship once the companies have sufficient capital. So refinancing comes prior to ending the conservatorship. Which all leads to Rome: PSPAs.

[Midas79]

PSPAs and Conservatorship are separate issues. FHFA placed them in conservatorship, not Treasury. So Treasury has no say in getting them out.

 

It's even simpler than that. Check section 5.3 of the SPSPA.

https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FannieMae_RestatedAgreement_N508.pdf

 

5.3.Conservatorship.  Seller shall not (and Conservator, by its signature below, agrees that it shall not), without the prior written consent of Purchaser, terminate, seek termination of or per-mit to be terminated the conservatorship of Seller pursuant to Section 1367 of the FHE Act, other than in connection with a receivership pursuant to Section 1367 of the FHE Act.

 

Treasury has direct veto power over any release. So while Treasury can't release the companies, they can stop FHFA from doing so. Treasury doesn't just have the de facto power that you claim, they have direct contractual power too.

 

my point is that once GSEs are out of conservatorship, enforcement of provisions in contracts that require GSE boards of directors to violate their fiduciary duties will be denied.

 

I think this will be moot, as the seniors will be dealt with prior to release.

 

My original point is that the "Treasury writes a $122B check to FnF" route allows for a recap without having to appease outside investors. Then they can impose whatever crazy capital standards and footprint reduction they want, then deal with the seniors, then allow the companies to be released.

[18436572]

It makes things more complicated than necessary (why are we transferring assets down the road in a 2-5 year transition process according to them) and at the same time forfeiting the governments 80% equity... Good luck with that

 

I think the warrants survive receivership and transfer to the LLREs. But I agree, it seems more complicated than necessary.

[Guest cherzeca]

"Termination or any change to the PSPAs requires Treasury's consent." 

 

my point is that once GSEs are out of conservatorship, enforcement of provisions in contracts that require GSE boards of directors to violate their fiduciary duties will be denied.

I understand. But how do they get out of conservatorship without capital? And how do they amass capital if the PSPAs aren't changed, which requires Tsy's consent? That is the 1st hurdle. Am I mistaken?

 

I believe HERA says the conservator can only terminate the conservatorship once the companies have sufficient capital. So refinancing comes prior to ending the conservatorship. Which all leads to Rome: PSPAs.

 

agree that there would be a capital raising plan that treasury would have to accommodate by amending the senior pref...which it will want to do in order to implement the plan successfully and create value for warrants....and at some point in that plan the FHFA would release GSEs out of conservatorship. 

[Midas79]

and there is a moelis blueprint out there that has done a lot of the heavy intellectual lifting to get this done, then I think some of these curve ball scenarios are beyond unlikely.

 

I agree that Moelis laid out the most likely path. But if Treasury writes a giant check, it will be because the Fifth Circuit ordered them to. I believe that qualifies as a curveball, because none of us would see it coming. It could also be the basis of a settlement, if Treasury somehow preferes writing that giant check and keeping the seniors over the inverse.

[Guest cherzeca]

and there is a moelis blueprint out there that has done a lot of the heavy intellectual lifting to get this done, then I think some of these curve ball scenarios are beyond unlikely.

 

I agree that Moelis laid out the most likely path. But if Treasury writes a giant check, it will be because the Fifth Circuit ordered them to. I believe that qualifies as a curveball, because none of us would see it coming. It could also be the basis of a settlement, if Treasury somehow preferes writing that giant check and keeping the seniors over the inverse.

 

that's not the way courts work.  if collins en banc voids NWS under APA claim, it sends case back to district court for that judge to implement remedy.  at that point judge asks parties what works for you both?  imo parties will both say terminate senior pref.  I am not sure what hoops treasury would have to jump through to write a 12 figure check, and Ps have no interest in making treasury jump through those hoops.

[Guest cherzeca]

reporting from Otting's speech today: 

 

no more waiting for Godot

[DRValue]

reporting from Otting's speech today: 

 

no more waiting for Godot

 

I read this a couple of times and thought, receivership would force legislative action...

 

Where is Gadot?  :)

[rros]

reporting from Otting's speech today: 

 

no more waiting for Godot

Thank you, Chris!

 

Midas, thank you for clarifying it.

[Guest cherzeca]

reporting from Otting's speech today: 

 

no more waiting for Godot

 

I read this a couple of times and thought, receivership would force legislative action...

 

Where is Gadot?  :)

 

I imagine gadot is sitting next to Godot.  otting talked to fhfa staff about a 6-18 month difficult process to raise capital.  a receivership would take years to complete before any new capital raising could begin.  but you stick with gadot

[undervalued]

https://finance.yahoo.com/news/fannie-freddie-watchdog-gets-careful-200603331.html

 

Someone secretly leaking out the plan? Well someone made a lot of money from that.

[Midas79]

that's not the way courts work.  if collins en banc voids NWS under APA claim, it sends case back to district court for that judge to implement remedy.  at that point judge asks parties what works for you both?  imo parties will both say terminate senior pref.  I am not sure what hoops treasury would have to jump through to write a 12 figure check, and Ps have no interest in making treasury jump through those hoops.

 

I defer to your expertise and judgment on how courts work. The Collins plaintiffs have a stated preference for the cancel-the-seniors route, without even asking for the extra $16.1B back if I remember right. And you're right, Treasury writing a 12-figure check would raise more than just eyebrows. I was just thinking out loud, thanks for showing me that that line of thinking isn't valid.