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

[orthopa]

From the IMF rag apparently FSOC voted unanmously to support FHFAs reproposed capital framework. How can FSOC approve it if it isnt finalized (or is it and we are just in a waiting game as assumed).

 

Apparently FSOC thinks the capital rules are not strict enough. Not sure how much of a blessing this was but glad there was no opposition.

[SnarkyPuppy]

Are there any controls in place within the US government that restrict the incumbent from implementing laws subsequent to an election but before removal at inauguration that could potentially impact any contracts signed between UST and FHFA? 

 

Said another way, in the event Biden wins - are there any arguments to be made that PSPA amendments made during a "lame duck" period can be revoked?

[Guest cherzeca]

Are there any controls in place within the US government that restrict the incumbent from implementing laws subsequent to an election but before removal at inauguration that could potentially impact any contracts signed between UST and FHFA? 

 

Said another way, in the event Biden wins - are there any arguments to be made that PSPA amendments made during a "lame duck" period can be revoked?

 

same story as filing RBG's seat.  if you have the power to do it, then you have the power to do it even if with hindsight that power wasn't for too much longer

[orthopa]

Based on the prepared statements of Calabria and FSOCs recomendations it doesnt appear the proposal capital levels are going to budge much if at all. Not a whole lot of tea reading other then Calabria saying the rule will be finalized in the coming months.

 

 

https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-FSOC-Principals-Meeting-9-25-2020.aspx

 

https://home.treasury.gov/system/files/261/Financial-Stability-Oversight-Councils-Statement-on-Secondary-Mortgage-Market-Activities.pdf

[Guest cherzeca]

Based on the prepared statements of Calabria and FSOCs recomendations it doesnt appear the proposal capital levels are going to budge much if at all. Not a whole lot of tea reading other then Calabria saying the rule will be finalized in the coming months.

 

 

https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-FSOC-Principals-Meeting-9-25-2020.aspx

 

https://home.treasury.gov/system/files/261/Financial-Stability-Oversight-Councils-Statement-on-Secondary-Mortgage-Market-Activities.pdf

 

agree. only hope I have is that there is a phasing in that permits GSEs to raise capital in a deliberate manner and without unreasonable conditions for dividends and exec bonuses

[Luke 532]

Hmmm, interesting tweet from ACG...

 

Full remarks from @MarkCalabria at #FSOC. Says they found adequate capital could be materially less:

[Guest cherzeca]

Hmmm, interesting tweet from ACG...

 

Full remarks from @MarkCalabria at #FSOC. Says they found adequate capital could be materially less:

 

I don't see this in Calabria's remarks.  looks to me like a whoopsie

[Guest cherzeca]

Hmmm, interesting tweet from ACG...

 

Full remarks from @MarkCalabria at #FSOC. Says they found adequate capital could be materially less:

 

I don't see this in Calabria's remarks.  looks to me like a whoopsie

 

Calabria:  "As the Council found, risk-based capital and leverage ratio requirements materially less than those in the proposed rule would likely not adequately mitigate the potential stability risk posed by the Enterprises. Indeed, more capital might be necessary."

 

[Guest cherzeca]

I have been researching ACB's writings, mostly law review articles, to see if I can understand her judicial philosophy and glimpse how she may regard the Collins case.  In doing so I came across this podcast, which is illuminating...rather than gleaning how she judges from opinions and law review articles, she comes right out and tells you in this speech how she judges:  https://podcasts.apple.com/us/podcast/madisons-notes/id1515595812?i=1000491179632

[Midas79]

It's really starting to look like 4% come hell or high water, and that Calabria really does see 4% as the de facto requirement rather than 2.5% with some buffers being nice. The question becomes "can FnF raise their g-fees enough to provide a competitive RoE on 4% without driving away a substantial amount of business?" Tim Howard thinks the answer is "no", and if he's right then all of recap and release is in jeopardy.

 

Calabria has said in the past that one way FnF can meet their capital requirements is to shrink their asset base and market share. Heck, this might have been his goal all along.

[Guest cherzeca]

"...all of recap and release is in jeopardy"

 

focus on the transition period. how long are the GSEs given to hit the capital target? indeed, if they are in consent decree, why impose a termination date? I would rather meet 4% over a long (unlimited period) than 2.5% in a short period.

[sholland]

Seems to me that it might take ~10 years to reach the 4% minimum leverage ratio.  Even if g-fees are raised it will take time for earnings to increase across the entire book of business.  Many comments suggest that private capital investors will be unwilling to invest the substantial equity capital needed if the re-proposed capital rule is not changed significantly. Like Tim Howard, I’ll also be very interested to see how Fannie and Freddie, and their financial advisors, react to where Calabria appears determined to take them.

 

[Midas79]

"...all of recap and release is in jeopardy"

 

focus on the transition period. how long are the GSEs given to hit the capital target? indeed, if they are in consent decree, why impose a termination date? I would rather meet 4% over a long (unlimited period) than 2.5% in a short period.

 

I don't think it's an either/or at all. Raise enough capital to get to 2.5% ASAP then let retained earnings, plus more small capital raises if necessary, complete the journey to 4%.

 

The problem with allowing the capital raise to go slow is that it defeats the entire purpose of wanting FnF to have substantial capital at all. The longer that FnF have little capital, the longer that taxpayers and the housing finance system are at risk, and the severity is tied directly to the capital amount. Elsewhere I have said that Calabria not pushing for his regulatory minima ASAP is a dereliction of his safety and soundness mandate, and I still believe that is true.

 

Something else to keep in mind is that if Calabria ends up finalizing the rule largely as-is, it could very well mean that he is following the advice of the FAs rather than ignoring it, and that investors with substantial capital really are willing to put up their money for FnF equity in these circumstances. Calabria doesn't need to attract all investors, only enough to get the job done.

 

I still think that propsective FnF investors might care more about ROIC than ROE, and on a ROIC basis FnF's current earnings are enough.

[Guest cherzeca]

so I put nothing past Calabria. he's very smart, but he has never held a real job in his life, which makes him dangerous.  however, you would think that he has had discussions with GSEs' financial advisors by this point and has gotten some indication of what they think is doable in the capital markets.  but as I said, he is dangerous...

[WB_fan82]

"Calabria doesn't need to attract all investors, only enough to get the job done."

 

Yes.  I think the TH camp of " more capital means higher prices to keep ROE constant and attract investors" misses reality of raising capital.

 

And there IS an investor standing by that can get the job done to 2.5% overnight.  The Treasury.  He only needs to attract Treasury's cooperation.  Then the rest can be retained over time and other private market ways (exchange prefs into common then sell new prefs to berkshire), NONE of which involve an ROE calculation...

[Luke 532]

Hmmm, interesting tweet from ACG...

 

Full remarks from @MarkCalabria at #FSOC. Says they found adequate capital could be materially less:

 

Nevermind.  ACG just told me they posted this erroneously.

[Jcmeg35]

There has been some discussion during the summer around the idea that if Trump were to lose, Calabria and Mnuchin will reverse the NWS, make a deal to settle litigation, and do a consent decree to ensure the work doesn't get undone with a change in administration. With the prospect of a contested election and no clear winner for 1 month+, I would think that this situation would put such a "big bang" event in some level of jeaporday. Curious to hear others thoughts on these risks.

[Luke 532]

Bloomberg Intelligence (Ben Elliott) on Biden win/utility model/cap reqs attached...

[WB_fan82]

I think big bang could be tough but little bang is a lock. 

 

FSOC and TSY just said the GSEs need more capital.  TSY's gigantic sr pfd doesn't count as capital, but would if it were converted.  That's the little bang that should happen after election and it also lets Mnuchin and Calabria leave their fingerprints all over GSE reform and consent decree.  I think that happens even w/ election uncertainty.

 

The lawsuit is a bit harder.

 

I think they should settle the lawsuits and return the $125B to further build capital (remember the govt would own 98% of this anyway via common position), but if the obstacles to that are too great then I don't see much post-election pressure to settle... There is very little capital benefit and all it does is give Calabria cover from being fired, which isn't TSY's problem anymore.  Meanwhile if they go to court, it probably gets remanded anyway and if the GSEs win then the govt has to fork over $125B (+ interest?), optics be damned.  And maybe the GSEs lose.

 

But from a recap perspective, it's WAY easier to use those sr pfds as a source of capital via conversion and still have the capital infusion of $125B overpayments out there than the alternative of deeming the sr pfd paid down with a small tax credit on the balance sheet.  That literally does nothing for capital, and takes away two huge  buckets of capital that would be easily tapped.  No reason to create a problem of raising hundreds of billions extra in the markets or retained earnings over time, imo.

 

 

[typicalvalue]

Bloomberg Intelligence (Ben Elliott) on Biden win/utility model/cap reqs attached...

 

If Calabria is not out of FHFA Biden cannot set the cap requirements, SCOTUS needs to rule to be firable at will

[Wiggins]

There has been some discussion during the summer around the idea that if Trump were to lose, Calabria and Mnuchin will reverse the NWS, make a deal to settle litigation, and do a consent decree to ensure the work doesn't get undone with a change in administration. With the prospect of a contested election and no clear winner for 1 month+, I would think that this situation would put such a "big bang" event in some level of jeaporday. Curious to hear others thoughts on these risks.

 

A big argument against Treasury amending the SPSPA in a lame duck session is that Mnooch already missed the best window for doing that, so why would he speed it up now? The delay is intentional as is the continued risible defense of the NWS. He and Calabria have both made it clear they want to hamstring the business of the GSEs (e.g., bank-like capital, reduce their footprint, level the playing field, etc). They're bank locusts. By the way, the capital rule looks like it was taken straight out of the playbook of FM Watch, as it's exactly what they called for. (It wasn't, but it may as well be) As for rewarding shareholders such as Paulson who bankrolled Trump's win, that's already been done by retention of capital which took receivership off the table. It hasn't been fully realized but the die is cast. Further headway for shareholders looks to be SCOTUS-driven. And this is essential because only a SCOTUS win can assure future investors they will be protected. A consent decree is not enough. ACG puts the odds of a favorable SCOTUS outcome at 90%. And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred. It will take a bit more time.

 

I predict there will be some downside around the election caused by a Trump loss, followed by pretty massive buying pressure immediately thereafter. SCOTUS oral argument is going to push the prices higher and they'll be back up to 50% by January.

[Guest cherzeca]

@typical

 

if there is a settlement of collins and elimination of senior pref, Calabria is on record saying that Seila doesn't apply to fhfa and him..now, he is wrong, but it would take a court to order him out, and that would take time...which gives Calabria negotiating leverage vs a Biden potus. I do expect a deal done lame duck if the election looks up in air or Biden is elected.  I also think that if the election is close enough so that there is more than one battleground state whose result are being contested, we may not have a potus until around inauguration.

[orthopa]

There has been some discussion during the summer around the idea that if Trump were to lose, Calabria and Mnuchin will reverse the NWS, make a deal to settle litigation, and do a consent decree to ensure the work doesn't get undone with a change in administration. With the prospect of a contested election and no clear winner for 1 month+, I would think that this situation would put such a "big bang" event in some level of jeaporday. Curious to hear others thoughts on these risks.

 

I think there a couple things to think about with this.

 

1. When is capital rule done? If pre election sometime after capital plans should be requested which makes it more likely done before end of year. How can capital plans be drawn up with the PSPA in place still? (I get that its a given that the Srs are dealt with in some fashion but once the capital rule is done submission of capital plans should come with or around cancelling of the SRs or the plans will include such.)ACG is saying capital rule is done before end of October which would be great but a part of me asks why Calabria would do that when 4 days later with a Trump win his timeline to work is extended greatly.

 

2. One would think settling before SCOTUS given the possible outcome AND goal to recap companies would make the most sense in the case of a unknown election outcome. Either way if Trump wins settling before hand takes risk off of the table and Trump does not have to worry about re election risk with helping out the hedge funds. If Biden wins then Mnuchin/Trump have no more political risk because they are lame duck and can help whoever they want on the way out. Mnuchin should just settle it before, what political risk is there after the election?

 

3. Settling with investors and ending the NWS can happen at the same time with Capital Restoration plan. Any  $$$ given back or not, exercise of warrants, etc, etc will be in capital plan and terms would be agreeable to both sides to end lawsuits. See 1. above again. I think these have to happen at the same time.

 

4. FWIW the consent decree could be drawn up in days if its not already. That could happen the week of the inauguration if needed.

 

 

[Guest cherzeca]

@orthopa

 

agree with this and I would add one thing.  I don't believe the DOJ wants to argue before scotus on 12/9 if there is any inclination at T to settle...DOJ is a repeat player before scotus and its rep would be tarnished if it is found to be wasting scotus' time by arguing a to be moot case. so if there is to be a settlement, I would expect before 12/9

[orthopa]

@orthopa

 

agree with this and I would add one thing.  I don't believe the DOJ wants to argue before scotus on 12/9 if there is any inclination at T to settle...DOJ is a repeat player before scotus and its rep would be tarnished if it is found to be wasting scotus' time by arguing a to be moot case. so if there is to be a settlement, I would expect before 12/9

 

Good point, this may have already been laid out by yourself but wouldn't Calabria be motivated to settle this too as the ruling by SCOTUS would put his position in jeopardy sooner then if separate litigation was taken up?

 

If so nearly all involved have motivation to settle. Get it over with and raise the capital everyone says you need.