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Hi Donotunderstand,
exactly. In order to meet the minimum capital requirements, core capital is needed:
- retained earnings
- stated value of common stock
- stated value of non-cumulative preferred stock
- paid-in capital
In order to achieve risk-based capital requirements, which are usually higher, anything the head of the FHFA deems appropriate is permissible.
According to the 2 preliminary proposals of the FHFA, Fannie's minimum capital is either 60 billion dollars or just over 80 billion dollars. This amount must be reached in order for Fannie to be released. For this purpose, only core capital counts.
GLTY
He's trying so hard...
Hi kthomp19,
It's a pleasure to hear from you.
I see things the other way around than you do. Because in the context of strongly procyclical capital requirements, preferred shares are less attractive to investors than common shares at the beginning of a crisis.
Here's my explanation: the higher the procyclicality of capital requirements, the more capital the company needs in bad times. This puts non-cumulative dividends at risk of default.
Common shareholders may do not receive a dividend either, but when times get better again, they receive the accumulated savings per dividend.
In bad times, common shares also lure investors with a weaker share price, which preferred shares can only make up for with an increased dividend, which may only be paid once or twice.
So much for the importance of procyclicality for shareholders. Basically, your considerations on Recap are quite understandable. But with the GSEs, nothing is basic.
GLTY
Elvis has left the building?
Is this the super-duper "$5 by Friday" week?
Please place your bets. I'm almost all in and holding thousands of shares, which qualifies me as a "stone member".
GLTA
Hi donotunderstand,
thank you for your interest. I will try to answer your questions in a simple way. Step by step:
Hi brooge,
the post was only informal.
The main message was that reaching the minimum capital requirements was sufficient for a release. It is quite possible that 60 billion dollars will be sufficient for Fannie.
Should the risk-based capital requirements cry out for more capital, it is possible to close this gap with a line of credit from the Secretary of the Treasury.
Best wishes
Hi andydub,
since the matter is somewhat complicated, I will proceed step by step:
Hi bcde,
Collins' en banc attorney Thompson agrees with your common sense. Calabria agrees. And I also agree with your point of view.
However, there is different truth in the existing treaties. Neither the SPSPAs, nor HERA address a possible repurchase of the SPS. There is simply nothing about it in it. Only in the SPS certificate you will find the text passage I posted before, which says that a buyback of the SPS is not possible as long as Treasury's Commitment exists.
Mnuchin's lawyer confirmed this at the en banc re-hearing by saying that SPS elimination remedy was not possible under SPSPA.
Let me put it this way: anyone who claims to simply return to the original contract and eliminate the SPS in the process has not researched thoroughly. Because the original contract excludes SPS elimination as long as Treasury's commitment exists.
These gag mechanisms are further evidence of the conspirators' determination to eliminate F+F: Impose F+F bailouts that are so high that a 10% dividend cannot be paid permanently. And make sure that this 10% dividend never decreases.
GLTY
Hi Dax1,
the plaintiffs propose 2 possible remedies in the en banc case:
1. Treasury pays back approx. 120 billion dollars to F+F and can keep the SPS for it.
2. Treasury returns SPS and F+F receive an additional $24 billion in tax benefits.
In both scenarios, the NWS must be stopped. There are no further claims on the part of the plaintiffs. It is therefore out of the question for the judges to decide on a modified remedy.
GLTY
Hi bcde,
the SPS certificate actually provides only limited possibilities to buy back the SPS. As long as treasury's commitment exists, a repurchase is excluded:
"Prior to termination of Commitment... the company may pay down the Liquidation Preference... but only to the extend of (i) accrued and unpaid dividends..."
Page 3
Calabria told Joe Light on Twitter that he thought that a repurchase could have been agreed at that time.
GLTY
Watt's capital proposal is lousy and makes it almost impossible to recapitalize by issuing common stock. This is due to its procyclical nature: Capital requirements are low in good times and high in bad.
We have good times right now. Imagine you buy a load of common stock in a capital raise, times get worse and the company is forced to raise new capital again...
Therefor it is not enough to simply make the "new buyers" a good SPO(IPO) offer. The risks are just unpredictable and unacceptable.
I hope Calabria is as smart as everyone says and that Watt's proposal has been thoroughly revised.
On the other hand, as a common shareholder it is of course right for me if we only issue new preferred shares for recapitalization. It will be cheaper for us.
GLTA
Happy weekend, my friend
Hi friends,
Freddie's CEO Layton puts the capital requirements at 50 for Freddie and 75 billion dollars for Fannie. He refers to Freddie's "conservatorship capital", which uses the FHFA's 2018 capital proposal as a basis for calculation.
Layton is just off the mark, especially with Fannie. Freddie's conservatorship capital amounts to 52.4 billion dollars:
http://www.freddiemac.com/investors/financials/pdf/2019er-1q19_release.pdf
Page 5 of 15
Fannie Mae does not use the term "conservatorship capital". But in the Q1 "Media Call Transcript" you can find the following:
"In the first quarter, our capital requirement under the proposed capital rule declined by 2% from $89 billion at the end of 2018 to approximately $87 billion. The decline in capital is primarily attributable to an increase in home prices and additional capital relief from credit-risk transfers, partially offset by growth of our book of business."
http://www.fanniemae.com/portal/media/speeches/2019/q12019-financial-results-media-call-remarks.html
87 billion dollars for Fannie at the moment.
The "final capital rule" of the FHFA is not yet out. So there is still a lot that can change as far as capital requirements are concerned. But I assume that this order of magnitude will work, is appropriate and will not change greatly under Calabria.
Here is Watt's 2018 proposal:
https://www.fhfa.gov/Media/PublicAffairs/PublicAffairsDocuments/Proposed-Rule-Enterprise-Capital-Fact-Sheet.pdf
Here is the proposal in detail:
https://www.fhfa.gov/SupervisionRegulation/Rules/RuleDocuments/Webinar-slides_EntCapNPR_6192018.pdf
Less than a year ago, the figures were significantly higher:
Fannie's capital requirements: 115 billion dollars
Freddie's capital requirements: 66 billion dollars
The main reason why capital requirements have fallen so dramatically is the expansion of the CRT business of the two companies: credit risk is shared with the customer. This of course costs money. Accordingly, Q1 profits have been smaller. However, there were other temporary reasons for the decline in profits.
Those who now think that capital requirements can be reduced even further by sharing even more risks are wrong. Because the capital requirements specify both a required minimum capital and a risk-based capital. Both requirements must be met. The increased issuance of CRTs has brought risk-based capital very close to minimum capital. If it is to be undercut, the minimum capital applies. This refers exclusively to the size of the assets. In other words, the minimum capital can only be decreased if Fannie is shrunk.
Fannie's minimum capital is about 60 or 83 (2. alternative) billion dollars. Only core capital counts here:
- retained earnings
- common stock
- non-cumulative preferred stock
- paid-in capital
Once Fannie has these 60 or 83 billion together, she can be released from conservatorship - according to Watt's preliminary proposal.
The difference to the risk-based capital, should it be higher, could be offset, for example, by a line of credit from the Secretary of the Treasury. (See page 23).
In short:
Fannie Mae must retain its profits until it has 60 or 83 billion dollars to be released from conservatorship. Issuing both common and preferred stock can speed up the process. Nothing else.
GLTA
Is it still nice in September or October at your place? Vegas should be good, right?
Hi brooge,
you got it.
Everywhere you hear IPO, there is Moelis at work.
GLTY
What happended to Fanniegate Blues #6 - Shorts Are Crying?
I miss it.
Dear passengers,
our ship is now in Recap and Release waters. Please enjoy the beautiful outlook. The team of #WhaleBalls Institut is always at your disposal. Please don't hesitate and get some warm whale cuddles.
...waiting for the plan... and en banc
Hi Rick!!
I hope Coca Cola doesn't buy the GSEs. Every second house painted red?
If apple strikes, there's at least Internet everywhere.
GLTY
Calabria just stated:
´´´´Common shareholders are here to stay, babe! Life is good.´´´´
at 1:24
GLTA
Thanks Doc and also a great weekend.
Hi DJVan57,
you can get a better understanding of the short sale activities on the OTC by reading this. An excerpt:
"In contrast, the most frequently misinterpreted data is the Daily Short Volume, sometimes referred to as Naked Short Interest... The daily short selling volume is misleading because market makers and principal trading firms report a large number of trades as short sales in positions that they quickly cover. For market makers with a customer order to sell, they will temporarily sell short (which gets published to the tape as a media transaction for public dissemination) and then immediately buy from their customer in a non-media transaction that is not publicly disseminated to avoid double counting share volumes. SEC guidance also mandates that almost all principal trading firms that provide liquidity at multiple price levels, or arbitrage international securities, must mark orders they enter as short, even though those firms might also have strategies that tend to flatten by end of day. Since the trade reporting process for market makers and principal trades makes the Daily Short Volume easily misleading, we do not display it on www.otcmarkets.com."
GLTY
Calabria interview from May 10th with Jennifer Schonberger at Fox Business:
Calabria sees itself legally obliged to end the Conservatorships - regardless of Congress.
As a reminder: Mel Watt always said that it is the responsibility of the Congress to decide on the future of F+F, "if any".
Calabria wants to wait for Mnuchin's plan, which he expects next month. Then he wants to set the "final rule" on capital requirements. He then wants to revise the SPSPA contract with Mnuchin.
Profits should then be allowed to be retained in order to recapitalize F+F.
In the first half of 2020 a capital raise could then take place through the issue of new shares.
There is no timetable for the termination of the Conservatoships, but milestones which the companies would have to reach in order to be released. It is possible that one company will be released earlier than the other.
Calabria sees the Secretary of the Treasury as responsible for what will happen to the SPS and the warrants. In his opinion, they could help with the recapitalization - whatever he means.
He assumes that Mnuchin wants to maximize the taxpayer's investment.
Does he mean profit? To me it sounds more like he wants Mnuchin to keep the SPS but return $120 billion to F+F - like Proposal 2 to remedy the Collins-En Banc case, which I will now call the Hitchkock case because it is really exciting and Hitchkock is one of three plaintiffs besides Collins and Liotta.
Calabria believes that there are probably other avenues to be explored in addition to retaining profits in order to provide F+F with sufficient capital. When asked whether an IPO, i.e. the issue of new shares, could serve this purpose, he said: "Possibly". And then he brought the warrants and the SPS into play...(13:58)
As Carson of HUD said, it takes a lot of creativity to bring $150 billion into the companies.
I am curious...
Calabria doesn't want to abolish F+F's charter. That would also have surprised me, because without this the 10 trillion dollar secondary mortgage market would be not amused . Calabria wants to be allowed to issue new charters for competing companies. But he needs Congress to do that. So does Mnuchin, who wants an explicit government guarantee that has to be paid. - Sure, and the ice cream vendor wants more sunny days...
Folks, this is incredibly good news. There is no doubt at all that F+F will be released. Now only the SPS problem has to be solved, then everything will be fine! En Banc... hopefully.
GLTA
Hi Rick,
Ah, okay. I thought it was you.
The Collins case is a real Hitchcock - no kidding. The plaintiffs are Collins, Liotta and Hitchkock.
Waiting for the Hitchkock ruling...
I hope so.
Calabria recently said that after his 5 years in office there will be 2 companies called Fannie and Freddie. That excludes your assumption.
It smells like IPO Moelis.
It smells like warrants.
It smells like $10+.
Hi brooge,
blocked by Fannie Mae on Twitter?! Awesome!
Just log out or open Twitter in a browser to read all.
Not anything - but the most.
There's nothing in the stock markets you can control. But Trump has now taken control of your Fannie investment. And only dirty roads lead to its destruction.
Stay strong - this year long.
Hi trunkmonk,
please don't break down just before the finish line. You are a hard-boiled Fanniegater. That would be really tragic.
Fannie is to be released. Mnuchin presents the plan soon. And Calabria will alter the 3rd amendment. No more NWS. Patience, my friend!
GLTY
Hi brooge,
today ends the deadline for the final procedural step in Sweeney's court. As of today, Sweeney has all the files in place to decide whether to open the trial or allow the motion to dismiss. I expect her decision in the coming weeks.
GLTY
You're right, lumpina,
I've put on ice the hope that anyone will be prosecuted for Fanniegate. Obviously nobody wants that except a few small shareholders.