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Don't take lightly today's Dallas Fed Mfg Survey. Just like the Phyllis last week, it came out very strong.
If I remember correctly -at the conference- the Chairman firmly said that short term rates are not going to be raised in a long time. Can anybody remember this? He was answering someone's inquiry. That was "a steepening hint". To me, that is. Now, unwinding of trades are creating turmoil.
I don't have those answers but peaks in stock market -and recessions- are associated more with a heated economy. So this may not be a 92, 03 or 09 style of bottom but definitely not a peak. I guess we will know in retrospect. Six months to a year from now when financials start posting huge profits. That is my Fed's leap of faith.
As for cycles, it could also be that so far all what we have seen was "damage control" to return to the pre 08' world as much as possible and set the stage for a new bull. In that sense, this could be the build up of a 1982/84 bottom here. The economy hasn't really gotten started yet, in a solid, strong sense. As nervous as I am, I am not playing this as a top.
When spreads peak, yield curve is at its steepest. From positive steep to flattening is when the bull runs. Until it inverts. Then, its all running for the hills.
See it for yourself. Click animate.
http://stockcharts.com/freecharts/yieldcurve.php
Curve flattens because short term rates go up to cool down the economy affecting corporate profits negatively. When the curve steeps, financials have greater incentives to lend and jump-start the cycle. My simple, layman interpretation. Not sure the Fed sees good news in the horizon. They could be feeling the 08' crisis is over and want to induce a new start. "Master of the Universe". I could be wrong.
Spreads peaked at around 2.70 in 1992 and 2003 and at 2.76 on June 4th, 2009.
Wait until the spread 2Y-10Y peaks, now at 2.21, and then off to the races in equities.
Lol. Same here. Time for a Miami colada.
3 bill retained earnings > 0 / Shareholder's equity > zero. Wind down.
"sweep=faster recovery" is what is behind the net investment assumption.
No, I didn't make any reference to "purchase shares"... like in buying a stake in the companies? If you refer to the line where I say GSEs sold Treasury Sr. preferred shares, isn't that what happened? Treasury was the buyer and each GSE was the seller of the Sr. preferred shares.
Not sure what arguments you use to debate 20c #3.
The 2 agreements between Treasury and the GSEs are mutually agreed contracts by which Treasury -acting in its own interest as a shareholder- can set any terms they want. This is an actual clause of each agreement, "as long as both companies are in accord". So mutually agreed. In this respect, changing the 10% dividend to a full sweep is within the provisions of the agreements, therefore legal.
One could question why the GSEs and its regulator/conservator agreed to such terms being that sweeping all profits goes against restoring the companies to a sound financial state. However, if the original intent was to wind down the companies (reducing retained earnings to zero after 5 years) then, there is no conflict.
As for any SCOTUS involvement there's been a recent US supreme court decision that gives more leeway to government agencies in interpreting certain statutes/regulations (City of Arlington v. FCC, SCOTUS made clear that agency interpretations of ambiguous status are entitled to deference where they involve questions related to the scope of an agency’s authority or jurisdiction). This will not help the recently filed lawsuit by shareholders.
I am starting to think that the essence for change should come from the heart of the administration by declaring that in virtue of present circumstances they no longer want to wind down the GSEs but to make them smaller keeping a role for them, reformed and re-regulated or as private companies. This will open up the doors to change the terms of the SPSPAs to rework the details. They can't issue a 4th amendment to recapitalize the companies unless they also change the original intent.
All this can happen even if c-ship outlasts Obama. C-ship is what protects the GSEs from Congress.
Exactly right. The whole thing is an agreement between a shareholder -Treasury by virtue of its holdings- and two private entities (before and after c-ship). And the deal has been an "equity" deal that has not made the companies part of the government. Either Treasury with a 4th amendment or Congress via legislation must find a way to reverse some of the negative effects stemming from the original agreement.
The original one was conceived under the assumption that the companies would never regain financial or operational health, so no way out was provided. Today's circumstances show the clarity of the flaw. Once net investment by taxpayers (used both by Geithner and CBO in some of their statements/calculations) reaches zero -very likely by 3Q in an accrual basis- this topic will come to the surface full force.
What will be questioned is the rationale behind having decided to force the GSEs to sell Treasury Sr. preferred shares as opposed to simply have requested a flexible, open, recurring line of credit.
One wonders how technically correct the text of this bill is. It should have read as a provision to "redeem or repurchase" the Sr. preferreds. As you mentioned, there is no loan! Rep. Capuano should have also extended this bill to include a cap on future amount of dividends these preferred shares could draw, such as a top market rate of 4% or less, automatically allowing for retained earnings and opening up the door for restarting the dividends on the Jrs.
For now, companies have enough profits to do all of these. Pay 4% to Srs, partially redeem them every quarter throughout a 30 year period, pay the Jrs. and retain earnings.
More importantly, even after all of the above, FHFA can continue to regulate/reform them and IPO the securitization platform if this were an option. In other words, this *accounting* stuff poses no conflict or obstacle to any further reform. And ALL of these can happen while the companies are still in c-ship.
In the last Congress hearing that had the right wing abolitionist panel, Rep. Capuano was the only one who in a 10-seconds passionate claim requested for the GSEs to be allowed to pay their debt to the Treasury.
Correct, Obit. In fact, the play on the Jrs. is almost a bet that Congress will fail (example, Corker's bill attempts to change how the c-ship operates). Which may pave the way for Tsy to restructure. Say, a 4th amendment that will let the GSEs rebuild retained earnings (to begin with).
Is that Corker's atomic clock?
Nice!
Ok. Thanks.
I think I found the details. Looks like they are actually holding more than that as of 3/31/13.
Fannie Mae, 6.75%, pfd. 3,000,000 shares / $8,400,000
Fannie Mae, 7.625%, pfd., 2,399,400 shares / $7,006,248
Fannie Mae, 8.25%, pfd. 11,784,000 shares / $38,298,000
Fannie Mae, 5.375%, cvt. pfd. 4,700 shares / $52,875,000
Freddie Mac, 8.375%, pfd., Z 16,608,000 shares / $55,138,500
They have a subnote as "non-income producing".
Anyone can check the holdings here (Franklin Custodian Funds Semiannual Report)
https://www.franklintempleton.com/forms-literature/download/FCF-S
Which comes from FKINX general page
https://www.franklintempleton.com/retail/app/product/views/fund_page.jsf?fundNumber=109
Close to 34 million Jrs. altogether. But we don't know when they purchased them.
Do you have a link?
If this their Franklin income fund https://www.franklintempleton.com/retail/pdf/fund_perf/port_holdings/4309_holdings.pdf I only see 17 mill commons and 16 mill commons of fmcc and fnma but can't find any position on preferreds.
I think what he says is:
"...so that was the *soup du jour* for hedge funds 60 days ago, right?"
What makes you think he bought 60 days ago? What is your interpretation of the above? Also, by 6/13 he was supposedly still holding under the same general thesis (We are betting on a capital structure bailout).
Link to Barrack (Colony Capital) video 6-13.
Right at the end he says he bought the Jrs.
"Betting on the full faith and credit bailing out the capital structure".
http://www.colonyinc.com/video/cnbc_061813_fastmoney.php
This link worked for me...
http://en.wikipedia.org/wiki/Thomas_J._Barrack%2C_Jr.
Ah. No, it didn't. The period "." must be added at the end for it work. This can be done at the browser where the html is written. Add the final "." and hit reload. Ihub does not make it part of the link.
Thanks David.
I actually think that if Sen. Reed introduces a bill like the one mentioned by the wsj and doesn't contain anything stupid, includes the basis for a recap. and gets some traction we could see 40% before your target date. WSJ said Sen. Reed could issue a proposal within weeks.
According to the wsj article you posted it could be coming in the next few weeks...
I am pretty sure Senator Reed's bill/draft will throw a wrench on Corker's scheme. Being similar but with a much easier and faster solution it has the potential to leave Corker's in the dust. It may also gather enough support from the media and other congressmen to harness some momentum. Wait and see.
Well... I think this will make many here happy.
The safest and best way for Democrats to perpetuate control over the GSEs would be having a Watt in the FHFA or whatever the FHFA morphes into. Then, nothing else should be done and they won't care about releasing them from c-ship. But to make sure nothing happens to the companies in a post-conservatorship world they have to wait for Republicans to exhaust all their options and talk and threats. Something that will render them inoperative. Then, their power to try to control the entities through Congress will have become null.
Thanks, again. You have good insight.
Given the way you think Treasury can always exercise warrants and become controlling shareholder. In a post-conservatorship world, how will Republicans in Congress be able to overstep this boundary? Treasury might even be able to pay itself a nice dividend if they convert their Sr. preferred shares and declare dividends on common. Money that will go to Treasury for a long time.
Also, a Millstein reform could actually provide Treasury with enormous funds, depoliticize boths GSEs stripping off their guarantee businesses and make them smaller private mortgage insurers. Why would Lew and Obama oppose this exit? The government could still offer social aid through FHA and VA programs while controlling the guarantee business through a public guarantor.
Great insight on the c-ship shield.
So mutually agreed contract. Misunderstood that part. Thank you. How do you explain that the GSEs -acting through the FHFA- agreed to a full sweep that prevents the companies to rebuild their capital?
FHFA takes the role of shareholder, BOD and management therefore acting "in the shoes of the GSEs" agreeing to the full sweep is in conflict to its own mission of bringing both corportation to a sound and solid financial status.
What am I missing? and thank you for your insight.
Funny thing is that this could still happen. Or a variation of it after we go through the Corker's hurdle that has a good chance of being shot down, if ever introduced. Nothing has been set in stone yet.
I am not sure preferred shares count as stocks when it comes to assessing ownership. Preferred shares do not participate in the growth of the company and they do not count as part of the market cap. They have redemption value, liquidation rights and a price ceiling. They do not convert into common stocks. I think that 5% rule is just for pure equity.
Adding one more thought...
In the past, we've read about more radical solutions for Fannie and Freddie. The Corker bill denotes that the door of what has become politically feasible has shut down quite a bit, believe it or not. Point is as more time goes by facts may turn to our favor even more. We should actually be happy to see that a draft that comes from a mad man only proposes a mild reform and a phase out with a payout.
We do not know what this discussion draft may morph into.
If you simply add a Millstein twist both companies could survive -stripped off their guarantee businesses- as smaller pmi's buying guarantees.
No need for this kind of exchanges, if I may intercede, extensive to SA.
We are all free to buy and sell according to our perceptions and interpretations. There are reasons to be scared and LD acted on this. But there are just as many reasons to keep holding. So no need to attack him. Those who keep holding must have strong reasons of their own to which LD's arguments will make no dent. Thus, his views may become less threatening.
I, for example, tend to think that the Corker bill has simply introduced some noise.
We cannot ignore the fact that politicians are practical people that will avoid hurting groups who they may rely on for either votes, campaign funding or any kind of support. From average joes to sophisticated hedge funds and everyone in the middle. Just the fact that this draft has gone from nuking evil speculators in its original, nasty form to admitting a payout to the Jr. holders respecting the principle of absolute priority is an incredible -repeat, incredible- progress, coming from -no less- senator Corker. Some slap-in-his-wrist must have occurred for such a change. And this piece of information should also be noted.
What also needs to be stressed is that -aside from a few name changes that Cat doesn't like- the proposed mortgage system is very similar to the current one with the government backing guarantees either by the Treasury or the FMIC and the securitization done by certified agents. People, this isn't an overhaul! And in that context, specially since it is now in writing, the Jrs. are money good.
As the GSEs continue to produce great profits for the Treasury and continue to approach the Net=0 finish line more concessions may happen. Just don't forget our beginnings when at 2c on the dollar the GSEs were basically left for dead.
As for the lawsuit, it could still be dismissed or be narrowed to damages to those who sold. So no great threat to the Treasury or Congress in the near term. Receivership, according to this bill is NOT the end of the world for us.
These two -unlike AIG- are entangled in politics way too deep. It's politicos who may require a new name, not me. I hope not. It was also a comment although it may have come across as me proposing it.
Let's face it, Fannie and Freddie need a new name. It's not that they are doing the wrong stuff. It's their names that have been vilified way too much.
The draft contains a section entitled
(e) RECOUPMENT BY SENIOR PREFERRED SHAREHOLDERS
with this paragraph,
(1) IN GENERAL.—Notwithstanding any other provision of law, after fully satisfying the outstanding obligations of the enterprises in a manner consistent with requirements of this title, all remaining proceeds from the receivership and liquidation of Wisconsin Avenue Management and Jones Branch Avenue Management shall be paid first to the senior preferred shareholders of each such enterprise, then to the preferred shareholders of each such enterprise, and then to the common shareholders of each such enterprise .
Search for this.
Secondary Mortgage Market Reform and Taxpayer Protection Act of 2013