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What's funny about the warrants is that even if they were cancelled this instant, junior prefs would likely still outperform the commons. Pref-to-common "cramdowns" are very, uh, common in situations like these. Given that pref holders could convert to common right now at a 1.7-2.2:1 ratio for $25 pars, they will be offered more to get them to settle the lawsuits.
Why don't you buy prefs then?
NY Times - World Market Holidays
I don't see any closures tomorrow.
So you don't like Moelis because it pays the government $200B, but you like Average Joe even though it pays the government $1000B?
It wasn't "they", it was Corker. He snuck it into a must-pass bill and there wasn't enough opposition to stop him iirc. He wanted to buy Congress time to draft a bill that actually would kill the GSEs without the administration pulling the rug out from under him.
Gretchen Morgenson joins WSJ
The Fannie and Freddie coverage will have make a drastic turn from the days of Carney and Light. I don't know how much weight the WSJ holds with the heavy hitters but this should be positive news.
Given the terms of the NWS it's worse than a loan. If FnF were to draw all $200B tomorrow, it would get swept at the end of next March and then Treasury's liquidation preference would increase another $200B while FnF would have nothing to show for it.
Right now the senior preferreds cannot be paid back. Treasury is barred from disposing of them in any way until January 1, 2018. Even then the NWS doesn't allow for payback. It would take a fourth amendment to actually get rid of the senior preferreds.
No, they don't keep any earnings at all. The $600M was already on the balance sheet.
Not positive at all to me, just repeating what he has always said. Anyone who spouts off that "taxpayers are on the hook for trillions of dollars of risk" is only looking for a sound bite and not reality. The only way trillions are at risk is if all mortgages go delinquent at the same time and never perform again. I think the economy would have far bigger problems than Fannie and Freddie failing at that point.
Hensarling wants Fannie and Freddie dead. DEAD. He thinks government has no business being part of housing finance. If it was up to him, the best shareholders could hope for is that he revokes their charters and makes them compete as equals with other private sector firms. The worst is what he has wanted all along: run them through receivership and dissolve them. With the senior preferred's liquidation preference still fully outstanding on the balance sheet, that would mean zero for all junior preferred and common shareholders.
I'll admit, if this actually has legs I will sell all my commons immediately, and probably most if not all of my preferreds. Hensarling wants to run the GSEs through receivership and would doubtless do so soon after taking over for Watt. It's a hell of a Halloween scare.
I kind of like how one judge (the man with the deep voice) shot down Cayne's argument that the GSEs would not exist if not for Treasury's actions, saying that companies go through bankruptcy and continue operations all the time. This reasoning has been used constantly by FHFA and Treasury.
On the flip side, the lady also shot down the plaintiff's lawyer bringing up the motive of timing the NWS.
There was too much of a righteous indignation vibe from the plaintiff's lawyer, in my opinion. But I don't know how judges, especially these three, respond to that type of attitude. I would imagine it's usually negative.
I haven't looked at the Roberts complaint in a while, I don't remember how much of their case rests on the allegation that Treasury made an illegal (according to HERA) purchase of securities after 2009 via the NWS. That discussion took up a lot of time. We have plaintiff's "Treasury effectively has 100% equity not" vs defendant's "Treasury didn't actually acquire any new shares".
I'm listening to them right now, but only halfway through at this point.
Thanks for the find! The shrinking of the retained portfolio is not "ahead of schedule" though, at least not for this year: it is right on schedule because $288,408 is exactly 85% of $339,304. The language from the 3rd amendment is
This is the way I remember things, though if I am wrong on part (or heaven forbid, most!) of this someone please correct me.
The GSEs' main business is buying mortgages, packaging them into securities, and selling those securities while (in the past) using their assets, credit rating, and track record to reassure investors that they would be paid interest and repaid principal, similar to corporate bonds.
Contrary to the belief of some, the GSEs' securities did not have a government guarantee leading up to the imposition of conservatorship in 2008 and stated this explicitly in their SEC filings. Any "implicit guarantee" was put in place by the market; the GSEs and the government had no control over this assumption by the market.
The GSEs' retained portfolios are mortgages that they did not package and sell, and instead held on to in order to gain interest income as the mortgages were paid. The SPSPAs require FHFA to reduce this retained portfolio over time, though not below $250B. Mel Watt has nearly completed this process, having said that they are ahead of schedule. I have not checked the SEC filings to see where they currently stand, though.
Eliminating the retained portfolios will make the GSEs less profitable, but it will also expedite their transition into a utility-like role. The GSEs actually did sustain heavy (for them) losses in the financial crisis, mainly due to the performance of their retained portfolios. A focus on only packaging mortgages and selling securities based on those makes them much less prone to a crash in home values.
The GSEs have been described as operating like hedge funds leading up to the crisis, and their aggressive lobbying made them many enemies on Capitol Hill. As evidenced by recent Congressional hearings much of the animosity remains. I hope that Treasury's desire to eliminate the retained portfolio altogether is a step towards mollifying Congress while transitioning the GSEs to a utility model, allowing them to run the MBS side of their business as they historically have. Capping their returns while letting them provide the same level of liquidity to the mortgage market might be enough for Congress to not have a (negative) knee-jerk reaction to administrative reform.
Actually FnF won't reach the zero capital point until (and unless) they pay the full NWS dividend on March 31, 2018. The next payment is scheduled for December 30, 2017 but it will still leave $600M in capital like the other 2017 payments.
Here is what I've been using:
H.R.2029 - Consolidated Appropriations Act, 2016
Thanks for looking that up. Where did you find your information? I have found bits and pieces in various places but no central location.
By what you found, Treasury never actually owned any shares. I believe that would get around rekcusdo's Section 16 idea that would require Treasury to be a fiduciary and hold the shares for at least 6 months if they ever took a more than 10% stake in the equity (do I have that right?).
But if the companies bought back the warrants, where did all that money come from? If Treasury still expects to make another $100B, for example, from selling the warrants, FnF would have to come up with that cash themselves. The only way to do so that I can see is a massive equity raise and subsequent dilution to existing shareholders, basically a warrant exercise scenario but potentially worse (or better, I suppose).
Can Treasury sell the warrants piecemeal, to then be exercised by the buyers in chunks? No single investor would be able to afford 79.9% of a recapped FnF.