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I don't know what is going to happen, BUT i do know this article is BS. This article is a rehash of a prior WSJ article, but taken out of context. Here are some examples:
Officially ending the conservatorship will require Congressional action, (author opinion, Calabria never said this) but Calabria said he will work to overhaul the system to make re-privatization a smoother process. That could includes changes to the “qualified mortgage patch,” which allows for loans to homebuyers with higher debt-to-income thresholds, the Journal reported.
Calabria said he will not act to allow Fannie and Freddie to keep its profits, (WSJ stated this, but forgot the part but it could be with "separate package of agreements with treasury") which currently are directed to the U.S. Treasury Department. Reversing the policy would allow the mortgage securers to re-capitalize ahead of a privatization, but Calabria said he prefers to enact one sweeping overhaul instead of piecemeal changes.
I don't believe anything will happen until the Collins en banc case has been decided.
yahoo counts the warrants, since the shares have been "set-aside," required by the SPSPA.
Gonna disagree with you here.
Conservatorship and the SPSPA are 2 different things and can be separated from each-other. The only link is the terms of the SPSPA require treasury approval to end conservatorship. But that does NOT end the SPSPA contractual agreement. The "line of credit" or remaining funding was part of the Contractual Consideration for SPSPA, and the NWS. Conservatorship is Regulation. SPSPA was the "Bailout"
Remember the deal:
100 Billion Now + "line of credit" FOR 100 Billion in Preferred Stock + 79.9% Warrant.
If the Government wants out of the "line of Credit" then either (or both, however it is renegotiated) the Preferred stock and/or Warrants also MUST go or be reduced etc. otherwise Breach of Contract by Gov. Also, NO Consideration for the NWS, as the "Valuable Consideration" was the increased credit line.
Conservatorship is a Regulatory action, once it is finished the Contact still exists until it is renegotiated or declared unenforceable in court.
That GAO report i sent you acknowledges the obligation. Also look at OLC 2009, think it was vol 33, on whether or not an obligation on the GOV was created. Bottom line they owe the line of credit.
Who is going to be selling today?
Read this one, it published the same time as the Memo:
https://www.gao.gov/products/GAO-19-353
They are aware of the explicit gov guarantee they created with conservatorship and now they want to be paid for it. (in a more legal not NWS kinda way).
FHFA is independent. The SPSPA gave the treasury some crazy "powers" over the conservatorship (I would argue illegal). I think it is interesting that the Treasury is drafting the "reform plan," Their administrative actions will be key.
This memo is 1/2 wish list, 1/2 Administrative powers. Wish list wont make it very far, but all we need is some good admin actions.
Like many i am banking on Administrative actions, but a lack of real reform. The Admin actions will be used to leverage their plan, but Crapo / Waters and Trump are on different sheets of music. IMHO Crapo and his Wells Fargo plans are the biggest threat to our long position, as they might be able to get Trump onboard. 5th circuit will have a say. If the government had a slam dunk the opinion would already be published. There is a reason GAO, White House, and Senate are freaking out all at once. As always someone knows something.
This is my favorite part:
"Treasury will prepare a reform plan for Fannie Mae and Freddie Mac."
Think Hard...
You may think... 'BUT the treasury is not FHFA, they only own the Senior Preferred/Warrants..."
Just Let it sink in... JYUGE!
Quote:
This is false. Section 5.3 of the original SPSPAs states (emphasis added):
Quote:
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.
This is so f*ing illegal. Powers given by congress to FHFA cannot be contracted away to Treasury.
I appreciate your reply and you gave me quite a bit to work through. Unfortunately, as on of my law professors used to say "that dog won't hunt."
1) AIG is not a precedent for FNMA.
- the Federal Reserve Bank issued AIG a LOAN under the authority of Section 13(3) of the Federal Reserve Act.
- The court in AIG held "illegal exaction," Specifically, Section 13(3) of the Federal Reserve Act did not authorize the federal reserve to take the warrant as collateral. Basically Congress did not give them that power.
- Since, it was an illegal exaction it could not be a 5th amendment taking. So the court never ruled on this.
FNMA SPSPA
- Authorization for the Treasury to purchase the warrants (a security as defined by statute) and the Senior Preferred Stock. 12 U.S.C. 1719 Sec 304 (g).
"Secretary of the Treasury is authorized to purchase any obligations and other securities issued by the corporation under any section of this Act, on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine. "
- "other securities" - "The term “security” has the meaning ascribed to it by section 77b of title 15." - This includes Warrant.
- So Congress Specifically gave the Treasury the Right to purchase the SPS and Warrants. THUS, unlike AIG there was NO illegal Extraction.
- 5th amendment claim, AIG did not Rule. And, since "valuable consideration" I am not sure how this claim would hold up in court.
The Treasury said hey i would like to buy 100 Billion Dollars in Preferred Stock From you and a warrant for 79.9% of the company. In exchange i will give you 100 Billion Dollars, and agree to purchase 100 billion dollars of additional preferred stock at par value.
2) it is proven the government “cooked the books”
Great article, I believe it, i just don't know if it will ever be proven in court. Remember that FNMA "Agreed to" placing the company in conservatorship. Also, statute of limitations.
The credit line comes to the fore. I am talking about the death spiral. Every draw reduces the governments commitment. We all know if left in place long enough (at the current rate 40 years) 100% of the line of credit will be gone.
Agree. IMHO, democrats will push back, they want to be able to control their affordable housing objectives.
200%-400%
Obviously these are just our idea's and suggestions. Politically feasible:
Here is the firepower:
Page 127:
https://www.justice.gov/olc/file/477051/download
This is why my plan has a cap equal to the "line of credit," The purchasers of MBS during conservatorship "relied on this" thus should be allocated to guaranteeing those outstanding MBS. Gov obligation would fade away.
Why? because they were harmed. They have the best standing. Trying to explain a point: If Risk increases, Value Decreases. If a company becomes financially unstable, what happens to the value of the outstanding Bonds? They go down, regardless of whether or not they missed a payment. When a company becomes financially unstable due to an illegal or unenforceable action, you have a law suit.
I'll stop harping, I really just wanted to know if such a suit existed.
Reasonable minds may disagree.
“THIS ("warrant”) CERTIFIES THAT, for value received the United States Department of the treasury…. Is entitled to purchase at the exercise price…shares of common stock, no par value, of the company, as provided herein” http://www.treasury.gov/press-center/press-releases/Documents/warrantfnm3.pdf"
for value
The value given for the SPSPA. This is one contract. SPS and Warrants in exchange for 100B and 100B additional line of credit, (really an option to sell more to the gov). Bad deal, we all know that. Enforceable, I think so, this was a package deal. The Government will argue it was prudent to demand such a steep price because it's 100's of billions of dollars. Consideration in contracting does not have to be fair, it just has to be of value.
I do hope and wish the warrants are unenforceable, but i haven't seen anything that would invalidate them.
If you haven't already, in regards to the line of credit and the obligation see: Page 127 of OLC VOL 33
https://www.justice.gov/olc/file/477051/download
There is an obligation on the part of the government. Courts keep giving clues on how to approach the whole thing, Breach of contract. NWS was a way to get rid of that obligation.
As for their credit rating, smoke and mirrors. But this is exactly why the NWS materially harmed MBS purchasers. The MBS specifically state no gov guarantee. Law requires capital not credit to protect the MBS. Credit line and capital were both materially altered by NWS.
The NWS reduced the mbs capital buffer increasing risk. If a death spiral is set in motion every dollar lost by the company backing your bond increases the risk of your investment. This is material. This is why I specified mbs purchased after 2009 before NWS.
I disagree, increased risk.
Why hasn’t a purchaser of a MBS issued by FNMA between 2008-2012 challenged the NWS in court? Did it happen and I miss it?
I hope you are right, but don't think that will cut it, they were part of the consideration for the purchase of the SPS, and the line of credit.
So you believe that these all couldn't be settled by agreeing to reverse NWS? You are talking punitive Damages. Short of proving Fraud there is just no way. All of the breach of fiduciary duty claims would go away. Way to much desecration in the laws. I am long, and have a lot of hope in the Collins En Banc, but i don't see how anything more than repayment with interest would be feasible.
They are on the hook now, purchasers of MBS would bring lawsuits, limits the amount and puts private capital in between, and would be assigned to specific MBSs issued rather than the whole company.
The 2 dozen lawsuits would become moot if the NWS were to be vacated. All of them would be dismissed.
Please provide the source for the conclusion that the warrants cannot be exercised. I have been looking rather hard for one.The assertion that they were collateral is simply untrue based on the SPSPA and language in the warrants themselves.
Next to worthless??? They would be over 20 per share. No IPO to dilute, DOUBLE the value of the Moelis plan.
Since everyone has a plan, here is mine:
1. Undo Net worth sweep and consider the senior preferred shares repaid. This is fair, and in the best interest of the government as it must happen in order to create a private capital buffer. Will kill the majority if not all of the outstanding litigation.
2. Provide an expressed government guarantee in the amount of $113.9 billion, the remaining additional treasury line of credit obligation under the SPSPA, and apply it proportionately to the MBS issued during conservatorship. This will prevent lawsuits from purchasers of MBS during conservatorship that relied on the existence of the government line of credit when they purchased the MBS.
3. Allow expressed government guarantee to be accounted for as an asset by Fannie Mae. This is in line with GAAP.
4. Since current assets = current liabilities, the $113.9 Billion asset will allow for the sale of $113 Billion in assets to raise core capital.
5. Exercise warrants, in consideration of guarantee/modified SPSPA
6. Release, re-list, sell government stock, Recoup $113 Billion +
7. Regulate, gradually increase capital requirements to a level adequate to ensure government guarantee is never required.
I am by no means an expert on accounting. However, this was my point. By no means was i saying that a government guarantee would count as core capital, but that a guarantee would reduce the liabilities on the balance sheet. Thus, reduce required core capital of the company. This would then change the assets to liabilities ratio, allowing FNMA to sell assets to get core capital. The argument can be made that this government guarantee is already in place through the existence of the SPSPA and their line of credit. Also, it is important to note that the government currently views this line of credit as "core capital" for the purpose of satisfying the statutory requirement, a key assumption to the Net Worth Sweep. The more i learn and follow this the more i think that many are underestimating the role accounting will play in the recap and release.
Source Please.
Please Don’t listen to anything Gasparino has to say, like ever. Even though he reported favorably the guy still managed to say “Conservatorship means the government owns the companies.” And, "this is a penny stock." He is an IDIOT.
For me the real news from yesterday was he Budget Plan Guarantee Fees.
“ a plan to raise $31.7 billion over 10 years by boosting the fees housing finance giants Fannie Mae and Freddie Mac charge to guarantee the mortgage market.”
The assumption is a "full faith and credit" guarantee of the MBS that GSEs issue.
Good or Bad? Here are my thoughts, I might be way off since this is not my expertise. Please provide input as I am always learning.
First remember what Trump really wants, open competition. Multiple charters etc, eventually going to full private and no more government guarantees.
So why explicit guarantees?
1) Income justification for forgiving/considering Senior Preferred Stock paid back.
2) Capital Requirements: GAAP as applied to guarantee fee’s
“A guarantee occurs when an entity accepts responsibility for an obligation if the party with primary responsibility is unable to settle the obligation. It is most commonly given to a related party, where the guarantor has an interest in the financial success of the related party. For example, a guarantee may be issued by a company for the debt of a joint venture in which it is an investor. Similarly, a guarantee may be issued by a corporate parent for the debt of a subsidiary.
A guarantee can create a liability for the guarantor that may need to be recognized, if the amount of the eventual payment can be reasonably determined and the payment is probable.”
My Interpretation: Fannie Mae can count the government guarantee fee against their balance sheet Reducing their capital requirements. Since it will not be “reasonably determined” that payment is “probable” the government will not have to account for the guarantee. i.e. Ginnie Mae.
3) If the government is guaranteeing the mortgages why not open the market to everyone? Exactly.
4) Want to raise capital? Sell off assets with a "full faith and credit" guarantee. Reduce footprint, and further reduce capital requirements. Look at the balance sheet. Write off 120 billion Senior Preferred Stock, sell 120 Billion worth of assets what do you get???
To me this starts to look like a tweak of Crapo’s Plan. Without receivership. It is a lot easier to just discharge the governments stake in the current GSEs and sell assets, result is essentially the same.
Sort run this could be great, long run, post conservatorship, this may have a substantial impact on GSE ability to make $.
Lastly, it is a Budget plan, Congress is going to get a say.
Thoughts?
-Yes, I have another paper that I am procrastinating as I sit in the library.
Another long one, here is my educated opinion to your questions:
When I say “old system’ I don’t mean that everything will be the same, just the general structure. This is where Regulation comes into play and where the debate will really be. Capital requirements and Government Guarantee will be at the top of the list. Some type of guarantee is required for the GSEs to accomplish their mandated affordable housing mission. The better the guarantee from the government the higher premium on MBS and larger profit margin for the GSEs, thus easier it is to raise the capital. The lower the government guarantee, the lower the profit, and the harder it will be to raise capital. Bare minimum they need enough capital and enough of a guarantee to keep their credit rating or the whole thing fails.
How much capital? IMHO, I doubt that they will put the same capital requirements on the GSEs as the banks. It should be formula / risk based. End of the day they have really become insurance companies with servicing fees. With that said, anyone that tells you it should or will be a % of the outstanding MBS. Look at it this way, if you have a 30 year mortgage and you are on year 20 with 70% equity in your house how much capital should FNMA have to have in the bank… Answer should be 0. Brand new mortgage with 3% down 36-50% DTI and a fluctuating market, better have some cash. Obviously, the whole point of pooling into a security is to further reduce risk. Age of mortgage, equity, DTI of barrower, stability of market, interest rates. Complex always changing formula. Short answer, my best guess, $35 - $135. How they raise the capital will be its own thing.
How long? Another unknown. Trump does not have to complete recap and release, he just needs to kill the Senior Preferred Shares. Look at it this way, they could forgive the preferred shares, exercise warrants, leave them in conservatorship for 10 years till they have capital. This is actually great for commons compared to a plan like Moralis (That plan favors Jr. Preferred and throws Commons enough of a bone to make sure all the FNMA longs are aboard). Selling stock, common or preferred is another way. And the extreme, undo the bailout, the whole enchilada.
“screw over past investors” – If they straight up take your current shares. They purposely tried to bankrupt this thing. “hey open market, I have this thing I sold back in the 60’s, I took it back and kept the money, I would now like to sell it to you, don’t worry I wont take it again.”
2029 – worst case, warrants expire in 2028, if they take the long slow route to build capital, it could take this long.
Long time reader. Why today? i am sitting in a library procrastinating writing a paper on the defense budgeting process... So i decided to drop some knowledge, get my writing juices flowing.
The irony is that the whole plan was to force a bailout and put the credit risk on the US government. And here we are with the work around. Rather than put 5 trillion dollars of 'bad debt' on the books, seriously jeopardizing the US credit rating and value of the dollar they "invested" in the private companies, and threw them into conservatorship. Obviously we know how that played out, but it did keep the debt off the books. Even the qualified buyers were way upside-down on their mortgages. Government purchased a $#IT ton of MBS. Enter HARP, this wasn't about helping individuals, it was about improving the quality of the outstanding MBS. After everyone stopped freaking out HARP and low interest rates increased buying and refinancing. Government then recouped $ three ways 1) sale of the now good MBS they purchased 2) 100 Billion or so in big bank settlements and 3) everyones favorite the Net worth Sweep, that ensured that all of the bank settlements went to the treasury. It is no coincidence that the NWS occurred right before the first BofA settlement, they were negotiating with the conservator... And now here we are strong dollar, strong MBS market, government is whole, last thing to fix is the private companies.
Read the book treasury wars. Talks about how Russia tried to convince China to fire sale their MBSs to crush the dollar. China refused as it was not in their best interest.
We know who holds the cards and the veto power. New can mean a lot of different things, all we can do is our due dillegence and make an informed investment decision.
"Trump, Mnuchin, Calabria, Otting, clearly want to recap and end conservatorship." I stand by this statement, however i will concede that it is an oversimplification.
Full Private ---- Old System ---- Conservatorship ---- //----Receivership New Entity ---- Nationalization
Government Guarantee
No Guarantee -- "Implied"/limited --- Express through SPSPA -- Expressed ---- Full Faith and Credit
Over this spectrum is Regulation, capital requirements, affordable housing social programs, multifamily programs, investment banking, retirement systems. These are just some of the factors weighing on this problem. As you see risk allocation, political views on social programs, the constitution, bankruptcy laws etc. are all factors.
Let's start with what Trump really wants. He wants to privatize the entire system, this is outlined in his "Delivering Government Solutions in the 21st Century," - "The proposal would remove the Federal charter from statute and fully privatize the GSEs." In this plan FNMA would be recapped and released to compete with new entities. There would be NO Gov guarantee. BUT, you cannot always get what you want. Why wont this work? It would require congress to remove the charters. By removing the charters the affordable housing mission is GONE, Zero leverage over any of the entities to give sub-prime, low down payment type loans. No way to enforce the 30-50 DTI ratio. This also puts the fixed rate 30 year mortgage at risk, and Congress will not do it.
Old system - This is actually the compromise, negotiations as to required capital levels, DTI ratios and down payments of conforming loans, the level of government backing. But, the companies are private. This is where the FNMA Long live. Capital will be required and cannot be obtained with the governments Senior preferred Stock in place. Why not receivership/new entity? Bankruptcy laws and the 5th amendment, while the court cases have largely unsuccessful this has been due to ripeness of a takings claim the taking will have actually happened. "notwithstanding the laws of Bankruptcy" Receivership will trigger bankruptcy laws and proceedings, this will call the whole damn thing into question, and i like our chances here. How capital is raised and dilution is the valid question. But if you screw over past investors, how easy will it be to raise capital?
Receivership, as discussed bankruptcy laws would have a big part in this, the validity of the Senior Preferreds will be called into question especially since they have created an obligation for the government to provide up to 100 billion extra dollars. Breach of contract bro. Here is the RUB. If the government places FNMA into receivership and even one cent of that 100 or so billion dollar line of credit is left then the entire Net Worth Sweep will lack consideration, like for real. The unforeseen consequence of the NWS is that it essentially BARS receivership until the governments commitment is extinguished. See the Office of Legal Counsel 2009 opinion on whether or not the SPSPA created an obligation on the part of the government.
Nationalization - full risk, 5th amendment as with receivership, and my previously posted comments from Waters.
So what does Trump and Co want? The closest thing to full privatization as possible, ie old system. What does Waters want, social programs and 30 year mortgage and some private capital to buffer.
But what about the Crappo plan - you mean the worst of both worlds? explicit gov backing to private unchartered companies. fun times.
But Charlie Gasparino said they were considering the "Milken Institute Plan" - Sit down, this plan says start building capital and then figure out what to do. This isn't a plan. This is literally the first step in ANY feasible plan to recap release.
For some fun reads try: OIG, OLC, Department of Treasury (pay close attention to the current "market value" of the SPS (hint: the lower it is the easier it will be to write off), White house, CBO report on how dividends from GSEs are accounted for differently between CBO and Treasury, Collins case court filings, All the court filings, Read the constitution. You get the idea.
Lastly this $#IT takes time, it's politics, its complex. Long till 2029. Don't worry about your money, it will be in my pocket soon enough.
Question for the shorts.... How do you think this is going to play out? Trump, Mnuchin, Calabria, Otting, clearly want to recap and end conservatorship. Generating private capital after screwing all the previous investors over seems unlikely. What about the democrats you say? How about this one
Maxine Waters (JAN 2019)
"Contrary to Republican claims, Fannie Mae and Freddie Mac did not cause the financial crisis. The Financial Crisis Inquiry Commission and others have made that clear. The financial crisis was driven by predatory lending, the private market packaging those toxic, risky loans into securities and then selling those securities to unsuspecting investors. Fannie and Freddie did not drive those actions, but the events that transpired during the crisis made clear the need for their reform. When it comes to housing finance reform, I have advocated for core principles that I believe should be part of legislative efforts to address the future of housing finance reform.
The principles include:
- maintaining access to the 30-year fixed rate mortgage;
- ensuring sufficient private capital is in place to protect taxpayers;
- providing stability and liquidity so that we can withstand any future financial crisis;
- ensuring a smooth transition to a new finance system;
- requiring transparency and standardization in a way that ensures a level playing field for all financial - - - institutions, especially credit unions and community banks;
- maintaining access for all qualified borrowers that can sustain homeownership and serving homeowners of the future; and
- ensuring access to affordable rental housing."
Want more fuel for the fire, just listen to the Collins en banc.
I get my information from .gov sites, records, testimony, balance sheets, actual language of stock certificates and purchase agreements... How do you make up your ideas? or do you just listen to Charlie Gasparino?
Yes! If NWS or any part of the agreement is unconstitutional then this opens the "perfect storm" door. The questions is what does the administration want. The purchaser is the treasury, Mnuchin/Trump would hold all the cards. If the administration is so inclined, and the court opens the door, they can ensure the GSE's remain private, and are instantly capitalized. If Congress objected, their only course of action is new legislation, BUT they would not be able to "re-do" what was undone. For me the most interesting part is the language of the agreement "determined to be," does not necessarily mean court. IMHO, a legal review from the OLC may be enough, thoughts? Fully aware that this is the long shot lotto perfect storm scenario, BUT if the door opens it is actually the easiest way.
My favorite day dream is government loss, followed by:
"6.12. Non-Severability. Each of the provisions of this Agreement is integrated with and integral to the whole and shall not be severable from the remainder of the Agreement. In the event
that any provision of this Agreement, the Senior Preferred Stock or the Warrant is determined to
be illegal or unenforceable, then Purchaser may, in its sole discretion, by written notice to Conservator and Seller, declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate."
talk about immediate recap.
Doubt it. Dude Muted me on Twitter. Just stating facts...