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Great Points Rodney5 - keep up raising the issues around the Charter. It wont matter until it matters so you need to keep raising the issues.
Mike Kelly did God's Work and Capital Structure - the reason he was in JPS. All the public investors who bought JPS in the Spring of 2008 knew about Capital Structure.
Look at the 8-K Fililng in May 2008 where $ 2bn of public capital was raised as part of a multi-billion capital raise by the GSEs.
https://fanniemae.gcs-web.com/node/15271/html
Jason Thomas seems like a really good market analyst.
Based on this timeline and the backup emails it is clear that both he and Robert Steel who was the UST Undersecretary knew that this Memo was written by the NEC. It does not seem like Jame Lockhart at OFHEO, Senators Shelby and Dodd and Barney Frank knew that this was the opinion of the NEC under GWB. Ironically Keith Hennesey who was the Chair of the NEC at this time also was one of the FCIC Commissioners.
https://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2007-2008_Fannie_Mae_Timeline_and_Supporting_Documents.pdf
This is the crux of the Mike Kelly suit - he and other GSE investors had no idea that the NEC was predicting the Nationalization of the GSEs as early as 6 months before the Conservatorship - one week before the failure of Bear Stearns, 2 months before public investors invested billions in recapitalizing the GSEs and 4 months before the GWB pushed for the enactment of HERA which gave the GWB Admin the authority to put the GSEs into Conservatorship as they had predicted in March.
The email trail is really interesting with a lot of interesting cc's on the email trail. Lockhart seems to be have set up and Mudd and Syron had no idea what the UST and the NEC really thought or what they were doing behind the scenes.
Another interesting fact is that Calabria was a senior advisor to Senator Shelby and the US Banking Committee at the time. Wonder what Calabria knew at the time especially since he claims to have drafted many of the components of the HERA legislation.
Hey No Name - what do you think about Jason Thomas from Carlyle?
https://www.bloomberg.com/news/videos/2021-12-16/carlyle-managing-director-on-inflation-video
He has a knack for being right. Here is what he said about the GSEs when he was part of the GWB Admin at the NEC. This was in March of 2008 a full 6 months before the Conservatorship - 2 months before the GSEs raised billions of dollars from public investors and 5 months before Congress passed HERA.
Who is more prescient - you or Jason Thomas?
Government Bailout Is Necessary, Likely, And Potentially Helpful
Fannie Mae is demonstrably a failed social experiment. A realistic assessment of its balance sheet shows
its net worth to be overstated by tens of billions of dollars and the company to be already insolvent.
Even with all its accounting legerdemain, Fannie's losses are an accelerating horror show, with
shareholders losing $1.5 billion in 07Q3 and $3.7 billion in 07Q4. Those losses are just the beginning.
As shareholder capital gets wiped, the government will have no choice but to seize the company and
place it in conservatorship or receivership. Importantly, mortgage-backed security holders guaranteed
by Fannie Mae will see no losses. The government will likely allow debt holders to fare okay, with either
no or token losses, perhaps 1%.
Shareholders, both common and preferred, are likely to be left with nothing. However, these
shareholder losses have already been locked in by the company's credit decisions over the past few
years and cannot be helped. It must be remembered that Fannie is the biggest mortgage risk holder in
the biggest mortgage crisis.
A fully government-owned guarantor of mortgage debt might be exactly what is called for given the
current housing crisis. While various proposals have been floated to expand the FHA to meet this role, it
has neither the infrastructure nor the expertise to address the broader mortgage market. A nationalized
Fannie Mae would be refocused to directly address the various problems of illiquidity, affordability, and
sustainability in the mortgage market. Without the need to satisfy a fiduciary duty to shareholders,
Fannie might finally be able to perform its affordable housing mission in a helpful and proactive manner.
https://ypfsresourcelibrary.blob.core.windows.net/fcic/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Excerpt from GWB Admin NEC Memo to UST on March 8, 2008 :
Government Bailout Is Necessary, Likely, And Potentially Helpful
Fannie Mae is demonstrably a failed social experiment. A realistic assessment of its balance sheet shows
its net worth to be overstated by tens of billions of dollars and the company to be already insolvent.
Even with all its accounting legerdemain, Fannie's losses are an accelerating horror show, with
shareholders losing $1.5 billion in 07Q3 and $3.7 billion in 07Q4. Those losses are just the beginning.
As shareholder capital gets wiped, the government will have no choice but to seize the company and
place it in conservatorship or receivership. Importantly, mortgage-backed security holders guaranteed
by Fannie Mae will see no losses. The government will likely allow debt holders to fare okay, with either
no or token losses, perhaps 1%.
Shareholders, both common and preferred, are likely to be left with nothing. However, these
shareholder losses have already been locked in by the company's credit decisions over the past few
years and cannot be helped. It must be remembered that Fannie is the biggest mortgage risk holder in
the biggest mortgage crisis.
A fully government-owned guarantor of mortgage debt might be exactly what is called for given the
current housing crisis. While various proposals have been floated to expand the FHA to meet this role, it
has neither the infrastructure nor the expertise to address the broader mortgage market. A nationalized
Fannie Mae would be refocused to directly address the various problems of illiquidity, affordability, and
sustainability in the mortgage market. Without the need to satisfy a fiduciary duty to shareholders,
Fannie might finally be able to perform its affordable housing mission in a helpful and proactive manner.
https://ypfsresourcelibrary.blob.core.windows.net/fcic/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Wazee Amended Complaint Excerpt:
Notwithstanding that they were created by federal statute, until September
2008, Fannie Mae and Freddie Mac were financed by private investment. The Companies
actively marketed their securities to a wide variety of investors – including through 2008. For
instance, they had a variety of programs to encourage their midlevel employees to buy Company
stock. See Worker Assets Shrink at Fannie and Freddie, N.Y. TIMES (Aug. 28, 2008). In May
2008, Fannie Mae produced a “Capital Raise Roadshow” presentation in which the company
touted its “[l]ong-term growth and profitability prospects” and the “[c]ompelling investment
opportunities in current environment.” The “rationale” was to “[e]nhance long-term shareholder
value” and the presentation noted that the “[m]ix of the offering maintains an appropriate ratio of
preferred to common equity in our capital structure....... ”
26. Prior to 2007, Fannie and Freddie were consistently profitable. In fact,
Fannie had not reported a full-year loss since 1985 and Freddie had not reported a full-year loss
since becoming owned by private shareholders in 1989.
27. The Companies’ federal regulators also actively promoted investment in
the companies – including through 2008. The Office of Federal Housing Enterprise Oversight
(the “OFHEO”) continued to assure the marketplace of the Companies’ soundness through 2008.
On June 9, 2008, OFHEO published a news release stating that it classified Fannie Mae and
Freddie Mac as “adequately capitalized as of March 31, 2008.” And, in a March 19, 2008
statement, OFHEO director James Lockhart said “both companies have prudent cushions above
the OFHEO-directed capital requirements and have increased their reserves” and “We believe
they can play an even more positive role in providing the stability and liquidity the markets need
Case 1:18-cv-01124-MMS Document 28-1 Filed 03/24/23 Page 13 of 69
13
right now.” Lockhart also said that the idea of a bailout is “nonsense in my mind” because “The
companies are safe and sound, and they will continue to be safe and sound.” As Crisis Grew, A
Few Options Shrank To One, N.Y. TIMES (Sept. 7, 2008).
28. Between 1996 and 2008, private preferred shareholders invested
approximately $32.9 billion into Fannie Mae and Freddie Mac, of which $19.1 billion was
invested into Fannie Mae and $13.8 billion was invested into Freddie Mac. During that same
time period, Fannie Mae and Freddie Mac paid out a total of $5 billion in dividends on the
preferred shares issued in exchange for that $32.9 billion in investment.
29. During 2007 and 2008, the regulator for the GSEs, OFHEO (the FHFA’s
predecessor), encouraged the GSEs to raise more capital from private investors to ensure that the
GSEs could withstand the increasing instability in the housing market. As a result, private
preferred shareholders invested over $19.7 billion into Fannie Mae and Freddie Mac, of which
$11.13 billion was invested into Fannie Mae and $8.6 billion was invested into Freddie Mac.
Thus, of the total $32.9 billion invested by private preferred shareholders into Fannie Mae and
Freddie Mac between 1996 and 2008, $19.7 billion was invested during the years 2007 and
2008. The GSEs paid a total of $1.1 billion in dividends on the preferred shares issued in
exchange for the $19.7 billion invested into the GSEs in 2007 and 2008
https://www.glenbradford.com/2023/03/fnma-fanniegate-1279/
I made a mistake reading a post today also.
You would think - right - $ 200 bn for the UST and $ 50 bn for common. Redeem JPS at Par - consenual conversion to common or turn on the low coupon JPS.
Just re-read your post - I misunderstood the main point - seems like a fair one - my apologies. If the next 8 years are GOP then I think we have a good shot at exit but understand your skepticism. I think we need the 5th Circuit to weigh in on the Constitutional issues and hope Lamberth gives us a small victory.
Fair Point - Maybe too much money on the table and too many Constitutional inconsistencies for the politicians not to do anything. Also what has happened is not right or fair and is a very bad precedent for the future of US Capital Markets and the US Financial System.
Fair points Eternal Patience
At some point it will become a matter of what kind of financial system do I politicians want.
One where an Admin can create or aggravate a crisis like the GWB did in the Spring of 2008 as a pretext for regulatory provisions of HERA. Just read this page from the NEC March 2008 memo and think it about it in terms of SVB and other future FDIC insured regulatory actions:
https://ypfsresourcelibrary.blob.core.windows.net/fcic/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
One where a crisis can be used to essentially nationalize financial institutions like the GWB Admin did with the GSEs with the Conservatorship.
One where previous nationalizations can be used to justify future nationalizations like the SCOTUS Collins decision being used for the CFPB and potential FDIC insured institutions going forward.
Is this what the GOP and some freer market Dems really want? It seems like DJT does not and we dont know about DeSantis.
FHFA will respond to Rop Cert Petition by April 7th
https://www.scotusblog.com/case-files/cases/rop-v-federal-housing-finance-agency/
Hi Robert - it seems like Ackman is raising his profile. It is hard to imagine that Ackman would just stand by and let common shareholders get screwed by a SPS cramdown especially since there was absolutely no consideration given for the SPS Liquidation Preference. Some on the Board stress how the UST would want to maximize profits since they own the SPS and warrants. I would think Ackman would want to maximize his profits and fight for that - he should get PAR on his JPS and get his share of the 20 pct of the market value of the equity of the GSEs. Kind of crazy to think otherwise - or as Skeptic would say super hilarious. Ackman has skin in the game while we got some posters with no names and no shares and some here just for comic relief apparently
Good point Fannie Heyyyy - perhaps timing is important for a political push. In the next month we shall know if the 5th will hear the Appropriations Clause separations of powers case - if it is not stayed there should be a lot of good fodder regarding the rise of the Administrative State and a good ruling should align the GSE issues with the CFPB issues. I am thinking that this would be a good time to push - also the biggest push should probably be with DeSantis because it would seem that Trump and Rand Paul care about shareholder concerns.
Thanks Robert - She was set aside and voided just like Judge Duncan will vote regarding the NWS and SPS Liquidation Pref when it comes to the Collins case on remand.
Thats right ewtrader - we should wish that all shareholders both JPS and Common get treated fairly. It is really out of our hands and most importantly we are waiting on an hearing date in the 5th Circuit for Collins. If the Collins proceeding is not stayed that decision will be very important to the future value of common because the 5th Circuit could or direct that the SPS Liquidation preference be set aside. We could know this in 2023 if the 5th is not stayed. Lamberth is small but could also be a positive event in 2023.
Good points Robert.
Collins on remand is important along with Rop and Bhatti are important because the SPS Liquidation Preference can be set aside for a separation of powers violation.
Calabria probably made the reference to legality of forgiving the SPS because there is a CFR reg regarding the compromising of USG assets which needs some rational basis like the threat of litigation or the probability of success. This is mentioned in the CBO report
Really interesting tweet by Calabria. Shows the risk of keeping the GSEs in Conservatorship. The GSEs in Conservatorship will be the playground for woke policy experimentation
Are you referring to your googlings skills or about something you have no expertise in?
How many CoCo bonds have been issued in the US? I dont know if they even qualify for capital in the US - please do tell us?
Are you now an expert on how Coco bondholder claims are resolved in Switzerland?
This is going to unravel the CoCo bond market in Europe. It was suppose to be gradual rather than just one regulatory action.
https://www.euromoney.com/article/b12kqjlwvsz26k/at1-capital-coco-bonds-what-you-should-know
I doubt if Calabria would support a cramdown today screwing common and I doubt if he meant to say that in his book but have not read the book yet. What we do know is what POTUS DJT said he would do and how he equated the FHFA actions to theft.
https://assets.realclear.com/files/2021/11/1921_trump_letter_to_rand_paul.pdf
It doesnt matter what Calabria or McNuchin wanted it is what DJT wanted.
Larry Kudlow and Calabria short discussion on March 18:
https://wabcradio.com/episode/mark-calabria-cato-institute-senior-advisor-03-18-23/
Sheila Bair talks about a "Bear Stearns moment" for the US Banking System.
https://www.allsides.com/news/2023-03-17-1540/banking-and-finance-banking-system-verge-bear-stearns-moment-former-fdic-chair
Wonder if the JB Admin has an internal memo they will leak to the press with a plan to to Nationalize the US Banking System like the GWB did when they sought to Nationalize the GSEs in March of 2008. This memo was leaked a week before Bear Stearns collapsed and added instability to the MBS market.
Looking for a Memo like this from the NEC to UST regarding benefits of Nationalization of the Banking System this time around:
https://ypfsresourcelibrary.blob.core.windows.net/fcic/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Wonder how the shareholders of SVB and Signature Bank feel - see the part in the NEC Memo talking about " as shareholders get wiped"
This is a couple of months before the GSEs sold billions more of JPS to the public in the Spring of 2008. Wonder if the Underwriting Syndicate knew anything about the GWB Admin efforts to Nationalize the GSEs.
Could the FDIC nationalize more banks for the public benefit and have the FDIC actions upheld by the Collins decision akin to the special conservatorship powers granted by SCOTUS?
Thanks Guido
Calabria had a good interview with Larry Kudlow - spoke about FNMA and FMCC
Worth the listen:
https://wabcradio.com/episode/mark-calabria-cato-institute-senior-advisor-03-18-23/
GSE equity are long dated exotics options on the finances and politics of the GSEs. Ackman is right about this. The strike price will be determined by a combination of legal and political outcomes. The legal component for fixing a strike price is probably shorter dated with the outcome of the Collins case probably most determinative.
We do know that the GSEs must report a 5 year Capital Budget to the FHFA by May 20th under the new Capital regs. This may not be made public but there has to be a number for possible equity offerings in the next five years. It could be 5 years of zeros but there has to be a number.
Hi Patswil
Check out this post from Robert regarding TH comments.
Wow! Thanks Robert
"at a time the public is learning that the Federal Reserve has been short-funding its now $2.6 trillion portfolio of agency MBS since its inception in 2009–and is on track to lose over $100 billion this year from doing s0–and also learning about unregulated and unsupervised banks “playing the yield curve” because their Basel III capital standards allow them to do so without penalty, is galling. But, yes, do take uninformed and mis-aimed shots at Fannie and Freddie to distract from what the banks and the Fed are doing."
The UST is also unhedged in its $ 224 bn claimed investment in GSE SPS and Common Equity.
Happy St Patrick's Day to Mike Kelly and Patrick Quinn for continuing to fight the good fight on behalf of FNMA and FMCC shareholders! Thank you for being such great patriots!
Hi Robert - this is probably just the beginning of the unraveling of the carry trade. Kind of scarry since we are coming out of an artificial quantitative easing rate and yield curve market structure.
Good Points Rodney5 ! It is not clear that the economics of CRT are a good deal for the GSEs. Layton has been kind of an opportunistic skeptic to date when he was at Harvard. For some reason he seems to pushing lower capital requirements now which seems to be the right outcome based on real facts. The use of CRTs also should result in lower required capital so this is another reason that Layton's current views are most likely rational and timely.
Also - away from Harvard Yard nestled nicely in NYC with new think tank
Hi Skeptic - Mike Kelly deserves his day in Court and if he has one - it will benefit all shareholders. While the GWB and BO Administration and the key players in both of this Administrations will probably never be held accountable as you said the transparency is what is important. Mike Kelly is suing for direct and derivative damages - a derivative win would in essence transfer the value of the UST claimed SPS position back to all shareholders. Why should the USG make out with $ 224 bn when Mike Kelly lost everything by doing the right thing? Again the GWB Admin stood by and said nothing about the March 2008 Barrons Memo and their stealth Nationalization strategy while the GSEs were raising billions from unsuspecting public investors in the Spring of 2008. If not accountability - the facts surrounding the GWB Nationalization Strategy should be made public.
Wow! Really interesting Robert - not to mention that the GSE equity has a lot of interest rate risk - smartest thing for all would be to exit conservatorship and have the UST monetize its rightful share of GSE equity under the warrants.
Hi Skeptic
The point is that GSE shareholders deserve a fair and reasonable resolution of the Conservatorship of their privately owned enterprise.
Mike Kelly and all GSE shareholders deserve a just and fair compensation from the stealth Nationalization strategy of the GWB Admin. The leak of the Barrons Memo undermined the MBS markets in March of 2008 and led to the passage of HERA and the further meltdown of the MBS markets. The GWB Administration should have disclosed their plans to nationalize the GSEs before they raised billions of dollars from the public in the Spring of 2008.
Hi FFF - I absolutely admire the Calabria who wrote the Conservatorship of Fannie Mae and Freddie Mac prior to the time he was appointed as Director the FHFA. I am confused on what happened to that Mark Calabria and I have been waiting for him to return to the old Calabria. Do you have a theory why he set capital requirements so high and why he did not negotiate the end of the NWS and SPS Liquidation preference in the Jan 2021 Agreement with UST?
Really would appreciate your insight because I too have had high esteem for the Cato Calabria and have been dissapointed by the FHFA Calabria.
Great Points again Guido!
Donot - The US Treasury probably could issue 100 Year UST at 4.5% right now. They should have at least 1 Trillion of 100 year debt
Great points Guido. Now is the time to exit Conservatorship and raise new equity while interest rates are low. The current value of the GSEs according to the 2024 budget is $ 224 bn and if interest rates rise the value of the GSE equity will decrease as interest rates rise.
Additonally now is the time to exit Conservatorship to ensure that the $7.2 billion MBS portfolio is properly backstopped by private shareholder equity as you mentioned. MBS investors assume the interest rate risk in the MBS pools due to the potential change in prepayment speeds but the GSE continue to assume the risk in potential market value declines in the liquidation of the underlying houses backing the MBS pools
Hi Eternal Patience - the primary reason SVB failed was that they did not propertly hedge their interest rate risk. If you examine the valuation scenarios in the CBO report on the GSE restructuring you can see that there is significant interest rate risk in the value of the UST and Common Shareholder stakes. If the UST wants to protect its investment the most prudent action would be to raise outside capital as soon as possible while interest rates and required ROI for new investors are low.
There is too much interest rate risk on the UST balance sheet and pretty much all public debt - the smart thing would be to firm the capital base for the $ 7.2 bn GSE MBS market.