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Selling MBS is not the same thing as selling mortgages. For Fy2015 FNMA generated approx. $110 B in revenue. That figure is a total of guarantee fees and MBS sales. Mostly it is MBS bond sales to 3rd parties, but BOTH disappear if big banks decide to bypass the GSEs. So $4.6 B is approximately 4.2% of FNMA's reported PY revenue total. Right?
You must remember that FNMA does not sell the mortgage with MBS, just the bonds that use mortgage income as the basis for their coupon value owed investors. Right?
The most insidious aspect to the JPM, anti-GSE initiative is that it has timed market entry to a period where most fixed rate investments are at all time lows, and much overseas sovereign debt is sinking into negative interest rate never-neverland, making many investors anxious to find new avenues for yield. Read any of the recent statements from former Pimco head Bill Gross if you doubt this. He is telling investors to favor hard assets. This new affront to Fannie & Freddie may be right up the alley for a lot of global hitters seeking fixed rate returns above the micro-% insanity.
JMHO.
Nope. Not at all. $4.6 B for one bank in their first month of packaging and selling MBS is a lethal start to a dangerous trendline if the phenomenon gains traction elsewhere. Chase is not the strongest lender in mortgage origination. But if a Wells Fargo decides to follow suit, it is a huge development to follow.
I can only consider it a desperate move for the GSEs to have approximately doubled guarantee fees. This is not consistent with affordable affordable home ownership "boilerplate" and very well could demonstrate fear within FHFA that the end is near.
JMHO.
Well, from The Street article linked on Yahoo Finance earlier this morning, it would appear that it was around $4.6 billion in July. Of course, that's just one bank in its first attempt to launch its own, in-house MBS offerings. Tip of the Iceberg, to coin a phrase. LOL.
JMHO.
JP Morgan is calling Fannie Mae litigants bluff. Plaintiffs love to claim that the big bad banks conspired to steal the GSEs riches in cahoots with the government and former UST Secretary Hank Paulson. So JPM has taken the B - U - L - L by the horns. Thhey are in the process of proving that they needed no such conspiratorial "help" because they can, as NIKE says, "Just do it."
The outrageous smears and slander from so-called industry experts and Pulitzer prize-winning pundits that impugn TBTF banks as the culprits for all manner of skullduggery may be best exposed by simply putting the GSEs out of their misery by out-competing with them for better alternatives to traditional "enterprise" guaranteed MBS that now carries with it an onerous price tag and nothing special to back it up.
What happens to the GSEs if other TBTF banks follow suit and start creating their own MBS? Hey, the banks have to do SOMETHING since both party platforms advocate reimposition of Glass-Stegall. If JPM has to split off Chase, best to do it with the sale of an invigorated auction candidate with a huge new, burgeoning business taken over from imperiled GSEs that nobody knows what to do with. Hey, the Fed might even decide to grant them advantaged borrowing costs to help them preserve affordable housing as The Twins slip into the oblivion of unwanted step-children thrown out of the house.
JMHO.
Is this reality what is driving the S/P through the floorboards?
I think you are exactly correct.
Huge eventual problem, IMO.
Says its from June 21st. SSDD.
$4.6 billion in self-originated MBS packaged and sold by JPMorgan with no guarantees from Fannie or Freddie in direct competition with the GSEs.
Fannie/Freddie guarantee fees were doubled making it cheaper for big banks to insure their own loan paper and sell it outside the traditional FnF marketplace.
JMHO.
JPM launches its own alternative MBS with no guarantee from Fannie or Freddie. That's what happens when the GSEs decide to double their guarantee fees. So the banks move into a closed loop MBS concept where they package their own mortgage loans into MBS/bonds and sell them independent of FnF. This effectively cuts Fannie and Freddie out of the mortgage market entirely.
I love competition. It's the American way. It's Free Enterprise at work in a free market economy. Soon we may have an open market equalizer in the CSP being made available broadly, coupled with the Fed discount window borrowing privilege being neutralized and leverage ratios pegged the same for banks and the Twins.
JMHO.
Judge Sweeney will NEVER challenge Executive Privilege. There will be no more "smoking gun" documents released for public consumption unless the government decides not to oppose such action.
I think it is finally going to BLOW UP. Just connect the dots, "Fannie experts"...
http://abcnews.go.com/Blotter/story?id=6201900&page=1
Sometimes the heat in the kitchen gets too intense...
http://freerepublic.com/focus/f-news/2492257/posts
Never a dull moment in Fanny & Freddie investing. You can meet a lot of important people along the way...
JMHO.
Yup. Brenda Gaines & David Sidwell announced their immediate departures, she in August and he in September.
Mayopoulos going to Lending Tree with gaping leadership vacancies at the top?
Not good, Fannie fans. Not good at all.
JMHO.
I believe that is a VERY old screen.
So, in your analysis, no settlement or damages will be awarded shareholders which the government=taxpayers must fund? That's a very pessimistic prediction for stockholders.
All yourquestions are fully answered in detail in the St. Louis and New York Fed reports I linked over the weekend. I see no purpose in reprising the approximately 200 pages of text that address the entire conservatorship and Amendment 3 scenarios in copious, exhaustively footnoted detail.
Hey, your Fanniegate hero Richard Epstein launched a real limp-wristed attack on John Carney, today. What a hoot that is!
JMHO.
"There is a school of thought that thinks that when Hank Paulson rescued Fnf but cut dividends to junior pfd, he actually created the financial crisis that erupted one week later."
Now you say you didn't say this?
1. The crisis was in full bloom when Congress acted to pass HERA.
2. The S/P for FnF had cratered throughout 2011, reflecting market awareness of huge problems at the GSEs. Many shareholders were smart enough to get the hell out of Fannie & Freddie stock before it sank into sub-dollar Hades.
3. No, you don't "break" a system like FnF solely out of revenge. You do, however, protect the American taxpayer by not allowing them to be "gamed" a second time and bilked out of $ billions so greed-driven investors get an enormous payday, claiming losses on stock they really, already made big gains on.
JMHO.
Was the fake timhoward717 shut down for Docugate?
Was it something I said about Fanniegate protected documents being compromised, risking a mistrial?
Sorry, there, fake tim. I didn't mean for you to be silenced, just leashed.
JMHO.
The opinion that the crisis erupted a week after UST imposed conservatorship is a new one for me. I never heard that one before. Anywhere. It seems very odd that Congress would have been working to pass the Housing and Economic Recovery Act throughout 2008 and passed it in August if the crisis only began in September, 2008, after the bill was already enacted.
The picture painted of how Hank Paulson actually caused the crisis is new to me, as well. The FCIC certainly never believed that to be the case. Neither did the New York Fed analysis:
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr719.pdf
The section that begins on page 14 addresses the health of Fannie in summer of 2008, Paulson's "bazooka" remark and why the view of regulators on Fannie's rapidly deteriorating financial health leading into the bailout was based on metrics, not emotion or skullduggery. It is quite remarkable detail, actually.
This NY Fed report which is entitled "The Rescue of Fannie Mae" was released in March, 2015 and is totally at odds with you opinions. Please provide alternative research that supports your remarkably different view.
JMHO.
None of the pending cases are being tried under securities law. These are civil cases being pursued for relief and/or damages.
The first step in the legal process is to determine if any recovery, at all, is appropriate for anyone. Lamberth said no and dismissed the case. Now the appeal is pending. I anticipate no different outcome.
But the most telling thing in the panoply of litigation is that after years of wrangling, discovery and added layer upon layer of new suits from every angle and possible iteration, no judge in any court has seen sufficient cause to schedule a trial and hear the case as charged.
20+ suits, no action. Kinda speaks volumes about how strong any of these cases really are, to me.
I know what I think is fair, and you disagree. There is nothing wrong with that divergence of opinion. Now I am going to wait for the court's decision.
Insurance companies have more actuarial certainty over their risks. There are hundreds of years of history in predicting the magnitude and frequency of natural disasters such as hurricanes and earthquakes. A force majeure opt out exists for events such as war.
Similar history exists for casualty events due to fire, automobile accidents and the like.
In both these cases, policy rates simply go up if actuarial predictions prove inaccurate.
Life insurance actuarial risks are perhaps most similar to the GSEs. Such policies often carry fixed payment schedules. But the risk gets ameliorated by increasing life expectancy from improvements in medicine, lifestyle and diet. But a mortgage at 30 years is fixed at 30 years with no chance for any extension to benefit the insurer (FnF). So even this insurance has a clear advantage by comparison to The Twins.
As for the banks, some like Wells Fargo would drool at the opportunity to step into a level playing field opportunity after years of playing second fiddle to Fannie and Freddie. And maybe also launches a new approach to mortgage finance and liquidity as an antidote, too.
A complete loss in all branches of government might make for the best news story EVER! It would make all the risk totally worthwhile, just to escape the current gridlock.
Cheers.
If you look at a problem such as a vehicle recall, I would suppose the current owner of the vehicle could be considered the beneficiary of any repair activity. But when you look at the additional question regarding any settlement awarded over that same vehicle's problems, it gets a whole lot murkier. The present situation over VW diesels comes to mind in this regard. The original owner who took a beating on resale due to the fraudulent mileage would seem entitled to any settlement over this issue, not the person buying a vehicle with known problems that was purchased at a devalued price.
I actually find this a fairly relevant comparative to the FnF matters at hand.
JMHO.
Be careful what is wished for. No one can predict what any judge may rule in any of these pending cases. Many pending cases seem to claim that even conservatorship, itself, was illegal and should be overturned. Courts can assess huge damages, if they so rule. All that is always possible in some eventual outcome.
Now comes the part that the judges cannot control.
Government regulates the economy. In this role, government can act in reaction to an adverse verdict in many ways, all of which are legal. Let's just say that government loses, bigtime, in one or more of these cases and decides the GSEs just aren't worth it anymore. They are tired of legal challenges, wrangling in court and huge legal investments clogging the DOJ and the Federal Court system. So it pulls the plug, releases Fannie & Freddie from conservatorship and tells its regulatory authority to treat these private enterprise enterprises in exactly the same manner as banks are treated. No more Fed discount window. No more guarantees of even an implicit nature. No more chartered tax privileges. Same reserve requirements as banks. Same leverage ratio requirements as banks. "Sink or swim, we aren't going to risk any moreexpensive and adverse judgements because of you."
Government then pays whatever settlement the court demands and moves on.
Let's just explore one teensy aspect to that quite likely, visceral response to nearly a decade of legal wrangling since the crisis precipitated the legal circus. Banks have a restricted leverage amount that basically allows them to maintain a 4 for 1 ratio of loans carried against reserves. That same leverage amount for the GSEs, last time I looked, is around 40 to 1. If they become limited to the same ratio as banks, they must reduce their loans booked and held by around 90%. Hey, maybe then Fannie wouldn't even need those huge, bloated, over-priced new headquarters Taj Majal buildings. That's surely good news. LOL.
But, to be fair, the GSEs could simply focus on building reserves to increase their allowed loan assets booked and held. But that could take a long time as John Carney has pointed out, and could leave nothing for shareholder recompense until reserves and asset book balance out. "But, wait, there's more!" Then there is the other teensy problem upon release which involves the junior preferred shares that once again must resume paying dividends. Remember? The JPD on hundreds of $ billions in stock that must now be satisfied while trying to also build reserves. "But wait, there's more!" Then there is the 800# gorilla that involves resuming JPD dividend payments at relatively high coupon rates up to 7.25% when retiring loan inventory are offsetting high interest rates gets matured and replaced by new loans that return less in I/R than preferred shares get paid at. "But wait, there's more!" The GSEs can choose to redeem the JPD shares instead of paying the high coupon rates. Oops, that removes all the capital needed with which to build reserves.
Gee, that sure all seems like good news for common shareholders counting on their Fannie and Freddie investments to fuel their financial future and comfortable retirements.
JMHO.
Its all about risk and reward.
JMHO.
Again, to remain consistent with many of my earlier statements, I have long maintained that Amendment 3 was an overreach by government and will eventually see some partial revision. It could even be walked back as totally illegal by some judicial order, though I think the far likelier outcome is a rollback of a 100% sweep to a lesser percent (like 79.9%) and or imposition of an "end point" to satisfy the complaints on "perpetuity" which is a presumption by plaintiffs that has no actual confirmation within the text of Amendment 3.
It may surprise you that I actually agree with you that some settlement may make its way to common stockholders if the GSEs get truly nationalized via a Congressional reform measure. I do not much opportunity, however, if the money runs out in 2018 and a receivership scenario emerges.
JMHO.
If you buy an inexpensive car from a seller that says this vehicle has serious problems, then it craps out on you there are no grounds to sue for a bad choice that you elected to make. It's the precise thing Judge Royce Lamberth said in his ruling, earlier, regarding the known risks in stock in a regulated entity.
Maybe the Fed bought back the $187 B in toxic loans under Quantitative Easing and so all the GSEs did was park the nasty stuff for a short while until government could take it back off their hands? If the banks were forced to just hold their shaky loans, further mortgage origination would have been impossible in a liquidity squeeze, many more of the banks would simply have failed and Fannie Mae and Freddie Mac would be out of business with no loans to buy and repackage in a depression-era market of economic chaos.
In their history the GSEs have never been so profitable as to be able to sop up $187 B in toxic loans AND pay the Treasury an additional ballparked $250 B in SPDs (bailout plus surplus). So the only remotely rational explanation can be that either the toxic loans weren't so bad, after all, or QE took them and made them go "bye-bye" which would be no harm to shareholders.
Preserving the banks was a key to SAVING the GSEs. No banks, no business for the GSEs. No business for the GSEs? No more shareholder equity for stockholders. It's just like the AIG scenario as spelled out clearly by Judge Wheeler.
JMHO.
Cancellation is not the only criteria for a taking. It can be one criteria. But in this case... or cases, as might be more descriptive... the taking at the crux of most of the litigation circus is that Fannie shares were stolen, or that Fannie shareholder rights were stolen, or the Fannie shareholders had their expected share rewards stolen... but the indisputable truth is that this is all speculative complaint that assumes some alternative and beneficial outcome could be expected to innure to shareholders had the government, FHFA, UST, or a combo of both, not acted as they did.
But as Judge Wheeler pointed out in the very similar case involving Perry and AIG, if the shareholder expectation could have been zero value without intervention, do damages get awarded even if some of the actions exhibited were actually improper? Judge Wheeler ruled with a convincing "No way, Jose." It's what is typically referred to in legal process as a Pyrrhic Victory.
To be precise, Judge Royce Lamberth ruled that claims were not ripe because a liquidation phase had not been entered. For common shareholders, a receivership and liquidation phase inevitably means common shares are cancelled and shareholders get bupkis. That's what it means. Many on this board know my extensive background in bankruptcy and liquidation law as revealed on multiple IHub boards over many years. My opinion is that until a liquidation via receivership is in play, no taking has taken place. You are welcome to your opposite view, but I seriously doubt any court would agree with you or disagree with me.
On the point regarding all shareholders get equal rights, regardless of when they bought shares... this is pure bullshit. Most every class action shareholder suit imposes a window of eligible share purchases by shareholders in the participative class. This was clearly the case in the earlier class actions which were settled over investment fraud charges against Fannie Mae and led to a $170 million shareholder distribution settled vs. the pre-conservatorship enterprise. It only covered shareholders of record from NOV 8, 2006 to SEP 5, 2008.
http://www.reuters.com/article/us-sec-fanniemae-settlement-idUSKCN0RL2F420150922
JMHO. More good stuff to come tomorrow!
Here is my answer, distilled down to the most understandable level: the actions taken by FHFA and Treasury caused no damages to investors who made bad decisions on where to invest, when to hold investments or relied on investment advisors that ignored clear warning signs and left their customers holding a much emptier bag.
Judge Royce Lamberth stated nothing was ripe. He is a judge. I value his opinion more than yours.
No taking.
JMHO.
McFarland wanted to save her own job.
JMHO.
Wrong. A common shareholder owns stock in a public company. Fannie's common shareholders still own the same shares now as in 2007. They may have diminished rights while in conservatorship, but no equity was seized. And, to be fully accurate, many of those shareholder's stock value is actually higher today than when they bought it. So, as far as I can see, the preferred shareholders may have had dividend expectations taken from them, and maybe that gets fixed in some eventual settlement. I like that outcome. But unless the common shares get cancelled, there is no TAKING. And, yes, that needs to have some finite date attached to it at some point, but Amendment 3 was only imposed in late 2012, so there's no moss growing on the rock, quite yet.
If you bought shares for 35 cents that are worth $1.90 today, hard to explain how they were taken without compensation. That rate of return is far higher than the S&P since late 2008. Right?
JMHO.
If Fannie and Freddie are released from conservatorship, FHFA has no portfolio or function and goes back into the vault of ideas that Congress authorized, once needed, but no longer does. It's just like a declaration of war; the conflict ends with the cessation of hostilities. We do not remain at war forever.
Government can revoke the Federal charter for both GSEs, which basically throws them out of the nest to sink or swim on their own. Once conservatorship is over, there is no governmental imperative to conserve, preserve, protect or even be helpful to either GSE, because the "G" just left them at the altar. Congress must then decide how to treat the GSEs for things like leverage ratios and reserves, just like are proscribed for big banks.
Congress then may act to establish any new entity it wishes, whether that becomes an eventual competitor of the GSEs or just a new blue sky approach to mortgage finance. And there isn't crap-shit Fannie or Freddie can do to stop this because it is perfectly legal. Just like when Ginnie Mae was created by an act of Congress.
JMHO.
If nobody removed the toxic assets from the banks, since that is what they had to sell to the GSEs, liquidity would have dwindled to zero, mortgage origination would have ceased, the housing market would have sunk into a depression-era decline and the GSEs, having no further purpose to exist, would simply have wound down and perished.
JMHO.
There were two Federal Reserve Board research studies that claim huge accounting deficiencies at Fannie & Freddie in the period leading into their conservatorship. These are not my numbers. I did not make them up. I can only report them as coming from credible sources in the New York and St. Louis Fed organizations.
Here's just a small portion of what the St. Louis Fed stated in the research paper I linked, earlier today: "As late as August, 2008 Fannie and Freddie claimed that they were solvent with regulatory capital of $37 and $47 billion, respectively. However, these numbers excluded "temporary" paper losses of $34 billion at Freddie and $11 billion at Fannie. These were booked as tax-deferred assets, having the perverse effect of inflating the assets instead of reducing them." This quote is taken from page 67 in the St.Louis Feds report.
There is a reason why conservatorship was warranted, and it had nothing to do with handing over FnF's "lucrative" businesses to big banks. It may have had the odd twist of trying to SAVE the GSEs to save the banks from being dragged into the financial abyss because of FnF's derivative hedging arrangements that threatened the ability of our domestic banking system to sustain the catastrophic losses emerging at The Twins.
http://wallstreetonparade.com/2016/05/the-u-s-government-is-quietly-paying-billions-to-wall-street-banks/
This link is NOT the one I posted earlier. It is important perspective and dismissive of many conspiracy theories that have been popularized on this and other message boards.
JMHO.
Yes, that is what Bruce Berkowitz said. Fairholme gets the minefield. Holders of common equity get the shaft: run off from the wind down of FnF's present business as Bruce launches a new private insurance business in which he owns most all the marbles.
That's what it says. JMHO.
It is finally time to dump the lame argument that the GSEs never needed a bailout or conservatorship. It remains timely to suggest that the government acted to save the banking system, but not by using the GSEs as a dumping ground for toxic debt but, rather, by saving the GSEs from almost inevitable collapse which, with their derivative hedging deals, could have busted even the most major banking institutions. At least that's the theory put forward by the St. Louis Federal Reserve in early 2011.
Here is just one quote in a goldmine of insight into the inner sanctum that defined Fannie & Freddie before FHFA stepped in, YES in collaboration with UST, to clean up the "Wild, Wild West" corporate culture that spoke out of both sides of the mouth. To politico's: never fear, there's really no guarantee. And to big banks: never fear, there really is a guarantee, just don't tell anyone.
Here's a quote to sum up the research piece captioned: "Guaranteed to Fail" which I quote as follows from page 5: "Fannie Mae and Freddie Mac are where they are because they were run as the largest hedge fund on the planet."
Make sure you read the section on the GSEs mounting losses and how DTAs were used to conceal the gravity of their crisis math. And don't miss the segment devoted to why Treasury sought to calm markets while working feverishly behind the scenes to get Paulson his "bazooka".
https://research.stlouisfed.org/conferences/gse/White.pdf
For serious investors, this piece could change your life and your investment thesis on huge legal victories reported to be on-tap to punish Mean Old Mr. Government for "stealing your fannie."
JMHO.
I don't think the tax argument has any significant value because of the enormous DTA offsets. Maybe someone has run some numbers on this to share?
You raise an interesting and potentially important point, and you are correct that I have never seen this put in play elsewhere or earlier.
Just reread the final section of Berkowitz's original filing with the court. Page 27, items #84 to #88 are very specific.
http://gselinks.com/Court_Filings/Fairholme/12-465-0001.pdf
Berko has had designs on privatizing Fannie Mae for years. I believe this is the real intent of his lengthy and expensive legal action. He wants a lot more than a court settlement. He wants to take over the whole enchilada, leaving common shareholders with the "run off" of the entrails of the business that "winds down" while he gets to keep all the good stuff. In his proposal, his junior preferred stock gets exchanged for shares in the new replacement for the GSEs, his privatized venture. You must read his proposal to get this.
http://online.wsj.com/public/resources/documents/FairholmeOffer.pdf
This stuff is REAL. Whether its popular or not does not matter. It is important for the full truth to be exposed, not just the pom-pom cheering for "We will all be filthy rich soon" when the S/P goes to $379.
JMHO.
"Just the idea of replacing the GSEs violates HERAs Conservator clause and should invalidate the entire government defense."
If FHFA releases the GSEs from conservatorship, they are no longerunder the legal auspices of HERA.
Thus, the quoted observation is baloney.
JMHO.
That's actually not true. Many experts have proposed a hybrid structure to 30 year loans that would be adjustable after 15 years and would allow borrowers to pay down substantial principle before any refinancing might be advantageous. This approach carries the extra benefits of removing much risk from the present fixed 30 year, and provides a further bank opportunity to recover additional closing costs, half way into a mortgage, and reinsurers (either Fannie or a private sector alternative) to generate a second round of guarantee fees.
JMHO.
No. The preferred shares are entitled to whatever the court says they get.
Read the Fairholme complaint.
Now the judge will decide if Brucie gets his payday as he envisions.
Might not be very good for common shareholders.
Baloney. HERA may exist but once conservatorship ends, FHFA is done with and ANYTHING can happen to shape the future of FnF.
Berkowitz could pull off the ultimate CHECKMATE and scoot with all the loot, leaving common shareholders with bupkis.
Under the Fairholme Proposal, no taxpayer-funded reserves would be required because private capital carries the risks of another crisis. There is, however, an open question to Congress on some form of backstop under extreme conditions, primarily I believe to address the geo-political concerns where foreign nations are major purchasers of MBS.
This is actually very similar to certain parts of the Mulvaney bill proposed in the House of Representatives.
JMHO.
??? If the GSEs are released from conservatorship, as so many wish for, there is no more HERA. Right?