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Jared seems like a serious well intentioned guy - sort of a liberal renaissance guy with a good enough jump shot to play basketball with the BO insiders. Give him credit to step away with Larry Summers from the BO White House before the sausage of the NWS was made. I think of him in the Mike Calhoun cohort - well intentioned but liberal. Good enough to want to serve now rather than make gobs of money off the plight of GSE common shareholders as a Advisor.
The key is that need to get something done now and they are almost certainly try to ram it though via Admin Action. DJT II timing and possibly a Tim Scott Chair of Senate Banking Committee will probably cause them to abandon to cram down to get something done administratively before it can be unwound by DJT II
What he has said in the past:
https://jaredbernsteinblog.com/
Glen - no wonder you want the Golden Ticket - it is your destiny!
https://www.bing.com/search?q=peter+ostrum+photos&cvid=80e9f5fcd95b4de998e00eee5127be50&aqs=edge.0.0.7425j0j1&pglt=2083&FORM=ANSPA1&PC=U531
Thanks for the humor Glen! - appreciate it!
We will see about whether I am in fantasy land -hopefully soon! I dont think I am and I believe Tim Howard probably has the best perspective about all of this. Not to say that the UST might come out with a cramdown proposal but at the end of the day - I think Tim Howard's perspective will rule the day. Perhaps he will change his mind as things evolve but for now I am with Tim!
Regarding the Chocolate Factory - personally I think we have one or two Augustus Gloop's on this board and perhaps he came out of the chocolate ok or was eventually eaten by some ravenous children as part of the whole chocolate bar batch. Gluttony and greed sometimes go together in chocolate and markets.
Glenn - when I watched the clip - I couldn't help to think about how much you look like Charlie? You seem to young to be the actor in the movie but I image you and the actor look alike?
Be like Charlie Glen - Be like Charlie. Willie Wonka Charlie - not 10 Cent Cramdown Charlie.
Thanks for the reply Kthomp:
Is this the portion of the McNuchin Plan that you are referring to:
"2. Recapitalizing the GSEs
As described above, each GSE should remain in conservatorship until it has retained or raised
sufficient capital or other loss-absorbing capacity to operate in a safe and sound manner.
Potential approaches to recapitalizing a GSE could entail one or more of the following, among
other options:
Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred
shares or exchanging all or a portion of that interest for common stock or other interests
in the GSE;
Adjusting the variable dividend on Treasury’s senior preferred shares so as to allow the
GSE to retain earnings in excess of the $3 billion capital reserve currently permitted;
Issuing shares of common or preferred stock, and perhaps also convertible debt or other
loss-absorbing instruments, through private or public offerings, perhaps in connection
with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;
Negotiating exchange offers for one or more classes of the GSE’s existing junior
preferred stock; and
Placing the GSE in receivership, to the extent permitted by law, to facilitate a
restructuring of the capital structure.
Each of these options poses a host of complex financial and legal considerations that will merit
careful consideration as Treasury and FHFA continue their effort, already underway, to identify
and assess these and other strategic options.
Treasury recommends:
Treasury and FHFA should develop a recapitalization plan for each GSE after identifying
and assessing the full range of strategic options. (administrative)
59
FHFA has relied primarily on its conservatorship authorities to oversee the safety and soundness of the GSEs
over the last 11 years. With the end of the conservatorship, FHFA will instead rely on its supervisory and
regulatory authorities, which include authorities to conduct examinations of the GSEs. FHFA could determine
that it should specify conditions with respect to the hiring and training of examiners or other aspects of the
buildout of its supervisory function.
28
Pending that recapitalization plan, and as an interim step toward the eventual PSPA
amendment contemplated by this plan, Treasury and FHFA should consider permitting
each GSE to retain earnings in excess of the $3 billion capital reserve currently permitted,
with appropriate compensation to Treasury for any deferred or forgone dividends.
(administrative)"
I guess I dont see this as suggesting a cramdown but a reasonable step to make sure the MBS knows that the UST backstop is in place via the SPSA and to placate any concerns that the UST will not act in a fair and deliberative manner. This is what Calabria was also going back to his CATO Paper on the Conservatorhsip. Prior to Collins decision at SCOTUS I think UST and FHFA believed that the Conservatorship for GSEs would be governed by the same principles as a FDIC conservatorship and not the "special conservatorship" that SCOTUS came up with.
We can talk about the political part of this and what DJT II would do if you want but I thought I would respond first to this part of your email.
Thanks for the thoughts.
Meanwhile - I'm with Tim H.!
Wow!! - Thanks Glen!!
Did you see you is the moderator for the panel at 9:40? - The 10:30 speaker's predecessor at the NEC!!. Wonder if his Advisory business is going to make a lot of money on the impending GSE common cramdown?
Looks like he has been working it for a long time - especially like the meeting on the 2nd page 2/24/11 where he and his current partner and DJT's to be head of the NEC had meetings with the UST on the same day
https://www.treasury.gov/initiatives/wsr/Pages/dfa2_11.aspx
Looks like Senate Banking Committee will vote on other Fed Nominees now that Raskin has withdrawn her nomination. My guess is that Thompson will move forward also now
https://www.banking.senate.gov/newsroom/minority/toomey-urges-brown-to-move-forward-with-fed-nominees
You edited the scene - Charlie won!! because he was honest and decent.
You have to keep your integrity and your conviction until the end - like Charlie!
https://www.bing.com/videos/search?q=what+happened+to+mr+wonka%3f&&view=detail&mid=4C9D891512FF97FAC7364C9D891512FF97FAC736&rvsmid=E1A2080C62080741A727E1A2080C62080741A727&FORM=VDQVAP
Great questions:
Calabria is a CATO guy and wanted to take a hard line regarding capital maybe expecting the Democrats to object to such stringent levels because it would reduce the potential for affordable housing programs. If he was going to have to take the Adminstrative route he could have compromised on the capital requirements to appease Sherwood Brown and the gang. To some extent philosophy and too some extent posturing.
McNuchin had to work with the same DOJ who had been litigating the same cases since 2014 - the guys who always brought up the lottery ticket. He had to take their advice to appeal but we all thought we would wind on the APA claim and the NWS would be ruled Unconstitutional. The Govt sent a junior Solicitor General and I think we all thought that Thompson cleaned his clock. The decision was nothing like the oral arguments.
Treasury Secretaries always have to take the USG position just like Yellen will have to now but the key is how they finese the outcome to meet a policy goal. I think Yellen knows she does not have time to push the cramdown through but will take the CBO line of logic to start. Just like McNuchin she has to think about the political opposition and that is why I think we need to focus on the Nationalization issues and how this could be a playbook for future Nationalizations like the Farm Credit system mentioned in the last paragraph of the CBO report. I would expect them to go out with a proposal keeping the SPS in place but then settle depending on how the law suits play out. I dont see how they can convert anything that takes the UST over 80 pct ownership or will cause unanticipated budget issues - especially if they want to keep the UST windfall in an affordable housing subsidiary.
You are assuming the pushback was at Treasury. The NEC started the Nationalization policy as early as 2008 and there is no evidence that the NEC changed its policy before - perhaps when Larry Kudlow took over. Personally I think McNuchin and Calabria did what they thought was best for the long term sustainability of US Housing policy. I dont think either of them would have crammed down common shareholders. My guess is that McNuchin and Calabria was surprised by the SCOTUS opinion on the NWS. Most of the market was.
Thanks Glen
So you are saying that the UST will own about 99% of the GSEs before they even sell a single share to the public?
You are saying that Secretary Yellen will authorize the UST to take at least $ 20 bn of common shareholder equity because the Collins SCOTUS decision says that they can? Calhoun called the UST a PAYDAY Lender at the Brookings event and said that the UST stake was at least worth $ 100bn.
If there is a cramdown I dont see how it happens before the UST starts selling shares and there is an attempt to settle with common. Perhaps I cram down can happen after some type of settlement or exchange offer but it seems much too problematic to execute as part of an Administrative Action. I think Tim Howard knows the extreme administrative complexity of completing a cramdown and that is why I personally think his comments are very credible because he has worked in this world his whole career.
Finally what is most likely to happen if the UST tries the cramdown route is that the UST will suffer more losses from dilution due to the duration risk than they could have possibly made from a cramdown.
In any event - the UST should start the cramdown soon if they want to get it done in this Administration.
Lael Brainard
https://www.congress.gov/nomination/117th-congress/1529
No movement on any of the major Fed nominees yet. Manchin said he would not vote for Raskin so that is not likely. Maybe compromise on the others including FHFA? Seemed like a hurry up and now a big lull?
Does anyone think that DJT will just watch JB make $ 200bn MORE by Nationalizing the GSEs and not say anything? Socialist Scam - Woke Finance Scheme - Next up the entire Farm Credit System!!
Didnt Tim file an Amicus Brief? He did file his own lawsuit and perhaps knows more than you? Perhaps since he was Vice Chairman of FNMA? CFO?
Do you really think they can get a cramdown done that cant be undone by DJT in 2.5 years? Better get a confirmed FHFA Director first dont you think?
Using CBO assumption of 8 pct ROI by new investors with 8 pct growth rate. Ballpark- 175 Equity Value - 25 bn JPS - 50 bn new equity = 100 bn Net Equity Value with 10 to 15bn in earnings in the 2025 -2027 period. CBO assumes new stock offerings start in 2025.
Best Case Scenario - if you assume twice of the implied cap rate or half implied PE - you are at $ 15 per share which is the same payoff for JPS which is $40 per share. - 20X.75 = $ 15 and 20X $ 2 = $40
Have you seen Ackman's 2014 worksheet - Glen would say it is not realistic after SCOTUS Collins due to the impending cramdown but it is a good framework. The poster in 2017 came up with a relative valuation between FNMA and FMCC
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=130950243#:~:text=Using%20Ackman%27s%20%22Illustrative%20Future%20Value%22%2C%20we%20can%20separate,entire%20investing%20world%20knows%20a%20recap%20will%20happen.
I think some one posted the whole presentation recently.
Have you looked at the CBO Restructuring Paper - best case scenario is that the GSEs have an equity value of $434 billion.
They need to raise outside equity so best case net equity value is $ 362 bn.
This Paper assumes JPS get paid back at PAR for most scenarios and SPS get priority allocation. The SPS cramdown is the real issue because otherwise the common is accruing equity every day as earnings are retained.
I am assuming a $ 250 bn net equity after dilution for new issuance - $ 150 FNMA and $ 100 FMCC. Best case is that the cramdown does not succeed and in the end we get 20 pct of the equity of the $100 bn for FMCC legacy common as the best case - 100/3.23 bn shares outstanding is $ 30.95 or about 41 X - Best Case. The Best Case for the Freddie JPS is about 1.6 times Par or $40 per share using the 5% div series as the benchmark. 25 plus 12 years lost dividends or 25 + 15 in lost dividends - At $ 2 market price this is a 20X payoff. Although these scenarios are very reasonable in the capital markets it is assuming the USG wants to treat investors fairly. Mr. Market has really got his teeth kicked in on this one so no confidence in a fair outcome.
For me the JPS is the better risk v return because there will be time to readjust if things start working out. If they do turn on divs at some point - the value of the JPS will likely increase much more for the JPS because it is unlikely the USG goes beyond the CBO methodology at the start. There is also the unfavorable cramdown risk and dilution risk for common that also makes it a tougher road for common - hence twice the potential payout. The cramdown risk is real but we all should be wary of the precedent that would come with this because it would just be a playbook for future nationalizations.
FNMA probably has more risk because it has more shares outstanding and more outside capital to raise but perhaps more return.
All of these numbers dont matter much until there is a proposal to raise capital by the FHFA which should be released by May 1 under the new Capital Budget Regs. Again - the market is super skeptical that anything good could possibly happen but the current price for common makes sense if you think the potential payoff is 2X JPS BEST CASE. Otherwise the JPS are probably the better investment for most scenarios.
Could it be JPS 25 and Common 5 or less - yes. Just a guestimate and of course I have been wrong for a long, long, long, long, long, long, long, long time.
Smart Move would be start paying divs on JPS as part of settling Lamberth. Stupid move would be try to cram down common because the UST and FHFA will run out of time trying to cram down in an administrative quagmire. Come to some settlement like not increasing SPS after the NWS and treat all common the same after the NWS.
Isnt the goal of a restructuring to be successful? If the Calhoun plan is the objective - why risk getting it done before DJT II happens? Lots of policy downside with not a lot of policy upside especially given the stinky
historical fact pattern.
The way to max the UST stake is to get it done ASAP and minimize the duration risk in the GSE capital structure. The potential gain from a cram down does not make sense in context to the potential equity value loss due to rising interest rates.
It looks like the Mike Kelly case can not proceed also - right? Seems so wrong but that is what it looks like.
Agreed - where would we be without the Lawsuits. Personally I appreciate everyone who has worked on behalf of shareholders - especially David Thompson.
Wonder if the President mentioned something about an Administrative Action in Housing on Friday at the Pep Talk?
https://apnews.com/article/immigration-voting-rights-biden-elections-voting-c91bce7873d865483426696508a4c729
Thank you for all you do for GSE Investors Guido.
If the USG can do this to people like Mike Kelly and Ralph Nader - they will do it again.
Here is another blurb about Mike Kelly who lost a billion dollars investing in GSE Preferred. A real life George Bailey.
https://www.oakpark.com/2009/11/17/mike-kelly-a-guy-who-gets-things-done/
Next up is the Nationalization of the Farm Credit system. See the last paragraph of the CBO Restructuring Paper.
I think you are right on the value with the JPS but we are all on the same team - Common and JPS. Different risk vs return scenarios. No one deserves to be crammed down.
Yes - Thank you Ano and David Fiderer
In addition to the GAO - the GWB NEC effectively undercut Congress and Nationalized the GSEs by blowing up the negotiations with Congress to stabilize the GSEs during March 2008
https://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2007-2008_Fannie_Mae_Timeline_and_Supporting_Documents.pdf
https://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2008-03-08_Treasury_Email_from_Hason_Thomas_to_Robert_Steel_Re_Source_document_for_Barrons_article_on_FNM.pdf
Perhaps overoptimistic or perhaps not. There are a lot of moving parts but what is clear is that the CBO has implicitly modeled the duration risk to the value of the UST stake and it is quite substantial. The UST has great financial incentive to sell equity and issue new JPS as soon as possible if they want to maximize the value of their stake. Those who are arguing for up to a $60 bn cramdown of legacy common are ignoring basic finance principals involving duration risk. If the UST is motivated to "maximize value to the UST" they would settle and get on with the recap while rates are still low.
Perhaps more interesting is how a cramdown would be executed administratively. Not only would UST and FHFA would have to file all the CFR comment periods for any material portions of the plan the UST is going to have work within the guidelines of CFR 31 902.2 and figure out how any stock sales would work through the Budget within the context of an Administrative action.
This aint a run of the mill corporate bankruptcy - I think Tim Howard knows a lot more about the complexities of a potential restructuring than the 10 cent cramdown crowd. I am also blown away with the statement that some of us dont know basic finance principals. GSE legacy equity and the UST Warrants have material intrinsic value related to the duration risk in the future equity capitalization of the GSEs.
Great Point JOak0ky - Looks like we are on the 2025 Recap Table 3, Page 17 - At current capital and current interest rates Scenario 1 is most applicable.
Equity Value is $ 434 bn
Capital Raise is $72 bn
Value of UST Treasury Warrants is $110bn
Value of GSE Common is $27 bn
The CBO does not give an explicit value to common but if you look at Footnote (a) to Table 3 and do the subtraction (362-190-35-110 = 27) the value of the legacy GSE Equity is $ 27 bn even under the CBO estimates. If you start breaking out for FNMA and FMCC you can start seeing the valuation upside in FMCC due to relatively low number of shares outstanding.
Alternatively if the SPS is written down to zero and JPS are paid for divs since the NWS the math works out like this:
Equity Value is $ 434 bn
Capital Raise is $ 72 bn
JPS Value is $ 62 bn ( assumes ave. div of 6% for 13 years ( .78Par)
UST Warrant Value is $239
GSE Equity Value is $ 61 bn
The biggest risk to the monetization of the UST stake is interest rate risk. The underlying GSE portfolio has negative convexity so an interest rate rise will extend out cash flows but the GSEs face massive losses to its equity value if it does not move as fast as possible to sell equity and new JPS at current low interest rates. If the Govt wants to really help affordable housing they would do the warrant scenario and not try to litigate a cramdown. GSE Common is worth somewhere between $ 30 and $ 60 bn in the current interest rate environment.
If the Shareholders get some type of win in Lamberth where it is clear that JPS are owed divs from some point in conservatorship then the JPS value will really start become real but we all face the risk in not moving early rather than take the duration risk.
Thats great - thanks
We still have:
1.Lamberth Implied Covenant claim relating to dividends
2.Fifth Circuit retroactive relief for separation of powers defect
3.Ropp and Bhatti - are both Appointment clause or also separation of power claims?
Meanwhile the Thompson nomination is being held up.
Calhoun and Brookings are talking an Administrative Action via an affordable housing subsidiary which would monetize the UST Stake
New Capital Budget required by May 1st under new Capital Rule
Overdue UST Treasury Report required from last SPSA Amendment.
US Senate Banking Committee Chairman Tim Scott Jan 2023
DJT President Jan 2025
Time to settle?
Thanks for taking the time to explain:
Just to be clear - you do not think the Feb DC Court of Appeals opinion changed any precedent for Lamberth?
Here is the excerpt from the DC Court of Appeals Opinion regarding the contractual claims - it seems to be consistent with your point - correct?
"In succeeding to the Enterprises' private contractual agreement with Cacciapalle, we conclude the FHFA does not retain its governmental character. Unlike the FHFA's adoption of the net worth sweep—which, as discussed above, necessarily required the FHFA to exercise its statutory power to subordinate the Enterprises' and shareholders' best interests to its own, see supra, at –––– – ––––—succeeding to the preexisting contracts between the Enterprises and Cacciapalle does not implicate any such governmental activity. To be sure, Cacciapalle's complaint makes clear that the FHFA's succession to the Enterprises' obligations only involves interpreting contractual terms, not federal law. See J.A. 856 (¶ 153) (“FHFA assumed the responsibility to act consistently with the [Enterprises'] contractual obligations when it became the [Enterprises'] conservator.”). Because Cacciapalle's breach of contract claim fails to implicate any governmental activity on the FHFA's part, the requisite privity of contract with the United States is absent. See Erickson Air Crane Co. of Wash. v. United States, 731 F.2d 810, 813 (Fed. Cir. 1984) (holding that the “government consents to be sued only by those with whom it has privity of contract”). We, thus, affirm the Claims Court's decision to dismiss these claims on standing (privity) grounds. To the extent Cacciapalle has a contract claim, it cannot be asserted against the United States."
The key seems to be that the implied covenant is a contractual right that was "preexisting" to the Conservatorship. Is this correct? It can not be asserted against the Government or the COFC claims but it can be asserted against the GSEs in their corporate capacity?
If so - you would think that the Plaintiffs would survive the Motion for Summary Judgement ?
Agreed - JPS Par plus past divs are really small potatoes in the future captial structure of the GSEs. The CBO has an Equity Value of $ 434 bn and a 2025 outside capital requirement of appoximately $ 75 bn. JPS Par is around $ 30 bn and even if you inpute a 6% div since 2013 you are looking at a JPS value of approximately $ 50 bn in $ 434 bn projected equity value. Common should get its 20% as a settlement ( 434- 75 -50 ) which would be about $ 62 bn between FNMA and FMCC. The UST would be left with about $ 250 bn before the required dilution to raise outside capital which also would impact common in the near term.
The cramdown path is totally unreasonable and is financial malfeasance. The biggest risk to the UST net equity value is the Duration risk in the required rate of return for outside capital whether it is common or preferred. The underlying GSE portfolio has negative convexity ( which is great since weighted average lives of guarantee fee income streams will extend as rates rise) but any new JPS or the required rate of return to new equity has gigantic duration risk. Treat everyone fairly and start raising capital now while interest rates are still low.
Thanks for the reply and analysis Ano! It is my perpective that the decision of the 5th Circuit En Banc panel in the All American case will have a material impact on how the Southern District of Texas rules on the REMAND. The oral arguments for All American were really interesting and centered on Article I and the Article III separation of powers issues that relate to the SCOTUS opinions on Seila and Collins.
Check out who met with UST on 2/24/21 regarding the GSEs. One guy was the head of the NEC for the first two years of the Trump Admin - another guy and his current partner were then NEC and HUD officials but are now paid consultants and another guy is the current head of the NEC.
https://www.treasury.gov/initiatives/wsr/Pages/dfa2_11.aspx
Check out the email time line around March 8th. Mudd is in Hong Kong trying to raise money and checking in how negotiations are going with the Senate Banking Committee regarding a bailout/restructuring for the GSEs. Within an hour the Under Secretary allows the Barron article to go forward and then asks the OFHEO Director how negotiations are going and how important it is to move forward with negotiations.
I liked the No Problemo casual discourse that they had with Mudd while they accuse him of Fraud in the Barron's Article.
https://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2007-2008_Fannie_Mae_Timeline_and_Supporting_Documents.pdf
Thank you Obiterdictum! Really interesting link - wonder if the case is still on her docket? Otherwise 9.05% for any Houston Division judge - assuming it was initially filed in the Houston Division that is.
Ano - thank you for taking the time to analyze the DC Circuit opinion.
Regarding the separation of powers issue - are you saying that the DC Circuit is relying on the Atlas opinion before SCOTUS overturned the 5th Circuit and ruled that the FHFA was UNCONSTITUTIONAL?
With the REMAND -didnt the 5th Circuit En Banc leave the issue of retroactive relief open and undecided until the District Court rules on the factual issues?
Thanks - have you considered the impact of the All American v CFPB case that was also heard En Banc on Jan 19th on what she may decide?
Here is the link:
https://www.ca5.uscourts.gov/OralArgRecordings/18/18-60302_1-19-2022.mp3
Judge Edith Jones really makes some great points - one of the Judges talks about a hypothetical where they would render a Declaratory Judgement on behalf of All American.
Thanks - did not know that - it says she is inactive and that is what I was going off. Thanks for clarifying that.
If that is the case she was very deferential to Lamberth in her initial dismissal of the shareholders claims that was eventually partially overturned - isn't that correct?