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Sept 14 - Final Listening Session
Sept 28 - Finalize Capital Rule
Oct 16 - Relist on NYSE
Oct 30 - Settle Lawsuits?
Nov 6 - Amend PSPA
Nov 13 - Approve GSE capital plans
Dec 20 - Convert Pfds
Jan 11 - Release (under consent decree, depending on election outcome)
In one of his papers, Don Layton actually made this point, that Fannie had better quality borrowers (high income) and that actually resulted in them having a higher rate of refinance.
Actually, they requested five years
"Graduated phase-ins have been a significant feature of all material rulemakings by the banking agencies in relation to capital and the Basel framework. The U.S. banking agencies implemented transition periods for each of the capital requirements in their final rule implementing the Basel Committee’s Basel III reforms in 2013 over a period of five years. Recently, the banking agencies implemented a three-year phase-in period for banking organizations for compliance with CECL, and the Basel Committee introduced a five-year transition period to phase in requirements of Basel IV beginning in 2022 (both of which have been extended recently due to COVID-19). Our recommended FIVE-YEAR phase-in period is similar to phase-in periods for complex capital requirements and would provide the Enterprises a suitable amount of time to reach full capitalization from private sources of capital without having to navigate either compliance failures or buffer restrictions." (p. 67 of the Freddie Mac Comment Letter)
I have to admit, I'm in the "or not" camp. I know this has been discussed ad nauseum on this Discussion Board, so feel free to ignore my thoughts.
I still fail to see why FnF would want to convert the JPS as the first item of business. I understand that an eventual conversion needs to be laid out in their capital plan, but they may choose to delay the execution of that until the end of 2021. That way they can maximize the value of a much higher share price (Just like TSLA did recently when their share price was soaring through the stratosphere). As long as they fully disclose their plan for eventually converting the JPS, it should be easy for new investors to buy into it. It should not be a problem to delay that conversion/buyout. To convert earlier than that would be overpaying for that capital, which makes no sense. If this Capital Plan is going to take multiple years (4-5 years?) to carry out anyway, why would you be in a rush to convert the JPS. I am with Whitney Tilson when it comes to my perspective on how they deal with JPS.
There are those on the BOD who are owners of common. I'm not aware that any are owners of JPS. So while they will do what is necessary with JPS to meet capital requirements, they are unlikely to do it sooner than necessary, because they have a personal interest as well as a fiduciary responsibility to the commons.
I've been rethinking the lawsuits lately. Since virtually all direct claims have been denied, and only derivative claims remain, the overhang of these lawsuits may not be much of a deterrent to new capital, since any court wins by shareholders would benefit the companies (and thus new as well as legacy shareholderrs). Any backward relief would just redound to their benefit.
The only other issue would have to do with the FHFA removal clause. If it is struck down, the Director is removable (potentially by Biden), but that also should not affect new investors, if FnF are under consent decrees.
I saw Calabria remark that the FHFA is structured unconstitutionally, so from a philosophical angle, he would probably welcome a SCOTUS decision similar to Seila. This would "seal" the fate of FHFA as unconstitutional.
So, in the end, Calabria may actually be hoping for a Collins victory vs. Treasury, with the final stamp of approval from SCOTUS. But none of it particularly affects his timeline for recap and release.
In their Capital Rule comment letters, FnF asked for a time horizon similar that given to the big banks to comply with Basel III capital requirements. Seems reasonable to me, since this is a much larger capital requirement than the other SIFI's had to raise. That would imply 5 years of retained earnings, along with some more reasonably sized stock offerings along the way.
22 days
September 30, 2010: AIG, the Fed and the Treasury agree to a recapitalization deal to repay the Fed.
October 22 2010: AIG prices the public offering of the largest IPOs ever.
Timeline
.
I guess my main questions revolve around the timing between the amendment of the PSPA and the approval of the capital plans. These amendments will, obviously, have a substantial impact on those capital plans. How long will the GSE's need to formulate these capital plans, how long will the FHFA need to review them and approve them?
If they try to postpone all of this until after the election, can all of this be done before inauguration?
Are there any historical examples that provide a template for this timeline?
And since any conversion of Pfds will be a part of the capital plan (assuming that is the route FnF want to go), those capital plans first need to be approved before that conversion takes place.
Timeline?
Sept 14 - Final Listening Session
Sept 28 - Finalize Capital Rule
Oct 16 - Relist on NYSE
Oct 30 - Settle Lawsuits?
Nov 6 - Amend PSPA
Nov 13 - Approve GSE capital plans
Nov 20 - Convert Pfds
Nov 30 - Release (under consent decree, depending on election outcome)
It seems that FHFA could not approve any capital plans that do not have clarity on the final PSPA. But pushing capital plans into Nov gives very little time for the advisors to do a roadshow with investors before inauguration day.
Obviously, SCOTUS has not ruled against FHFA at this point, so Calabria is safe in his position until they do. So perhaps the time horizon should not be 1/20/2021, but more like the summer of 2021
I only had 2 hours to give to it. But when I hung up from the phone call, I believe there was only one more person on the agenda to speak, so it could not have lasted much longer. Most people did not take the whole 5 minutes for their comments.
This appears to be the key paragraph from Tim Howard's post:
"In its request for input, FHFA states that Fannie and Freddie’s credit risk transfer programs “should consist of transactions in which the cost to the Enterprise for transferring the credit risk does not meaningfully exceed the cost to the Enterprise of self-insuring the credit risk being transferred.” Fannie’s CAS program badly fails this test. Fannie has committed itself to make billions of dollars in interest payments to purchasers of CAS risk-sharing securities that will absorb few if any credit losses, even in a stress environment. These deals are clearly, and grossly, uneconomic, and as it reviews its approach to evaluating future credit risk transfers FHFA must ask itself how it could have failed to detect that fact."
This appears to be where Tim Howard and Don Layton have a difference of opinion. Don Calculates the cost at around 7%. Tim does not give a percentage, but clearly sees the cost of these transactions as much higher.
I'm still learning about CRT's, so could you explain why they are, in your estimation, frauds?
I understand that they are not countercyclical, that is, during a downturn, you will not be able to issue more CRT's because independent capital will dry up. Some allowance should be made for this lack of countercyclicality. But, since you have so much cash escrowed, you should still be able to count that cash toward your overall capital requirement.
The FHFA listening session on CRT was good stuff, but basically a summary of many of the points already made in the comments submitted.
It makes no sense why they would not provide credit for at least some forms of CRT, especially those that have "Nil Reimbursement Risk" (cf. pp. 7-8 from the paper linked below). In these transactions, the providers of CRT basically put cash in an independent escrow account to draw from in the event of a default. In the words of Don Layton: "So...the principle amount of the bond functions as a pool of cash, paid up-front" by the initial investors purchasing the bonds at the inception [of the CRT product], equal to 100% of the maximum reimbursement the GSE's might be owed for losses. The CRT investors get some portion of their original principle amount back years later, at the maturity of the bond, after reduction by the defined cumulative losses they have reimbursed to the GSE's"
He goes on: "A simplified example will help. Assume there is a pool of $1 billion of mortgages and a CRT bond has been issued that is designed to cover cumulative lose from 0.10% of principal to 4.00% of principal
of that pool. (In this case, 0.10% is known as the “attachment point” and 4.00% as the “detachment point.) That means the principal amount of the STACR bond to be issued will be $39 million: 3.9% (i.e.
the 4.00% less the 0.10%) of the $1 billion principal amount of the mortgages in the pool. This amount is paid upfront by CRT investors and deposited with a trustee. As losses are incurred by the GSE on the
specific $1 billion worth of mortgage loans in the reference pool, the trustee sends the GSE the funds to reimburse those losses. Then, when the STACR bond matures, the bondholders get back the original $39 million less the cumulative total of the losses reimbursed, which still will be sitting with the trustee. If losses above the attachment point have been very low (e.g., $4 million), the investors will get back $35
million or so; if losses have been very high, the investors may even get back nothing" (p. 8)
So with the Nil Reimbursement Risk requirement, the CRT investors are basically stocking away CASH in the required amount of the 4% ratio currently being required by the FHFA. Yet the FHFA does not want to count that 4% as 4%. Instead, the GSE's are being asked to keep ADDITIONAL capital over and above that provided in the escrow accounts by the CRT.
I'm not sure how many of these CRT transactions have this Nil Reimbursement Risk built in, or what the barriers are for CRT investors to provide this up-front cash. But for every CRT transaction done by the GSE's there should be a significant reduction in their required capital to be retained on their books.
https://www.jchs.harvard.edu/sites/default/files/harvard_jchs_gse_crt_part2_layton_2020.pdf
You can find it here:
https://www.facebook.com/watch/live/?v=3224517150995611&ref=search
My bad
Last year's October arguments receive opinions in December. The two SCOTUS conference dates are 12/4 and 12/11, so I expect a decision no later than 12/14.
https://www.supremecourt.gov/opinions/slipopinion/19
They have already set the date for Oral arguments for Tuesday, October 13th. As to when they will have an opinion, who knows.
https://www.supremecourt.gov/oral_arguments/argument_calendars/MonthlyArgumentCalOctober2020.pdf
I agree with Whitney Tilson, the GSE's have some similarities to the GGP scenario, in that they had a cash flow problem, not an asset problem. I follow Ackman into GGP and did very, very well. I believe this will turn out to be the same.
https://kaoboymusings.com/wp-content/uploads/2019/11/Empire-Investment-Report-issue-6-FNMA-9-18-19.pdf
Kthomp19,
You and others often cite MC's words that he is not concerned about shareholders and that current shareholders should have been wiped out in 2008. But you appear to believe he directs these comments ONLY at common shareholders.
I understand that in a liquidation, preferreds hold seniority over commons, but the fact is, if a company is completely insolvent, then Preferreds are also wiped out. Thus, MC's comments would include Pfd's as well as CS.
That is, of course, unless you think that the GSE's were not completely insolvent, in which case, the CS would be entitled to the equity beyond the par value of the Pfd's.
MC says the shareholders (including Pfd's) should have been wiped out, because the government determined that the companies were insolvent. The issue was not a lack of cash flow, but an absolutely insolvency based on the accounting methods used.
Exactly!!!
There have been a few people floating the comments by Calabria that commons "should have been wiped out," meaning that, in 2008-2009, they should have held the position of first loss. This is exactly the way Calabria intends to structure FNMA post-conservatorship. But as he makes clear in his paper, since they were not wiped out, they should be allowed to benefit in the future profitablity of the company.
I've never denied that the Treasury would or should exercise their warrants. They are well within their legal rights to do so (or sell them back to FNMA). But even with the exercise of warrants and the raising of $140B of capital (at 4% capital ratio) or $55B (at 2.5% capital ratio), the commons shares would be worth between $30-$20 (accounting for 4 years of retained earnings). That accounts for the dilution that Calabria speaks about repeatedly.
The major problem, of course, is that nearly everyone understands that raising $140B on the capital markets is virtually impossible, especially if historic shareholders are not treated fairly (per Calabria's comments in his paper and also per Ackman's recent comment letter). Fair treatment, according to his paper, is to allow them to benefit from the financial value of the company as it has continued to operate.
From Calabria's own pen:
https://www.cato.org/publications/working-paper/conservatorships-fannie-mae-freddie-mac-actions-violate-hera-established
"Among the Treasury and FHFA departures from HERA and established precedents are the following:... disregarding HERA's requirement to “maintain the corporation’s status as a private shareholder-owned company” and FHFA’s commitment TO ALLOW PRIVATE INVESTORS TO CONTINUE TO BENEFIT FROM THE FINANCIAL VALUE OF THE COMPANY'S STOCK AS DETERMINED BY THE MARKET" (Calabria and Krimminger, p. 2-4)
"Despite having been repaid far more than it injected into the Companies, TREASURY HAS IGNORED THE CREDITOR PROTECTIONS REQUIRED UNDER HERA OR, FOR BANK SHAREHOLDERS AND OTHER STAKEHOLDERS, under the FDIA by using the conservatorships to strip all value from the shareholders, rather than complying with the HERA requirement that it "preserve and conserve" the Companies for the benefit of all stakeholders." (Calabria and Krimminger, p. 12)
"While the PSPAs were certainly dilutive of the existing shareholders’ interests in the Companies, THE FACT THAT SUCH PRIVATELY HELD SHARES CONTINUED TO EXIST IN COMPANIES THAT CONTINUED TO OPERATE AND GENERATE SUBSTANTIAL CASH FLOW IMPLIED A CONTINUED RIGHT TO RECOVERY and were consistent with a potential return to full private control." (Calabria and Krimminger, p. 15)
"shareholders and other stakeholders were to incur losses consistent with their protection under bank insolvency statutes. The value of the bank was not stripped by the FDIC. The FDIC [Calabria’s model for FHFA] RECOGNIZED THAT THE SHAREHOLDERS WERE TO BE DILUTED, BUT ONLY TO THE EXTENT OF THE ASSISTANCE ACTUALLY PROVIDED BY THE FDIC. If the assisted bank returned to profitability, that was success, and after the repayment of the FDIC's assistance all future value would inure to the benefit of the shareholders." (Calabria and Krimminger, p. 31)
"In a conservatorship, stakeholders are protected because the company is operating and stakeholders are being paid according to their contractual rights (as modified by any contract changes and resulting payment of damages by the conservator). As a result, all stakeholders including shareholders receive payment in the normal course of business and there is no need to resort to the priority of payment provisions of an insolvency law." (Calabria and Kimminger, p. 43)
"Failure to abide by these principles [including fair treatment of shareholders] will undermine market confidence, and 'uncertainty about the priority of and process for resolving creditors’ claims against Fannie or Freddie could CURTAIL THE FIRM'S ACCESS TO CREDIT and reduce the market value and liquidity of those claims.'"
-(Calabria and Kimminger, p. 47)
https://www.cato.org/publications/working-paper/conservatorships-fannie-mae-freddie-mac-actions-violate-hera-established