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Calabria was appointed by Trump to play ball. Mnuchin was appointed by Trump to play ball. Mnuchin and Calabria are on the same page. We all know Mnuchin will do anything Trump wants. Calabria doesn’t have this job without Trump. Calabria does not all of the sudden do a 180 after getting the job. That’s not how the real world works.
This fantasy of believing Calabria more than Mnuchin is pure fiction. These guys understand hedge funds are heavily invested in FnF. They need to comport themselves appropriately as government officials.
There are a myriad of concerns about an over inflated float. Treating current shareholders well will instill confidence in future shareholders being treated well. If there is another huge economic downturn spearhead by catastrophic housing issues, new shareholders will want some guarantee the won’t wind up in this current debacle again. Private capital wants to minimize as much risk as possible and shareholder precedent can be a factor. Future financing can also be an issue.
There is a difference between FnF “organic” capital raises via equity placements so private capital is at risk during a future economic downturn versus the gov excercising all of its warrants and converting SPS. That is a huge difference.
There are also methods to raise capital outside of common dilution. Corporate debt, prefered shares, etc., are also other means.
Diluting FnF into oblivion via Gov warrants and SPS would continue to have the Gov as owners. That is not raising private capital and removing the Gov from the GSEs, which is a well understood goal of the Gov.
I think FHFA can be reorganized similar to the FED for example to properly oversee the housing market. Obviously, based on 2008, it requires oversight and governance as capitalism will push the envelope of any industry. What the GSEs don’t need is FHFA & Treasury ownership.
Yes, and putting the GSEs in control of their own destiny via diluting them into oblivion is not how the Gov places the GSEs on sound footing. Bottom line that should be considered by the Gov is FnF have repaid enough in dividend payments to cover the bailout principal and the 10% interest. Debt has been paid.
FnF with help from Gov via tax credits can build capital buffers to prevent Gov intervention in the future. That was all that was ever needed - better regulation and oversight of the mortgage quality FnF were underwriting along with capital reserve requirements. QED
Never needed to be in conservatorship for this long.
Yankee, agreed. Doubtful FnF will get monetary compensation. Best case scenario IMO is tax credits via a settlement that will allow faster recapitalization. Otherwise recap and release will have to do.
I like to use ACG for an intermediate term price prediction which will be refined as more clarity related to FnF’s future comes into focus. 6 to 14$ for a year IMO.
Lotto - that is the million $, or multi-million $ question. Congress has had 11 yrs to effect change. Republican members of the senate housing and finance committee basically told the administration to act b.c they have no faith any proposed legislation would even make it out of their committee for the full senate to debate.
FnF has paid back everything, including the 10% interest. Shareholders have an appellate ruling that also provides the executive branch judicial coverage to act.
Get’er done!
justtradin - not asserting the hotel room incident is true or false. The point of my post was primarily centered on the acrimonious relationship Trump has with the democratic leadership. I thought the hotel room story was a nice touch. Sorry that is all you got out of my post.
CatBird - 5% or more is the mandatory reporting threshold for investors in a public company.
I personally cannot envision the Trump administration, if it were to lose in 2020, allowing a democrat administration to define FnF going forward considering it is within the implied powers of the executive branch (Treasury & FHFA - at least currently) to release FnF from conservatorship without congressional approval. QED
Trump will not leave an elected Democrat the opportunity to continue the NWS/SPS/Warrants under the guise of taxpayer protection to fund the donkey party’s administrative goals. Trump would certainly be spiteful if he lost and it would be well within his power to instruct Mnuchin to nullify the SPS, Warrants, and NWS to resolve one of the longest outstanding governmental issues of our time.
Missing anything?
Yankee - the goal is to exit conservatorship - emptying FNMA’s treasury for years to cone doesn’t make sense. Hopefully higher lows and higher highs!
It appears the Gov on the FHFA side says there are other gov agencies that are insulated so as to prevent undue influence so the agency can act in the best interest of their charter, e.g., the FED.
Can someone explain the difference between other gov agencies and the unconstitutionality of the FHFA. Want to understand the Gov’s argument.
Agreed - credibility goes a long way to raising future capital.
The utility model fascinates me although I have no idea as to the likelihood of such a plan. Breakup FnF into regional companies with each utility receiving a % of the total equity within FnF today. Shareholders remain whole and each utility can begin raising capital separatley to meet FHFA requirements. Any capital raise would dilute across the, say, 6 utilities. Each company is more compartmentalized and can continue to be regulated by FHFA. If hurricanes wipeout Florida only the regional utility would incur loses.
These utilities would only bundle regional mortgages...etc etc etc on and on - interesting thought excercise but goes against competition. Breaking up FnF into smaller companies to compete with one another seems way to complicated and wrought with gamesmanship on which company gets which portfolio, etc.
2 cents
Consent Decree
ACG states the market is underestimating the possibility of, I assume, the parties in the lower court where count 1 in the appellate court was remanded reaching a settlement sooner than many expect.
A settlement would harden any timeline for FnF exiting conservatorship at the request of shareholders. I think the gov wants that and they will not hold on too tightly.
My reasonable best case is a settlement soon with a hard release date. Reasonable worst case is conservatorship ends in the beginning of 2021. Enough movement will be completed before the end of 2020 that a new administration won’t be able to reverse progress. Certainly, if Trump doesn’t win in 2020, he will never leave FnF’s destiny to a Dem admininstration.
Glad to be moving up. Hopefully more good news related to negotiations over the next several weeks.
Well, it’s got me speaking to great, great, great relatives so it’s got to be decent!
*inhale* I like the theory that the en banc decision gives the Prez, Treasury, and FHFA the legal coverage to act by releasing the LOA and jump starting this juggernaut! *cough, cough*
Is it accurate to assume when SM and MC were talking about the September negotiations and announcing the LOA, they would ultimately needed Trump’s signature on the LOA? If so the LOA is signed and ready to be released.
I now realize I walked into a lion’s den. I yield on all topics leading up to today - I will only focus on September 2019 going forward.
Warm Bier - in newbie terms what does it mean to you regarding FNMA shareprice and dilution over what time period?
izzyt - MC and SM are on record for ending the sweep. The prez has signed the LOA, it is ready to be released and will likely have information regarding many topics, including the NWS. Is it possible NWS continues at a significantly reduced amount? Yes, but MC is quoted on Bloomberg as saying they need to allow FnF build capital. Must end or significantly marginalize NWS.
Trump has signed the LOA and there shouldn’t be any need for further negotiations.
IMO Trump definitely doesn’t want to leave the cornerstone of real estate financing to the Dems if he doesn’t win re-election in 2020. Especially considering he’s a property man.
Again, I’m bot a conspiracy theorist. I like the scientific method, value education, and I believe in historical events and the cause of them based on an abundance of fact and historical understanding. I don’t like revisionist history...
I’m not a conspiracy theorist - I need facts and proof to come to conclusions.
I’ve done my DD. It isn’t hard to imagine 30% of the financial industry going insolvent. The great depression was catastrophic because the gov raised rates and allowed companies to fail. It lasted until ww2 - close to 15 yrs. FDR implemented the New Deal for public works, social security, etc. Bernanke was a student of the great depression. What was done was needed - was it done perfectly no - bit it was necessary.
Last post for today. I want FnF recapped and released with as little dilution as possible. I think the economy, my family, friends’ families would be in a lot worse shape if bailouts weren’t given. Main St suffers more than wall st during major economic turmoil.
Has the accounting fraud been challenged in the courts? If so great - if you could post a link to the PACER files that would be great. Otherwise it’s a public narrative for all groups, shareholders included, to speculate on.
I’m long fnma - so why did FnF need 190 billion if they were sound? To be clear I think post 2012 is the issue. We will have to agree to disagree.
Wasn’t the decision made to take the twins to 0 made in 2012? Aka NWS - if so that fits the narrative posted earlier today.
Nice post - I’m long FNMA and I also like the record to be kept as close to reality as practical.
justrain - thanks - do you have a legal document that quantifies this? I take public articles from unknown people to be less impartial than an appointed judge who is more impartial than most.
I disagree - I don’t think conservatorship is illegal - the NWS while in conservatorship was illegal. If the GSEs were not put into conservatorship in 2008 they would not exist today and we wouldn’t be here. 2012 NWS is the question and that is the only place there might be relief. IMO we can’t look at the GSEs in a vacuum when it comes to a bailout. The bailouts IMO saved the economy and the Gov has by in large been paid back in full.
All the above considered, 2012 NWS is when the violations begin in earnest and on one side of the spectrum the only relief shareholders will get is that it will end and FNMA will be released to make money. On the other side of the spectrum FNMA could get massive damages paid to them via Treasury. I think the likely outcome is on the first side of the spectrum but that is my opinion.
*Note: HERA was based on prior governmental moves - Savings and Loan scandals back in the early 90s. There was also similar items done with receiverships and conservatorship dating back to 1966. Point being conservatorship and receivership is not the issue/illegal, it’s the fact that receivership-like programs were implemented while the GSEs were all n conservatorship - that is essentially what the en banc remitted back to the lower court.
I respectfully disagree about all profits from 2008 on. Maybe we would get reimbursed the excess paid of 190 plus the 10%, which isn’t too much equating to a 10 to 30 billion. Certainly anything is possible but the constitutional question IMO being appealed to SCOTUS is the fact the FHFA director can only be terminated for cause.
IMO it is important to look at the situation in relation to all the other companies that received a bailout. Honestly, until the NWS, the Gov did the right thing in bailing out the GSEs, etc, or we would have 15% unemployment right now and a whole myriad of other issues. We would be asking why Gov didn’t act.
Post 2012 IMO is possible but SCOTUS doesn’t appear to have the question of relief presented before them, only the question of dismissing an FHFA director for other means beyond “cause.”
All the above may not be worth the digital 2 cents this post is written on.
Snippets below from en banc ruling:
http://www.ca5.uscourts.gov/opinions/pub/17/17-20364-CV2.pdf
IMO it’s pretty clear the appellate decision claims the continued NWS goes beyond the FHFA conservator’s authority, which is supposed to protect and rebuild capital to allow the GSEs to reemerge from insolvency. The GSEs never went to receivership where the NWS for liquidation purposes might have been legal.
The Scotus cert (appeal) is only about count 4 if I remember correctly and is about the constitutionality of an agency with no checks and balances, which is how the decision begins - referring to our founding father’s ingenious idea for check and balances to check overzealous “ambitions.”. IMO The Scotus request doesn’t affect anything regarding the NWS.
Great read if you haven’t read the decision.
Pages 37 to 39 are telling regarding Count 1 of the complaint.
Now to apply this understanding of conservator powers to the Third
Amendment. We hold the Shareholders stated a plausible claim that the Third Amendment exceeded statutory authority. Transferring substantially all capital to Treasury, without limitation, exceeds FHFA’s powers to put the GSEs in a “sound and solvent condition,” “carry on the[ir] business,” and “preserve and conserve [their] assets and property.”188 We ground this holding
in statutory interpretation, not business judgment.
In adopting the net worth sweep, the Agencies abandoned rehabilitation
in favor of “winding down” the GSEs. Treasury announced that the Third Amendment would “expedite the wind down of Fannie Mae and Freddie Mac” and ensure that the GSEs “will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.”189 The FHFA acting Director also said that the Third Amendment “reinforce[d] the notion that the [GSEs] will not be building capital as a potential step to regaining their former corporate status.”190 In a report to Congress, FHFA explained that it was “prioritizing [its] actions to move the housing industry to a new state, one without Fannie Mae and Freddie Mac.”191 For reasons we are about to explain, this “wind down” exceeded the conservator’s powers and is the type of transaction reserved for a receiver.
As a textual matter, the net worth sweep actively undermined pursuit of a “sound and solvent condition,” and it did not “preserve and conserve” the GSEs’ assets.192 Treasury has collected $195 billion under the net worth sweep.193 This alone exceeds the $187 billion it invested.194 After paying back more than the initial investment, the GSEs remain on the hook for Treasury’s entire $189 billion liquidation preference.195 And under the net worth sweep,
Treasury has a right to the GSEs’ net worth in perpetuity.196
FHFA had authority, of course, to pay back Treasury for the GSEs’ draws on the funding commitment. The funding commitment provided liquidity and took on risk, so Treasury was also entitled to compensation for the cost of financing. But the net worth sweep continues transferring the GSEs’ net worth indefinitely, well after Treasury has been repaid and the GSEs returned to sound condition. That kind of liquidation goes beyond the conservator’s powers.
Page 42
We now turn to Count IV, the Shareholders’ constitutional claim.
Although the Shareholders could theoretically obtain full relief under Count I alone, they appeal from the dismissal of that count, so the parties have yet to litigate it to judgment.
archilles - have you viewed this interview with Bloomberg and Mark Calabria held on 9/16. He states the LOA will kick off the following:
- Significant increase in the amount of capital FnF can retain = NWS is de facto dead - the gov may continue to capture a small amount to account for a future gov implicit guarantee based off of fee
- Responsibility for raising capital goes to FnF themselves - verbatim "Destiny in their hands"
- Depending on how quickly FnF can raise capital, once they reach an intended goal post determined by Gov and/or FHFA, they will be able to exit from conservatorship which may be end of 2020 or beginning of 2021
- FnF will continue, by and large, with the same the footprint of the twins as it is today - higher risk products they sell are not significantly profitable so no big change to their products
- First step is to retaining earning for 6 month to a year before going to market for further captial - end of 2020 or beginning of 2021
- New competition requires Congress to act - wants to have 5 to 6 entities to spread risk
- Part of plan is to end NWS - believes once NWS is ended much of the litigation goes away
- Overall goal is to end NWS - believes the NWS is of questionable legality
- Wants to use his limited time as head of FHFA to build captital for FnF
https://www.bloomberg.com/news/videos/2019-09-16/fannie-mae-and-freddie-mac-won-t-go-to-market-until-end-of-2020-fhfa-director-says-video" rel="nofollow" target="_blank" >here[/tag]https://www.bloomberg.com/news/videos/2019-09-16/fannie-mae-and-freddie-mac-won-t-go-to-market-until-end-of-2020-fhfa-director-says-video
Admittedly, I'm relatively new to posting daily, but haven been following at a high level for a decade.
Mark Callabria is quoted as saying to Bloomberg this month that the goal is to end the NWS and build captial. Not sure why this debate keeps going. It will end. Hopefully it will end this month, or significantly more capital will be allowed to be retained beyond the $3 Billion. The LOA will hopefully have some timing as to when the NWS is completely ended in the near future unless it ends today or Monday.
Simple answer to Wallison. You had your chance. 11 years is plenty of time to effect change. You patch things up - install a governor so the engine cant pass 6k RPM - require regular maintenance, e.g., stress test - or make them into utilities.
The tenor of that article is so self-serving it is ridiculous!
Thanks, Rick! I remember losing my job due to Madoff and was considering going all in on FNMA back in 2009. Been following sporadically until Trump was elected. Started to focus more recently after I sold bitcoin and decided to take a solid position in FNMA around 3.90 based on the LOA news.
Hopefully this thing ends for this group - recognize some of the names still posting although I posted under a different name, I think it was ease2002 - Anyway, GSEs have to be considered time served and rehabilitated. Unnecessary restrictions - Let’s move forward!
If both SM and MC have both said they want to have the LOA released before end of month, why would a request to have the most recent court case be heard by SCOTUS delay the LOA letter. MC is quoted as saying to Bloomberg this month that (paraphrasing) the intent is to end the NWS and that by releasing FNMA from conservatorship will essentially settle all claims.
SM was on CNBC and stated the president has signed the letter. Not sure why an appeal to SCOTUS would prevent the framework of recap and release per the LOA from being released.
What am I missing?
If I may ask isn’t there a question of external/quick capital increase via 3rd party issuance equating to common shareholder dilution vs organic/slower capital increase via ending networth sweep and a possible friendly tax treatment on earnings until retained capital goals are attained?
In the fast version there would certainly be dilution from a capital increase via an external placement.
The organic version is slower but doesn’t require 3rd party common issuance to raise capital. Sufficient capital with favorable tax treatment could be raised within 3 to 5 years to attain 100 billion in reserves. There is a risk the housing market could collapse in the 3 to 5 yr window although highly unlikely given the high bar for loan approval.
Lastly, if the Gov fully dilutes FnF into “oblivion,” raising capital in the future on at least equal terms with prospective investors becomes difficult. It would not seem FnF would exit conservatorship on sound footing given that is an administrative goal.
I’m sure I’m not addressing some key points so comments welcome.
So is the ACG price estimation a near term estimate based on the networth sweep ending this month?
Best case scenario IMO over next several months:
- Possible tax exemption/minimal rate until FnF attain ~ $100M. Within 4 or 5 years this could happen based on historical earnings - Allows for faster organic recapitalization instead of additional equity/IPO
- JPS are not converted, go to par, and dividend payments resume - need help on this one as I’m not sure about the damages/compensation the JPS lawsuit is seeking
- 50 basis pt payment to Gov for similar backing like FDIC for bank deposits
- SPS and Warrants deemed paid and cancelled, respectively
Result: Essentially recap and release
Worst case scenario has significant dilution to FnF, although how can private equity/capital be sufficiently raised if these companies have a massive bloated float only to do a reverse split, or some shennanigans. Future/prospective investors would be hesitant to risk capital with FnF if they know they also could be massively diluted in the future also. Need to treat existing shareholders as well as future shareholders to build trust with the investment community.
Been following for a while - just took a position recently based on the apparent wind change to recap and eventually release FNMA. If the current path succeeds and recap and release is "basically" the path, is the biggest threat to the common shares the gov warrants?
From a self-serving perspective, I would think the extra $100 Billion dollars paid to Treasure above the $190B bailout would be more than enough to cancel the warrants. Sort of a "consider their debt paid to society" type of deal.
Anyone give any thoughts to that? Is that the main point since the warrants could dilute common 4 fold? Not concerned about jr preferred converstion as that is a fraction of current float and can be absorbed with solid earnings going forward.
Is there anything else that is major?