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Tim Howard was RIGHT! MC has this idea of a Nirvanna with MULTIPLE TBTF MBS ISSUERS with Federal Government Guarenteed MBS competing head to head with the twins (and throw in life insurance companies, nonbanks, and other FI's). In his view, this will "create more competition and innovation", but the reality is it will be a race to the bottom again just as in 08/09. That's why I think he wants to OVERCAPITALIZE the twins, so the TBTF banks and the twins are on an "even playing field", which they WON'T BE because as Tim Howard astutely pointed out, the TBTF banks get funding from these short term deposits (e.g., checking and savings, cds,etc) & then they can lend long on mortgages at HUGE SPREADS, especially compared to the twins longer term cost of funding and THIS IS EXACTLY THE CAUSE OF THE 1980'S S&L Crisis.
I heard MC in a radio broadcast do an interview in the Midwestern US and he was like, "Isn't more competition better?" "Won't it lead to innovative new products and lower prices?" If I was interviewing him, I would have said, "Yeah like Negative Amortizing Mortgages, Subprime Mirtgages, LOOK AT THE FRICK IN DIASTER CREATED BY THE TBTF BANKS as they raced to the bottom and brought the world into the Great Recession of 08/09"!
I know but what a GREAT TIME TO BE A CORPORATE BORROWER! These interest rates are SUPER LOW! I heard somewhere that $14T worldwide is earning NEGATIVE INTEREST ON GOVT 10 YR BONDS!
Sounds about right, Uncle Sugar needs to unnationalize and free these private companies, 12 years of "conservatirship" is ENOUGH!
Man, when these hit the NYSE AGAIN, and pension funds, fiduciaries, and tons of others with $Trillions looking for decent returns, TO DA MOON!!!!
I am hoping this is done administratively by US Treasury and FHFA as the goal seems to be get them out of conservatorship sooner than later and I think Moelius plan, and the FA's will recommend it!
Great analysis as usual YG! The only thing I can add is I read in the 2Q20 10q that management is thinking about implementing some type of FASB accounting rule to smooth out these artificial hits and gains depending on interest rate movements and there hedging activities.
JP Mogans Net interest margin is 2.49% https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSKCN1UB15U
Their range of investable assets (i.e., loans) is virtually unlimited compared to the twins monoline of US Home Mortgages, that's why it seems grossly unfair for FHFA to demand the SAME Capital buffers for the twins as for JP Morgan!
BECAUSE, $275B(debt)+$16.5B (equity)LEVERAGES $3.5T in mortgage loans/investments. The twins (just like banks) live off the "spread" between the interest income those assets generate (i.e.,3.21% as of 6/30/20) and the liabilities or cost of the debt used to finance the mortgage loans (i.e., 2.58% as of 06/30/20) for a "spread" or Net Interst Income of 63 basis points (i.e., 0.63% as of 06/30/20) on the $3.5T in mortgage loans/investments. This generated $11.124B in revenue for Fannie Mae for the 1st 6 months of 2020 vs. 10.023B in 2019, which had a "spread" of 59bps. Page 17, 10q2Q20
https://www.fanniemae.com/portal/media/financial-news/2020/second-quarter-2020-financial-results-scheduled-release-7050.html
Fannie Total Debt=$275B and is approaching $300B cap, I think FHFA/TREASURY should allow them to bump up above $300B and probably Retained Portfolio for LIQUIDITY NEEDS as a result of (1) New Liquidity Rule from FHFA and (2) To accommodate COVID-19 Forebearances.
10q 2Q20 pg.59:"Pursuant to the terms of our senior preferred stock purchase agreement with Treasury, our aggregate indebtedness may not
exceed $300 billion and our mortgage assets may not exceed $250 billion without Treasury’s prior written consent. FHFA has
directed that we further cap our mortgage assets at $225 billion, as described in “Business—Conservatorship, Treasury
Agreements and Housing Finance Reform—Treasury Agreements” in our 2019 Form 10-K. As described above, we expect our
debt funding needs to increase. Depending on the extent of these funding needs, including the amount of mortgage loans we
purchase from MBS trusts, we may be required to obtain FHFA’s and Treasury’s prior written consent to increase our current
debt limit and mortgage asset limit. Depending on the extent of our funding needs and the amount, if any, by which Treasury and FHFA agree to any request we make for an increase in our debt limit, our business activities and our ability to meet our
objectives may be constrained."
MC and SM ending the NWS before the courts do, has several appealing reasons (Hint:IF they do it would probably be on a Friday):
(1) Assures MC's tenure for the majority of his 5yr term regardless of November's outcome.
(2) It provides needed capital for their plan to recapitalize.
(3) It would make resurrection of the NWS very difficult.
(4) Fits well with the idea that the US government is helping businesses and allows for more flexibility with COVID and US Housing.
(5) Fits well with MC's past views with Cato that the NWS is incompatible with conservatorship.
BUT, SM may have orders from DJT not to give up the NWS until after the elections for political reasons, as the D's will inevitably say that it is helping the "evil banksters" & "hedge fund guys".
The Net Worth Swipe is NOTHING MORE THAN A DEFACTO NATIONALIZATION OF 2 HIGHLY PROFITABLE COMPANIES!
I think Karen Petrou is anti-gse:
https://www.cnbc.com/video/2016/12/05/privatize-fannie-freddie.html
Here's link for ROLG's comment letter on Reproposed Capital Rule.
https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/Comment-List.aspx?RuleID=674
Gross Revenue
JUN20 $35B Net new biz @ 47BPS=$165M/YR in new Gross income going forward!
13.4% Annualized Growth Rate June 2020
So, wouldn't that be 6.5yrs on a consent decree?
I know but why the urgency to not allow capital to grow organically, unless you are jps and don't want to wait? 12 years of defacto nationalization by Uncle Sugar can't be undone overnight.
Check my math. If Fannie earns $2.5B/QTR or $10B/YR, and WITH the Treasury warrants there is 5.5B shares outstanding, doesn't that mean the "market" is pricing these shares at a PE Ratio of "1", exclusive of the Net Worth Swipe?
How come Maxine didn't ask MC to release the 11,000 documents?
Looks like 2Q20 earnings for Fannie Mae coming out Thursday morning, before the bell, I am guessing $1/2B Net Income, with a huge increase in Net Interest Income because the 30yr frm has gone from 3.50% on 3/31/20 to 3.01% today, and this will rocket Net Amortization Income, but Fair Value Losses should increase substatially as they write down the value of derivatives. I bet loan loss provisions come in between $3-$5B.
Thanks,Guido,and I have thoroughly enjoyed yours and others posts throughout the years,and stay long and strong, Ackman is right,there is just no reason to throw away these 2 important companies!
SCOTUS is the final end game for litigation on any legal issue, the shareholders are in a good position as they await the inevitable conclusion that the Net Worth Swipe was a horrible abuse of governmental power and in the meantime the twins can build up their balance sheets with much needed capital, as any "conservator" should have done in the 1st place.
This whole defacto nationalization of the twins has resulted in a huge disservice to Americans and has lowered the supply of housing by hobbling the twins ability to open up channels of liquidity for home builders, LIHTC's, apartment owners, and by needing to keep mortgage credit underwriting extremely tight because they have so little capital, which has in essence been stolen by O'Bummer and remarkably still continues under MC.
But this will change in the future.