Here's another from this afternoon
Special Situation Observer
April 27, 2017 at 11:49 am
Thanks Tim, really enjoyed your post. Excellent insight as usual.
Do you believe that it is reasonable to deduce that in addition to Mnuchin potentially waiting for a favorable court decision involving the sweep before acting, there are other events that might force the action sooner rather than later? Two that come to mind are, 1) tax reform later this year that would cause another taxpayer bailout of the GSEs due to DTA write-downs and 2) GSEs balance sheet equity going to 0 on 1/1/18 which will leave taxpayers on the hook for any future bailouts caused by quarterly business fluctuations. It seems in either scenario, removing the NWS could be soundly justified against critics as it would be done in order to “protect” the taxpayers from having to bailout the GSEs and infuse more capital into them which both Mnuchin and Trump have said is very important to them (protecting taxpayers from future bailouts).
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jtimothyhoward?
April 27, 2017 at 1:43 pm
Yes, I agree there could be other “forcing events” that allow Mnuchin to begin settlement talks with the plaintiffs in the lawsuits. The passage of tax reform (or a simple cut in the corporate tax rate, without reform) could be one such event. The draw from Treasury that this likely would trigger, at least for Fannie, would give Mnuchin an opening to begin a public dialogue about reforming the companies, which really can’t be done with the lawsuits hanging over them. (And remember, it’s not just the net worth sweep suit, it’s also the breach of contract suits remanded to Perry–to clarify the dividend rights of preferred shareholders and the liquidation rights of common shareholders) and the regulatory takings being contested in judge Sweeney’s Court of Federal Claims.)
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