Fannie Mae-No Politics (FNMA)

[Wise Man]

I've realized that FnF also include the Prescribed Capital Buffer to calculate the Capital Shortfall, as seen in the figure that was posted for the last time with the ERCF of June 30, 2023.
They haven't read the explanation from the FHFA in the Capital Rule, of being a cushion above the capital requirement. It isn't a capital requirement. There is no "Total Capital requirement", but a minimum capital requirement. The other portion is a cushion.
As always, there are people playing with the words, because there is a capital metric called Total Capital = Core Capital + ALLL.
Also, there is a Minimum Capital Level, now called Leverage ratio, that Howard wants to pass it off as the minimum capital requirement for the Risk-Based capital requirements, so, all of a sudden, the Minimum Capital Level disappears. This is because he focuses on the Risk-Based, to peddle the bank-like rhetoric and bash the Capital Rule, when the binding capital requirement is the Leverage ratio, because it's higher.


What it looks like, is a regulator pretending to manage the enterprises it regulates, taking the place of the management.
For instance, in an amendment of the Prescribed Capital Buffers one year later, the FHFA confirms that it's just a gauge to control the capital distributions of the enterprises, like dividend payments, when the company operates business as usual.


That's not the role of a regulator. It must establish a minimum capital requirement and be ready to require Prompt Corrective Actions upon breakout (not a 3-notch jump in the Capital Classifications or a Mnuchin-style OFF MARKET deal at a time they are Adequately Capitalized. If any, it's upon Significantly Undercapitalized, but a Rights Issue first).

Another reason of the existence of capital buffers, is stated in the Captial Rule:

To mitigate the inherent risks and limitations of any methology for calibrating granular credit risk capital requirements.

Basically, it says that a capital buffer aims to protect the regulator in its role of overseer.
A Capital Rule doesn't necessarily have to capture 100% of the credit risk with formulaics to perfection. Just a minimum capital requirement.

What lies behind, is to swell the capital buffers to protect the capital stocks from the Prompt Corrective Actions, specially the rogue JPS holders (Berkowitz buys mostly Preferred Stocks, etc.) that enjoy an outstanding dividend rate in comparison to the interest rate on similar obligations by the same issuer, to reflect the risk of dividend suspended.
The JPS, surprisingly, are never redeemed, as seen with JPM that has spent $116B in common stock repurchases (Treasury Stock, a contra-equity account. Once they are retired, it reduces the Additional Paid-In Capital account and the Retained Earnings account. The Treasury Stock is eliminated.) instead of repurchasing its costly JPS in the first place.