Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 2587777 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9960 on: June 12, 2018, 03:41:22 PM »
@midas

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

while I don't doubt you, I didn't see this explained on my quick first read


Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9961 on: June 12, 2018, 04:13:43 PM »
@midas

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

while I don't doubt you, I didn't see this explained on my quick first read

I will take a closer look. I could very well be wrong.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9962 on: June 12, 2018, 04:16:25 PM »
@midas

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

while I don't doubt you, I didn't see this explained on my quick first read

I will take a closer look. I could very well be wrong.

the two smaller amounts are proposed rule alternatives.  i just don't understand where the first amount comes from.

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9963 on: June 12, 2018, 04:41:37 PM »
the real Tim Howard...
I’ve just now downloaded FHFA’s notice of proposed rule making (NPR) on Fannie and Freddie capital. I’m very glad they’ve done this. I’ll read it as soon as I can (it’s 368 pages), and definitely will submit a comment on it.
https://howardonmortgagefinance.com/2018/05/03/a-view-on-affordable-housing/#comments
Doesn't beat around the bush, gets right down to the business of Christ laying down His life and conquering death for you, me, and everybody else that accepts Him. "Oh death, where is your sting? Oh Hell, where is your victory?" Listen: https://www.youtube.com/watch?v=7bJzhkWVANc

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9964 on: June 12, 2018, 04:52:03 PM »
@midas

"I believe the required capital is the greater of the risk-based capital number and the minimum capital number. So right now it would be the risk-based number ($180.9B), which is greater than the minimum number ($139.5B or $103.5B, depending on the Alternative chosen)."

while I don't doubt you, I didn't see this explained on my quick first read

I will take a closer look. I could very well be wrong.
I don't doubt you either but if I remember correctly, Moelis stated there is the companies capital (between 150B and 200B) + Treasury's backstop for which the companies will pay a commitment fee for a total +/- of 400B of capital cushion. If Watt is implying more than 300B of capital is needed perhaps a chunk of that could be that taxpayer's backstop.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9965 on: June 12, 2018, 06:13:58 PM »
fnma:

risk based capital 9/2017:  $115B  table 5 p.72
minimum leverage 2.5% assets:  $83B table 7 p. 73
minimum leverage bifurcated:  $60B table 7 p. 73

so i see the most stringent capital requirement under proposed rule as $115B (pro forma 9/2017)

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9966 on: June 12, 2018, 07:02:57 PM »
Imagine the reaction two years ago if the following happened simultaneously:
- FHFA put out a proposed capital framework (seemingly aligned to a shareholder proposal)
- Treasury Secretary went on TV and agreed that Obama used fannie/freddie profits for Obamacare
- Treasury Secretary confirmed in an interview that he won't consider getting rid of fannie/freddie
- Treasury Secretary stating that any resolution will be contingent on the companies being "adequately capitalized"
- FHFA putting out a proposal for a shareholder owned utility model
- RNC resolution basically written by a shareholder
- HUD Secretary stating that he wouldnt be opposed to shareholders "getting their money back"
- Modification to SPSA to suspend 1 dividend payment
- Consistent friction between Corker/MBA and the administration

Of course the legal case has weakened since so that should be accounted for as well.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9967 on: June 12, 2018, 07:25:30 PM »
fnma:

risk based capital 9/2017:  $115B  table 5 p.72
minimum leverage 2.5% assets:  $83B table 7 p. 73
minimum leverage bifurcated:  $60B table 7 p. 73

so i see the most stringent capital requirement under proposed rule as $115B (pro forma 9/2017)

Yes, this is what I meant earlier: the companies will be held to the highest capital standard to be considered adequately capitalized. The numbers I used were for both companies combined, while yours are Fannie only.



And because I can't write a post without writing a short essay...


This passage at the bottom of page 21 explains some of it.

Quote
Under the statute, both in 1992 and today, an Enterprise is considered adequately capitalized when core capital meets, or exceeds, the minimum capital requirement and total capital meets, or exceeds, the risk-based capital requirement. An Enterprise is considered undercapitalized if it fails the risk-based requirement, but meets the minimum capital requirement.  It is significantly undercapitalized when it fails both the minimum and risk-based capital requirements, but still has enough critical capital.  It becomes critically undercapitalized when it fails both the minimum and risk-based capital requirements, as well as the critical capital requirement.

I believe I was wrong in my initial impression: the undercapitalization levels imply that risk-based capital is never less than minimum capital; there is no provision for meeting the risk-based standard but not the minimum.  Though I suppose it's possible (though quite unlikely) they could be the same if the risk profile of the companies changes enough (all assets are cash?).

It's also important to note the difference between core capital, which is defined on page 255-256 as

Quote
Using the statutory definitions, core capital means the sum of the following (as determined in accordance with GAAP): (i) the
 par or stated value of outstanding common stock; (ii) the par or stated value of outstanding perpetual, noncumulative preferred stock;
(iii) paid-in capital; and (iv) retained earnings.

and total capital as defined earlier on page 21

Quote
The statute, both in 1992 and today, requires the risk-based capital requirement to be met with total capital, which is the sum of core capital and a general allowance for foreclosure losses, plus “[a]ny other amounts from sources of funds available to absorb losses incurred by the enterprise, that the Director by regulation determines are appropriate to include in determining total capital” (a determination that OFHEO never made).   

The minimum capital requirement of $139.5B or $103.5B (still using numbers for the combined companies) can only be met with core capital, while the higher risk-based capital requirement of $180.9B can include many other things as defined above.



This still means that the companies are at least $97.5B short of the minimum in terms of core capital. That enormous accumulated deficit really hurts. Though as I said in a previous post, I think Treasury really will just cancel the seniors or deem them repaid because what they get in return is freedom from the backstop, which in turn would remove $187.5B of the deficit, nearly eliminating it. I think the SPSPAs themselves will have to go. Attracting new capital would be nearly impossible with a $193B liquidation preference overhang, even if the dividends are halted permanently.

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9968 on: June 12, 2018, 08:57:21 PM »
Midas,
Treasury can deem the Srs. paid and remove the overhang but can still provide a backstop in exchange for a commitment fee. Can't they? Isn't this part of the plan?

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9969 on: June 13, 2018, 04:27:14 AM »
That is exactly what Moelis suggests. Keep the current Treasury credit line for a fee (only to be tapped in catastrophic circumstances), and redeem the senior prefs as fully paid back.

Midas,
Treasury can deem the Srs. paid and remove the overhang but can still provide a backstop in exchange for a commitment fee. Can't they? Isn't this part of the plan?