Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 2677010 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9960 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 #9961 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 #9962 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

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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 #9963 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 #9964 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?


Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9966 on: June 13, 2018, 08:45:28 AM »
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?

The Moelis plan does involve Treasury's backstop declining over time as the companies' capital reserves increase.

The problem here is that if getting out of the backstop is Treasury's incentive for deeming the seniors repaid, continuing to provide a backstop undermines the argument. Every year that Treasury's backstop exists - while the companies are undercapitalized - increases the risk of another bailout.

It all depends on whether Mnuchin is willing to have Treasury still on the hook past Trump's term (albeit with an end in sight), or if he instead wants the backstop completely gone by the end of 2020. The former allows for retained earnings to increase core capital for longer, reducing dilution to commons.

The original Moelis plan was scheduled to basically have the companies out of conservatorship by the end of 2020, coinciding with Mnuchin's timeline. Mnuchin's delays, though, have sown the seeds of a conflict between staying on the timeline and not having to move too fast.

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9967 on: June 13, 2018, 09:37:57 AM »
Quote
... and not having to move too fast.
"Fast" is in the eye of the beholder lol. At the speed this Administration moves we could still be right on schedule.

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9968 on: June 13, 2018, 09:40:19 AM »
Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9969 on: June 13, 2018, 09:53:05 AM »
Also keep in mind the Moelis plan had a 3-4 year timeline, pre tax reform. Since tax reform passed, GSEs earnings are materially boosted which will lead to quicker build up of retained earnings. What was 3-4 years pre tax reform is now 2-3 years. So still on schedule for 2020.

Excellent point.