Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 4477591 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15900 on: September 02, 2020, 06:46:02 AM »
InvestorG:

It would be done after a sr pfd conversion to common.  Following AIG example, US govt would 1. exercise warrants then 2.  exchange sr pfd into common, ending up with 95%+ of shares outstanding.  Therefore settling Collins by putting the $125B back into the company would effectively be writing a check to itself.  The economic leakage would just be a couple billion.

The net impact would be a GSE that is very close to the full capitalization figures, especially if cap rule is tweaked at all.

Heck, the GSEs could even be required to lower G-fees by 10 bps in return for the amendment.  ROEs don't really matter when they don't need to raise additional capital.

So to me, if there is a will there is a way with a couple penstrokes that serves every contingency.  More capital.  Lower mortgage rates.

this is a very sensible scenario.  but when have you seen USG writing a >$125B check to settle litigation?  I guess there is always a first time.  your next question should be whether treasury needs congressional appropriation in order to write that check.  your answer is...?


Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15901 on: September 02, 2020, 06:56:53 AM »
InvestorG:

It would be done after a sr pfd conversion to common.  Following AIG example, US govt would 1. exercise warrants then 2.  exchange sr pfd into common, ending up with 95%+ of shares outstanding.  Therefore settling Collins by putting the $125B back into the company would effectively be writing a check to itself.  The economic leakage would just be a couple billion.

The net impact would be a GSE that is very close to the full capitalization figures, especially if cap rule is tweaked at all.

Heck, the GSEs could even be required to lower G-fees by 10 bps in return for the amendment.  ROEs don't really matter when they don't need to raise additional capital.

So to me, if there is a will there is a way with a couple penstrokes that serves every contingency.  More capital.  Lower mortgage rates.

this is a very sensible scenario.  but when have you seen USG writing a >$125B check to settle litigation?  I guess there is always a first time.  your next question should be whether treasury needs congressional appropriation in order to write that check.  your answer is...?

One possibility I had thought of in the past is that instead of Treasury writing that check, they could pledge to send the first $125B of the proceeds of the sale of all that common stock to FnF. Treasury can't keep a 95% position (which I think would be more like 99+%) anyway. Then there is never a net cash outflow, though Treasury wouldn't see a "profit", on top of what it has already gained off the seniors, until after it sells the first $125B.

Since the market cap of FnF is likely to be $200-250B, Treasury shouldn't have any trouble recouping its $125B if it just drops the share price low enough to clear the market.

If I understand the court cases correctly, converting the seniors, pledging that $125B, and amending the NWS out of the PSPA should be good enough to get all the cases mooted, except Collins/Bhatti (constitutional defect) and maybe Perry (junior pref contract claims). This part is out of my wheelhouse though.

WB_fan82

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15902 on: September 02, 2020, 06:58:00 AM »
Cherzeca, I don't know the answer on appropriation for a settlement payment.  That's a good question.  Do you have any thoughts on the answer?  Does TSY need approval to settle litigation?  Does it change if the FHFA requires something in exchange for that settlement?

If Supreme Court orders the same remedy, does TSY need approval to pay?

I only have questions, no answers, but if there's some obstacle to what seems like the perfect game theory outcome I'd love to know about it.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15903 on: September 02, 2020, 07:54:02 AM »
@midas

if Ps get the relief they are seeking pursuant to a 4th A, then both claims should be muted (courts don't hear cases when there is no relief to be granted), but of course T/FHFA would get Ps to settle in connection with any big deal that gives Ps what (or close to what) they are looking for

@WB

as Midas points out, feds don't want to put all of GSEs liabilities on its B/S, which over 80% ownership would do.

as for congressional appropriation, I do know that HERA makes clear that all monies disbursed under PSPA are deemed appropriated....BUT this is for the purpose of purchasing SPS, not making settlements.

WB_fan82

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15904 on: September 02, 2020, 02:15:25 PM »
Midas, that's a neat idea.  I hadn't thought of that (or any others) as a path to get $125B from the govt via settlement. 

One way is to write the check, but your way might work just as well.  Instead of cash, the GSEs could book a receivable of that amount from the government stock sales.  I think Calabria has the authority to decide what to treat / not treat as Cet1 or Tier 1 and maybe he would be fine counting that receivable.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15905 on: September 02, 2020, 09:28:00 PM »
Midas, that's a neat idea.  I hadn't thought of that (or any others) as a path to get $125B from the govt via settlement. 

One way is to write the check, but your way might work just as well.  Instead of cash, the GSEs could book a receivable of that amount from the government stock sales.  I think Calabria has the authority to decide what to treat / not treat as Cet1 or Tier 1 and maybe he would be fine counting that receivable.

Calabria can only redefine CET1 and tier 1 if he breaks from Basel III, which defines those terms. Core capital is defined by HERA, though; Calabria's hands are tied there. A receivable cannot count as core capital until it is actually received. In my scenario, Treasury would have to unwind its position relatively quickly to send the $125B to FnF so they can actually be fully capitalized. This is also why, if Treasury returns any overpayment as a tax credit, it will only count towards core capital as it is earned (around $5.3B per year).

@cherzeca

I don't think 99+% ownership by Treasury will be a problem because there are many ways to structure the senior conversion to avoid it. The easiest one I came up with was to convert the seniors to non-cumulative zero-div convertible prefs with a clause that Treasury cannot convert them, then Treasury sells them to outside investors who do the conversion. Just like a common stock conversion and sale but Treasury never even has a 0.1% stake let alone 80% or 99+%.

WB_fan82

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15906 on: September 03, 2020, 06:21:07 AM »
Why would it have to be received?  A receivable is an asset.  An asset increases equity.  I think the default Basel III treatment would be to include in capital and he would have to make the exception to exempt it.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15907 on: September 03, 2020, 07:12:08 AM »
@midas

again, high marks for creating a way to capitalize GSEs w/o going to capital markets, but you still have the appropriations question.  big legal difference between writing down senior prefs and writing a check of equal amount.  big difference between the fed which can create money willy nilly and the treasury, which spends only by authority granted by congress.

edit:  background discussion
https://www.americanbar.org/groups/taxation/publications/abataxtimes_home/16aug/16aug-ac-cummings-spending-without-appropriations-whos-to-complain/

congress argued in this case before scotus, basically, that if an act authorizes the govt to contract, then the govt cannot be prevented from acting by an argument that congress did not also appropriate funds for govt to act...which is the way scotus held in the Obamacare case cited in link.  in case of GSEs, you wold have to make argument that the authority in HERA for treasury to enter into PSPA somehow also authorized the payment that you are positing...would be litigated for sure
« Last Edit: September 03, 2020, 07:29:22 AM by cherzeca »

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15908 on: September 03, 2020, 08:16:38 AM »
@WB_fan82

The spirit of CET1 and tier 1 capital in Basel III is that they are loss-absorbing in case of a downturn or crisis. Receivables don't absorb losses. In the capital rule Calabria went on and on about capital quality (in addition to quantity). So while he might be able to choose to make receivables count towards the risk-based standard I don't think he will.

@cherzeca

Perhaps my creativity is exceeding my knowledge here. I hadn't considered appropriations, but all Treasury would be doing is redirecting money, not writing a check. Is that a distinction without a difference?

Treasury would still have to go to the capital markets, though. My route doesn't bypass the capital markets, it bypasses the companies.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #15909 on: September 05, 2020, 08:00:55 AM »
I don't see how FHFA could pull off a 4thA/release into consent decree before a Biden inauguration given current pace of developments.  in order to do this, I would think FHFA would need the capital restoration plans from the GSEs, so that they could be reviewed by FHFA (and Treasury) as a reasonable basis for deciding to enter into the 4thA/release into consent decree. I don't see how JPM/MS and GSEs can produce capital restoration plans until the capital rule has been finalized.  I don't see Calabria finalizing the capital rule soon.  he has received substantial comments that will need to be digested and responded to (he may have already done this, but I doubt it) and is on a listening tour for next two weeks. Calabria has never worked in private enterprise where a deadline is a deadline and not an opportunity to kick the can down the road further (as it is in govt and at think tanks).  so I think the whole lame duck conservatorship release idea is lame, not because it is politically improper but because I don't see Calabria being efficient enough to do it.
« Last Edit: September 05, 2020, 08:04:00 AM by cherzeca »