FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[cherzeca]

"...all of recap and release is in jeopardy"

focus on the transition period. how long are the GSEs given to hit the capital target? indeed, if they are in consent decree, why impose a termination date? I would rather meet 4% over a long (unlimited period) than 2.5% in a short period.

[sholland]

Seems to me that it might take ~10 years to reach the 4% minimum leverage ratio.  Even if g-fees are raised it will take time for earnings to increase across the entire book of business.  Many comments suggest that private capital investors will be unwilling to invest the substantial equity capital needed if the re-proposed capital rule is not changed significantly. Like Tim Howard, I’ll also be very interested to see how Fannie and Freddie, and their financial advisors, react to where Calabria appears determined to take them.

[Midas79]

"...all of recap and release is in jeopardy"

focus on the transition period. how long are the GSEs given to hit the capital target? indeed, if they are in consent decree, why impose a termination date? I would rather meet 4% over a long (unlimited period) than 2.5% in a short period.

I don't think it's an either/or at all. Raise enough capital to get to 2.5% ASAP then let retained earnings, plus more small capital raises if necessary, complete the journey to 4%.

The problem with allowing the capital raise to go slow is that it defeats the entire purpose of wanting FnF to have substantial capital at all. The longer that FnF have little capital, the longer that taxpayers and the housing finance system are at risk, and the severity is tied directly to the capital amount. Elsewhere I have said that Calabria not pushing for his regulatory minima ASAP is a dereliction of his safety and soundness mandate, and I still believe that is true.

Something else to keep in mind is that if Calabria ends up finalizing the rule largely as-is, it could very well mean that he is following the advice of the FAs rather than ignoring it, and that investors with substantial capital really are willing to put up their money for FnF equity in these circumstances. Calabria doesn't need to attract all investors, only enough to get the job done.

I still think that propsective FnF investors might care more about ROIC than ROE, and on a ROIC basis FnF's current earnings are enough.

[cherzeca]

so I put nothing past Calabria. he's very smart, but he has never held a real job in his life, which makes him dangerous.  however, you would think that he has had discussions with GSEs' financial advisors by this point and has gotten some indication of what they think is doable in the capital markets.  but as I said, he is dangerous...

[WB_fan82]

"Calabria doesn't need to attract all investors, only enough to get the job done."

Yes.  I think the TH camp of " more capital means higher prices to keep ROE constant and attract investors" misses reality of raising capital.

And there IS an investor standing by that can get the job done to 2.5% overnight.  The Treasury.  He only needs to attract Treasury's cooperation.  Then the rest can be retained over time and other private market ways (exchange prefs into common then sell new prefs to berkshire), NONE of which involve an ROE calculation...

[Luke 5:32]

Hmmm, interesting tweet from ACG...

https://twitter.com/ACGAnalytics/status/1309598464674869249
Full remarks from @MarkCalabria at #FSOC. Says they found adequate capital could be materially less:

Nevermind.  ACG just told me they posted this erroneously.

[Jcmeg35]

There has been some discussion during the summer around the idea that if Trump were to lose, Calabria and Mnuchin will reverse the NWS, make a deal to settle litigation, and do a consent decree to ensure the work doesn't get undone with a change in administration. With the prospect of a contested election and no clear winner for 1 month+, I would think that this situation would put such a "big bang" event in some level of jeaporday. Curious to hear others thoughts on these risks.

[Luke 5:32]

Bloomberg Intelligence (Ben Elliott) on Biden win/utility model/cap reqs attached...

[WB_fan82]

I think big bang could be tough but little bang is a lock. 

FSOC and TSY just said the GSEs need more capital.  TSY's gigantic sr pfd doesn't count as capital, but would if it were converted.  That's the little bang that should happen after election and it also lets Mnuchin and Calabria leave their fingerprints all over GSE reform and consent decree.  I think that happens even w/ election uncertainty.

The lawsuit is a bit harder.

I think they should settle the lawsuits and return the $125B to further build capital (remember the govt would own 98% of this anyway via common position), but if the obstacles to that are too great then I don't see much post-election pressure to settle... There is very little capital benefit and all it does is give Calabria cover from being fired, which isn't TSY's problem anymore.  Meanwhile if they go to court, it probably gets remanded anyway and if the GSEs win then the govt has to fork over $125B (+ interest?), optics be damned.  And maybe the GSEs lose.

But from a recap perspective, it's WAY easier to use those sr pfds as a source of capital via conversion and still have the capital infusion of $125B overpayments out there than the alternative of deeming the sr pfd paid down with a small tax credit on the balance sheet.  That literally does nothing for capital, and takes away two huge  buckets of capital that would be easily tapped.  No reason to create a problem of raising hundreds of billions extra in the markets or retained earnings over time, imo.

[typicalvalue]

Bloomberg Intelligence (Ben Elliott) on Biden win/utility model/cap reqs attached...

If Calabria is not out of FHFA Biden cannot set the cap requirements, SCOTUS needs to rule to be firable at will