Fannie, Freddie Permitted to Boost Capital Cushions by Billions
So the world was watching Calabria’s Twitter feed last night with bated breath, and this is what we got:
Funny guy – the comments are even funnier!
Thankfully, Treasury/FHFA followed it up this AM with the real deal (see article below) and officially ended the Net Worth Sweep after 7 years of stripping these capital structures bare. They are now allowed to retain up to a combined $45 bn of capital (up from the de minimus $6 bn). This was very well-telegraphed into the market, so I don’t expect any trading fireworks from this alone; nevertheless, IT IS A BIG DEAL.
It means that Treasury/FHFA are serious about allowing the GSE’s to retain capital, and ending the Net Worth Sweep is a necessary precondition for what must come after if the goal is to eventually build enough capital cushion to compete with banks. I estimate this number to be close to $150 bn- $200 bn – a number that can only be reached by raising new private capital, and I’ve maintained for the last 11 years that one can’t raise new private capital if one eviscerates the old private capital (our junior preferreds).
What happens next? I see today’s announcement as a big first step to a more comprehensive plan. There was no mention today of the senior preferreds, but I expect this liquidation preference of $190 bn to be increased (I’m guessing ~$250 bn) to compensate Treasury for the cost of an explicit guarantee over the last 11 years. But then I expect that they will deem this number fully repaid, since Treasury has already swept ~$310 bn during conservatorship.
Next, I expect Treasury/FHFA to settle the myriad outstanding shareholder lawsuits, especially now that the recent 5th Circuit decision gives shareholders significant judicial momentum. The writ of certiorari I opened about in my last email adds additional pressure by bring this matter before the SCOTUS.
Finally, when the capital structures and shareholder lawsuits are cleaned up, I expect Treasury/FHFA to commence the capital raising part. This is unlikely to happen until end of 2020 at the earliest, coinciding with the Presidential election. I expect that the Trump Administration will tout the successful recapitalization as a political win: “preserving the 30-year mortgage and home affordability for the masses.”
Meanwhile, here is an article about this:
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