9 months to the day I announced my GSE stocks sale and was lambasted online for “selling on the eve of a SCOTUS victory”, SCOTUS finally weighs in.

Their answer?

It’s Over.

Some shareholders are hanging their hat on the remand to the 5th Circuit on the constitutionality of the FHFA single head director. Their thought process is that this will then make the actions of FHFA illegal. Justice Thomas commented on that:

I seriously doubt that the shareholders can demonstrate that any relevant action by an FHFA Director violated the Constitution. And, absent an unlawful act, the shareholders are not entitled to a remedy

The full annotated (PDF) of the decision can be founds here

This was my fear earlier this fall and the reason I sold most of my GSE holdings. There are a ton of people on Twitter claiming victory here stating it “clears the way for an end to the conservatorship”.

Guess what?

It doesn’t. Other than raising the retained earnings limit (which will be offset dollar for dollar by an increase in Treasury’s liquidation preference), nothing is new here.

There is nothing here that Treasury/FHFA could have done at any point in the last 4 years. Now we will a new administration grappling with massive new debt and spending and a new Treasury Sec tasked with the nation’s finances. Does anyone “know” what Yellen thinks of all this? Anyone???? Bueller???

I can honestly see, given the current economy repeating this same post 4 years from now….

WHAT YOU SHOULD KNOW:

After the close on Thursday, Treasury and FHFA announced amendments to the Preferred Stock Purchase Agreements (PSPAs) with the GSEs, which allow Fannie Mae (FNMA, Not Covered) and Freddie Mac (FMCC, Not Covered) to build additional capital. The agreements permit the GSEs to retain capital up to their regulatory minimum of roughly $280 billion, or 4.3% of their combined $6.6 trillion in assets, versus the prior agreements from 2019 which permitted Fannie and Freddie to only retain up to $25 billion and $20 billion, respectively, before excess earnings were swept back to Treasury. However, Thursday’s agreement also establishes that the GSEs cannot exit conservatorship with a capital ratio of less than 3%, and so we don’t think the agreement helps meaningfully accelerate a near-term exit from conservatorship. Overall, we see it having a low impact on mortgage finance stocks, although we note the amendments also establish limits around the GSEs acquiring certain higher-risk loans, which we view as a modest incremental positive for lenders and aggregators including mortgage REITs. Treasury’s amendments replace the net worth sweep by raising the liquidation preference of Treasury’s preferred stock by the amount of retained capital at the GSEs. Treasury’s combined senior preferred liquidation preference in the GSEs is currently $228.7 billion. At the end of September, Fannie had $21 billion in net worth, and Freddie had $14 billion (a combined capital ratio of about 50 bps), which implies it will likely take several more years before each has the opportunity to exit conservatorship. Additionally, the agreements on Thursday establish that the GSEs can raise up to $70 billion each in new stock, but only after Treasury exercises its warrants to acquire up to 79.9% of common stock, and after all material litigation related to conservatorship gets resolved or settled. In December, the Supreme Court heard arguments related to the constitutionality of the net worth sweep, including whether the President has the power to unilaterally remove the FHFA Director. The new agreements also cap at current levels the percentage of certain higher-risk mortgage loans that can be acquired by the GSEs, including loans secured by second homes and investment properties. We see those cohorts being attractive potential sources of longer-term growth for lenders such as mortgage REITs (we note NLY (Buy, $9) and CIM (Neutral), for example, have been active in recent years aggregating and financing Agency-eligible investor loans through securitization). Treasury’s agreements don’t necessarily expand the market share available for REITs, although at the same time, it likely helps stymie any additional GSE support those loans could have received under the incoming Administration.

Full Report (pdf)

UPDATE 2

Peter Chapman writes:

he U.S. Supreme Court granted the Collins Plaintiffs’ and the government’s petitions to review the Fifth Circuit’s decision, and a copy of the High Court’s order list dated yesterday is attached to this e-mail message.  The four questions the parties want the nine justices to answer are:

(A) Whether FHFA’s structure violates the separation of powers;

(B) Whether the courts must set aside a final agency action that FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make FHFA independent;

(C) Whether the statute’s anti-injunction clause, which precludes courts from taking any action that would “restrain or affect the exercise of powers or functions of the Agency as a conservator,” 12 U.S.C. 4617(f), precludes a federal court from setting aside the Third Amendment; and

(D) Whether the statute’s succession clause — under which FHFA, as conservator, inherits the shareholders’ rights to bring derivative actions on behalf of the enterprises — precludes the shareholders from challenging the Third Amendment.

UPDATE

Bove comments:

• Odeon Capital analyst Dick Bove upgrade Fannie Mae  and Freddie Mac  common stock to Hold from Sell after the Supreme Court agreed to decide whether investors can challenge the 2012 agreement that allowed the government to collect hundreds of billions of dollars of the companies’ earnings.
• Bove expects the shareholders to prevail, although he points out that he’s not a lawyer. The potential outcome can span a broad range of possibilities.
• He speculates that: the net worth sweep will be disallowed; the senior preferred will be declared paid but the government will keep the dividends it received; the companies will be given tax relief for the overpayment of dividends; junior preferred will start to get dividends; the GSEs will make a “sizable common stock offering but much less than the $245B now being suggested.”
• FNMA and FMCC shares might move up along with the preferreds “for a period,” Bove writes in explaining the upgrade. “Therefore, they are unlikely to decline in price.”
• He doesn’t rate them a Buy because “I do not believe that these companies have articulated a long-term business plan that is attractive to investors.”

ORIGINAL POST

The SCOTUS today released the list of cases they will hear next. SCOTUS Decision (pdf) We’ve been waiting for this for some time….

I think this dramatically increases the chances of a settlement now

• Supreme Court agreed to decide whether investors can challenge the 2012 agreement that allowed the federal government to collect hundreds of billions of dollars of the government-sponsored enterprises’ profits.
• Technically, the court will hear an appeal by the Trump administration seeking to avoid a lawsuit by shareholders of the mortgage finance giants relating to the government rescue of the GSEs after the 2008 financial crisis.
• It also will hear a related appeal brought by shareholders that challenge the constitutional structure of the agency.

Here it is:

The questions:

Did you listen to the interview between Whitney TIlson and Acg Analytics on Real Vision?  If so, basically Whitney feels the Prefs are a bad investment in that they may double at most but can also just sit at this price for a really long time.  He also thinks the commons need to go to $10 before any action on the prefs, which could take many hears he said.   Additionally, he thinks commons are super risky and only worth allocating 2-3% of your portfolio.  Any thoughts?   Whitney seemed to be less bullish that anything will get done and Gabby didn’t really push back at all..

 

As an owner of both Pref and Common of Fannie, I put this interview in the depressing category…

 

Why do the GSEs need $180-240 billion for a capital buffer against future calamities before they can become privatized? The Fed bought $1.3 Trillion of mortgage-backed securities in three months alone and “has plenty of ammunition left,” the Treasury wrote every mortgage-paying American a $1,200 check to make sure they kept paying, the SBA donated another $660 billion PPP to ensure mortage-paying furloughed workers kept receiving payroll, and Mnuchin and Powell threw another couple trillion into slush funds across banks to make sure mortgage lenders could defer and forbear, plus they lowered interest rates to make it even sweeter. Then Powell gave an hour-long speech today asking for even more fiscal stimulus. I mean, who cares about a $240 billion capital buffer to ostensibly protect ostensibly private GSEs, does anyone really think these things won’t always be backstopped by the government, why are we kidding ourselves that their delinquency rate is “just 6% even at the trough of the crisis”?

 

J.P.Morgan thinks crude oil could hit $190.00 / B by 2025! What’s your take?

 

Many on line news articles say Chesapeake energy is bankrupt and stockholders going to “0”. 

What path do you see for the stockholders and company?

 

Any comments on hires by GSE’s on Monday?  Seems newsworthy, right?  Maybe I’m overthinking it.

 

What is your outlook for the rest of 2020?

 

 

We’ve been talking for some time about the election risk in this. I’ve believed this is real and I think this tweet proves it. Calabria has to get the GSE’s to a point his actions are not easily reversible. The clock started going faster today.

SCOOP: Advisers to @JoeBiden say if former VP elected prez he will remove @MarkCalabria from FHFA, stall plans to recap, release @FannieMae @FreddieMac; Calabria said to be planning for a poss Biden victory. more now @FoxBusiness PLUS @MLB to release latest salary plan in an hour

— Charles Gasparino (@CGasparino) June 12, 2020

Questions:

1. Why CHK has a 33% spike today? volatility? short squeeze? or real positive development?
2. Southstreet Seaport – 10 Corso Como  permanently closed….clearly it was a dog before it even got going..now they are stuck with a big loan on the property…and still in design for whatever the future holds…not too happy about this other than maybe 10 years from now something will get going
3. Given the possible large volatility or binary outcome for some stocks (such as CHK, FAS, TNA), is it a good idea to long option straddle (or buy calls & puts with different strike prices depending on the discount of option premium)?

 

4 what is the change of congress and senate pass another round of stimulus plan

 

5. your take on GSE’s recap plan? effects on pfs? commons? new commons? timeline?
6. financial sector (e.g. BAC) still very depressed? when it will come back? good idea to buy LEAP call?
7. possibility of next coronavirus relief bill? infrastructure plan? how to play with them?
8. CHK? bonds with what maturity has the best chance of winning?

 

Thank you again for all of your great perspectives.

 

9. Based on the recent Treasury rhetoric on FNMA, what do you see as the timing for release and the low end window for commons.  Also, any thoughts on dividend timing for the commons?
10. My question to you is: what concerns for junior preferred shareholders do you see in the proposed capital rule (whether an issue Howard brings up or one that you may have discovered)? 
11. Is it good idea to buy company stocks after bankruptcy and restructuring process? such as JCP, or possible CHK and other oil/gas comanies?
12. how can we take advantage of current large market volatility to strike big? e.g. Ackman. On the one hand, it seems like so many companies are significantly undervalued, but on the other hand, lots of companies are at the brink of bankruptcy. Very hard to single out the big winners.