Bill Ackman Fannie Mae Presentation

요약 보기

빌 애크먼은 패니메이·프레디맥(GSE)의 구조와 역사를 설명하고, 2008년 이후 지속된 conservatorship과 net worth sweep이 부당하다고 주장하며, 트럼프 행정부 하에서 GSE를 민영화·재상장해 주주가치를 회복해야 한다고 제시한다. 결론: 패니메이·프레디맥은 핵심 보증 사업이 수익성이 높고 안정적이므로 conservatorship을 종료하고 재상장하는 것이 최선이라는 입장. 역사적 배경: 대공황 이전 미국은 단기 변동금리 대출이 일반적이었으나, 대공황 이후 정부가 장기 고정금리 30년 모기지 시장을 만들었고 패니메이(1938)는 유동성 공급을 목적으로 설립됐다. GSE의 역할: 현재 두 기관은 약 7.6조 달러 규모의 MBS를 보증하며, 보증 수수료(G-fee)로 수익을 얻는 자산경량·고ROE 구조이고 전국 단위 주택 침체가 드물어 리스크가 낮다고 평가. 과거 문제: 금융위기 전 AAA 등급을 남용한 수익성 낮은 포트폴리오(약 1.6조 달러) 투자와 레버리지가 손실의 원인이었으며, 이 사업은 축소되어 현재 약 820억 달러 수준이다. conservatorship과 net worth sweep: 2008년 9월 conservatorship 편입 후 정부는 이익 100%를 가져가는 net worth sweep을 2012년 도입했고, 애크먼은 이를 약탈적이며 미국 시장 신뢰를 해친다고 비판. 재상장 방안: 우선주 상환 후 일부 자본 확충을 거쳐 민간에 공개하는 방안을 제시하며, 보통주 주주에게 큰 가치 창출이 가능하다고 주장. 주가 영향 및 리스크: 보통주를 재상장하면 기관 투자자 유입과 지수 편입으로 가치가 크게 올라갈 수 있으나, 정부 지분이 크고 재무 구조 변화에 따른 불확실성이 존재. 출연자 전망: 애크먼은 트럼프 행정부의 친기업 성향과 재임 기간을 감안하면 이번 딜이 실현 가능성이 높다고 낙관적으로 봄. 시장 관련 언급: 발표 시점 미국 경기 강세, 실업률 저하, 주택가격 사상 최고, 주식시장 신고가 등을 긍정 요인으로 제시.

다듬은 글

※ 자동 자막 원문(다듬기 전)

01. okay we're going to get started uh this is Bill akman uh we're to present the art of the deal uh the background here is November 1987 I was a junior in college and I bought a book called Trump the art of the deal learned a lot I thought at some point it would come in handy uh an app title for what's to come um we will uh provide these slides uh shortly after presentation we will I will post them on Twitter and which point you could read the disclaimer I'm going to cover a lot of ground my colleagues Anthony masaro and Manning Fang on the call uh with me or on the presentation we'll start with a brief background on Fanny and Freddy just to provide some context uh we'll get to the conservatorship in the netw worth sweep provide a framework for ending the conserto ship and then a what we call illustrative GSC restructuring where the entities become public uh in the next couple of years background um prior to the Great Depression was not a 30-year mortgage Market you could borrow from a bank for five 10 years maybe 50% loan to value these were floating short-term uh loans uh and this uh made it more difficult uh for people to buy homes home ownership rate was 45% of the country uh then the Great Depression transpired unemployment rate hit 25% housing prices were crushed uh quarter of the mortgages went into default 10% of homes were in uh foreclosure and people couldn't meet the principal payments as they came due they couldn't refinance uh and this led to really a collapse in the banking system the housing uh collapse was really a catalyst for prolonged uh depression so the government's response was to try to create uh more liquidity and kind of longer term mortgage Market they started 1933 with something called the homeowners uh loan Corp issuing government back bonds to purchase defaulted mortgages from uh Banks to kind of clean up their balance sheets uh and and you know create a long-term believe for the first time long-term fix rate mortgage Market 1934 the National Housing Act which set up the FHA uh again this business of credit insurance and long-term fixed rate mortgages and in 1938 Fanny May was created as a government agency began by purchasing FHA insured loans and the goal again to provide liquidity for mortgage lenders so they could make new loans and it was chartered to support liquidity stability and affordability in the secondary mortgage Market they've evolved a lot over time uh Fan's remit expanded to allow them to purchase loans insured by the Veterans Administration providing liquidity and low down payment mortgages to Veterans coming back from World War II 1954 it kind of adopted this sort of public private mixed ownership structure in the 1968 it became a for-profit shareholder owned Enterprise and they were allowed to buy non-government uh backed mortgage mortgages 1970 they started securitizing mortgages that were issued by snls uh and they issued their first conventional mortgage back uh security and then by 1989 it was a for-profit shareholder owned Enterprise uh this is a graph uh of Fanny and Freddy's kind of market share and there's importance uh to the supplying credit to the mortgage markets and as you can see from the chart uh their market share only grew post the financial crisis and been a long-term trajectory of more and more Market share uh for uh the gsas um you know this is the the period since the financial crisis kind of makes it clearer uh how important the gs's have become over time and housing uh you know I think this is well known certainly uh but in particular uh the homeowners who are uh kind of lower middle income home equity is an even more important uh part of their net worth more affen people tend to have Equity portfolios and other assets but it's a critically important asset for uh middle class America and the US is really unique uh globally uh you know obviously you know putting aside uh not major countries but even among you know European quote unquote first world Nations uh US is an outlier in terms of a 30-year fix rate mortgage market and obviously the long-term payment plan allows for lower monthly payments really facilitating the opportunity for a much broader group of people uh to own their own uh home um you know a fixed rate 30-year obligation that you can prepay without penalty is is really an amazing uh form of financing and it can't exist in a world with just Banks uh the banks can't own assets like that and fund themselves with deposits because they end up with massive liability mismatch uh problems um us is also really unique globally in financing our mortgage Market uh principally with mortgage-backed uh Securities so the the GSS were chartered by Congress to support liquidity stability and affordability and how they do what they do is they uh have kind of come up with a design for so-called conventional mortgage and uh Banks underwrite uh and uh as well as other um um institutions create these mortgages and then uh they sell them off to Fanny and Freddy uh for cash or they exchange them for Fanny Freddy mortgage back Securities uh Fanny Freddy pull up these kind of Warehouse these mortgages until they get to a significant size pool they stick them in a trust they issue Securities uh backed uh by the underlying mortgages and then they put their guarantee on them and this has created a global market uh really for us mortgages um and these are uh Securities that are uh have never defaulted and uh they're enormously liquid uh they trade at very tight uh spreads and that's really what's created uh I would say as the president would say the greatest mortgage Market uh in the world um and uh this in turn has provided credit to a very uh you know um the sources of capital are really institutions all over the world and this is enabled our uh banking institutions to issue these long-term uh fixed rate mortgages because they they're enormously liquid because of their ability to sell them to fenny and Freddy uh and uh you know this ability to refinance these mortgages and the enormous degree of liquidity in the MBS Market has led to very lowcost uh mortgages uh when you look at Fanny and Freddy they're really in two principal businesses kind of the core uh guarantee business is um you know their mission uh but if you look back in time uh they got into a business that was not core uh and in fact it was a major Catalyst uh for the uh their failure uh during the credit crisis basically Fanny and Freddy had a triaa rating uh and because of their implied government support uh and then Fanny Freddy in our view I think in many people's view abused that AAA rating not just to issue AAA rated NBS but to issue AAA rated corporate debt an enormous uh scale and then they use that liquidity to prepurchase uh Securities that had kind of lower credit rating what you might think of as a fixed income Arbitrage business they lever that business you know 40 to1 and they that became a meaningful component of their profits but of course it created enormous liquidity risk and other risks that were really unrelated uh to the core Mission uh of the business um focusing on the guarantee business today they combined have 7.6 trillion outstanding mortgage back Securities uh people sort of erroneously think of fenny and Freddy as something kind of a bank in fact they're really best described as credit insures uh their business is you know packaging up these Securities packaging up the mortgages issuing Securities back by the mortgages guaranteeing the underlying Securities they get paid guarantee fees or G fees uh and uh these payments are made kind of about a monthly basis uh as insurance uh on the security and it comes out of uh you know it's reflected uh in the interest uh the underlying interest income um and you know the more the housing market grows uh the more this business grows over time and of course this enormous scale allows them to be the lowest cost provider of this guarantee that really don't have much if any uh competition and you can think of this you know persing Square likes to own the super high quality durable growth businesses this certainly fits it's really an asset light very high Roe uh business uh it's not reliant on funding from the capital markets uh you don't need to hedge interest rate risk because it sort of all of the underlying interest rate risk flows through to the owner of the uh mortgage back Securities it's also a low liquidity risk business U because when there are defaults on the underlying mortgages uh there's no acceleration uh Fanny steps in and uh makes the interest payments you know effectively on the underlying uh mortgages so that the MBS holders continue to receive interest in principle and that gives them a couple years to sort of work out the loan before they would be forced to repurchase the loan from the portfolio that really limits uh their uh need for large amounts of capital from liquidity perspective and these loan portfolios are geographically Diversified they're enormous number the underlying borrowers are generally very high uh credit um and if you look at the housing market uh over a very long period of time it's rare that there's a nation wide housing uh downturn there are natural disasters La being a tragic kind of recent example that will affect uh you know some housing markets or a downturn in the economy due to their exposure to let's say the Auto industry uh but a National Housing downturn is rare and the diversification is is quite helpful to them and the requirements for borrowers to have generally substantial you know 20% plus equity in their homes and these loans amortise uh over time which is uh and generally housing prices have increased so overtime Fanny Freddy's exposure and risk generally uh declines as the borrows Equity uh builds over time best understood kind of graphically here uh think of a home someone paid U $100 for the home or think $100,000 for the home and they borrowed 80,000 and they put up 20,000 to purchase the home the guarantee the fany Freddy guarantee is on the mortgage uh which is the senior most 80% of the value of the home at the time the mortgage is U provided to the underlying homeowner so if the uh the borrow defaults there's a an initial cushion obviously in the form of owner's equity other than you know if the house has declined in value over time um and if you think about frany Freddy's kind of Core Business it's really a very low-risk business the goal here is to provide mortgage credit to middle class borrowers you know people buying you know Million Dollar Plus Homes are getting jumbo loans uh from uh financial institutions but the kind of think the traditional 30-year fixed rate mortgage that Fanny uh in effect uh has exposure to it's to a middle- class borrower with very high F good scores you know 750 these are very high credit uh people who pay on time and and generally don't default um and the business we think of is you know generally uh low risk you know but there are periods obviously recessions and otherwise financial crisis being an unusual example with which we'll talk about uh where there's a you know decline in housing prices um but the good news about that is that when there is and good example is the financial crisis there's a reset in the value of homes and people uh new buyers come in buy those homes from let's say a distress borrower uh the kind of loan to replacement cost is much lower for the new uh loan underwriting standards tend to get much more conservative after a recession um you know rates come down uh as the FED uh and the economy effectively uh justify sort of lower interest rates lower interest rates means the borrower is less likely to fault so there's sort of this recovery that takes place right after a challenging period uh that's made the business uh you know and a great example is how quickly Fanny and Freddy recovered after the worst uh housing downturn since the Great Depression uh G's also play very important role in the multif family uh sort of think apartment Market uh that guarantee 38% of multi Family Mortgage Debt this allows for you know very lowc cost um and more liquid Market uh in the um kind of a Parton Market fanny has these so-called designated underwriting or DSes they're called that serve in a capacity to underwrite these loans on behalf of Fanny Freddy when they meet certain standards Fanny will step in guarantee them issue Securities back by them uh we're not going to get into depth here this is the a business of Fanny and Freddy that actually really has not seen any meaningful problems it's been profitable and we really think there should be no change they managed right through the financial crisis without uh a problem um if you look at the uh guarantee fees they've charged over time uh they were extremely low in the early days of of Fanny and Freddy and that uh they have grown significantly since the company's been in conservative ship now why is this the answer is uh guarantee fee is very much related to how much Capital Fanny and Freddy hold on balance sheet and and it's early days Fanny and Friday were only required to hold 45 basis points of equity against their guarantee portfolio and the result is at a 20 basis point guarantee fee they could earn an adequate return on Equity uh I think the in conservatorship I think our the government the fhfa recognized that that was not a viable long-term capital structure clearly these entities were under capitalized uh during the financial crisis and so they've taken up guarantee fees uh over time uh today they're about 65 basis points I believe on average and then as the existing portfolio kind of refinances into new mortgages the guarantee fee uh average of the whole portfolio goes up uh over time um and if you look at the business this was generally uh very profitable business with very modest credit losses even during kind of a challenging recession of the early 90s until the financial crisis when credit losses uh spiked uh significantly um and then the the gs's themselves experienced extraordinary losses uh during the financial crisis which we're going to get into some depths on but then they' returned uh to profitability uh beginning in 2013 and fairly quickly uh started generating enormous amounts of earnings uh they had 138 billion of Gap losses uh During the period from 2007 to 2011 uh when I say Gap losses these are losses that include realized losses as well as uh account reserves and charges they took uh in anticipation of future losses the 20 basis and again we're looking at the institutions combined here they held only about $20 billion of capital that was the 45 basis point minimum Capital requirement obviously 138 billion overwhelms 20 billion and that's why these entities were put into uh conservative ship um when you look at um the uh actual credit losses uh they lost $46 billion uh these are the actual realized losses they incurred so what you recognize is they kind of over reserved by about hundred billion dollar but even then the 46 billion was not uh was more than two times the capital so clearly under capitalized now uh when you look a little deeper however uh you realize that these you know substantial majority losses uh you know subprime was a an Al a was a pretty small percentage of Fanny and Freddy but it accounted for a very high % of the losses they incurred and in the early days of Fanning and Freddy really up through maybe early part of the 2000s uh Fanny and Freddy were not they were not in the subprime and Al business I think the best I could describe here is that Fanny and Freddy uh were criticized for their large fixed income Arbitrage book um they lobbied to continue in that business um and then they got pressure to underwrite lower and lower um kind of credit worth worthy loans it was a d ous uh combination and the result is um these loans accounted for a meaningful percentage of losses now if you f and Freddy had never gotten into the subprime at alte business um if you just look at their actual losses in terms of realiz losses on on non subprime non Al day collectively they lost 27 billion they held 20 billion of capital so actually the 20 billion 45 basis points was almost enough uh to cover uh the losses during the financial crisis but clearly they were still uh under capitalized fixed income Arbitrage business hit 1.6 trillion of uh of assets at the peak you know this was a uh you know 40 to1 levered business where they kept a 100 basis point spread and with the leverage they earned a attractive Roe um but this was non-core to the mission uh very dangerous business and really taking advantage of this implied uh government guarantee alen greens ban kind of alert of the world Federal Reserve has been unable to find any credible purpose for the huge balance sheets built by fenny and Freddy other than the creation of profit through the exploitation Market granted subsidy they were criticized for this but they continued on in this business Warren Buffett the portfolios are what really got them into trouble the portfolios were the ways that the managements of Freddy and Fanny tried to juice up the earnings basically because the insurance guaranteed that they were given that mortgage I always thought that made a lot of sense but the portfolio operations enabled both of these entities to use in effect government related borrowing costs so of unlimited credit to set up the biggest hedge fund uh in the world this was a business they should not have been in complex low return high risk High leverage High liquidity risk no real competitive advantage and they had to use a lot of derivatives to hedge risk U and this was a approximate Catalyst to these entities problems to the credit of the conservators and to Fanny and Freddy uh they were you know uh required to reduce this book of business and they did uh they took down very substantially from over one .7 trillion uh to now uh 82 billion they're capped at 450 billion but this they do need the capacity to own assets on balance sheet um but these are either uh mortgages that they're pulling up kind of warehousing and anticipation of a future securitization this could be a very safe uh Securities portfolio think an insurance company holding assets on balance sheet um in you know just in terms of fixed income lowrisk assets that they can like kind of Investment Portfolio but these portfolios should be in much more modest size than we're uh you know today they are in a a good position so now let's talk about uh conservatorship and the net worth uh sweep uh the gsts were put into uh conservative ship on September 6 2008 uh the goal the objective was returning them returning them to normal operations when their business stabilized I quote here James lockart the fhfa director on the DAT on the day they announced the conserva therefore in order to restore the balance between safety and soundness and Mission fhfa has placed Fanny and Freddy into conservatorship that is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations fhfa will act as the conservator to operate the Enterprises until uh they are stabilized and the government uh made a very tough deal uh with Fanny and Freddy uh you know I'm sure all of us remember uh the government stepping in and injecting preferred senior preferred stock into uh all the big Banks um AIG and others um really only AIG and fany got the tough deal the tough deal worth uh senior preferred at a 10% coupon and then warrant delution uh warrants for 79.9% of the uh common stock and uh During the period 2008 to 2011 uh they were unable to make the cash dividend payment uh so the treasury provided more liquidity and kind of paid themselves for the proceeds of of new draws on the uh senior preferred but preferred by its terms interestingly had a pick provision where they could pick at a 12% interest rate um we don't really know why they didn't they chose to pick as opposed to continue to draw more and more uh from the treasury beginning 2012 uh as I mentioned before these entities recovered very very quickly as they were their guaranteed business uh and their market share expanded dramatically as other players dropped out and they became guaranteed fees were raised they became enormously profitable uh and they were able to start paying the uh 10% uh dividend so if you look at the chart you saw the early years where they couldn't make the payments because the entities were losing money they started making money and q1 of 2012 and then interestingly uh something called the net worth sweep was announced on August 17th and they amended the terms of the senior preferred stock to require the GS uh to pay out all of their dividends uh payout dividends equal to 100% of their earnings uh and sort of the stated purpose here is they look Fanning Fred you're never going to be able to pay us back so we're just going to take 100% of their earnings uh as what came out in the litigation uh there was a big concern part of the bomb Administration it did not like Fanny and Freddy uh and the power Market power and the power they had over Congress and uh basically they decided to make sure these entities could not recapitalize and so the net worth sweep uh is announced uh and it begins and then you know literally the next quarter uh the companies are required uh by their accountants to reverse uh these very large reserves uh that they had taken and now they all of a sudden they become enormously profitable and all of that those earnings are Swept Away uh by the government with no credit uh toward the interest um or to the uh coupon on the preferred or and no credit toward uh principal uh payments uh if you look at all the payments the government has received over time you treat them first to cover any unpaid acred uh dividends or I'm sorry uh coupon on the preferred and the balance goes to advertise the preferred over time and you do a calculation of the return that the government has earned the government has earned more than their contractual uh 10% IR they've received 301 uh dollars of dividends um and that would returned all of the 191 billion uh that has been borrowed plus an extra 25 billion because again it was a sweep of 100% of the company's uh earnings and so the government's actually been paid back more than a 100% of what they were owed um and if you look at uh all of the government bailouts or or the big ones during that uh period uh Fanny was the biggest and it was by far uh the most profitable uh so this is the government at its best in terms of uh you know stepping in when needed saving these institutions and taking a real pound of Flesh and this profit does not include uh their 79.9% uh ownership of the company through Penny uh warrant when uh president Trump was elected in uh 2016 uh Steve minian uh became treasury secretary and his stated goal was to end uh the conservative ships um and the most important thing he did was suspending uh the net worth sweeps until the gs's are fully Rec capitalized uh and that has that enabled the networ we basically made these institutions um in nearly insolvent because they they had really no uh Equity at all because government sweep away all the profits and then with the uh termination of the uh Network sweep uh these entities have been able to recapitalize uh interestingly January 2nd uh the current treasury secretary the FJ uh director of the Biden Administration made some amendments to the preferred stock uh purchase agreements uh including a right to consent from the treasury for a release from conservative ship a commitment to conduct a market impact assessment but in short we don't believe these changes kind of last minute changes in B Administration one will have any kind of real effect and the new treasury secretary Scott uh bassent um subject to his confirmation today which I'm sure will go quite well and the new fhaa director are free to modify these terms um so let's talk about ending how the believe the conservative ship uh should be ended uh this is a letter from president Trump it's worth reading the whole thing but we highlight this paragraph he says this is November 20 uh 21 he says my Administration would have also sold the government's common stock and those these companies had a huge profit and fully privatized the companies the idea that the government can steal money from its citizens it socialism and it's a travesty brought to you by the Obama Biden Administration my Administration was denied the time it needed to fix the problem because the unconstitutional restriction on firing mwatt basically Trump Administration Steve minuchin ran out of time uh to get these entities out of conservatorship uh but we're obviously grateful uh for president Trump's uh public statement to that effect um now obviously a lot of uh debt has been put on our government's balance sheet over time we have Doge Elon and Vic underway to help us uh reduce cost but uh in addition to reducing costs we should look for other assets and there is a very large asset here uh and uh a proper release from conservative ship where the government could recover we estimate 300 billion dollars uh with no impact uh on Fanny and Freddy's Avail ability to provide um 30-year fixed rate mortgage financings at low cost uh with tremendous availability so for context of course uh this is not the first conservatorship in the history of the United States uh there are been thousands I think more than 4,000 conservative ships for banking institutions that have failed these are always designed to be temporary periods where the uh government uh steps in uh protects depositors usually in a banking institution uh and then sort of winds down the entities in a way to maximize the value of the assets respects the hierarchy of claims of the various sort of participants and put them back into the private sector as promptly as practicable and that's what uh was started uh during the Trump Administration and the uh elimination of the netw worth sweep and the inherent enormous profitability of these companies has enabled Fanny and Freddy to build 131 billion of capital um from a zero start at the beginning of the uh Trump Administration the Biden Administration uh really took no action uh on Fanny and Freddy uh and the good news is we think now that Trump uh is a few days away from being back in office he and his team could put these entities on the path to be released uh within two years U the government warrants uh we believe are worth more than uh $300 billion this this a highlighted paragraph uh and it's important our release from conservative sh does not require any action by Congress so this is not something that has to go to Congress for approval they can exit conserv ship as soon as they get approval from uh Treasury and fhfa um so the objectives uh for the country and ending conservatorship is number one most important maintain the availability affordability of the 30-year fixed rate prepay mortgage with no changes uh protect taxpayers uh from bearing the cost of a future housing uh downturn so the government here has to uh be protected we have to want to minimize the government's involvement in the Housing Finance system we want to maximize the probability that these entities raise uh for Capital that'll need some Capital to emerge we want to maximize the taxpayer profit on the treasury's investment in the GSA uh now how do we do that uh we exit conservatorship by setting one appropriate Capital requirements of Fanny and Freddy uh we restrict the government granted benefits that they've historically had uh we make sure that we have market-based compensation and best-in-class governance of the companies uh Fanny and Freddy have seen uh enormous turnover in leadership at the company because the executives are contractually underpaid they're paid below Market uh compensation there's no equity uh comp compens ation and it's uh kind of a thankless job to run these uh institutions and the result is there's been enormous turnover these are the largest probably the largest asset institution uh in the world and you want stable high quality uh leadership that's a critical element and then we want to clarify the nature of any ongoing uh government back stop big part of the problem here was the government uh back stop historically was implied that's not ideal for the people who buy Securities and it's not ideal uh it created this big part of creating this uh mess um so the question is how do we set the right Capital levels so the fhfa's capital rule was finalized in 2020 was amended 202 2023 increased the capital requirements with the gsse and that was important because 45 basis points as I've shown was inadequate uh the mistake they made however is they went uh you know they increased the capital requirements but nearly tenfold uh to a level that uh is well beyond what even Jamie Diamond would call a fortress level balance sheet uh creating a near impossibility in terms of the ability to recapitalize these institutions so how do we think about what the right Capital levels are well let's start by comparing uh the capital requirements that banks are required to hold when they hold mortgages so when Banks hold mortgages on balance sheet uh mortgages have a uh a risk rating of 50% the uh their tier one Capital ratios under Basel 3 are between 7% and 99.4% so in effect they need to hold three and a half% to 4.7% Capital against mortgages now why is that well one uh unlike the gse's they do a broader range of they take more credit risk on the mortgages that they underwrite they actually own these mortgages on balance sheet so they have the interest rate associated with these mortgages they fund them on balance sheet again so that creates uh you know liquidity risk uh for them uh and they do uh jumbo and various alternative mortgage products um now importantly the gsse as I mentioned you know High fi go score uh you know uh relatively you know conservative loans to Middle Class Credit worthy borrowers so lower credit risk than Banks the gs's do not take interest rate risk because they pass along the interest rate risk to the buyers of the underlying Securities I pointed out you know because again they're not holding other than a a portion on balance sheet that a warehouse in anticipation of f securization it's not a balance sheet uh intensive business and even when the mortgage is default the requirement is uh you know there's no obligation from them to buy a defaulted mortgage out of the pool uh for two years which gives them time to work out a transaction and they are not in the business of jumbo or alternative or subprime mortgages any or subprime any longer for sure the question is what's the right number we think uh as do others that mistake some people make is thinking about the gsse as of they're Banks they're really insurance companies credit insurance companies and we think therefore the right way to think about them is in the context of the capital standards for other kinds of credit uh insurance companies this is a uh quote from The Mortgage Bankers Association Insurance regulation is also more likely to see a stream of future premiums as a source of loss absorbing capacity hence looks to be sure that pricing sufficient to cover losses under all but the most C profit scenarios in MBA portfolio with the guarantors having only a minimal Investment Portfolio holding assets of short duration Insurance regulatory Concepts may become more applicable then Bank regulatory uh concept so the idea is as they've now shrunk this fixed income Arbitrage business to basically a warehousing uh business as opposed to fixed income arbitr they're now nearly pure uh guarantee companies uh credit insurers we should look at Insurance standards so the private mortgage insurers uh are credit guarantee companies that guarantee mortgages now they're different from Benny and Freddy and that the private mortgage insurers or the pmis they were you go uh if a borrower comes in with a very modest down payment or other credit uh you know kind of lesser credit and in order for that loan to be purchased by a fanny and Freddy or to be underwritten uh the borrower has to obtain um Credit Insurance uh on the junior most 20% of that loan so the pmis are exposed to credit losses on a first dollar basis generally uh on you know kind of the uh the most Junior 20% uh of the loan uh so it's obviously very high loan to value um they guaranteeing this 80 to 100% loan to value trunch and they also do uh jumbo and alternative mortgage products uh their credit requirements were in in the I think 400 basis point range actually fenny and Freddy required them to increase uh in order for PMI uh private mortgage insurance to be considered on a Fanny May underwritten uh Fanny May Freddy Mac underwritten loan uh the uh requirements for the mortgage insurers are at 5.6% uh the regulatory Capital requirements are generally a state-by-state thing but the market power of Fanny and Freddy has really caused all the pmis to have to adopt this higher uh Capital uh standard but as you can see graphically uh fenny and Freddy are exposed to the uh not exposed to the first dollars of loss whereas the PM I uh if there's a mortgage to fall they typically uh will lose their entire the entire guarantee will be called or in the case of Fanny and Freddy the severity is much lower um because they have a first mortgage on the property they're protected by borrower equity and amortization uh sort of over time um now the issue uh you know I think after a financial crisis the instinct is to say well 45 basis points is enough we got to come up with a number that is so large uh that uh you know and I think we went another extreme here's the again Mortgage Bankers Association they say to generate the large amount of private Capital required to fund such a system that is a system with a 4% Capital requirement the guarantor business model and expected returns through the cycle need to be attractive that is private investors and the guarantors would have a reasonable expectation of a market rate of return on a risk adjusted basis to achieve this objective investors would want to ensure that Capital requirements are not too high regulation supervision is not too expensive credit stand are sound in efforts to make housing more affordable do not impinge significantly on returns I think you think this is a very good framework um but the problem is the 4% Capital uh requirement is too high uh the result of that would be one these institutions would have to raise would have to have $270 billion of capital uh we believe that's more than a 100 billion of capital well beyond a fortress uh balance sheet that is to raise that incremental Capital we believe that Fanny and Freddy would have to uh generate higher returns for investors this in turn would require higher guarantee fees uh you know guarantee fees have already gone from 20 to about 65 basis points they would have to go as high we think as as 90 95 perhaps 100 basis points for the gs's to earn add a high enough return to attract the capital um you know really this way to think about this the same way to think about Banks you know obviously you want a bank that will never uh um you know fail uh so higher Capital therefore is better but you don't want Capital requirements to be so high that U banks are not viable businesses and therefore they can't provide they can't raise capital from investors and they can't provide um you know War their function of providing uh credit uh to the world the same is really true uh for Fanny and Freddy um you know the the you know getting a little more granular uh the incremental costs of uh if they had to hold 4% uh capital would be as much as you know on a relatively you know $500,000 loan about $25,000 of incremental interest uh to the homeowner from the higher Capital requirements assuming it was actually possible to raise uh this large amount of capital which we do not think uh is viable so kind of lining them up uh you know the gsc's are on a low credit R low credit risk business they don't have interest rate risk they don't have liquidity risk they don't make high loan to value loans they don't guarantee their guarantee does not apply to the 80 to 100% loan to value TR they're not in the jumbo and alternative business we believe the right number uh is 250 basis points or 2 and a half percent uh Equity uh common Equity Capital that compares with three and a half to 4.7% for banks which are again have much more liquidity risk interest rate risk uh and their the credit quality and the nature of the underlying loans is uh is much riskier and then of course uh lower than the private mortgage insurers which is the really really high risk business of guaranteeing uh junior tranches of uh of of uh value of a home um 2 and a half% equity Capital uh combined for the two institutions about 170 billion uh based on there 6.7 trillion of guarantees that gives them five and a half times as much Capital as that they were previously required to hold and we look to uh the great financial crisis which was the worst housing down turn in in the existence of a 30-year uh mortgage Market uh when you look at the cumulative credit losses the actual realized credit losses during the financial crisis were 27 billion clearly the 168 billion would have comfortably covered uh those losses uh during that period even if you include their uh subprime and Al day exposure businesses they're no longer in 168 billion would be almost 4X uh the amount of capital and we think of this as a uh we want the GS to have an unquestionable Fortress level balance sheet 6.2 times the of actual losses um excluding losses from lines of business they're no longer uh in today this is keep ret and woods um and they they concur uh while GSC revenues and earnings are significally higher Now versus preg GFC levels driven by much higher guarantee fees meaningfully larger guaranteed portfolios required minimum Capital levels have increased far more meaning resulting in a sharp decline in run rate Roes we believe that the only realistic way to solve for this is to remove the stability buffer and take the minimum Capital level back to two and a half percent the other alternative to increase guarantee fees we estimate the increases would have to be the 2025 basis point range which is likely be politically unacceptable since it would increase mortgage rates by an equivalent amount one thing that people don't talk about but is actually a critically important part of the um the I would say ility and strength uh of the fenny and Freddy guarantee uh is off balance sheet asset they have which is Fanny and Freddy have a nearly 7 trillion dollar existing portfolio on which they collect guarantees guarantee fees this is a recurring not you know the zero capex royalty stream uh and if they stopped issuing new business um the world ended they'd receive they continue to receive this 32 billion of net revenue that you over time declines as people um you know refinance uh more if they're if they're I guess if they' lost market share this would you know sort of go down over time but this is a very important part of their credit strength and their ability to recapitalize after a uh a challenging uh period um we believe the if you value that the present value of the GS is about 101 billion if you kind of present value out these uh you know discount these back you know their contractual fees that we expect them to receive while it's not reflected on the balance sheet it's an extra 101 billion of credit support and as I mentioned before after uh there is a cataclysmic moment uh and the credit markets housing markets uh really the other competitors that are not nearly as uh well positioned as fan they don't have the capital the scale the market share the dominance uh they take a lot of market share and you saw that in the chart uh as their market share uh grew significantly you know we try to estimate uh and uh the the assumptions are are presented what the value of this incremental ability to kind of take market share after crisis we think that's worth another 17 billion so it's like 128 billion of sort of additional uh sources of funding capital and value really it's it's a form of capital uh that you don't see uh on the company's balance sheet so when again benchmarking off of the the worst uh housing crisis uh since the creation of fenny and Freddy uh whether it's the 46 billion their actual cumulative credit losses 27 billion excluding uh subprime or Al day versus our proposed Capital levels U you know a 6.2 multiple of the actual losses when you add in uh the existing book of guarantee fees plus the ability to write new business during a crisis um now we're talking a towering amount you know 286 billion you know literally 10x uh the losses uh an excess of 10x the actual credit losses on lines of business uh that they remain in obviously the conforming uh loans versus the subr alte book of business now there's certain government granted benefits that Fanny and Freddy receive uh that we think they should no longer receive so one they're exempt from SEC registration of debt and MBS we think the SEC does an excellent job overseeing Securities issuers so we do not think they should have that an exemption um the they have a line of credit of two and a quarter billion that was put in place many many years ago one they don't need it and two this was sort of part of the perceived implied government support we think they should be uh that should be ended um they were exempt uh from all gsse Securities were exempt from the bual RO this kind of created their ability to have effectively an unlimited amount of corporate debt that they Ed to enter the fixed income Arbitrage business we think they should only have this exemption with respect to the gsse mortgage backs Securities um we you know lack of exposure limits for banks investing in Fanny Freddy debt again here uh we want people to differentiate between the mortgage back security guaranteed by fan and Fredy versus the corporate uh debt of fan and Freddy um there should be you know with and this will reduce their unlimited ability uh to borrow money you know question query where these limits should be set they were exempt from epso the financial stability oversight Council view fory status uh again we like the idea these are clearly uh you know uh very important systemically important institutions that deserve to uh be continued to be reviewed um benefits they receive that should be preserved um they get a 20% risk waiting uh for gscmbs when a bank has to think about holding Capital against mortgage back Securities um a lower level than private level mortgage back Securities we think this is appropriate in light of a very very lowrisk nature of Fanny Freddy MBS uh mvs should be eligible for purchase by the Federal Reserve light of safety and other reasons uh gscmbs should be eligible as collateral for PP deposits and for loans from that Reserve board and then this one no requirement for information disclosure underlying the Securities ratings um you know the Tob announced uh Market you you want all GSC MBS to be fungible you don't want people like looking to see who's got La exposure this month and all of a sudden the security start TR at different spreads it's actually a case interestingly where less transparency is better for the for the market and uh and so we think this is an important benefit compensation um as I mentioned before there's been enormous turnover Fanny's had a new CEO every three years fredd every two years since conservative ship began in 2008 it's really hard to run a company when you're have a revolving door in the CDO seed I think a big part of this relates to U being able to compensate people appropriately um you know Market base salaries bonuses you know we like the idea of restricted stock with long-term investing uh you know not a thoughtful person running the compensation committee you want to emphasize Capital strength operational risk management controls um and then you need a worldclass board of directors who take on this job and understand the importance of you know this entities these entities support the housing market for for middle-class Americans are critically important we can never let what happened happen uh again and again the board here should not receive big cash payments but rather restricted stock with long-term investing and even when you leave the board you know a period of time thereafter before you can get the benefit of that uh compensation um importantly we think you know some people have said oh we're going to need an explicit government guarantee of Fanny and Freddy mortgage back Securities we think this is a mistake we do not think it's necessary we don't think it's feasible and we think it's not desirable at all um the complications would require the consolidation 7.6 trillion of mortgage back Securities on the government balance sheet that would add another 7.6 trillion to the 35 trillion we have outstanding that's a catastrophe we think it could be disruptive uh to the treasury market um because you have unsecured US Government obligations the general treasuries and then you'd have secured MBS uh this could lead to a repricing of the unsecured versus secured this of course would require an act of Congress we think it's just not a viable alternative we do think it's however very important to clarify uh the nature of the relationship between the gsc's and the government uh this impli licit guarantee was a problem we think the government uh should provide some support we'll be very clear what that is and that the taxpayer should be compensated for it um and the market does need us a explicit understanding that there is some form of government back stop so in connection with the uh bailout if you will of Fanny and Freddy um the government set up these preferred stock purchase agreements uh which today have a 44 $45 billion uh availability um as long as the people deem the senior preferred stock is repaid I'll get to that kind of momentarily but that would be an a a very substantial back stop in addition to a fortress level balance sheet in addition to the other um you know forms of uh of recapitalization that exists by virtue of the guaranteed fee and other uh portfolio um you know a bit like Deposit Insurance uh but uh in this case a government funding commitment um treasury would be paid a a commitment fee in exchange for this support uh we think that commitment fee should be priced on a market basis uh we think of this as a super senior obligation where the probability of being called upon is very very close to zero um we we'll give you our sense of where that should be priced uh this would require a modification the terms of the uh senior preferred um we can't be in a world uh in which uh the treasury uh willy-nilly can step in and inject uh you know senior referred into the company have to be real Clarity around when and if uh that would come in uh so again looking at the 27 billion of cumulative losses uh uh as kind of a a benchmark um the 138 billion includes uh you know the the Gap reserves that were taking at the time uh here we have 168 billion of E Equity we're ignoring for a moment the additional claims paying resources that come from the uh contractual stream of guarantee fees and we layer on top of that the ability to draw 445 billion from the government so you've got 613 billion of draw capacity versus 27 billion to 138 billion whether you take the Gap uh over reserving or the actual credit losses and clearly the world will look at this uh as a massive uh Capital stack to protect uh against future uh losses interestingly uh just about a week ago Fitch uh came out with a ratings report where they said current ratings of referring to the ratings of Fanny and Freddy reflect support provided by the US Treasury Department under the senior preferred stock purchase agreements and fit's view of the gsc's policy role in the US housing market the pspas require the US Treasury to inject funds if either gse's net worth drops below zero up to the agreement limits as with Q3 2024 aggregate availability in the pspas exceeded 250 billion the housing GS is combined net worth at 147 billion currently indicating strong US Government backing fit expects the upcoming incoming Trump Administration potential explore options for taking the gs's out of conservatorship if the gs's were to exit conservatorship while maintaining the pspas or similar support their ratings could remain aligned with the US Sovereign rating um so uh an early indication this approach works from the rating agencies how do we price this again in light of the very very large amount of capital that comes before and the very low probability these would be called upon they should be priced like similar obligations you know it's a bit like a undrawn revolver those fees are you know for an entity of a double A minus uh or better it's four basis points um if you look at single name CDs uh pricing for high quality uh credits from you know Berkshire to J&J uh anywhere between 13 and and 23 basis points um you know again perhaps some people would like to you know punish the gsse by making this say you know a very high fee obviously the higher the fee uh the higher the G fees and therefore the higher the mortgage cost we think it should be priced on a market basis but not on a punitive uh basis and you know our number is 25 basis points which we think is a an appropriate Fair uh but not uh overpriced uh cost for this exposure so now we're going to get to our uh restructuring of the gsse so the first and critically important step as I mentioned before uh the senior preferred has received more than its contractual 10% return uh they've received 11 uh 6% uh and you know 301 billion has been sent back to the government which means the 191 billion has been fully repaid with 11.6% interest well it's from an accounting perspective the government leaves it on the balance sheet of the entities it should be wiped off uh the balance sheet uh the existing pspa should be amended to serve as a back stop going forward in exchange for a commitment fee again we talk about a 25 basis point commitment fee the treasury bargained for and received warrants uh on 79.9% of the common stock they they retain them uh the existing Junior preferred can either be left outstanding or converted to common stock on a negotiated basis um are plan here is for a REO of Fanny May by the end of 2026 I.E in a little under two years it will only require $5 billion of fresh capital in order to uh meet the capital standards by December 31 2026 and then a REO Freddy Mack by the year end 2027 at which point they raise $5 billion we like the sequential nature here uh Freddy needs a little more time to recapitalize anyway but we'll have the market will have the benefit of one year of Fanny uh experience before the Freddy uh IPO once both business businesses are public we want the government uh to sell down at stake you know kind of on a a long-term program uh over uh time that's the basic kind of business plan so now we start to look at the entity separately uh the fanny Drew 121 billion uh they've returned 181 billion it's been 11.2% irr to the government Freddy Drew 73 billion they've returned 100 uh 20 billion that's been a 12% uh return combined as I mentioned 11.6% return $25 billion extra in our plan we're allowing the government to keep the $25 billion extra um it's kind of hard to get money back from the government um and we're just trying to uh you know move forward in the a way that has the highest probability uh of getting done this is a quote from a uh former uh member of the Trump admin Administration Council to the treasury secretary nin uh he says so it's an 11.5% moment he's referring to that IR on the Senor preferred and it just shows that you know that there's an opportunity here to protect the taxpayer the taxpayer has actually been in some ways in many ways repaid from the ballot of fny and Freddy we got to kind of Turn the Page fix it and move on this was an interview in May of 209 um interestingly if the government didn't keep the 25 billion that is more than sufficient if they return that Capital the excess payments that they were not contractually owed to the institutions both institutions Fanny could emerge 2026 in effect in a direct listing um it just could be released for conservative ship and Fanny by the end of 2027 so we obviously uh if we respect conservative ship um we don't need to do an IPO so this is uh another uh alternative um but again if we don't get the money back from the government we're going to need to raise uh some Capital uh in the case of Fanny May uh by year end 2026 uh the company will have 100 uh 11 billion of capital we we're assuming A5 billion uh IPO at that point in time to get them to the 2 and a half% capital ratio again what we estimate to be about 4.65 uh trillion dollars of outstanding guarantees at the time uh so here's kind of the bridge today they're showing negative uh Gap common Equity um and uh so what gets that to the restored Capital levels is $32 billion of income over the next two years uh this is the 121 billion is the kind of wiping off the balance sheet the senior preferred it's now deemed repaid because it has been five billion of REO uh proceeds that gets you to 97 billion and then we're in our model we're converting the junior preferred common Equity at the IPO price for the5 billion doll that gets you to a pure common equity capital structure of 116 uh billion dollars Freddy uh has been growing more quickly than Fanny uh and as a result the capital requirements uh it needs it's not uh as well capitalized if you will as as uh uh Fanny which means that by the end of 2027 it will have to uh raise about uh $15 billion um obviously after the successful REO of Fanny which we think will be an enormous success uh 15 billion we think is not a huge reach uh here's the bridge today showing minus 35 billion of uh of Gap common Equity as of the end of Q3 33 billion of of income over the next two years uh we credit uh the uh we wipe the uh senior preferred off the balance sheet because it's been repaid we do a $15 billion IPO gets it 85 billion and then we convert the junior preferred it's exchanged uh for common stock the company on you know par value versus uh the IPO uh price of the two uh companies with respect to the junior preferred uh uh it's a non-cumulative Perpetual security there's no obligation uh to pay dividends if they're not paid they don't acrew uh we think the holders would be uh because you can leave them outstanding by the way we own Junior Preferred Securities as well in addition to Common um you know the choice for Fanny and Freddy is just to leave them outstanding um or convert them to common stock at the IPO price that's a much more favorable outcome uh for the junior preferred because they get to come in they convert the par value into common stock a much more liquid instrument uh at a a discount to where the stocks expected to Trade Post IPO so we think this will be the you very uh every preferred Holder will choose this option um again Fanny and Freddy fully recapitalized by the end of 2026 Freddy M ma uh in a$ 15 billion IPO by the end of uh 2027 benefit of doing Fanny's uh Fanny first uh is one it's a very modest sized IPO I mean it's actually five billion is a decent sized IPO but modest in the context of IPOs that have been done um allows the market to kind of observe uh Fanny and uh May gives Friday more time uh to prepare gives the kind of Market time to kind of reand these business models it's a smaller IPO I expect it to be massively over subscribed and then Freddy of course can apply the learnings with its own test just to give you cont text on the size of these IPOs these are you know their IPOs at much much larger scale that have been done uh you know years ago uh compared to these are very executable and I've even heard Banks uh well-known Wall Street banks are are getting involved to um obviously be in position a uh to be part of these IPOs um the model uh Anthony I'm doing a lot of talking why don't you walk through uh how how you built the model here sure thanks Bill uh so we've uh basically kept um a lot of the economics of the business in line with today so the two and a half% capital is kind of elegant in the sense that it allows the entities to return to earn what we think is an appropriate return on Equity um while leaving G fees unchanged so uh you know we model long-term G fees of 65 basis points uh that's exactly where they are today um you know this would have to kind of adjust uh up or down over time as kind of the underlying e economics of the business change if they do at all you know we don't anticipate much changes in them they're kind of simple businesses but um idea is you have a g fee that targets a low double- digigit return on Equity we assume no change in market shares uh from uh today's levels for Fanny or Freddy We model a commitment fee as we discussed on the prior pages of 25 basis points per anom on the total amount of the undrawn psba commitments uh if they were to draw any funds here which they would only do if their Capital were exhausted you know the interest on the drawn amounts would be uh you know significantly higher than that uh and credit losses GNA expenses other expenses we model in line with long-term historical levels the investment book we grow in line with the single family guarantee business at 2% per year uh the idea here is that it is used solely for two things one is temporary warehousing of mortgages prior to when they're put into MBS trusts and then also buyouts of non-performing loans uh from existing MBS trusts uh we don't model kind of any investment Beyond uh this basically serves as a function that to assist their Core Business of single family um no changes to the multif family business as Bill mentioned earlier in the presentation and uh you know we model these entities paying out 90% of their net income as dividends once they're fully capitalized the idea here being that uh you know they're not going to use their Capital to enter any other lines of business you know we think they need to be focused on their guarantee business uh this shows our financial projections for Fanny May uh I've shown the first five years post IPO uh plus 2035 the reason we picked 2035 is uh as you can see it takes some time for the average portfolio guarantee fee to converge with the guarantee fee they're charging on new acquisitions of 65 basis points uh we model that that will happen uh you know by kind of 2035 plus or minus obviously uh the tcca fees are a uh fee that Congress enacted in 2011 2012 uh it's a little bit strange they take 10 basis points of the guarantee fee that the gsse is charged and they used it to fund a payroll tax cut um once Congress kind of starts charging a fee they rarely let it go so they extended this it was originally supposed to expire in the early 2020s they extended it through 2032 we don't assume that it actually lapses if it does There's an opportunity to lower mortgage costs there which we think is uh attractive uh credit losses we model in line with long-term historical levels you know the long-term historical average credit losses excluding subprime alte were about nine basis points since 1990 for Fanny 12 voes points for Freddy we we're modeling 10 they're a lot lower today they're in the low single digits um but we're kind of trying to take a long-term view here uh you know no change in kind of GNA expenses from current levels it gets you to a long-term uh um margin on the single family business of 30 basis points which at a two and a half% capital ratio allows Fanny to achieve an 11.9% return on equity uh on new business the long-term earnings growth here uh is uh 3% uh kind of reflects the steady uh nature of the business go to the next slide uh this just shows the same analysis with Freddy Mack I won't spend too much time on it again solving to kind of an 11 to 12% return on Equity uh same Rix growth growth lat long term so uh our valuation of Fanny May so uh we've tried to take a very um kind of straightforward approach to valuation uh you know this kind of most Bedrock valuation uh framework is kind of the the dividend growth model so we model uh 2035 we project the dividend that Fanny May would pay on their common stock to be about 223 uh that that dividend should grow 3% in perpetuity we've assumed an 8% cost of equity which implies a 5% dividend yield we think that's quite attractive kind of a 5 perent yield growing at 3% uh and then that implies a share price of $45 uh about 10 years from now which implies 15 times forward earnings we discount that back at the 8% cost of equity and add all of the interm dividends between uh you know 2026 the IPO and 2034 and that gets you to a implied fair value per share at the end of 2026 of about $35 uh and then we assume that Fanny's $5 billion IPO is done at a 10% IPO discount to that um which we think would be sufficient to uh attract the demand that's needed uh this implies kind of a sixfold return from uh current uh share prices uh this shows the same analysis for Freddy Mack you know we're showing them uh go public a year later given that they need to raise more Capital uh you know retaining earnings in 2027 uh helps a lot with that um we get to a similar value you know we get to $39 per share value here um important to point out that that's at the end of 2027 so if you actually roll Fanny forward forward uh they're worth they're both worth kind of the high 30s in our estimation at the end of 2027 uh and uh we're assuming a uh IPO discount of 15% for Freddy uh since they're raising significantly more money you know they're raising 15 billion in our model versus five for fenny so we think a larger discount to entice that demand um helps and it doesn't really uh change the fair value that much go to the next slide please you forgot to say it's a Sevenfold return versus oh that's right that's right and this is a Sevenfold return uh from share prices uh which is obviously extremely attractive so uh you know it's interesting uh we're modeling IPOs you may have noticed at more than $30 per share for both companies uh but the stocks today are at between five and six bucks how is that possible so um why only turn it back to Bill to talk through an investment that uh he led uh where this played out exactly in the same way so uh the most successful Equity investment we've made at fing Square was our investment in general Growth Properties he bought 25% of the common stock of the company beginning at 34 cents a share stock had dropped 99.5% this was November of 2008 I think our average cost was around 60 cents um and it's there's very kind of important sort of analogies here uh it wasn't in conservative ship but it was in bankruptcy it was in bankruptcy uh not because it was insolvent but it couldn't uh pay it deaths as they became due in the credit markets uh the cnbs markets uh shuttered uh so I joined the board in around I guess April or May of uh 09 and uh we were pretty proactive uh in one working obviously with the court and the judge and explaining our story about how uh you know the problem how the entity was in fact uh actually solvent how there was real Equity value we also were pretty forward-leaning in making public presentations to uh shareholders uh and you know I we gave a presentation called the buck stops the the Bucks rebound begins here play on the Bucks bound family uh uh name remember exactly when that was it was maybe May of 09 when the stock goes around a dollar uh and and uh Market took more and more interest uh in the company and then as the company made progress uh you know Court approved the our paying common dividends uh very very important initiative is we went to the New York Stock Exchange and we said look we got a solvent company we have a stock trading you know 10 bucks a share uh or maybe maybe it's more like five at the time I I have to look up when the um we went to The Exchange and they said well we have a rule that says that bankrupt companies can't remain listed on the exchange and I said well this is not you know you do that to protect investors from stocks that are going to be worthless this is a stock that's going be worth a lot of money and to the exchanges credit they went back reviewed the rules and they said we're going to going to change the rule uh because of this unique sort of circumstance so we got the company relisted uh on the New York Stock Exchange um a Woman by the name of Tara that uh was the person at the exchange back then very early on in her career who was the person I interacted with I I'll get back to why I mentioned uh her name and then as the the uh we made continued progress toward the eventual uh exit from bankruptcy the stock continued to rise uh until eventually we did an i we did effect an IPO we did a backstopped rights offering for the company uh to merge from chapter 11 which valued the company at uh $14.75 a share we rais $2.3 billion of uh it was a you know very large uh IPO it was a a back stop right offering for a piece of business and an i and a uh I guess a secondary primary offering a primary offering of of of uh of stock uh for the company to uh to emerge um and uh let's talk about um actually I want to jump to one I've mentioned tar zic so I want to get to another slide uh where is my new Stock Exchange slide right there right yes so the good news is terara zic is still at the New York Stock Exchange she's now head of listings and so I called her uh and uh told her about the situation and um the New York Stock Exchange would be happy to relist uh Fanny and Freddy because they meet all of the criteria uh for relisting the only thing needed is the I think the conservator ship the conservator's approval um but I do think uh uh there it's in the interest of the conservator uh for the listing to take place because there are many investors who are not permitted to buy pink sheet or OTC uh Securities who could buy the stock you build you bring in other investors obviously uh that starts putting you on a path to doing an IPO at higher price the higher the price the IPO the less delution uh to uh the government therefore the more value that can be created um uh for uh the US government so why don't we get back to valuation I'll turn it back to Anthony on page 92 sure thanks Bill so uh there's obviously no perfect uh comparables out there for Fanny and Freddy given that they're they're they are perfect comparables for each other and they're both in conservatorship so you don't have something to Benchmark them against today so you kind of have to look at the universe of what's out there so the two universes that we thought made sense to look at were one uh Property and Casualty Insurance companies uh given that these are credit insurance companies and then second regulated utilities uh there's important differences uh with Fanny and Freddy versus both of those so uh pricing for PNC insurers is quite volatile uh Fanny's pricing is much more uh simil much uh more in line with kind of the way that regulated utilities work where they're seeking to earn a certain return on Equity uh PNC insurers have many competitors of fragmented Market uh again more similar Fanny and Freddy here to the Utilities in that they have kind of very few competitors the utilities sometimes are local monopolies and Fanny and Freddy kind of compete with each other and then they they do compete with private label and stuff but it's that's a very different business um the underwriting discretion for PNC insurers is High um whereas utilities and Fanny and Freddy have a duty to serve their markets uh PNC insurers have kind of a medium level diversification uh utilities by their nature are not geographically Diversified as we're seeing you know tragically uh play out in places like California Hawaii and others uh Fanny and Freddy are very Diversified across the country looking at their financial attributes uh PNC insurers earn you know tangible Returns on Equity north of 20% I think that's reflects the level of risk they're taking as again was highlighted by recent events uh the Fanny's returns that and Freddy's returns that were modeling again much more in line with the utilities kind of a low double-digit Roe to attract uh the necessary Capital uh earnings per share growth kind of 8% for the the PNC insurers 7% for the utilities 3% for Fanny and Freddy why is it so much lower well it's a kind of a simple lower growth business but also um we're paying out a much larger dividend here than uh kind of the PNC insurers or the regul utilities kind of their Total return earnings growth plus dividend yield within the 10 to 11% range Fanny and Freddy at 8% uh so if we go to the next slide please uh this kind of shows uh the trading Universe today and uh if you kind of take the median of uh the insurance universe and the utility Universe you get to kind of the the comp average uh this is not kind of a determinative analysis just kind of a a data point that's obviously very helpful in an IPO process everyone looks at trading comparables uh what's interesting here is uh given the sequential nature of what we proposed you'll have kind of Fanny go public first and that will establish a trading price uh for Freddy's much larger IPO so when Fanny's going public you'll kind of have this comp Universe when Freddy's going public I expect it will be benchmarked kind of solely against um Fanny but um and then the ownership uh what's interesting here is the treasury will still own the vast majority of both companies uh post IPO you can see the new IPO investors will own much more of Freddy than Fanny because uh the IPO is larger uh Legacy shareholders are all kind of Amit to it percentage of both companies uh and uh you know we think that both companies today have widely distributed shareholder bases so their shareholder bases are not reported like they are for most other companies because they trade on the pink sheets but we think you know uh many many many individuals uh in the United States own own these shares and would be beneficiaries of what we're proposing and then importantly uh both of these companies are going to be index eligible and they would rank in the top 100 S&P 500 companies so post uh restructuring and exit from conservatorship they will be owned indirectly by hundreds of millions of Americans through index funds uh bill went through this already so we can move to the next slide uh so kind of modeling out uh what the government receives over time so uh we we monetize we we excuse me model the government monetizing their stakes in both companies kind of radly in the five years after each IPO so the idea is they would sell a fifth of their stake in the company uh kind of per year in the five years after the IPOs are done so that's why you see kind of uh Fanny May sales going first and followed by Freddy um they would get dividends in the interim while he own the shares obviously uh we're modeling stock sales at kind of 15 times earnings uh at a 5% uh discount when they sell uh the stock given that they're selling kind of large quantums of stock if you add all this up over time uh we estimate treasury will earn uh well north of $300 billion dollars by monetizing these warrants which is a huge uh you know payment to taxpayers so there's a lot of uh debate around the senior preferred out there and we think uh some of it is flawed and we'll kind of explain why so um today this the legal liquidation preference on the senior preferred stock is $340 billion um that's more than both companies are worth today um it's not actually um a real number in the sense that you can't convert it to cash there's no mechanism to convert that to cash um and importantly treasury already owns 80% of both companies so the only mechanism people are talking about in terms of having if the senior prefer not written awful what do you do with it the most common idea we see is converting it to Common Equity um treasury already owns 80% of both companies common Equity you could only take your common Equity ownership up from 80 to 100 uh so mathematically uh their claim on the earnings power of the G can only go up by 25% um we think that's unlikely to happen why well one any attempt to convert the senior preferred into common would uh invite a fresh round of litigation uh you know where we are today most of the serious litigation been settled we're kind of through all that which provides an interesting window for emerging from conservatorship if treasury were to attempt something like this uh it would delay the exit from conservatorship well beyond the current administration's term so kind of the last round of litigation that went up to the Supreme Court was filed somewhere around 2013 and took eight years to to finally settle um and you know that's well beyond uh the Trump administration's term um so it would it would basically prevent this Administration from getting this done which they have said they want to do and then more importantly it would it would prohibit any new private Capital raise because we don't think any new investor is going to buy common stock in these companies whether it's a primary sale uh from Fanny and Freddy to raise fresh capital or a secondary sale of Treasury stock um if uh the litigation is outstanding and if treasury does something so hostile to kind of the existing investors um in the very unlikely scenario that uh an IPO and exit from conservative ship was actually possible uh if the government converted their senior preferred we think uh that conversion would severely impact uh the valuation of what they're converting into right so you're converting your senior preferred to Common shares if doing that nukes the value of your common shares you're actually worse off by doing it and we think investors would assign either a really low valuation multiple uh to those common shares if this were done or just not invest at all and then the treasury would basically be suck with these common shares on balance sheet with no way to monetize them and if we show on the next page actually by the way the other point would be they would be they'd have to consolidate uh kind of both Enterprises so you know that that's a problem with respect to all the uh the debt that's outstanding and another thing I'll point out here you know the government was saying prior to and Freddy going to conservatorship that they were solvent there was no issue they were forcing them to raise Capital they were issuing they issued a lot of this preferred very shortly before uh you know in the period just leading up to the uh the conservatorship and that the the preferreds were bought by you know the biggest uh you know asset managers in the world the black rocks uh you know State streets all these kinds of uh sort of Institutions the common stockit here was held you know very broadly by millions of small investors but this was you know the ultimate sort of in institutional stock in almost pretty much every portfolio certainly all the indices uh so there are a lot of very unhappy people uh kind of going into uh you know the memory institutional memory of what happened uh with Fanny and Freddy is not a good one um and so uh you know that puts a little bit of a a taint on these companies I think the um you know it's helpful that we have a trump Administration uh you know can was not involved in the networ sweep uh but the the incremental perceived benefit of squeezing out the common stockholders when you own 80% of an institution uh already uh and then to Anthony's point you know who's going to want to step into you know a company owned 100% by the federal government who steps into that overhang after they did this uh and the answer is it's a zero set um this is Anthony's point about um you know the uh the common stock they would own would be worth a fraction of what it would be own when it has you know an Institutional long-term base uh you know the index eligible this would not be an index eligible company one other very important Point here uh is that um is conservatorship uh is a process that's an important one uh where financial institutions uh are managed through uh challenging periods um and the uh and it's important that they're they handled correctly this one has been in conservative ship for you know what 16 years U I'll read a quote uh 87 years of FDIC s fsic RTC history demonstrate that conservators are caretakers were not meant to operate an institution indefinitely conservatorship is supposed to be a temporary measure leading either to Rehabilitation or to receivership and ultimately payment of creditors and shareholders nor to Federal conservators receivers act for the benefit of a single preferred shareholder the government to the detriment of all the institutions other shareholders such unprecedented deviations from settled insolvency practices and creditor protections undercut one of the critical foundations of a market economy and could call into question the reliability of the government as a resolution Authority the consequences to Future resolutions and many resolutions require raising Capital selling institutions Etc and and you know taking this kind of and violent action would uh would damage that um there have been 4,000 uh conservative ships um and importantly uh in each of those uh recognized that uh the preferred is entitled only to its contractual repayment with interest quote in open bank bank assistance and conservative ship the stakeholders interests are protected by their contractual rights since the institution is continuing to function as an open and operating company provided the assistance formally the FDIC for banks and treasury for the companies received repayment plus interest like any creditor based on the assistance agreement all passed open bank assistant and conservative ships all principles underlying her related insolvency statutes limited that repayment to the actual funding provided a statutory goal explicitly is to restore the company to to a sound insolvent condition that cannot be accomplished with a confiscatory seizure of current and future value um I think critically important uh points made here an argument for the government returning the 25 billion extra that they received an extra contractual uh payments um you know this came out uh January 9th um and uh you Craig Phillips joining Freddy Mack as executive vice president corporate strategy external Affairs work with the CEO the president entire senior leadership team to support the dynamic evolution of the company's strategies external Affairs includes industry engagement Regulatory and conservative ship Affairs and initiative so Freddy and Fanny are preparing uh for release uh from conservatorship we think the timing is excellent uh we're in a strong economy unemployment is low GDP strong National home prices alltime highs stock market all-time highs um the uh senior preferreds have been repaid with more than their contractual return uh we need to raise Capital to uh delever our country's uh balance sheet um this is you know very Doge aligned uh initiative um you know again the conservative ship itself uh the fhfa has grown significantly in terms of personnel I'm sure those Personnel would prefer there would be lots of opportunities for private sector jobs but uh if they were not uh effective met overseeing this company um we could you know find some efficiencies and government we're at the beginning of the Trump Administration we have four years uh Pro business administration led by as we say the consant dealmaker uh so we began with the art of the deal and we end uh with a quote uh from Donald J Trump deals are my art form other people paint beautifully on canvas and write wonderful poetry I like making deals preferably big deals that's how I get my kicks um you know I'm somewhat of a dealmaker myself what happens with deals is you get kicks from bigger and bigger deals uh the president's done a lot of big deals this would be the biggest deal he's ever done um it would be one uh that would resolve uh kind of one of the really the last remaining soore uh from the financial crisis would restore uh fairly uh respecting the hierarchy of claims of the various participants here it would release uh these really remarkable companies and a really important Mission business for the benefit of the country uh it would create a lot of shareholder value uh for the millions of shareholders that frankly got screwed uh by the netw worth sweep uh that was took place during uh the Obama Administration this is something that the president has publicly uh committed to do as recently as several years ago um and uh you know he's now really well positioned uh to get it done uh interestingly um I don't think my guess is the Scott bent hearing wasn't scheduled to occur at the end of the Persian Square presentation on Fanny May and Freddy Mack we I sort of randomly picked this date uh a few weeks ago to give us enough time to get our presentation done um but we made sure to finish in under 90 minutes uh so we can hear from the treasury secretary to the extent that he mentions uh Fanny uh and Freddy um but you know we're quite excited about the potential here um and uh we appreciate you're taking uh 844 minutes of your time we will be uh releasing copy of the presentation if you have additional questions uh just uh reply uh with those questions and I will do we will do our best uh uh to respond to them and thank you very much and have a great day