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

[hardincap]

One positive is that after seeing all the documents thus far in Discovery, Berkowitz did buy more, and apparently got back into the common as well.

 

He said on the call he's not allowed to see any of it, only his lawyers are. Doubtful his lawyers would keep it totally private from him though. 

[brker_guy]

Fairholme Discussion of FNMA and FMCC.  I believe this transcript is from yesterday's call:

 

https://www.youtube.com/watch?v=mmlHfEtl6QY

 

 

[hardincap]

Anyone else wonder why Ackman confidently proclaims the 3rd amendment will be reversed, and yet he does not own a meaningful position in the preferreds? Yes, he owns quite a bit of the commons, but its still <3% of his asset base. If he were so confident, you'd think he'd be building up a big position in preferreds. Makes me think he's being coy about the risks he perceives...?

[cubsfan]

Anyone else wonder why Ackman confidently proclaims the 3rd amendment will be reversed, and yet he does not own a meaningful position in the preferreds? Yes, he owns quite a bit of the commons, but its still <3% of his asset base. If he were so confident, you'd think he'd be building up a big position in preferreds. Makes me think he's being coy about the risks he perceives...?

 

I think he has been pretty clear about this - he could make 25X his money on this position if it goes well, it could also

turn out to be a zero because of the litigation risk - so it is sized accordingly.

 

 

[hardincap]

Yes, he's going for the maximum gain scenario. I guess I'm wondering why he believes thats a more attractive risk-adjusted bet than the more simple and straightforward preferred scenario, which still has 6-8x+ upside if the 3rd amendment is reversed.

 

Anyone else wonder why Ackman confidently proclaims the 3rd amendment will be reversed, and yet he does not own a meaningful position in the preferreds? Yes, he owns quite a bit of the commons, but its still <3% of his asset base. If he were so confident, you'd think he'd be building up a big position in preferreds. Makes me think he's being coy about the risks he perceives...?

 

I think he has been pretty clear about this - he could make 25X his money on this position if it goes well, it could also

turn out to be a zero because of the litigation risk - so it is sized accordingly.

[Jurgis]

Assuming cost at ~$5, possible gain to $50 and possible loss to zero, the probability of success has to be higher than XX% (I intentionally did not write a value  8)) for the investment in prefs to have a positive expected return.

 

As it is known, humans are notoriously bad in guessing probabilities of events. However, it would be interesting to hear what probability do people assign for the successful outcome? :)

 

Possibly someone should create a poll. :)

 

I did not write down the value of XX to avoid anchoring. As soon as I write it down, everyone will pretty much anchor to it. ;) So to be unbiased - haha - this is simple calc and some people can probably do it in their heads - perhaps we should not disclose XX before getting some probability guesses. :)

[wachtwoord]

For your pay off estimates you need at least 1:11 (9.1%) for this to be +EV. Of course you oversimplified (nothing is this binary).

[Mephistopheles]

For your pay off estimates you need at least 1:11 (9.1%) for this to be +EV. Of course you oversimplified (nothing is this binary).

 

Why only 9.1%? The prefs are trading at an average of like 11% of par. And of course if you add in the time value, the number should be a bit above 11%, depending on how long it takes to break or make it.

[wachtwoord]

For your pay off estimates you need at least 1:11 (9.1%) for this to be +EV. Of course you oversimplified (nothing is this binary).

 

Why only 9.1%? The prefs are trading at an average of like 11% of par. And of course if you add in the time value, the number should be a bit above 11%, depending on how long it takes to break or make it.

 

In his example he gives a purchase prices of 5 and a max profit of 50. So:

 

-5*10/11 + 50*1/11 = 0

 

So at least an 1/11 chance of succes is needed for this to be +EV.

[Mephistopheles]

For your pay off estimates you need at least 1:11 (9.1%) for this to be +EV. Of course you oversimplified (nothing is this binary).

 

Why only 9.1%? The prefs are trading at an average of like 11% of par. And of course if you add in the time value, the number should be a bit above 11%, depending on how long it takes to break or make it.

 

In his example he gives a purchase prices of 5 and a max profit of 50. So:

 

-5*10/11 + 50*1/11 = 0

 

So at least an 1/11 chance of succes is needed for this to be +EV.

 

I see. Well the gain would be 45, not 50. So at a price of $5 it would be a 10% chance of success needed.

[mg0516]

Can anyone confirm the mechanics of the liquidation preference on the SPC and estimates of value?  It's an accordion meaning it increases with the size of the draw but couldn't find anywhere in the legal docs that indicate it declines as the funds are paid back.  Any help would be appreciated.  Thanks

[mg0516]

From the 2008 Agreement:

 

http://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FannieMae_RestatedAgreement_N508.pdf

 

"3.3. Increases of Senior Preferred Stock Liquidation Preference as a Result of Funding under

the Commitment. The aggregate liquidation preference of the outstanding shares of Senior

Preferred Stock shall be automatically increased by an amount equal to the amount of each draw

on the Commitment pursuant to Article 2 that is funded by Purchaser to Seller, such increase to

occur simultaneously with such funding and ratably with respect to each share of Senior Preferred

Stock. "

 

Fannie drew $117B (table 1 pg 2):

http://www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/TSYSupport10012014.pdf

 

with $130B paid back to Treasury (table 2 page 3)

 

Does the liquidation preference decline byt he amount of the dividends paid back to Treasury or does the Liq Pref remain on the amount drawn of $117B and not decline?

 

Clearly a material item that I don't have a clear answer to...

[merkhet]

You've hit the nail on the head.

 

The question is whether the amounts paid to Treasury must be classified as a totally kosher Net Worth Sweep of 100% of the profits. If not, then the question is whether they count as a repayment of principal -- and there's no specific provision in any of the documents that outlines exactly how that occurs. And if they don't count as a repayment of principal... what do they count as?

[doughishere]

http://www.globest.com/news/12_1042/national/multifamily/About-that-191B-Profit-from-the-GSEs-355123-1.html

 

 

"Last week when the White House released its budget for fiscal year 2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship."

[constructive]

From the 2008 Agreement:

 

http://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-9-26_SPSPA_FannieMae_RestatedAgreement_N508.pdf

 

"3.3. Increases of Senior Preferred Stock Liquidation Preference as a Result of Funding under

the Commitment. The aggregate liquidation preference of the outstanding shares of Senior

Preferred Stock shall be automatically increased by an amount equal to the amount of each draw

on the Commitment pursuant to Article 2 that is funded by Purchaser to Seller, such increase to

occur simultaneously with such funding and ratably with respect to each share of Senior Preferred

Stock. "

 

Fannie drew $117B (table 1 pg 2):

http://www.fhfa.gov/DataTools/Downloads/Documents/Market-Data/TSYSupport10012014.pdf

 

with $130B paid back to Treasury (table 2 page 3)

 

Does the liquidation preference decline byt he amount of the dividends paid back to Treasury or does the Liq Pref remain on the amount drawn of $117B and not decline?

 

Clearly a material item that I don't have a clear answer to...

 

No, the liquidation preference does not decline as a result of the net worth sweep dividend. You can confirm that by reading FNMA and FMCC financial statements, or by reading FHFA's reports.

[Grenville]

http://www.globest.com/news/12_1042/national/multifamily/About-that-191B-Profit-from-the-GSEs-355123-1.html

 

 

"Last week when the White House released its budget for fiscal year 2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship."

 

Thanks for that. I haven't been able to find the 191.2bln number in the Budget main document.

 

I did find this in the Appendix link from here: http://www.whitehouse.gov/omb/budget

 

If you download the Dept. of Treasury Report, they expect 23.3bln and 19.8bln in 2015 and 2016 from "Proceeds, GSE Equity Related Transactions: Enacted/requested"

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/tre.pdf

 

 

[doughishere]

http://malonigse.blogspot.com/2015/02/a-very-good-week-for-f.html

 

 

Bill Maloni's GSE Blog

[doughishere]

http://www.globest.com/news/12_1042/national/multifamily/About-that-191B-Profit-from-the-GSEs-355123-1.html

 

 

"Last week when the White House released its budget for fiscal year 2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship."

 

Thanks for that. I haven't been able to find the 191.2bln number in the Budget main document.

 

I did find this in the Appendix link from here: http://www.whitehouse.gov/omb/budget

 

If you download the Dept. of Treasury Report, they expect 23.3bln and 19.8bln in 2015 and 2016 from "Proceeds, GSE Equity Related Transactions: Enacted/requested"

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2016/assets/tre.pdf

 

 

Page 368 of this document? Row titled "GSE support"

 

Edit: The Fiscal 2016 Analytical Perspectives document.

 

https://docs.google.com/viewer?a=v&pid=forums&srcid=MDUxNDQwNjExMTIwMzQzNjc3NDIBMDAwODY0NjkwNTU1MzQ3NzA2NjQBYTUtdDFudnM5YjBKATAuMQEBdjI

 

 

Second Edit:

 

Found it! From the above doc. page 307

 

Through December

31, 2014, the GSEs have paid a total of $225.4 billion in

dividends payments to Treasury on the senior preferred

stock. The Budget estimates additional dividend receipts

of $153.3 billion from January 1, 2015, through FY 2025.

The cumulative budgetary impact of the PSPAs from

the establishment of the PSPAs through FY 2025 is estimated

to be a net return to taxpayers of $191.2 billion.

The Temporary Payroll Tax Cut Continuation Act of 2011

signed into law on December 23, 2011, required that the

GSEs increase their fees on security guarantees issued

through 2021 by an average of at least 0.10 percentage

points above the average guarantee fee imposed in 2011.

Revenues generated by this fee increase are remitted directly

to the Treasury for deficit reduction and are not

included in the PSPA amounts. The Budget estimates

resulting deficit reductions from this fee of $39.5 billion

from FY 2012 through FY 2025.

 

 

 

[mg0516]

thanks constructive...saw in the Q.  can't imagine another scenario when the liquidation pref isn't reduced as capital is returned.

[Grenville]

 

Found it! From the above doc. page 307

 

Through December

31, 2014, the GSEs have paid a total of $225.4 billion in

dividends payments to Treasury on the senior preferred

stock. The Budget estimates additional dividend receipts

of $153.3 billion from January 1, 2015, through FY 2025.

The cumulative budgetary impact of the PSPAs from

the establishment of the PSPAs through FY 2025 is estimated

to be a net return to taxpayers of $191.2 billion.

The Temporary Payroll Tax Cut Continuation Act of 2011

signed into law on December 23, 2011, required that the

GSEs increase their fees on security guarantees issued

through 2021 by an average of at least 0.10 percentage

points above the average guarantee fee imposed in 2011.

Revenues generated by this fee increase are remitted directly

to the Treasury for deficit reduction and are not

included in the PSPA amounts. The Budget estimates

resulting deficit reductions from this fee of $39.5 billion

from FY 2012 through FY 2025.

 

Awesome! Thanks for posting the location and details.

[constructive]

If the budget estimate is accurate, by my math the government will make about 17% annualized on the senior preferred. (Although, maybe $0 on the 80% of common warrants they own.) That is higher than I had assumed.

 

It may or may not be a valid legal argument, but you can make a financial argument against the 2012 Amendment for increasing the senior preferred return from 10% to ~17% without a valid reason.

 

At the same time, the estimate is probably less than what a lot of bulls would hope for (since they assume 15% reduction in assets per year).

[doughishere]

Constructive....thats a very valid point. The "security" that the government has materially changed from %10 to %17.....an increase of 70%.

[doughishere]

FHFA - The Little Regulator That Could (but Hasn't) Published by joshrosner

 

http://www.scribd.com/doc/254729408/02-03-15-FHFA-The-Little-Regulator-That-Could-but-Hasn-t

[jawn619]

I hear that ackman and icahn own these but i can't seem to find it on their 13Fs. Why is that?

[gfp]

As with Fairholme, you aren't required to include securities in your 13F that don't trade on a major exchange apparently.

 

I hear that ackman and icahn own these but i can't seem to find it on their 13Fs. Why is that?