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

[Guest cherzeca]

https://www.insidemortgagefinance.com/imfnews/1_1310/daily/federal-reserve-worries-about-nonbank-mortgage-firms-1000045140-1.html?ET=imfpubs:e10636:73599a:&st=email&s=imfnews

With GSE reform looking deader than a $31,000 conference room table ordered (and then cancelled) by HUD, we’ve come up with a simple plan that might be amenable to all the different warring factions who waste their time slamming each other on Twitter. Here is a rough outline: Let Fannie and Freddie live but as government utilities with three classes of stock (senior preferred, junior preferred and subordinated juniors). Each class of stock pays a quarterly dividend based on profits, with the seniors earning the most. Only Treasury can own the seniors and all profits would go into the general fund and would be used exclusively to pay down the nation’s debt. The other two classes of stock would be given to current shareholders with their existing holdings retired. (Investment bankers, after completing a course in business ethics, can work out the ratios.) This would be done in exchange for dropping all legal claims. The federal guarantee on MBS would remain implicit (yes, implicit) for federal budget purposes and loan limits would be reduced and kept flat for a 10-year period while the private sector explores whether it can really make (enough) money as guarantors. And one last thing: never ever give Fannie and Freddie the right to lobby Congress or the states. This is just a basic outline. Congress can fill in the details or maybe Craig Phillips and Mel Watt…

 

you know that when the fine folks at IMF start making mortgage finance reform proposals the MBA/TBTF boys are at the end of their rope

[SnarkyPuppy]

when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

 

Meh.  Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

 

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

[Spekulatius]

when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

 

Meh.  Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

 

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

 

Seems to be thwt the conclusion of this argument is too keep everything the way it is , since it seems to work just fine.

[orthopa]

when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

 

Meh.  Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

 

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

 

Seems to be thwt the conclusion of this argument is too keep everything the way it is , since it seems to work just fine.

 

Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

[Midas79]

Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

 

This is why Tim Howard advocates for hard up-front equity capital, i.e. shareholder ownership, as opposed to the pro-cyclical risk sharing deals that don't actually transfer risk in any economical fashion.

 

But I still don't know where current shareholders fit in. All of their capital was put up when the shares were issued and then eventually swept to Treasury, so the equity capital to absorb first losses has to be put up by others, and they would have to receive actual equity for their capital. Dilution of commons is basically necessary here, right?

[rros]

Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

 

This is why Tim Howard advocates for hard up-front equity capital, i.e. shareholder ownership, as opposed to the pro-cyclical risk sharing deals that don't actually transfer risk in any economical fashion.

 

But I still don't know where current shareholders fit in. All of their capital was put up when the shares were issued and then eventually swept to Treasury, so the equity capital to absorb first losses has to be put up by others, and they would have to receive actual equity for their capital. Dilution of commons is basically necessary here, right?

put up by others (raised by dilution) , retained and/or converted from preferreds.

[locutusoftexas]

I am trying to make sense of all of this. Having visited the links recently provided by this thread, here are my conclusions:

1. This is a highly politicized and extralegal situation because a large segment of Congress and perhaps federal judges seem to hate FnF (due to past history) and a group of powerful financial interests would like to take over the business of FnF.

2. The Treasury Department has in my opinion robbed at least the junior preferred shareholders of their just proceeds.

3. According to the ruling of the DC District Court, the relevant law, as amended, apparently gives the Treasury the power to rob the shareholders.

4. The DC Court demurred on judging the constitutionality of the law.

5. The Supreme Court demurred on hearing the case, probably with the excuse that there were other relevant cases ongoing in the lower courts.

6. In an ideal world, the Treasury Department would be exceedingly vulnerable to civil suits and the enabling law would have already been declared unconstitutional with the strongest possible rebuke to Congress and the Treasury Department.

7. In our current reality, the odds that private shareholders will receive reasonable compensation by 2019 are, in my opinion, no better than around 50-50 (see next item).

8. In the long term (several years), if enough court cases are filed, the odds will increase geometrically as the power of the number of cases N (i.e., the probability P of success in at least one of the cases will be something like P ~1 - (1 - p)^N, where the caret (^) indicates exponentiation and the probability of plaintiff success in any one court case is p). I have assigned the value p ~ 1/3 based on the split of the justices on the Perry case, which is the only source of an actual number for the estimate.

9. Note that the probability of ultimate success is never one in the model proposed in item 8 above.

 

The point is that this case involves factors that are counter to our Constitution, including improper legislation (i.e., unconstitutional), Executive Branch actions that would be considered criminal if a private citizen had done the same thing, and apparently criminal collusion against FnF on the part of interests competing for the same business and perhaps with the conscious complicity of government employees. This is a massive headwind for private shareholders and could easily end with the shareholders receiving little or nothing for their initial investments, including the amount of the original investments, especially if the government and the judicial system are able to delay significantly the ultimate proper judgement for the plaintiffs.

 

Please tell me that the above is too negative or that my conclusions are simply wrong. Thanks.

[Eye4Valu]

I am trying to make sense of all of this. Having visited the links recently provided by this thread, here are my conclusions:

(1) This is a highly politicized and extralegal situation because a large segment of Congress and perhaps federal judges seem to hate FnF (due to past history) and a group of powerful financial interests would like to take over the business of FnF.

(2) The Treasury Department has in my opinion robbed at least the junior preferred shareholders of their just proceeds.

(3) According to the ruling of the DC District Court, the relevant law, as amended, apparently gives the Treasury the power to rob the shareholders.

(4) The DC Court demurred on judging the constitutionality of the law.

(5) The Supreme Court demurred on hearing the case, probably with the excuse that there were other relevant cases ongoing in the lower courts.

(6) In an ideal world, the Treasury Department would be exceedingly vulnerable to civil suits and the enabling law would have already been declared unconstitutional with the strongest possible rebuke to Congress and the Treasury Department.

(7) In our current reality, the odds that private shareholders will receive reasonable compensation by 2019 are, in my opinion, no better than around 50-50 (see next item).

(8) In the long term (several years), if enough court cases are filed, the odds will increase geometrically as the power of the number of cases N (i.e., the probability P of success in at least one of the cases will be something like P ~1 - (1 - p)^N, where the caret (^) indicates exponentiation and the probability of plaintiff success in any one court case is p). I have assigned the value p ~ 1/3 based on the split of the justices on the Perry case, which is the only source of an actual number for the estimate.

(9) Note that the probability of ultimate success is never one in the model proposed in item (8).

 

The point is that this case involves factors that are counter to our Constitution, including improper legislation (i.e., unconstitutional), Executive Branch actions that would be considered criminal if a private citizen had done the same thing, and apparently criminal collusion against FnF on the part of interests competing for the same business and perhaps with the conscious complicity of government employees. This is a massive headwind for private shareholders and could easily end with the shareholders receiving little or nothing for their initial investments, including the amount of the original investments, especially if the government and the judicial system are able to delay significantly the ultimate proper judgement for the plaintiffs.

 

I am not a troll-- just a fairly ignorant indirect shareholder trying to decide on my best option. Please tell me that the above is too negative or that my conclusions are simply wrong. Thanks.

 

Emily will answer all of these questions for you.

[blackcoffee]

“The press was to serve the governed, not the governors.” But in GSE case, unfortunately, press is serving the governors, with fake news, lies and twisting of the facts.

 

I'd love to hear this board's thoughts on the media coverage of this topic.

 

Yes but to what do we all attribute the reasoning that they're all lying in tandem here to be?

 

[rros]

Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?

[Guest cherzeca]

Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?

 

tim howard has a comment up to his last post from his book quoting kudlow as being virulently anti-congressional charter for GSEs...wanted them to become pure private companies.  but i do believe that given his free market capitalism bent, he would want GSE shareholders to get back to square given the 10% moment has been reached.

[blackcoffee]

Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?

 

tim howard has a comment up to his last post from his book quoting kudlow as being virulently anti-congressional charter for GSEs...wanted them to become pure private companies.  but i do believe that given his free market capitalism bent, he would want GSE shareholders to get back to square given the 10% moment has been reached.

 

We finally got a 10% on this mob loan we gave you that you can't ever repay. We're totally going to treat you fairly going forward from here even though we don't have to and the judges all agree that we don't have to....pardon me for not giving any thought about the 10% moment...

 

how about instead, we get a judge that says the entire c-ship was a fraud, which it was, based on the discovery documents.

[HalfMeasure]

Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?

 

tim howard has a comment up to his last post from his book quoting kudlow as being virulently anti-congressional charter for GSEs...wanted them to become pure private companies.  but i do believe that given his free market capitalism bent, he would want GSE shareholders to get back to square given the 10% moment has been reached.

 

Relevant:

[rros]

Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?

 

tim howard has a comment up to his last post from his book quoting kudlow as being virulently anti-congressional charter for GSEs...wanted them to become pure private companies.  but i do believe that given his free market capitalism bent, he would want GSE shareholders to get back to square given the 10% moment has been reached.

Thanks. Yes, he most likely wants the government completely out as TH states. But check HalfMeasure's tweet by LK... That wasn't his only tweet. He was saying the same thing over the radio and in cnbc interviews over a period of time. Point is, he was very specific at defending shareholders' rights w/o one mention of Fannie and Freddie (which he may not like). I have followed him for a decade when he was commenting daily at cnbc together w/Cramer. He is seriously free market and his defense of shareholders could be real. As oppose to yapping on top of a hedge fund's check.

 

My question stands, will he turn into a do-nothing Mnuchin/Mulvaney/Ross?

 

At a minimum, Wayne's Goldman fears have subsided a little?

[SnarkyPuppy]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

[Midas79]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

 

Pre-NWS shareholders shouldn't be worried at all.

 

How exactly have post-NWS holders been screwed? Or more to the point, what reason does Kudlow have to believe that post-NWS holders have been screwed?

[rros]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

Looks like a 2015 show as LK speaks of government compensating us in 2016. However, he kept the same point of view of unjustice to shareholders up until recently.

 

The main risk we face, kudlow or not kudlow, is that anyone becoming part of the administration will have access to new information we may not have. This new information could make them change their stance or may force them to. So what they may have thought before doesn't really matter.

[rros]

Interesting article by Alex Pollock regarding the real estate market. Not directly related to us. Just that he is pessimistic about this market.

http://thehill.com/opinion/finance/378004-home-prices-are-soaring-as-federal-reserve-hope-to-avoid-market-crash

 

[Guest cherzeca]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

 

Pre-NWS shareholders shouldn't be worried at all.

 

How exactly have post-NWS holders been screwed? Or more to the point, what reason does Kudlow have to believe that post-NWS holders have been screwed?

 

the pre/post NWS debate is meaningless; pre-NWS holders sell their stock and claims to buyers who become post-NWS holders

[DRValue]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

 

Pre-NWS shareholders shouldn't be worried at all.

 

How exactly have post-NWS holders been screwed? Or more to the point, what reason does Kudlow have to believe that post-NWS holders have been screwed?

 

the pre/post NWS debate is meaningless; pre-NWS holders sell their stock and claims to buyers who become post-NWS holders

 

I've been thinking about how any compensation etc. payments would be made to past holders of stock.

 

For example, if Junior prefs are found to be entitled to past missed dividend payments, would shareholders who had owned the shares at the time a dividend would've been declared and paid, be due any dividend if they have since sold their stock?

 

I used to think they should be entitled to any award but now, thinking about how bankruptcy contract claims can be sold, I'm more inclined to think the reasoning would be that only current shareholders at the time of any court victory would receive any award.

 

Is that the way to think of it Cherzeca?

 

In other words, if I bought a junior pref today and the courts vacated the NWS and declared that junior prefs are owed all previous undeclared dividends, tomorrow, then they would all be paid to me because the previous holder sold their claim, in the form of a stock certificate, to me.

[Guest cherzeca]

Larry Kudlow - https://www.dropbox.com/s/soupvnqqu349wz3/20150718__Kudlow%20Show%20Fannie%20Mae.m4a?dl=0

 

Interesting.  Is nobody worried that only pre-NWS are compensated?

 

Pre-NWS shareholders shouldn't be worried at all.

 

How exactly have post-NWS holders been screwed? Or more to the point, what reason does Kudlow have to believe that post-NWS holders have been screwed?

 

the pre/post NWS debate is meaningless; pre-NWS holders sell their stock and claims to buyers who become post-NWS holders

 

I've been thinking about how any compensation etc. payments would be made to past holders of stock.

 

For example, if Junior prefs are found to be entitled to past missed dividend payments, would shareholders who had owned the shares at the time a dividend would've been declared and paid, be due any dividend if they have since sold their stock?

 

I used to think they should be entitled to any award but now, thinking about how bankruptcy contract claims can be sold, I'm more inclined to think the reasoning would be that only current shareholders at the time of any court victory would receive any award.

 

Is that the way to think of it Cherzeca?

 

In other words, if I bought a junior pref today and the courts vacated the NWS and declared that junior prefs are owed all previous undeclared dividends, tomorrow, then they would all be paid to me because the previous holder sold their claim, in the form of a stock certificate, to me.

 

if some court voided the NWS, then there would be an additional remedy proceeding.  Ps would argue for applying all sweep payments in excess of 10% dividends as pay down of senior preferred resluting in a complete retirement of senior preferred (aka 10% moment).  since juniors only get divs as/when declared, there is no claim for Ps to get divs.

[DRValue]

@Cherzeca

 

I don't think whatever way this plays out will result in a dividend windfall, but I do recall plaintiffs arguing in a court hearing (Perry, I think) that junior pref and common should have been paid rateably alongside the senior pref, i guess getting at contractual rights.

 

I guess that this would only apply should the NWS stand.

 

I'm betting this plays out with the seniors being declared paid and retired, the GSE's pay a re-insurance fee to the Treasury while they rebuild capital and then go about raising capital in one way or another.

 

I'd be interested in what that would do to the warrants though as I have read (somewhere...) that the original intent was that they would only be exercised if the Treasury was not be able to recover its investment in the seniors. I don't know how the common warrants would be worth anything if the treasury lost its investment in the seniors but that's for another day.

 

I can't cite anything right now but if i can find the text regarding the intention of the warrants i'll link to it.

 

I wonder if the text shows the intention for the warrants was as above, and the seniors are paid down, a case could be made to invalidate the warrants?

[Midas79]

I'd be interested in what that would do to the warrants though as I have read (somewhere...) that the original intent was that they would only be exercised if the Treasury was not be able to recover its investment in the seniors. I don't know how the common warrants would be worth anything if the treasury lost its investment in the seniors but that's for another day.

 

I can't cite anything right now but if i can find the text regarding the intention of the warrants i'll link to it.

 

I wonder if the text shows the intention for the warrants was as above, and the seniors are paid down, a case could be made to invalidate the warrants?

 

The primary intent of the warrant was to drive the share price down and make it appear that the companies were in more trouble than they actually were. FHFA's extremely shady accounting practices were the final nail in the coffin. I believe this is in one of the released documents from the Fairholme discovery.

 

the pre/post NWS debate is meaningless; pre-NWS holders sell their stock and claims to buyers who become post-NWS holders

 

Legally yes. But I'm trying to get more into Kudlow's mindset. If Kudlow believes that only pre-NWS shareholders were screwed, and if enough shareholders bought after the NWS (making them easy to demonize as dirty speculators), then Kudlow might conclude that it's not worth "unfairly" compensating post-NWS holders to make pre-NWS holders whole. Of course that assumes that Kudlow has that much power over this process.

[Eye4Valu]

My bet would be on Mnuchin driving the train. Kudlow seems more concerned with private capital entering the secondary market than on whether you purchased common or preferred shares pre or post sweep. I think 9 out of 10 posters/observers of this thread would hazard that any purchase of common or preferred shares is speculative in nature. Bruce Berkowitz has discussed why he thinks purchasing preferred stock isn't an outright speculation due to its contractual nature. He also emphasized how the contractual rights are assigned to the new holder irrespective of when purchased. All of this got me thinking about the speculation versus investment dichotomy. While that line is never clear, to the extent holders here, including myself, are speculating, Buffettpedia.com offers the following on this link http://buffettpedia.com/2017/08/investment-versus-speculation-2/:

 

Benjamin Graham, widely known as the  father of value investing, said that “outright speculation  is neither illegal, immoral, nor (for most people) fattening to the pocketbook”. He acknowledged speculation is necessary and unavoidable, saying that in many common-stock situations there are substantial possibilities of both profit and loss, and the risks must be assumed by someone. But there is intelligent speculation as there is intelligent investing. He mentioned three ways in which speculation is unintelligent: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

 

 

[Midas79]

My bet would be on Mnuchin driving the train. Kudlow seems more concerned with private capital entering the secondary market than on whether you purchased common or preferred shares pre or post sweep. I think 9 out of 10 posters/observers of this thread would hazard that any purchase of common or preferred shares is speculative in nature. Bruce Berkowitz has discussed why he thinks purchasing preferred stock isn't an outright speculation due to its contractual nature. He also emphasized how the contractual rights are assigned to the new holder irrespective of when purchased. All of this got me thinking about the speculation versus investment dichotomy. While that line is never clear, to the extent holders here, including myself, are speculating, Buffettpedia.com offers the following on this link http://buffettpedia.com/2017/08/investment-versus-speculation-2/:

 

Benjamin Graham, widely known as the  father of value investing, said that “outright speculation  is neither illegal, immoral, nor (for most people) fattening to the pocketbook”. He acknowledged speculation is necessary and unavoidable, saying that in many common-stock situations there are substantial possibilities of both profit and loss, and the risks must be assumed by someone. But there is intelligent speculation as there is intelligent investing. He mentioned three ways in which speculation is unintelligent: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

 

My point about "investor" versus "speculator" is a matter of connotation: positive for the former and negative for the latter. Especially when used in the phrase "hedge fund speculators". The FnF saga is at least as much political as economic, just see how often David Stevens has used not letting hedge funds get a "windfall" as a reason not to recap and release the companies.

 

I only brought the point up to muse about whether Kudlow's proclamations about shareholders getting screwed is necessarily good news for post-NWS buyers in the event Kudlow does end up heading the NEC.