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

[muscleman]

How the fuck do these still trade at 40% of par?  I have a dangerously large and irresponsible position and am still contemplating adding more - but am worried of my own ignorance.

 

isn’t it funny that value investors are disbelievers of efficient market hypothesis, while at the same time complain that the price is not trading at the correct value right away?

[SnarkyPuppy]

How the fuck do these still trade at 40% of par?  I have a dangerously large and irresponsible position and am still contemplating adding more - but am worried of my own ignorance.

 

isn’t it funny that value investors are disbelievers of efficient market hypothesis, while at the same time complain that the price is not trading at the correct value right away?

 

Fair point

[Guest cherzeca]

over past year, fnmas is up 110% v 8% for S&P500.  so one cannot complain about price action.

 

however, the lay of the land has significantly improved as well, with administrative reform becoming something that one can expect to be attempted in the near future.  you couldn't say that one year ago.  but it can fail since it is a difficult and large endeavor that  will be hard to execute purely as a financial matter, putting aside all political risk.  the counter to this is that the GSE businesses are performing very well in a relatively robust economy, so if you can get past the political risk, the businesses are world class. 

 

so this is an intriguing speculative investment no matter how you look at it

[allnatural]

From a colleague: "Regarding giving Congress "sufficient" time. The journalist confirmed that Calabria's interview should be interpreted that Admin / FHFA will take the first steps towards ending the conservatorship, and Congress will be free to chime in along the way / at the end. Not that the Admin will do nothing / sit on their hands until 2020+ as some are mistakenly misreading the article to be."

 

This is consistent with Calabrias comment from his American Banker article last week where he says he hopes that the admin moving forward alone will put pressure on congress to act (but not required).

[SnarkyPuppy]

I think everyone is over complicating what is obvious:

 

Announce plan for broader reform simultaneously with specific administrative steps to be taken to protect taxpayers and recommendations to congress for broader legislative steps: 

1. Legislative recommendations

a.  Ask federal charters to be modified to allow for private competition and explicit paid for catastrophic guarantee

b.  Other recommendations (such as changes to affordable housing specifics or ginnie item mentioned by cherz recently which are not relevant to our thesis)

 

2.  Administrative actions to reduce taxpayer risk

a.  Amend agreement to original contract terms and deem fully repaid (10% moment) consistent w/ mulvaney prior legislation and w/ Calabria's views on NWS

b.  Finalize capital requirements

c.  Implement capital requirements through some moelis type recap

d.  Unwind govt "line of credit" relative to recap progress (moelis)

e.  FHFA to deem conservatptship ended once these steps have been accomplished

 

When asked why administrative actions are being taken without approval by congress:

- lack of capital exposes taxpayers and does not adequately price current explicit limited backstop under all scenarios

- existence of SPSA and conservatorship does not allow capital to build (secondary offering)

- government makes $150bn and private capital bears risk of impairment of net income stream

- explain conservatoeship and SPSA are mutually exclusive from congress reforms and for reasons described above create hidden taxpayer risk

- won't be said but will be true:  congress can't do jack sh1t

[orthopa]

FWIW there seems to be a quite a steady stream of somewhat calculated info via calabria. Every time we turn around we are fed a couple more interesting tidbits. Some vague, some more direct. What I find as good news is there has been little to no outrage regarding the hedge fund windfall which I think could possibly shape the outcome due to the ignorant lay persons perception. Secondly since Crapos plan and the panel from a little while back not a peep out of congress. Calabria keeps floating these trial balloons dropping info and no pushback from anyone. No one seems to be mad admin reform is coming. Warner warned everyone at the panel and its fallen on deaf ears.

 

Thankfully for shareholders sake the constant pushback from MBA, Corker, Hensarling, Warner, ie congress and big bank interest via op eds seems to have fizzled out. As much as shareholder fatigue has set in I think just as much has set in on the opposition side.

 

I agree regarding price. Not 100% sure why it trades where it does my regurgitated thoughts around price when at this point seem to really be an opportunity more then anything else.

 

Thinking outloud...

 

1. If I follow the logic correctly the sr prd have to be declared paid or retired to initiate a recap.

2. The NWS will be stopped to satisfy lawsuits via Calabria comments and to help build capital.

3. Unless possible conversion to common or issues of new Jr. Prfd in recap pfrd stands as once originally issued in capital structure due to 1. and 2.  and % of par dictated by dividend turn on at some point.

4. Market believes prfd dividend still matters as outside of some large bid/ask spreads and liquidity premium the higher div prd tend to trade higher.

 

For what ever reason the market seems to still look at the coupon when valuing a prfd possibly for optionality but is still scared off by the time required to realize par or possibly getting crammed down the capital structure. To make this as clean as possible for many reasons I still don't see how the prfd isn't declared whole in the recap. Value maybe +/- absolute par due to dividend. I don't see the logic in organizing this mess, settling the lawsuits per Calabria via the NWS, and then contesting standing of the prfd.

 

We may ultimately find the last couple % points or ultimate value of the prfd comes down to dividend treatment if there is not a plan for conversion. But as short sighted as it looks it seems people just don't want to wait.

[Cox022]

Thanks for the great discussion lately-great content.  The mounting info and evidence seems to be tipping the scales in the right direction.

 

Sorry my question has been covered but I am rusty on the points.

 

What are the main reasons we generally assume the senior preferred will be treated as repaid/reduced as opposed to the senior preferred being converted to common equity?

 

Berkowitz thought reasonable action by the government would mean AIG would be 80% diluted, instead it turned out to be 90%+.  This matters because the value of X assuming 80% dilution drops to 50% of X when dilution turns out to be 90% instead.  This seemed like a point worth revisiting in case others are rusty on the topic as well.

 

Thanks

[orthopa]

Secondly after re reading the Bloomberg article to jump on cherzecas post this is the no bull shit version.

 

1. FnF can be and will be freed with admin action.

2. Congress can act but we know they wont.

3. We will release FnF without an explicit guarantee and they and the market will function fine.

4.  Because of 3. FnF will need a recap which we will do with ratios more in line with other big financial institutions and creditors will be fine with that.

5. Solvency and the capital built will be done before we release them.

6. Capital build will need to be big and will happen in stages.

7.  Crapo chimes in and says you will see admin progress this year and hes ok with that because he knows they wont do shit.

8. We will settle the law suits with the stopping the NWS and the hedge funds will be fine with the eventual outcome in exchange for dropping the lawsuits.

[Guest cherzeca]

I think everyone is over complicating what is obvious:

 

Announce plan for broader reform simultaneously with specific administrative steps to be taken to protect taxpayers and recommendations to congress for broader legislative steps: 

1. Legislative recommendations

a.  Ask federal charters to be modified to allow for private competition and explicit paid for catastrophic guarantee

b.  Other recommendations (such as changes to affordable housing specifics or ginnie item mentioned by cherz recently which are not relevant to our thesis)

 

2.  Administrative actions to reduce taxpayer risk

a.  Amend agreement to original contract terms and deem fully repaid (10% moment) consistent w/ mulvaney prior legislation and w/ Calabria's views on NWS

b.  Finalize capital requirements

c.  Implement capital requirements through some moelis type recap

d.  Unwind govt "line of credit" relative to recap progress (moelis)

e.  FHFA to deem conservatptship ended once these steps have been accomplished

 

When asked why administrative actions are being taken without approval by congress:

- lack of capital exposes taxpayers and does not adequately price current explicit limited backstop under all scenarios

- existence of SPSA and conservatorship does not allow capital to build (secondary offering)

- government makes $150bn and private capital bears risk of impairment of net income stream

- explain conservatoeship and SPSA are mutually exclusive from congress reforms and for reasons described above create hidden taxpayer risk

- won't be said but will be true:  congress can't do jack sh1t

 

I have never seen a massive capital raise executed where congress has the invitation to muck up the works before it is completed.  big execution risk

[Guest cherzeca]

@cox

 

"What are the main reasons we generally assume the senior preferred will be treated as repaid/reduced as opposed to the senior preferred being converted to common equity?"

 

revoking the NWS would settle the lawsuits.  also make new money easier to raise.

 

[Midas79]

I have never seen a massive capital raise executed where congress has the invitation to muck up the works before it is completed.  big execution risk

 

In the past I have argued that risks like these won't stop the capital raise from happening, it will just lower the price per share of the offering as compensation for those risks. Do you think the risks involved, especially the possibility of Congress stepping in, are big enough to just scuttle the entire capital raise altogether? If so, what could be done about them? Congress can act at any time. The only one I can think of right now is a promise by Trump to veto any bill that messes with the (post-recap) shareholder structure of FnF.

 

revoking the NWS would settle the lawsuits.  also make new money easier to raise.

 

Minor nitpick: I would change "easier" to "possible".

 

The Collins plaintiffs ask for Treasury to cancel the seniors (and thus the NWS) and give FnF a $20B or so tax credit. I can see Treasury countering with an offer to do the same but without the tax credit. That could be Treasury's condition to not appeal whatever ruling the Fifth Circuit issues up to SCOTUS. Would that be enough to get the plaintiffs to settle? Now that I think about it, is it even possible to come to a settlement like that once a ruling has been made?

[Guest cherzeca]

@midas

 

I agree with both of your points.  I was just trying to take some air out of snarky's balloon. 

[Midas79]

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

[Guest cherzeca]

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

 

I just wish calabria would STFU.  more he talks the more congress might get riled up.

[DRValue]

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

 

I can't see calabria confusing his dates in 2 interviews so close together.

Way I see it is the recap process takes 2+ years but formalised much sooner.

 

The caveat to that is I see an instant recap as easier given the looming uncertainty with congress. Doing the recap without a capital raise would allow congress to do whatever it wants whenever it wants to.

That would leave the stock price depressed until congress formally backs off.

[allnatural]

"Great news for shareholders. There is no IPO without settling w/ current shareholders first (which Calabria hinted at yesterday). So.... settlement to come by Q4 '19 or Q1 '20."

 

Sounds good to me  8)

 

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

[Guest cherzeca]

"Great news for shareholders. There is no IPO without settling w/ current shareholders first (which Calabria hinted at yesterday). So.... settlement to come by Q4 '19 or Q1 '20."

 

Sounds good to me  8)

 

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

 

I just have more questions as calabria speaks.  even hazarding a timeline for an IPO would seem to imply that an investment banker has been retained and its views as to market conditions and timing has been given.  which is great, except calabria may think he is so smart that he can give this kind of guidance on his own, not having participated in an IPO before.  which just worries me more...

[allnatural]

How are people not more bulled up on this comment from yesterday,

 

"He brushed off concerns about the legality of Treasury’s net-worth sweep, which is the focus of legal challenges.

 

“I think that if we can get them out of conservatorship and then we can set a path, I think a lot of those issues will go away,” he said.""

 

This is the first time anyone is directly acknowledging the lawsuits, and Calabira is all but admitting that the shareholders will naturally receive their desired remedy (treat senior pfds as paid off + no more NWS) if admin has their way (recap, reform, release).

 

"Great news for shareholders. There is no IPO without settling w/ current shareholders first (which Calabria hinted at yesterday). So.... settlement to come by Q4 '19 or Q1 '20."

 

Sounds good to me  8)

 

https://twitter.com/jenniferisms/status/1126519132986531841?s=21

In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned.

 

 

It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

 

I just have more questions as calabria speaks.  even hazarding a timeline for an IPO would seem to imply that an investment banker has been retained and its views as to market conditions and timing has been given.  which is great, except calabria may think he is so smart that he can give this kind of guidance on his own, not having participated in an IPO before.  which just worries me more...

[rros]

There are still risks out there. It is at this altitude that we usually get the court exocet.

Let's hope none this time.

[allnatural]

It seems Calabria/Admin have the path laid out regardless of Collins outcome. But a negative Collins ruling will prob cause some short-term pain / pullback in pfds. But not as bad as in 2017 when there was no admin plan being discussed.

 

There are still risks out there. It is at this altitude that we usually get the court exocet.

Let's hope none this time.

[rros]

It seems Calabria/Admin have the path laid out regardless of Collins outcome. But a negative Collins ruling will prob cause some short-term pain / pullback in pfds. But not as bad as in 2017 when there was no admin plan being discussed.

 

There are still risks out there. It is at this altitude that we usually get the court exocet.

Let's hope none this time.

Mnuchin has never disregarded the lawsuits. He has never (and never would have) said 'they will go away'. So far, it's all Calabria. Collins and others are suing both. We can't anticipate Treasury's reaction to a setback in Collins. Sure, WH/Kudlow have a laid out plan. But those nobody is suing.

[Grenville]

fwiw:

 

"(two of two) Then Calabria will negotiate w Treasury & hopes to come to agreement by the fall that would allow them to stop Fannie and Freddie from sending profits to Treasury later this year. That is, ending the net sweep."

 

[DocSnowball]

"@MarkCalabria is waiting on a plan from @USTreasury on reform for Fannie & Freddie, which he expects this summer. (one of two)"

 

Entire tweets and replies compiled here, or should I say his stated timeline of activity as per the reporter (video of interview awaited):

https://twitter.com/Jenniferisms/with_replies

[Eye4Valu]

I agree with what Tim Howard says. Just saying.

[orthopa]

So with what we know from Calabria talking anyone have any thoughts why the prfd isnt with par? I think at this point a discussion as to whether or not dividends are eventually turned on is worth a thought too.