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

[Midas79]

@orthopa you are overthinking it i think. the simple mechanism to achieve > par is to issue a common conversion option to pfd shareholders where they receive $20-25 worth of new common shares (or via rights)... and if common becomes an attractive investment on the back-end, you can appreciate in value beyond the original conversion terms (or lose value if common goes down).

 

Yup. When Sullivan sold his commons to buy prefs, he gave a conversion to common as a primary reason.

 

There's also the chance that the prefs are converted at more than par. FHFA has no reason to care if the prefs get a boatload of commons, and Treasury might not either depending on when in the process the conversion is offered vis a vis when the warrants are exercised.

[Guest cherzeca]

@orthopa you are overthinking it i think. the simple mechanism to achieve > par is to issue a common conversion option to pfd shareholders where they receive $20-25 worth of new common shares (or via rights)... and if common becomes an attractive investment on the back-end, you can appreciate in value beyond the original conversion terms (or lose value if common goes down).

 

this is a good point and in the case of the GSEs, they should attract an increasing investor pool as time passes after end of conservatorship...which should lead to an increasing common share value if all goes well just by virtue of their gaining mindshare among investors who wouldn't touch it now

[onyx1]

Todays WSJ:

 

"FNMA & FMCC federal regulator kicked off a process for the mortgage-finance companies to raise enough capital for them to return to private ownership.The Tuesday announcement by the Federal Housing Finance Agency is a sign it thinks the companies likely need more than $180 billion in capital previously envisioned by the agency in 2018.

"Anyone know of any specific basis for this "sign"?  Or is the author hallucinating?

[orthopa]

@orthopa you are overthinking it i think. the simple mechanism to achieve > par is to issue a common conversion option to pfd shareholders where they receive $20-25 worth of new common shares (or via rights)... and if common becomes an attractive investment on the back-end, you can appreciate in value beyond the original conversion terms (or lose value if common goes down).

 

I guess I am kind of, but only in regards to a settlement that could come any day. I get the preferred to common thing and agree with that. What i was referencing was a podcast Sullivan had right after the en banc decision in which he said  that he "knew" or talked to people who expected to get way more then par via "damages" in a settlement with treasury. That narrative is what I think is false.

[Luke 532]

What i was referencing was a podcast Sullivan had right after the en banc decision in which he said  that he "knew" or talked to people who expected to get way more then par via "damages" in a settlement with treasury. That narrative is what I think is false.

 

Sullivan has mentioned a couple times on podcasts that he heard David Thompson on one of those public Investors Unite calls where he (Thompson) mentioned 6% annual interest (not sure if compounded or simple interest) since 2012, on top of par, as part of a settlement package.  I don't recall Thompson saying that, but I haven't listened to all the IU calls.

[allnatural]

Ah i see where the confusion is coming from. In the collins case, remedy (APA or unconstitutional)  would result in either wipe down of senior pfds or excess payments >10% going to GSEs. No payment to shareholders. He must be confusing Thompsons comments re: the Lambert case. the damages there would be that shareholders receive a check from the GSEs themselves. Plaintiffs will argue that that the potential damages should be PAR + carried interest every year (i think its 6% simple in Delaware) since the NWS. that's how he gets > PAR but along shot if you ask me. Give us new common equivalent to $20-25, and no cash needs to change hands.

[Luke 532]

Plaintiffs will argue that that the potential damages should be PAR + carried interest every year (i think its 6% simple in Delaware) since the NWS. that's how he gets > PAR but along shot if you ask me.

 

I've always considered this as nothing more than a negotiation tactic by plaintiffs.  I would argue for it, too, if I were a plaintiff.  Ask for par plus 6% annually, but be willing to accept par or something slightly beneath par.

[Guest cherzeca]

Todays WSJ:

 

"FNMA & FMCC federal regulator kicked off a process for the mortgage-finance companies to raise enough capital for them to return to private ownership.The Tuesday announcement by the Federal Housing Finance Agency is a sign it thinks the companies likely need more than $180 billion in capital previously envisioned by the agency in 2018.

"Anyone know of any specific basis for this "sign"?  Or is the author hallucinating?

 

the author (Ackerman) had fannie's current capital amount wrong.  I find him to be very sloppy

[Luke 532]

Dick Bove this morning (attached)

r_4.pdf

[Luke 532]

The latest from Gaby Heffesse of ACG Analytics: https://www.realvision.com/tv/shows/trade-ideas/videos/an-update-on-fannie-and-freddie-the-road-to-recapitalization?source_collection=9ac2e47e08a84d3d88dfcea6ffc99f3e

 

She thinks prefs trade around 75%-80% of par by Summer 2020.

[james22]

2) After 300% run-ups earlier this year, the stocks of the government-sponsored entities ("GSEs"), Fannie Mae (FNMA) and Freddie Mac (FMCC), have taken it on the chin over the past two months.

 

I've just finished writing up a full analysis of the latest developments for this month's issue of the Empire Investment Report, but I still think their stocks are the most interesting mispriced options in the market.

 

3) Here's my friend Michael Kao of Akanthos Capital Management with some breaking news:

 

Of the myriad lawsuits against the Treasury/FHFA by different classes of GSE investors, one very important hearing regarding the government's motion to dismiss in the Court of Federal Claims (COFC) was held yesterday.

 

While I don't have the full transcript yet, I've heard several key soundbites from the presiding Judge, Margaret Sweeney, that appear quite positive for plaintiffs (shareholders):

 

- She was concerned that the current terms of the Net Worth Sweep would never allow the GSEs to become solvent and exit conservatorship, and she questioned how the government could justify never allowing repayment of the liquidation preference so that the companies can get back on their feet

 

- She opined that Treasury/FHFA placed the GSE's in a "death grip" and used them as a "piggybank," comparing government's actions to "the mob"

 

- She opined that a "reasonable investor" would not have expected all profits to be swept to Treasury forever

 

While these soundbites appear way more constructive than I expected, I caution that the wheels of justice have moved very slowly in these GSE cases. Nevertheless, if the COFC strikes down the government's motion to dismiss, it will add to the political cover that Mnuchin/Calabria need to do the right thing for shareholders. Stay tuned...

 

- Whitney Tilson

[investorG]

The latest from Gaby Heffesse of ACG Analytics: https://www.realvision.com/tv/shows/trade-ideas/videos/an-update-on-fannie-and-freddie-the-road-to-recapitalization?source_collection=9ac2e47e08a84d3d88dfcea6ffc99f3e

 

She thinks prefs trade around 75%-80% of par by Summer 2020.

 

With all due respect to a very talented analyst (and I can't view the tape), the summer of 2020, a few months before the election would be the least best time politically for a non-court decided write down of the sr pref.  Logic suggests that if it even happened it'd be either soon (but they couldn't muster the courage) or post-election -- either lame duck or 1h2021 depending on the outcome.

[Guest cherzeca]

The latest from Gaby Heffesse of ACG Analytics: https://www.realvision.com/tv/shows/trade-ideas/videos/an-update-on-fannie-and-freddie-the-road-to-recapitalization?source_collection=9ac2e47e08a84d3d88dfcea6ffc99f3e

 

She thinks prefs trade around 75%-80% of par by Summer 2020.

 

With all due respect to a very talented analyst (and I can't view the tape), the summer of 2020, a few months before the election would be the least best time politically for a non-court decided write down of the sr pref.  Logic suggests that if it even happened it'd be either soon (but they couldn't muster the courage) or post-election -- either lame duck or 1h2021 depending on the outcome.

 

I disagree with this.  the administration has shown that it is very wary (or put more positively, respectful) of congress' prerogatives regarding the GSEs, and I think its recommendations to congress for actions congress can only perform and its general slow playing of the process show that the administration is concerned with the political optics of GSE administrative reform....in the eyes of congress.  I think it doesn't give two whits about the political ramifications of GSE reform to the general public and in connection with POTUS election.  you haven't seen GSE reform discussed at all outside the beltway. if there is a pspa amendment in summer 2020 will the D potus candidate (nominated 7/13/20) hammer trump on it?  dont you think of all the things the Ds will try to hammer trump on GSE reform will be rather far down the talking point list?

[DRValue]

The latest from Gaby Heffesse of ACG Analytics: https://www.realvision.com/tv/shows/trade-ideas/videos/an-update-on-fannie-and-freddie-the-road-to-recapitalization?source_collection=9ac2e47e08a84d3d88dfcea6ffc99f3e

 

She thinks prefs trade around 75%-80% of par by Summer 2020.

 

With all due respect to a very talented analyst (and I can't view the tape), the summer of 2020, a few months before the election would be the least best time politically for a non-court decided write down of the sr pref.  Logic suggests that if it even happened it'd be either soon (but they couldn't muster the courage) or post-election -- either lame duck or 1h2021 depending on the outcome.

 

+1

 

Im thinking this happens over Christmas or after elections.

[rros]

Dick Bove this morning (attached)

If J. Sweeney rules against the NWS common sense is we go back to 2nd amendment. Isn't it a stretch (wishful thinking) for Bove to suggest the funds paid will offset the Srs. by default? The 2nd amendment still put us squarely at the old 10% dividend, f-o-r-e-v-e-r. The 2nd, like the original PSPAs, says nothing about redemption. J. Sweeney may insert something in her ruling specifically designed to deal with the impossibility of repayment but there is no guarantee.

 

Her complaining about the government tactics to extract all the companies' earnings does not lead to the conclusion the Srs. have been paid off. Under what arguments can the judge change the nature of the original deal? If she rules that not being able to repay the Srs. directly contradicts HERA08 the whole agreement (PSPAs) is in play, not just the NWS.

[Guest cherzeca]

Dick Bove this morning (attached)

If J. Sweeney rules against the NWS common sense is we go back to 2nd amendment. Isn't it a stretch (wishful thinking) for Bove to suggest the funds paid will offset the Srs. by default? The 2nd amendment still put us squarely at the old 10% dividend, f-o-r-e-v-e-r. The 2nd, like the original PSPAs, says nothing about redemption. J. Sweeney may insert something in her ruling specifically designed to deal with the impossibility of repayment but there is no guarantee.

 

Her complaining about the government tactics to extract all the companies' earnings does not lead to the conclusion the Srs. have been paid off. Under what arguments can the judge change the nature of the original deal? If she rules that not being able to repay the Srs. directly contradicts HERA08 the whole agreement (PSPAs) is in play, not just the NWS.

 

treasury has taken the money. over $180B.  if they give it back then there is no preference pay down.  they wont give it back. in fact, I am not sure if treasury has that much in its accounts with the fed.

[rros]

Dick Bove this morning (attached)

If J. Sweeney rules against the NWS common sense is we go back to 2nd amendment. Isn't it a stretch (wishful thinking) for Bove to suggest the funds paid will offset the Srs. by default? The 2nd amendment still put us squarely at the old 10% dividend, f-o-r-e-v-e-r. The 2nd, like the original PSPAs, says nothing about redemption. J. Sweeney may insert something in her ruling specifically designed to deal with the impossibility of repayment but there is no guarantee.

 

Her complaining about the government tactics to extract all the companies' earnings does not lead to the conclusion the Srs. have been paid off. Under what arguments can the judge change the nature of the original deal? If she rules that not being able to repay the Srs. directly contradicts HERA08 the whole agreement (PSPAs) is in play, not just the NWS.

 

treasury has taken the money. over $180B.  if they give it back then there is no preference pay down.  they wont give it back. in fact, I am not sure if treasury has that much in its accounts with the fed.

"...over $180B."

 

I understand where you are coming from. But if we stick to the letter of the agreement and its amendments, nothing has been overpaid. It is just us that would like to think in those terms. The 10% dividend has been set for eternity, unfortunately. So there is really no "10% moment". There is no finish line.

 

About the only thing that would have been different w/o the 2012 sweep -and my hope is that J. Sweeney can see it this way- is that in 2013 the companies could have seen the 50 bill reversal in their own books after having paid the regular dividends. And that following that reversal the companies may have been able to continue building up capital, albeit at a slow pace because of 18.7 bill yearly obligation to Treasury. This accumulation of capital may have led to the Conservator guide the companies out of conservatorship (raising additional capital) or perhaps redeeming the Srs to reduce the bulky outlays. A path Obama team likely envisioned and sought to obstruct.

 

If J. Sweeney understands the damage done to the organic recapitalization process she may rule in a way that reverses this. But ruling that 187 bill will just evaporate because the nws was illegal is a stretch. For face value the Srs. must absolutely disappear. I do not know if J. Sweeney can legally stretch a ruling that will entail killing the Srs.

 

I am still long but just a fraction of my original shares.

[Guest cherzeca]

So following your logic rros the GSEs can never be recapitalized. Senior preferred must stay outstanding with full preference amount and their future dividends have been prepaid till kingdom come. If that is your contention then you should be short and the administration is wasting its time. Sounds like what Carney was spouting years ago.

[rros]

So following your logic rros the GSEs can never be recapitalized. Senior preferred must stay outstanding with full preference amount and their future dividends have been prepaid till kingdom come. If that is your contention then you should be short and the administration is wasting its time. Sounds like what Carney was spouting years ago.

They could have been before the sweep. A strong reason to have purchased the shares after HERA and prior to the sweep. There was a path to getting out which Obama blocked.

 

I do not think the commons or preferreds are or ever were a good short. I just feel this Administration and prior aren't (haven't been) really forthcoming with a solution. Although this year Calabria spoke a lot. And Mnuchin did in the past.

 

I keep the remaining shares in part because of inertia, do not have to sell them for any other reason and would certainly like the courts to disentangle this mess or throw a bone to the FHFA or Treasury, one that will pave the way for them to act. At present, while the Srs. continue to build up, recapitalization is just talk.

 

The above has nothing to do with how shares trade. I hate to admit this but over the years the preferreds have been a phenomenal trade (trade in which I never engaged in). And as I said a few days ago when there was a lot of gloom here, all preferreds were trading at a similar bottom like in the past 3 years. I think if they run again say, by next summer, I will simply let go of these final shares. The pre-sweep holders like me have suffered a devastating emotional blow. Compounded by the fact that placing hope on the courts has been also enormously frustrating. Sure, a ruling a ruling there... but no true relief.

[Wiggins]

Great buying opportunity two days ago. Some JPS still selling at 1/3 par.

[rros]

Great buying opportunity two days ago. Some JPS still selling at 1/3 par.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg388515/#msg388515

 

Where my Mr. Muscle?

[muscleman]

Great buying opportunity two days ago. Some JPS still selling at 1/3 par.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg388515/#msg388515

 

Where my Mr. Muscle?

 

Mr. Muscle is in his muscle training session at the moment.  ;)

Unbelievable that after I said this was my last post here a while back, you guys still wouldn't let me go. Didn't know you love me that much.  ;)

 

 

[Guest cherzeca]

Great buying opportunity two days ago. Some JPS still selling at 1/3 par.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg388515/#msg388515

 

Where my Mr. Muscle?

 

Mr. Muscle is in his muscle training session at the moment.  ;)

Unbelievable that after I said this was my last post here a while back, you guys still wouldn't let me go. Didn't know you love me that much.  ;)

 

https://giphy.com/gifs/B3nATT4FPkb3G/html5

 

[allnatural]

Phillips continuing to make appearances lately

 

No Longer at Treasury, Former Counselor Phillips Stands Up for GSE Shareholders

dhollier@imfpubs.com

 

Craig Phillips, the former Treasury official who served as Secretary Steven Mnuchin’s point man on housing issues until departing for the private sector in June, has come out in defense of Fannie Mae and Freddie Mac investors.

 

Speaking midweek at a conference in Washington, the man widely credited as the author of the Treasury’s plan for housing-finance reform said the recap and release of the GSEs should “really respect the rights of the current shareholders.”

 

Phillips’ comments were couched in a how-we-got-here description of “the role of capital markets and the pesky nature of the existing shareholder.”

 

“When a company fails,” he said, “the capital structure is typically eliminated and there are no shares left. But when these companies were put into conservatorship, for a variety of reasons, the interests of the common stock holders and the preferred stock holders were not eliminated. So those shares continued to exist. They trade freely. It wasn’t a bailout or a sweetheart deal that got them there.”

[rros]

Great buying opportunity two days ago. Some JPS still selling at 1/3 par.

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg388515/#msg388515

 

Where my Mr. Muscle?

 

Mr. Muscle is in his muscle training session at the moment.  ;)

Unbelievable that after I said this was my last post here a while back, you guys still wouldn't let me go. Didn't know you love me that much.  ;)

We need your input for some quick bucks :)