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

[Midas79]

I'm left wondering if Session's DOJ will soon lead the Perry panel toward a reversal.  Sounds crazy, yes.  But a ruling against the government would:

 

1. provide political cover against the "hedge fund giveaway narrative",

2. blunt congressional opposition,

3. speed along a settlement,

4. allow a jump ahead toward recapitalization negotiations.

 

This whole issue is complicated by the looming cut in the corporate tax rate, which would reduce the GSE's DTA valuation and force a government draw.  A quick resolution of the mortgage giants would avoid this scenario, and a Perry reversal would move things along.

 

Reversal would add a trump (no pun intended) card to Mnuchin's hand: he could invoke the non-severability clause (6.12) in the SPSPA and unwind the entire thing. This has been mentioned on this board before. Mnuchin might need the reversal first so he has the unilateral authority he needs.

 

It would have to be rare for the defendants in a case to suddenly argue in favor of the plaintiffs though. Would Brown/Ginsburg/Millett get suspicious and pore over the case even more, or just go along with it and be glad they don't have to deal with it anymore?

[Sunrider]

Indeed. Wonder what the lawyers on the board think a court would make of that?

 

I'm left wondering if Session's DOJ will soon lead the Perry panel toward a reversal.  Sounds crazy, yes.  But a ruling against the government would:

 

1. provide political cover against the "hedge fund giveaway narrative",

2. blunt congressional opposition,

3. speed along a settlement,

4. allow a jump ahead toward recapitalization negotiations.

 

This whole issue is complicated by the looming cut in the corporate tax rate, which would reduce the GSE's DTA valuation and force a government draw.  A quick resolution of the mortgage giants would avoid this scenario, and a Perry reversal would move things along.

 

Reversal would add a trump (no pun intended) card to Mnuchin's hand: he could invoke the non-severability clause (6.12) in the SPSPA and unwind the entire thing. This has been mentioned on this board before. Mnuchin might need the reversal first so he has the unilateral authority he needs.

 

It would have to be rare for the defendants in a case to suddenly argue in favor of the plaintiffs though. Would Brown/Ginsburg/Millett get suspicious and pore over the case even more, or just go along with it and be glad they don't have to deal with it anymore?

[Luke 532]

A good SA article (I know, I know...)

http://seekingalpha.com/article/4046185-protected-designation-removal-first-positive-gse-omen-new-administration

[Flynnstone5]

Yellen just said "the GSE's were not the critical part of what caused the housing crisis" - pretty close to verbatim

 

Royce then brings up Basel3 and GSE's were leveraged 100:1. Asks what is the right capital 5%, 10% and references another study of 23%.

 

Yellen: basically says leverage ratios shouldn't equate junk bonds to the treasury. Nothing said specifically as to capital.

 

Certainly seems the rep's are going to keep up the BS of private gain at taxpayer expense, caused crisis, etc. Damaging docs and a positive court outcome would go a long way to muzzle them.

[no_free_lunch]

Good catch Flynnstone.  Very interesting to see it from yellen given she isn't even part of the republican admin.  Part of my thesis is that you will start to see a narrative shift as they prep the gse's for re privatization.

[muscleman]

Glen is crazy......

 

http://seekingalpha.com/article/4046185-protected-designation-removal-first-positive-gse-omen-new-administration

 

"I own 4050 shares of FMCCH, 19238 shares of FMCCP, 7370 shares of FMCCT, 1341 shares of FMCKO, 16885 shares of FMCKP, 13207 shares of FNMFN and 5 shares of FNMFO."

 

So his cost basis is likely around $250K, a lot more than his net worth.  :o

I was long CCME back in 2011 and he was "all in" on those Chinese reverse mergers. Then those all went bust one by one and he went into quiet mode for a few years. (I also lost quite a bit on CCME) Now he is going crazy again. I hope the outcome is different.  :)

[Luke 532]

Glen is crazy......

 

http://seekingalpha.com/article/4046185-protected-designation-removal-first-positive-gse-omen-new-administration

 

"I own 4050 shares of FMCCH, 19238 shares of FMCCP, 7370 shares of FMCCT, 1341 shares of FMCKO, 16885 shares of FMCKP, 13207 shares of FNMFN and 5 shares of FNMFO."

 

So his cost basis is likely around $250K, a lot more than his net worth.  :o

I was long CCME back in 2011 and he was "all in" on those Chinese reverse mergers. Then those all went bust one by one and he went into quiet mode for a few years. (I also lost quite a bit on CCME) Now he is going crazy again. I hope the outcome is different.  :)

 

Regardless of what someone thinks of him that article I posted is still really good.  I tend to focus on the message instead of the messenger.

[Guest cherzeca]

Yellen just said "the GSE's were not the critical part of what caused the housing crisis" - pretty close to verbatim

 

Royce then brings up Basel3 and GSE's were leveraged 100:1. Asks what is the right capital 5%, 10% and references another study of 23%.

 

Yellen: basically says leverage ratios shouldn't equate junk bonds to the treasury. Nothing said specifically as to capital.

 

Certainly seems the rep's are going to keep up the BS of private gain at taxpayer expense, caused crisis, etc. Damaging docs and a positive court outcome would go a long way to muzzle them.

 

fed doesnt regulate GSEs.  not sure why she is even answering questions about GSEs

[Flynnstone5]

Yellen just said "the GSE's were not the critical part of what caused the housing crisis" - pretty close to verbatim

 

Royce then brings up Basel3 and GSE's were leveraged 100:1. Asks what is the right capital 5%, 10% and references another study of 23%.

 

Yellen: basically says leverage ratios shouldn't equate junk bonds to the treasury. Nothing said specifically as to capital.

 

Certainly seems the rep's are going to keep up the BS of private gain at taxpayer expense, caused crisis, etc. Damaging docs and a positive court outcome would go a long way to muzzle them.

 

fed doesnt regulate GSEs.  not sure why she is even answering questions about GSEs

 

I know. Think it's just the start of each side making their case. What do you think time frame is regarding court ruling on unsealing docs and admitting to record?

[Flynnstone5]

Glen is crazy......

 

http://seekingalpha.com/article/4046185-protected-designation-removal-first-positive-gse-omen-new-administration

 

"I own 4050 shares of FMCCH, 19238 shares of FMCCP, 7370 shares of FMCCT, 1341 shares of FMCKO, 16885 shares of FMCKP, 13207 shares of FNMFN and 5 shares of FNMFO."

 

So his cost basis is likely around $250K, a lot more than his net worth.  :o

I was long CCME back in 2011 and he was "all in" on those Chinese reverse mergers. Then those all went bust one by one and he went into quiet mode for a few years. (I also lost quite a bit on CCME) Now he is going crazy again. I hope the outcome is different.  :)

 

Regardless of what someone thinks of him that article I posted is still really good.  I tend to focus on the message instead of the messenger.

 

Guy's doing great. His cost basis was around $250K and he's now over $1M net worth from that. If he gets par he's at $3.5M.

[waynepolsonAtoZ]

"fed doesn't regulate GSEs.  not sure why she is even answering questions about GSEs."

 

Fed doesn't directly regulate the FHFA, however, the Chairman of the Board of Governors of the Federal Reserve System (Yellen) is one of 10 voting members of the FSOC. The FSOC can veto actions by the FHFA via a 2/3 vote of the 10 voting members. The Tsy Secretary is chair of the FSOC. FHFA Director Watt is also a vting member of the FSOC.

 

Needless to say, this is an important duty for the Treasury Secretary and Yellen, who will inevitably be the ones that the other eight members will look to for guidance. So, yes, Fed does "regulate the GSEs" given that it shares oversight authority with respect to actions by the FHFA.

 

Anyway, this has been a source of confusion viz a viz the CFPB. Circuit Court Judge Kavanagh wrote a clever but ultimately dumb--and apparently non-binding--decision complaining about the CFPB director having "too much power." I believe Kavanagh totally ignored the existence of the FSOC veto authority (though I haven't double checked).

 

As an aside, this is relatively comparable to the regulatory structure of the National Energy Regulatory South Africa (NERSA), which has a nine-member tribunal, five part time and four full time. The four full time members are responsible for gas pipelines, electricity, and petroleum pipelines, plus the CEO. So, the full time member on petroleum pipelines, for examples, takes the lead on the regulation of electric utilities, with final decisions decided by a majority vote of the full tribunal.

 

People have sometimes argued that FHFA should have a multi-member commission like the FERC or FCC, which wouldn't be a bad idea. They would at a minimum have to start following the APA of 1946, something the FHFA currently barely even pretends to try to do a little, when convenient. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Midas79]

Having read the offering circulars for Fannie Mae preferreds, I don't see how a forced conversion can happen at all.

 

FNMAS circular: http://www.fanniemae.com/resources/file/ir/pdf/stock-info/series_s_12062007.pdf

 

Page A-5, Section 3(d):

(d)

The  Series  S  Preferred  Stock  will  not  be  subject  to  any  mandatory  redemption,  sinking  fund  or  other  similar  provisions.  In  addition,  Holders  of  Series  S  Preferred  Stock  will  have  no  right  to  require redemption of any shares of Series S Preferred Stock.

 

Page A-6, Section 7(b) (partial):

(b)

Without the consent of the Holders of Series S Preferred Stock, Fannie Mae will have the right to amend, alter, supplement or repeal any terms of this Certificate or the Series S Preferred Stock (1) to  cure  any  ambiguity,  or  to  cure,  correct  or  supplement  any  provision  contained  in  this  Certificate  of  Designation that may be defective or

inconsistent with any other provision herein or (2) to make any other provision with respect to matters or questions arising with respect to the Series S Preferred Stock that is not  inconsistent  with  the  provisions  of  this  Certificate  of  Designation  so  long  as  such  action  does  not materially  and  adversely  affect  the  interests  of  the  Holders  of  Series  S  Preferred  Stock

 

It appears a forced conversion would be inconsistent with the first sentence in section 3(d). And we already know that the major preferred holders are willing to fight for their contractual rights in court, so a "we're going to do this anyway, see you in court" stance by the government is unlikely.

 

Update to this post:

 

I looked at the circulars for the Freddie Mac preferreds for this kind of language.

 

FMCKJ Circular

 

Page A-8, Section 8(h) (partial):

(h) Freddie Mac, by or under the authority of the Board of Directors, may amend, alter, supplement or repeal any provision of this Certificate pursuant to the following terms and conditions:

(i) Without the consent of the holders of the Non-Cumulative Preferred Stock, Freddie Mac  may  amend,  alter,  supplement  or  repeal  any  provision  of  this  Certificate  to  cure  any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions  arising  under  this  Certificate,  provided  that  such  action  shall  not  materially  and adversely affect the interests of the holders of the Non-Cumulative Preferred Stock.

 

I checked several series (FMCKJ, FMCKO, FMCKM) and never found any language about not allowing a forced conversion like we saw in FNMAS. It appears the only protection Freddie Mac preferred holders have against forced conversion is the last quoted sentence, which is hard to enforce. Freddie Mac's board could easily argue that a forced conversion is in the best interests of the preferred holders because it would allow for a recap without having to get 2/3 of every series to agree.

 

Does anyone else know of any material differences between the preferred stock of Fannie Mae and Freddie Mac? I can't say that I've read the circulars closely enough to spot any others: I was specifically looking for this forced conversion difference.

[waynepolsonAtoZ]

I want to echo Fairholme's comments in their report to shareholders that "As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact."

 

I'll leave it to you to compare the yield curves for 4th Q 2016 (Sept 30, 2016 and December 31, 2016) and 2nd Q 2015 (March 31, 2015 and June 30, 2015). It's easy to do here.  https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

 

Point is that the Treasury yield curve went up a LOT in the 4Q2016. This means deriv gains not deriv losses given that this line item is marked to market each quarter.

 

I used 2Q2015 as a comparison. Deriv gains were $3.135 b that quarter.

 

Note that interest rates went up a lot more in 4Q2016 than they did in 2Q2015. On the order of 20-40 basis points at the short end and 40-50 bp at the longer end.

 

Note that 3Q2016 deriv gains/losses were negligible so we may be looking at total comp income for Freddie Mac that is $3 billion or more higher than last quarter.

 

The 10K should come out first thing tomorrow am.

 

 

 

[investorG]

I want to echo Fairholme's comments in their report to shareholders that "As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact."

 

I'll leave it to you to compare the yield curves for 4th Q 2016 (Sept 30, 2016 and December 31, 2016) and 2nd Q 2015 (March 31, 2015 and June 30, 2015). It's easy to do here.  https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

 

Point is that the Treasury yield curve went up a LOT in the 4Q2016. This means deriv gains not deriv losses given that this line item is marked to market each quarter.

 

I used 2Q2015 as a comparison. Deriv gains were $3.135 b that quarter.

 

Note that interest rates went up a lot more in 4Q2016 than they did in 2Q2015. On the order of 20-40 basis points at the short end and 40-50 bp at the longer end.

 

Note that 3Q2016 deriv gains/losses were negligible so we may be looking at total comp income for Freddie Mac that is $3 billion or more higher than last quarter.

 

The 10K should come out first thing tomorrow am.

 

you gotta start somewhere ----- in press release it cites 'scheduled' sweep.  scheduled has not been used in prior releases.

[waynepolsonAtoZ]

$6.4 b of deriv gains in 4Q2016

[Guest cherzeca]

from freddie release (p.14):

 

Scheduled dividend obligation to Treasury in March 2017 will be $4.5 billion, based on Freddie Mac’s net worth

of $5.1 billion at December 31, 2016, less the 2017 capital reserve amount of $600 million.

 The applicable capital reserve amount is $600 million for 2017, and will be zero beginning on January 1,

2018.

 Aggregate cash dividends paid to Treasury will total $105.9 billion (including the scheduled March 2017

dividend obligation), $34.6 billion more than cumulative cash draws of $71.3 billion received from Treasury

through December 31, 2016

 

edit:  if you do a proforma calculation of what the senior pref balance would be if nws divs were recalculated based upon original 10% deal, there would still be a small balance left, so i can see mnuchin saying maybe lets continue the sweep until it is paid off on a proforma basis.

[Flynnstone5]

Mulvaney's in

[Luke 532]

Whoa, read what the real Tim Howard just said.  FHFA may be on board, finally.

[no_free_lunch]

Very interesting Luke.  His comment that FHFA would have approved the language change was informative.  I am trying to stay impartial here but it just keeps adding up.

 

If the plan was to wind down fannie/freddie, I don't think they would be considering repealing NWS.

[investorG]

healthcare in march, taxes thereafter.

 

i suspect housing reform will not pass congress this year (crapo hinted at this) unless they move fast.

 

if this is true, two questions ----

 

what's a realistic expectation of what mnuchin-watt can/will do this year on their own, and will he wait for perry appeal or vice versa to act?

 

edit: my best guess would be:

 

--- he should and will stop sweep on his own

--- he will likely propose his plan to congress

--- he will wait on the courts outcome before a 4th amendment / warrant adjustment on his own

 

any good thoughts?

 

[rros]

healthcare in march, taxes thereafter.

 

i suspect housing reform will not pass congress this year (crapo hinted at this) unless they move fast.

 

if this is true, two questions ----

 

what's a realistic expectation of what mnuchin-watt can/will do this year on their own, and will he wait for perry appeal or vice versa to act?

 

edit: my best guess would be:

 

--- he should and will stop sweep on his own

--- he will likely propose his plan to congress

--- he will wait on the courts outcome before a 4th amendment / warrant adjustment on his own

 

any good thoughts?

Just my opinion.

 

January 1st, 2018 is approaching fast. Then, the minimal capital cushion becomes zero. Although nothing changes dramatically this means that the slightest loss, however unlikely, will create a draw and a political storm Treasury won't be able to blame on past administrations. I seriously doubt Mnuchin wants that time bomb on his lap. So he may try to defuse that fast. Very fast.

 

This does not mean we are golden. He can simply arrange with FHFA to allow a certain amount of capitalization to increase the cushion. A 4th amendment that allows to retain earnings up to 5 billion of net worth and any excess goes to Treasury.

 

That would be a gigantic change signaling the first stage of recapitalization and possibly light at the end of the tunnel for the commons and Jrs. equally. From here, FHFA can order the companies to work on a capitalization plan as per HERA and both Treasury and FHFA can start work on how to exit the conservatorships, including welcoming restructuring ideas and possible bills from Congress. All the while, we would have gone from winding down capital to building capital.

[orthopa]

healthcare in march, taxes thereafter.

 

i suspect housing reform will not pass congress this year (crapo hinted at this) unless they move fast.

 

if this is true, two questions ----

 

what's a realistic expectation of what mnuchin-watt can/will do this year on their own, and will he wait for perry appeal or vice versa to act?

 

edit: my best guess would be:

 

--- he should and will stop sweep on his own

--- he will likely propose his plan to congress

--- he will wait on the courts outcome before a 4th amendment / warrant adjustment on his own

 

any good thoughts?

 

Complete speculation on my part but again only reinforcing what mnuchin has told us; Fannie and Freddie need to get out of goverment control, priority and relatively fast. According to Cohn he has been working hard on a solution

 

Again unless the man is lying sooner then later something should happen.

[orthopa]

Not sure if these have been linked...

 

New documents

https://fanniefreddiesecrets.org/resources/

 

 

This one makes it pretty clear the intention is to wind down the GSE's, they say as much. Not exactly what a conservator should be doing no?

 

http://fanniefreddiesecrets.org/wp-content/uploads/2017/02/PSPA-Modification-Key-Points-to-Make-7-20-12.pdf

[no_free_lunch]

There was an article out today with greenspan where he said an alternative to financial regulation is for financial companies to just hold more equity.  If Mnuchin put in place fairly high thresholds of equity would that not address much of the concern about the government having to backstop them while also getting them out of conservatorship?  It would also be relatively easy to set in place.  It also can be deemed as going after equity holders from an optics perspective.  Of course for the same reaons not so great for equity holders but it's such a profitable enterprise it would still be okay for them once they build up the capital.

 

[Flynnstone5]

This one makes it pretty clear the intention is to wind down the GSE's, they say as much. Not exactly what a conservator should be doing no?

 

http://fanniefreddiesecrets.org/wp-content/uploads/2017/02/PSPA-Modification-Key-Points-to-Make-7-20-12.pdf

 

What do the legal guys think about this? "It is consistent with our commitment that the GSEs will be wound down."

 

What would it take in your opinions to virtually guarantee a reversal?

 

Merket, cherzeca, hardnicap - what do you guys think? No one here knows better than you IMO.