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

[rros]

An off-the-wall thought:

 

Could Watt direct the GSEs to use their profits to start retiring/redeeming the junior prefs? Any money used to do that is out the door and is no longer part of net worth, meaning that the GSEs wouldn't have to send any money to Treasury. It could help with a restructuring of the balance sheet and maybe even undercut the lawsuits; perhaps Berkowitz and others would drop their suits if they're paid at par. High-dividend series like FNMAS and FMCKJ are Fairholme's main holdings and also the most prudent to pay off first.

 

Of course, this doesn't address Watt's concern with the lack of capital for short-term fluctuations. But it would help with a post-conservatorship future by not having dividend obligations. Watt might see this as a better use of money than just sending it to Treasury for no consideration.

 

I believe the chances of this happening are very small, but are they non-zero? Or would this violate the PSPAs in some way?

zero.

[rros]

fwiw, from paulson's 1H 17 letter: 

 

"In Fannie Mae and Freddie Mac, our view is that the net worth sweep will not likely change until there is a broader plan in place to recapitalise the entities. We believe there is considerable upside to our holdings despite potential volatility and a high probability of a resolution before the end of 2017."

 

http://www.valuewalk.com/2017/08/paulson-co/

That is just 5 months away. Right now it isn't looking that good, I am afraid.

[FreeOption]

An off-the-wall thought:

 

Could Watt direct the GSEs to use their profits to start retiring/redeeming the junior prefs? Any money used to do that is out the door and is no longer part of net worth, meaning that the GSEs wouldn't have to send any money to Treasury. It could help with a restructuring of the balance sheet and maybe even undercut the lawsuits; perhaps Berkowitz and others would drop their suits if they're paid at par. High-dividend series like FNMAS and FMCKJ are Fairholme's main holdings and also the most prudent to pay off first.

 

Of course, this doesn't address Watt's concern with the lack of capital for short-term fluctuations. But it would help with a post-conservatorship future by not having dividend obligations. Watt might see this as a better use of money than just sending it to Treasury for no consideration.

 

I believe the chances of this happening are very small, but are they non-zero? Or would this violate the PSPAs in some way?

zero.

negative 1 million %, doesn't make sense financially or politically.

[rros]

Both Paulson and Berkowitz expect this to be resolved in 2017. Do you see it that way? I am not sure how this could be done when Watt is out there playing politics. They need him to get this done. May be all of the 12000 documents will be released and there would be no other option than to release and return all of the money that was looted. Trump administration does have all the power to release all of the documents.

The last thing I see is a windfall. That would be for Jrs. to go from $6ish today to $25 or $50 full value when this is Paulson-Berkowitz-resolved. There is too much resistance from everywhere for anything like that to happen. Even Carson said something like shareholders should get their money back but not all at once. So I am fairly pessimistic regarding the 12/31/17 deadline.

 

About the only thing I can think of is a coordinated announcement by the Treasury, FHFA and Congress that shareholders will have a seat at the table regarding reform, their rights respected and HERA upheld. Then, lawsuits are settled and we all move along. While this may not get us full value we may trade at a premium from today.

[Luke 532]

Then, lawsuits are settled and we all move along. While this may not get us full value we may trade at a premium from today.

 

One can almost bet their life that lawsuits (Perry, Berkowitz, etc.) won't settle for anything less than 80% par at a bare minimum.

[investorG]

Then, lawsuits are settled and we all move along. While this may not get us full value we may trade at a premium from today.

 

One can almost bet their life that lawsuits (Perry, Berkowitz, etc.) won't settle for anything less than 80% par at a bare minimum.

 

They are likely tired, I'd guess they'd likely settle now for something solid but below 80pct.

 

[Luke 532]

They are likely tired, I'd guess they'd likely settle now for something solid but below 80pct.

 

Anything lower than 80% would be weak, not solid.

[hardincap]

@luke, if they can't win any cases, what are their alternatives? at that point settling for 5% is better than zero

[Luke 532]

@luke, if they can't win any cases, what are their alternatives? at that point settling for 5% is better than zero

 

If they can't win any cases, then sure.  But that's one heck of a strong statement.  Remand on contractual claims isn't losing a case.  Sweeney releasing documents isn't losing a case.  And so on.  I think it's a huge stretch to say with any certainty that they can't win any case. 

 

I understand that people are fatigued, and Berkowitz/Perry probably are to a certain degree as well, but to me at least that doesn't mean I start thinking it's impossible to win any court cases. 

 

With that said, the likelihood of winning a case might not even matter if the Administration simply wants to put these cases behind them.

 

And with that said, I don't even think court cases are what will determine this... I'd be very surprised if court cases determined the outcome.  I think this is more a bet on what one believes Mnuchin, Watt, Trump, etc. will do and I've seen enough, and continue to see more and more, that makes me think they'll do something favorable for the housing market, taxpayers, and shareholders (at least preferred).  But that's just how I see it and I could be wrong.

[ValueMaven]

'I'd be very surprised if court cases determined the outcome'

 

1000% - you nailed it!

 

ValueMaven

[rros]

@luke, if they can't win any cases, what are their alternatives? at that point settling for 5% is better than zero

Realistically, for any real reform lawsuits are an impediment. They appear to move along different, independent tracks:  reform and lawsuits. But what will be the point of completing a reform when -as unlikely as it may be- a ruling may come that dumps a bucket of cold water? Generally, lawsuits aim at upholding the rights of shareholders. The government can do that on their own with a simple statement.

 

To speed up reform, regardless of the chances of losing any of the lawsuits by Treasury or FHFA is zero or above zero, government may come to the understanding they should be a thing of the past. Settling may not involve any fixed price or reward. Just the beneficial statement that shareholders will be respected, their rights upheld and their chunk of the companies revalued in any of the outcomes. Thus, all shares might trade at a premium. How significant, I don't know.

[Guest cherzeca]

AEI's Pollock and what to do at the "10% return moment":  http://thehill.com/blogs/pundits-blog/finance/346392-fannie-and-freddie-face-a-moment-of-truth-on-their-taxpayer

[investorG]

AEI's Pollock and what to do at the "10% return moment":  http://thehill.com/blogs/pundits-blog/finance/346392-fannie-and-freddie-face-a-moment-of-truth-on-their-taxpayer

 

anything that suggests an imminent retirement of the sr preferred, especially from antagonists, is good news in my opinion.  especially relative to the current securities' prices.

[rros]

AEI's Pollock and what to do at the "10% return moment":  http://thehill.com/blogs/pundits-blog/finance/346392-fannie-and-freddie-face-a-moment-of-truth-on-their-taxpayer

 

anything that suggests an imminent retirement of the sr preferred, especially from antagonists, is good news in my opinion.  especially relative to the current securities' prices.

It's a lot more complex. The 10% dividend and the 100% dividend are tied to the financial commitment by the Treasury. You can't simply do away with the Srs. as they are part of an integral mechanism. Will the commitment fee he proposes take the place of the dividends by the Srs. and continue to support Treasury's commitment? And where is the capital going to come from to replace that commitment? What will Watt do when capital reaches zero? Will Watt order a recapitalization plan or declare a receivership? This opens up more questions than the answers it provides.

 

All he is suggesting is Treasury has been paid off. Or is about to be.

[investorG]

AEI's Pollock and what to do at the "10% return moment":  http://thehill.com/blogs/pundits-blog/finance/346392-fannie-and-freddie-face-a-moment-of-truth-on-their-taxpayer

 

anything that suggests an imminent retirement of the sr preferred, especially from antagonists, is good news in my opinion.  especially relative to the current securities' prices.

It's a lot more complex. The 10% dividend and the 100% dividend are tied to the financial commitment by the Treasury. You can't simply do away with the Srs. as they are part of an integral mechanism. Will the commitment fee he proposes take the place of the dividends by the Srs. and continue to support Treasury's commitment? And where is the capital going to come from to replace that commitment? What will Watt do when capital reaches zero? Will Watt order a recapitalization plan or declare a receivership? This opens up more questions than the answers it provides.

 

All he is suggesting is Treasury has been paid off. Or is about to be.

 

while I can't prove your assumptions are wrong, I believe you are taking a quite pessimistic view rather than a base case reasonable scenario that I simply interpreted as sr preferred gone, commitment fee replacing it (which dents earnings), and a multi-year capital build (that probably incorporates some conversion by jr preferred) from retained earnings and outside sources.  he mentions the warrants which I don't believe works in a receivership.

[rros]

AEI's Pollock and what to do at the "10% return moment":  http://thehill.com/blogs/pundits-blog/finance/346392-fannie-and-freddie-face-a-moment-of-truth-on-their-taxpayer

 

anything that suggests an imminent retirement of the sr preferred, especially from antagonists, is good news in my opinion.  especially relative to the current securities' prices.

It's a lot more complex. The 10% dividend and the 100% dividend are tied to the financial commitment by the Treasury. You can't simply do away with the Srs. as they are part of an integral mechanism. Will the commitment fee he proposes take the place of the dividends by the Srs. and continue to support Treasury's commitment? And where is the capital going to come from to replace that commitment? What will Watt do when capital reaches zero? Will Watt order a recapitalization plan or declare a receivership? This opens up more questions than the answers it provides.

 

All he is suggesting is Treasury has been paid off. Or is about to be.

 

while I can't prove your assumptions are wrong, I believe you are taking a quite pessimistic view rather than a base case reasonable scenario that I simply interpreted as sr preferred gone, commitment fee replacing it (which dents earnings), and a multi-year capital build (that probably incorporates some conversion by jr preferred) from retained earnings and outside sources.  he mentions the warrants which I don't believe works in a receivership.

I *am* pessimistic. You are correct. Zandi came out basically saying companies are 99% reformed. And now Pollock says Treasury has been paid and the Srs. should be gone. These 2 were on the other side throughout Obama's tenure. Yet, we have heard no word from Mnuchin who said second half. While Trump continues to be MIA. And Watt appears to have backtracked. Perhaps Wayne is correct that nothing will happen and companies will remain in c-ship till the day it is Goldman's day.

[rros]

And the most significant negative indicator: Bradford spewing out about 2 new articles a day.

[merkhet]

What I find interesting in the AEI article is the idea that Pollock envisions that the companies would pay some sort of a commitment fee to Treasury to maintain their capital "line of credit," let's call it. Except, what would be the point of doing that instead of doing a combination of a capital raise and/or capital retention as envisioned by the Blueprint?

 

My read is that he's seeing the writing on the wall re the resolution of the NWS, so he's slowly inching his way back while still trying to hobble the entities w/ the commitment fee and a ridiculously punitive amount of capital requirements.

[Luke 532]

What I find interesting in the AEI article is the idea that Pollock envisions that the companies would pay some sort of a commitment fee to Treasury to maintain their capital "line of credit," let's call it. Except, what would be the point of doing that instead of doing a combination of a capital raise and/or capital retention as envisioned by the Blueprint?

 

My read is that he's seeing the writing on the wall re the resolution of the NWS, so he's slowly inching his way back while still trying to hobble the entities w/ the commitment fee and a ridiculously punitive amount of capital requirements.

 

Spot on.

[Midas79]

What I find interesting in the AEI article is the idea that Pollock envisions that the companies would pay some sort of a commitment fee to Treasury to maintain their capital "line of credit," let's call it. Except, what would be the point of doing that instead of doing a combination of a capital raise and/or capital retention as envisioned by the Blueprint?

 

My read is that he's seeing the writing on the wall re the resolution of the NWS, so he's slowly inching his way back while still trying to hobble the entities w/ the commitment fee and a ridiculously punitive amount of capital requirements.

 

Good point. The narrative has come a long way (in fits and starts) from winding them down.

[Guest cherzeca]

What I find interesting in the AEI article is the idea that Pollock envisions that the companies would pay some sort of a commitment fee to Treasury to maintain their capital "line of credit," let's call it. Except, what would be the point of doing that instead of doing a combination of a capital raise and/or capital retention as envisioned by the Blueprint?

 

My read is that he's seeing the writing on the wall re the resolution of the NWS, so he's slowly inching his way back while still trying to hobble the entities w/ the commitment fee and a ridiculously punitive amount of capital requirements.

 

agreed.  plus, you might remember pollock was on the email from fellow traveller parrott on day of nws, when pollock asked if the nws would amortize principal.  while a gse hater, i think pollock never envisioned that there should be nationalization, just a quicker payoff.  so this new blogpost would be consistent with that.

[waynepolsonAtoZ]

Pollock always has been the best of a bad pack of AEI dogs. His proposal is pretty reasonable. The 5% equity ratio is OK, keeping in mind its not going to happen anytime soon, and maybe never. 

 

I'll have to try to replicate his IRR calcs sometime.

[TonyG]

https://assets.pershingsquareholdings.com/media/2017/08/17151225/PSH-Interim-Financial-Statements-06.30.17.pdf

 

"We are fortunate that two of the most financially sophisticated Senators in Washington, Senators Corker and Warner, have taken the lead on housing finance reform and have suggested that they will put forth new legislation shortly to address this last remaining restructuring of the financial crisis. We believe that this initiative combined with support from the Treasury Secretary has dramatically increased the chances of a favorable resolution for the country and for investors in Fannie and Freddie, including the government, which is not reflected in their current share prices."

 

uhhh what

[Luke 532]

https://assets.pershingsquareholdings.com/media/2017/08/17151225/PSH-Interim-Financial-Statements-06.30.17.pdf

 

"We are fortunate that two of the most financially sophisticated Senators in Washington, Senators Corker and Warner, have taken the lead on housing finance reform and have suggested that they will put forth new legislation shortly to address this last remaining restructuring of the financial crisis. We believe that this initiative combined with support from the Treasury Secretary has dramatically increased the chances of a favorable resolution for the country and for investors in Fannie and Freddie, including the government, which is not reflected in their current share prices."

 

uhhh what

 

That sounds like a deal is in the works.

[Guest cherzeca]

they covered their shorts