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

[Guest cherzeca]

Tax bill: http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf

 

am i correct in saying that the bull case for the prefs now is that because of this tax bill the DTAs are worth less and thus they will have to take a write down and thus this will force trump/mnuchin to act to "set them free"?

 

tax bill should increase the future value of Fannie Mae->better value for unlocking the warrants, from governments point of view.

 

+1

 

fnma had $6B provision for income tax in 2016.  if taxable income doesnt change, the tax savings should be around $2B.  capitalized that at the PE ratio you prefer, say, 12.5X, means common equity is worth $25B more.  treasury gets .80 of that, or $20B in enhanced valuation.  build a lot of infrastructure with that, especially if used to support leverage the way trump seems to want it to be.

[Luke 532]

What Corker got for his "yes" vote...

http://www.ibtimes.com/political-capital/donald-trump-gop-leaders-could-be-enriched-last-minute-tax-break-inserted-final

 

Republican congressional leaders and real estate moguls could be personally enriched by a  real-estate-related provision GOP lawmakers slipped into the final tax bill released Friday evening, according to experts interviewed by International Business Times.

 

Sen. Bob Corker, who was considered a potential “no” vote on the bill, abruptly switched his position upon the release of the final legislation. Federal records reviewed by IBT show that Corker has millions of dollars of ownership stakes in real-estate related LLCs that could also benefit.

[Midas79]

Tax bill: http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-%20466.pdf

 

am i correct in saying that the bull case for the prefs now is that because of this tax bill the DTAs are worth less and thus they will have to take a write down and thus this will force trump/mnuchin to act to "set them free"?

 

There is a ton more reason behind the bull case for prefs, but the direct and immediate impact of tax reform is that it forces Mnuchin/Watt to address the capital buffer issue with actions and not merely words (paraphrased... Watt: "dangerous to have no capital buffer."  Mnuchin: "No more bailouts.  GSE's won't be killed, aren't going anywhere.").  Don't mistake that with being the entirety of the bull case for prefs.

 

Well put.

 

If Trump signs the bill before Dec 31 then the GSEs will have to immediately write down the DTAs and the clock for the Mar 31 draw starts ticking for Mnuchin and Watt.

 

Part of the bear case, or at least the not-so-bull case, was that the whole process could be dragged out much longer and it would depress the annualized ROI on the junior prefs, even if they recover to par. That is mostly off the table now imo.

 

 

Aside: a quick search of the tax bill for terms like "GSE", "Fannie", "Freddie", "preferred" etc. gave no results.

[no_free_lunch]

I can't access the full article but there is a WSJ piece on the GSE's being retained.

 

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

 

https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600

[Midas79]

I can't access the full article but there is a WSJ piece on the GSE's being retained.

 

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

 

https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600

 

I'm guessing that "wind down" has become "revoke the charters and invite competitors" for Corker and Warner. Will it be enough for Hensarling?

[Guest cherzeca]

@no free lunch

 

both wsj and bloomberg have reported on the "draft" corker/warner bill and it seems clear to me that neither have read it, just someone talking on very general background.

 

this indicates to me that the proponents of the draft do not have confidence in their work product.  it has been reported that while senate finance committee staff has given draft to "industry participants" (read MBA) to review, staff has apparently insisted on nondisclosure.

 

if you have confidence in the draft, you leak it.  if you dont want to put it out there for criticism and attack, you keep it close to vest.

 

in any event, i would not spend too much time thinking through what is being reported until you can read the bill and then get treasury's reaction as well.

[rros]

I can't access the full article but there is a WSJ piece on the GSE's being retained.

 

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

 

https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600

shhh...

 

http://archive.is/QdGy8

[no_free_lunch]

RROS,  ;).

[Mephistopheles]

I can't access the full article but there is a WSJ piece on the GSE's being retained.

 

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

 

https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600

shhh...

 

http://archive.is/QdGy8

 

"The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. "

 

Well that doesn't sound too good

[muscleman]

I can't access the full article but there is a WSJ piece on the GSE's being retained.

 

Lawmakers in both parties and the Trump administration are negotiating overhauls of the two companies—critical to home mortgages but in government conservatorship since the financial crisis—that could keep them at the center of the U.S. mortgage market for years to come, abandoning long-stalled proposals to wind them down, people familiar with the matter said.

 

https://www.wsj.com/articles/government-shifts-gears-on-fannie-mae-freddie-mac-1513515600

shhh...

 

http://archive.is/QdGy8

 

Thank you so much! This is awesome!

[Luke 532]

"The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. "

 

Well that doesn't sound too good

 

Moelis page 29...

 

Q4 2017: Announce future, not immediate, exit from conservatorship

 

Year 2020: GSEs emerge as rebuilt organizations and taxpayers profitably exit their only remaining financial crisis federal financial assistance program.

 

Safety-and-Soundness-Blueprint.pdf

[Eye4Valu]

"The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. "

 

Well that doesn't sound too good

 

Moelis page 29...

 

Q4 2017: Announce future, not immediate, exit from conservatorship

 

Year 2020: GSEs emerge as rebuilt organizations and taxpayers profitably exit their only remaining financial crisis federal financial assistance program.

 

+1

 

This is not going to be an immediate windfall when resolved. Will take long term investment to reap rewards, particularly if pref are converted to common. Reinvesting the dividend should amplify those returns over time if that is indeed the outcome. This will be a life long investment for me if it works out.

[Luke 532]

"The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. "

 

Well that doesn't sound too good

 

Moelis page 29...

 

Q4 2017: Announce future, not immediate, exit from conservatorship

 

Year 2020: GSEs emerge as rebuilt organizations and taxpayers profitably exit their only remaining financial crisis federal financial assistance program.

 

+1

 

This is not going to be an immediate windfall when resolved. Will take long term investment to reap rewards, particularly if pref are converted to common.

 

Perhaps, but page 29 of Moelis also states "agree to terms to equitize remaining SPS balance, and partially equitize JPS" (JPS being Junior Preferred Shares) around the same time an announcement that the conservatorship will be ended in the future.  If they equitize them at par or close to it (as recent articles suggest) and then convert to common then it could be an immediate windfall for preferred shareholders.

 

It includes footnote 3: Conversion price and terms can be pre-established (consistent with the approach used by Treasury in AIG), or can be set at the IPO price.

[SnarkyPuppy]

Mnuchin was recently removed as a defendant in one of the lawsuits (fairholme I think?).  Is there any significance of this?  Is it consistent w anything that needs to happen for Moelis?

[DocSnowball]

Even if dividends turn on in 2020, once the uncertainty is resolved valuation is easy to calculate and not too far from par

[no_free_lunch]

Why is a $25 preferred share going to convert to 2.5 $2.70 FNMA shares?  I get that if there is an exchange and a recap procedure the fnma shares are going to move in price.  However where does the $10 FNMA share price that is implied come from?

[Eye4Valu]

"The companies would remain under government control until privately backed competitors emerge and gain market share, a process that could take years, the people said. "

 

Well that doesn't sound too good

 

Moelis page 29...

 

Q4 2017: Announce future, not immediate, exit from conservatorship

 

Year 2020: GSEs emerge as rebuilt organizations and taxpayers profitably exit their only remaining financial crisis federal financial assistance program.

 

+1

 

This is not going to be an immediate windfall when resolved. Will take long term investment to reap rewards, particularly if pref are converted to common.

 

Perhaps, but page 29 of Moelis also states "agree to terms to equitize remaining SPS balance, and partially equitize JPS" (JPS being Junior Preferred Shares) around the same time an announcement that the conservatorship will be ended in the future.  If they equitize them at par or close to it (as recent articles suggest) and then convert to common then it could be an immediate windfall for preferred shareholders.

 

It includes footnote 3: Conversion price and terms can be pre-established (consistent with the approach used by Treasury in AIG), or can be set at the IPO price.

 

Agree. I guess I just mean it will take time to reap even larger rewards with common and dividends post conversion, if that is what happens. As I anticipate Fannie/Freddie will still have a large moat even with new competition, they seem like good long term holdings to reinvest dividends in.

[Guest cherzeca]

view from 30,000 feet

 

if you canvas the the reasons offered by professional investors for a GSE investment, paulson and eisman offered the simplest: GSEs cant be replaced or duplicated.

 

i tended to analyze the investment from a legal perspective. these guys simply looked at the housing finance landscape and concluded that GSEs are not only necessary, they cant be replaced.  they tended to be agnostic about the legal angle.  berkowitz was about even/steven legal analysis and market need analysis.

 

so i understand that we dont know what is in this senate banking committee bill draft, or accurately gauge likelihood of passage etc.  but based upon what has been reported, it seems that paulson and eisman have been proved out, that GSEs are here to stay (in some form), and for these guys, that was enough.

 

once you admit their necessity, then congress can tinker (or at least try to) around the edges (induce competition, enhance regulation etc) but the big hurdle identified by paulson and eisman has been cleared.

 

this is big

[Midas79]

once you admit their necessity, then congress can tinker (or at least try to) around the edges (induce competition, enhance regulation etc) but the big hurdle identified by paulson and eisman has been cleared.

 

this is big

 

Agreed. The biggest risk of zero, imo, was Congress eliminating the companies and giving shareholders the middle finger by keeping the SPS on the balance sheet. It is much harder to screw shareholders when the companies themselves are preserved, and there is less incentive to do so.

[orthopa]

once you admit their necessity, then congress can tinker (or at least try to) around the edges (induce competition, enhance regulation etc) but the big hurdle identified by paulson and eisman has been cleared.

 

this is big

 

Agreed. The biggest risk of zero, imo, was Congress eliminating the companies and giving shareholders the middle finger by keeping the SPS on the balance sheet. It is much harder to screw shareholders when the companies themselves are preserved, and there is less incentive to do so.

 

Agree, is now the time to go all in if you haven't already?

[investorG]

once you admit their necessity, then congress can tinker (or at least try to) around the edges (induce competition, enhance regulation etc) but the big hurdle identified by paulson and eisman has been cleared.

 

this is big

 

Agreed. The biggest risk of zero, imo, was Congress eliminating the companies and giving shareholders the middle finger by keeping the SPS on the balance sheet. It is much harder to screw shareholders when the companies themselves are preserved, and there is less incentive to do so.

 

Agree, is now the time to go all in if you haven't already?

 

imo there's never a good time to go 'all in' until it's too late to do so.

 

[Guest cherzeca]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

[rros]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

In the past, almost like clockwork, prices going up meant a hidden explosive ready to be thrown at us by some judge. That could mean today a SCOTUS denial to hear our cases. However, given the current legislative news the effect of that explosion may be diminished. Re going all in. For me it was at $ .45, for Berkowitz $4.50/$5. Anytime seems to be the time. As Livermore put it... making money sitting on your hands.

[Guest cherzeca]

@rros  SG granted another 30 day delay. scotus wont consider perry cert before end of january

[rros]

@rros  SG granted another 30 day delay. scotus wont consider perry cert before end of january

Thank you, Chris.