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

[blackcoffee]

Jesus Christ

https://howardonmortgagefinance.com/2018/03/21/the-state-of-the-debate/#comment-6269

 

[Midas79]

I just had a thought about the NWS and its potential unwinding. If the NWS had never happened then FnF would have just finished paying down the seniors last year when they passed the 10% moment (credit to Pollock for that term, it's very useful). They would have a few billion extra in capital, though that would only plug the hole left by the DTA writedowns. Pollock calculated Treasury's IRR on Fannie alone as 10.04%, meaning that without the NWS they would have a present net worth of approximately zero, though with no future dividend obligations to Treasury. Freddie would be positive by perhaps a few billion.

 

But if I understand the SPSPAs right, once the seniors are redeemed/paid back/gone, Treasury's funding commitment would be cancelled as well because the dividends they receive (their consideration for providing the backstop) are proportional to their senior pref share ownership. So wouldn't voiding the NWS ab initio leave Fannie and Freddie critically undercapitalized? Watt has suspended their capital requirements for now but I don't think he can justify continuing to do so with no Treasury backstop.

 

So if the NWS had never happened FnF could have been paying down the seniors. However I don't think they necessarily would have put every penny available towards them, given that the aim of paying them down would be to get free from the need to rely on the Treasury backstop. More likely is that Watt would have set a capital standard and FnF would have built up enough capital to be considered fully capitalized, and only then put money into paying down the seniors. I would be willing to run the numbers on this but only if I can be reasonably sure that it would be informative.

 

The upshot of all this: I think the narrative of "if it wasn't for the NWS then FnF would be out of conservatorship by now" is not necessarily true.

 

I might ask Tim Howard this but if my understanding here is just completely wrong then I can save some embarassment.  :-X

[SnarkyPuppy]

I just had a thought about the NWS and its potential unwinding. If the NWS had never happened then FnF would have just finished paying down the seniors last year when they passed the 10% moment (credit to Pollock for that term, it's very useful). They would have a few billion extra in capital, though that would only plug the hole left by the DTA writedowns. Pollock calculated Treasury's IRR on Fannie alone as 10.04%, meaning that without the NWS they would have a present net worth of approximately zero, though with no future dividend obligations to Treasury. Freddie would be positive by perhaps a few billion.

 

But if I understand the SPSPAs right, once the seniors are redeemed/paid back/gone, Treasury's funding commitment would be cancelled as well because the dividends they receive (their consideration for providing the backstop) are proportional to their senior pref share ownership. So wouldn't voiding the NWS ab initio leave Fannie and Freddie critically undercapitalized? Watt has suspended their capital requirements for now but I don't think he can justify continuing to do so with no Treasury backstop.

 

So if the NWS had never happened FnF could have been paying down the seniors. However I don't think they necessarily would have put every penny available towards them, given that the aim of paying them down would be to get free from the need to rely on the Treasury backstop. More likely is that Watt would have set a capital standard and FnF would have built up enough capital to be considered fully capitalized, and only then put money into paying down the seniors. I would be willing to run the numbers on this but only if I can be reasonably sure that it would be informative.

 

The upshot of all this: I think the narrative of "if it wasn't for the NWS then FnF would be out of conservatorship by now" is not necessarily true.

 

I might ask Tim Howard this but if my understanding here is just completely wrong then I can save some embarassment.  :-X

 

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

[blackcoffee]

I just had a thought about the NWS and its potential unwinding. If the NWS had never happened then FnF would have just finished paying down the seniors last year when they passed the 10% moment (credit to Pollock for that term, it's very useful). They would have a few billion extra in capital, though that would only plug the hole left by the DTA writedowns. Pollock calculated Treasury's IRR on Fannie alone as 10.04%, meaning that without the NWS they would have a present net worth of approximately zero, though with no future dividend obligations to Treasury. Freddie would be positive by perhaps a few billion.

 

But if I understand the SPSPAs right, once the seniors are redeemed/paid back/gone, Treasury's funding commitment would be cancelled as well because the dividends they receive (their consideration for providing the backstop) are proportional to their senior pref share ownership. So wouldn't voiding the NWS ab initio leave Fannie and Freddie critically undercapitalized? Watt has suspended their capital requirements for now but I don't think he can justify continuing to do so with no Treasury backstop.

 

So if the NWS had never happened FnF could have been paying down the seniors. However I don't think they necessarily would have put every penny available towards them, given that the aim of paying them down would be to get free from the need to rely on the Treasury backstop. More likely is that Watt would have set a capital standard and FnF would have built up enough capital to be considered fully capitalized, and only then put money into paying down the seniors. I would be willing to run the numbers on this but only if I can be reasonably sure that it would be informative.

 

The upshot of all this: I think the narrative of "if it wasn't for the NWS then FnF would be out of conservatorship by now" is not necessarily true.

 

I might ask Tim Howard this but if my understanding here is just completely wrong then I can save some embarassment.  :-X

 

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Agree. It's also impossible to say, if they hadn't been forced into gov't control, essentially by Goldman, that their management could have used their expertise to invest in MBS when AAAs were trading at penny's on the dollar in 2008, rather than paying the banks par for their PLMBS garbage and thereby bailing out the banks ANOTHER way.

 

What a world.

[Midas79]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

[rros]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

An injunction is dangerous. The SPSPAs have their own self-triggering explosive mechanism. Courts can see this. The commitment terminates instantly leaving companies severely undercapitalized. I am starting to think of Hank Paulson as some kind of genius. Or a complete fool who landed the deal of the century by mistake.

[Eye4Valu]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

An injunction is dangerous. The SPSPAs have their own self-triggering explosive mechanism. Courts can see this. The commitment terminates instantly leaving companies severely undercapitalized. I am starting to think of Hank Paulson as some kind of genius. Or a complete fool who landed the deal of the century by mistake.

 

As Tim Howard points out, an injunction would motivate Mnuchin to resolve the situation. Favorable ruling from 5th Circuit has the most potential in the near term to trigger this. SCOTUS would be very likely to grant cert on appeal. Not sure if Mnuchin would let SCOTUS rule on it or settle prior. I used to think the later, but now think the former is likely. Ultimately, I'm not sure how spineless Mnuchin is on advancing administrative reform. He may be more or less spineless than we think. A favorable ruling that advances the arguments made in Judge Brown's dissent would go a long way to bringing Godot around.

[SnarkyPuppy]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

 

I think you raise a good point though - I hadn't thought about it that way.  Primarily because I think this ends with a moelis type settlement/recap (because what else can actually happen?)

[rros]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

An injunction is dangerous. The SPSPAs have their own self-triggering explosive mechanism. Courts can see this. The commitment terminates instantly leaving companies severely undercapitalized. I am starting to think of Hank Paulson as some kind of genius. Or a complete fool who landed the deal of the century by mistake.

 

As Tim Howard points out, an injunction would motivate Mnuchin to resolve the situation. Favorable ruling from 5th Circuit has the most potential in the near term to trigger this. SCOTUS would be very likely to grant cert on appeal. Not sure if Mnuchin would let SCOTUS rule on it or settle prior. I used to think the later, but now think the former is likely. Ultimately, I'm not sure how spineless Mnuchin is on advancing administrative reform. He may be more or less spineless than we think. A favorable ruling that advances the arguments made in Judge Brown's dissent would go a long way to bringing Godot around.

Just to make sure only.. have you read the SPSPAs? There is a specific mention to what may happen if there is an injunction granted by any court.

[investorG]

 

As Tim Howard points out, an injunction would motivate Mnuchin to resolve the situation.

 

exactly.  if required, a new deal can be struck overnight between fhfa and tsy for a fresh backstop that is explicitly paid for.

 

mnuchin appears to be waiting until someone makes his job easier for him -- either a court outcome or a new makeup in congress.

 

meanwhile, long time holders get kicked out because they can't wait forever for justice -- even though he as all the power to either act (or more plausible speak strongly) on the matter.  not good for anyone involved, although I must admit it's only my fault for misjudging his competence and strength.

[Eye4Valu]

Presumably if they were private and actually allowed to pay down the sr prefs & allocate their own capital, they would have also have done a capital raise whereby existing investors would be more than happy to pay down the 10% yielding senior debt in exchange for some dilution

 

Fair point, and I agree with what you said.

 

But I'm looking at this from the perspective of a possible legal victory that would unwind the NWS. It's easy to say that voiding it as if it never happened would eliminate the seniors, but I don't remember anyone bringing up the undercapitalization issues it would create.

 

It's probably moot anyway, any court decision that unwinds the NWS would get appealed anyway, though I don't know what would happen to all the dividends in the meantime. Perhaps they would go to escrow, being returned to FnF if the appeals fail and sent to Treasury if the decision unwinding the NWS is overturned? That would make a recap a complete nightmare because FnF wouldn't know how much capital they need to raise.

An injunction is dangerous. The SPSPAs have their own self-triggering explosive mechanism. Courts can see this. The commitment terminates instantly leaving companies severely undercapitalized. I am starting to think of Hank Paulson as some kind of genius. Or a complete fool who landed the deal of the century by mistake.

 

As Tim Howard points out, an injunction would motivate Mnuchin to resolve the situation. Favorable ruling from 5th Circuit has the most potential in the near term to trigger this. SCOTUS would be very likely to grant cert on appeal. Not sure if Mnuchin would let SCOTUS rule on it or settle prior. I used to think the later, but now think the former is likely. Ultimately, I'm not sure how spineless Mnuchin is on advancing administrative reform. He may be more or less spineless than we think. A favorable ruling that advances the arguments made in Judge Brown's dissent would go a long way to bringing Godot around.

Just to make sure only.. have you read the SPSPAs? There is a specific mention to what may happen if there is an injunction granted by any court.

 

Not denying your point on SPSPAs. Any court victory in favor of plaintiffs will automatically enjoin the sweep though. So what then?

[Midas79]

Just to make sure only.. have you read the SPSPAs? There is a specific mention to what may happen if there is an injunction granted by any court.

 

Mnuchin can unwind the entire SPSPA by himself if any part of it is found unenforceable, and a court injunction would certainly do that. But I have no idea what unwinding the whole agreement from the beginning would entail. I think it would either lead to FnF being critically undercapitalized (and thus at risk of needing a taxpayer-funded bailout) or Treasury having to send a check of potentially large size to FnF (money that comes out of taxpayers' pockets). Neither jives with Mnuchin's stated desire to protect taxpayers.

 

On the surface I don't think Mnuchin would lob a grenade into the process by unwinding the SPSPAs at the first possible opportunity, but I would need to think about it more.

[DocSnowball]

Would be so lovely if GSEs can pay for the wall and all this ends happily

[blackcoffee]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

[DRValue]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

Let's put it this way. I'm from the UK.

I own commons. I'd gladly accept (some) warrant dilution for the yanks to get their wall.

 

I'm so far on the Trump train you don't even know.

[DocSnowball]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

Well said

[muscleman]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

The wall is a high ROE project. The illegals are costing the country a few billion dollars a year for the social benefits, in addition to crimes they bring in.

[Sunrider]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

The wall is a high ROE project. The illegals are costing the country a few billion dollars a year for the social benefits, in addition to crimes they bring in.

 

Thought you didn’t get any benefits if you’re illegal? As to crime ... when has a wall ever stopped that?

[DRValue]

Off-topic political fight in 3... 2... 1...

[muscleman]

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

The wall is a high ROE project. The illegals are costing the country a few billion dollars a year for the social benefits, in addition to crimes they bring in.

 

Thought you didn’t get any benefits if you’re illegal? As to crime ... when has a wall ever stopped that?

 

 

lets not go off topic on that. I noticed for most political views, either people believe that from the start or never. Spending countless hours debating never changes a person’s political view.

 

[Sunrider]

Agreed ,, off hand comment to what I saw as an off hand comment

 

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

lol there are people here who actually think the wall is a good idea? amazing.

 

 

The wall is a high ROE project. The illegals are costing the country a few billion dollars a year for the social benefits, in addition to crimes they bring in.

 

Thought you didn’t get any benefits if you’re illegal? As to crime ... when has a wall ever stopped that?

 

 

lets not go off topic on that. I noticed for most political views, either people believe that from the start or never. Spending countless hours debating never changes a person’s political view.

[blackcoffee]

Agreed ,, off hand comment to what I saw as an off hand comment

 

Would be so lovely if GSEs can pay for the wall and all this ends happily

 

 

lol there are people here who actually think the wall is a good idea? amazing.

 

 

The wall is a high ROE project. The illegals are costing the country a few billion dollars a year for the social benefits, in addition to crimes they bring in.

 

Thought you didn’t get any benefits if you’re illegal? As to crime ... when has a wall ever stopped that?

 

 

lets not go off topic on that. I noticed for most political views, either people believe that from the start or never. Spending countless hours debating never changes a person’s political view.

 

Sorry I brought it up..

 

let's look at this instead https://assets.pershingsquareholdings.com/media/2018/03/26000442/2017-Annual-Report.pdf

[Luke 532]

 

let's look at this instead https://assets.pershingsquareholdings.com/media/2018/03/26000442/2017-Annual-Report.pdf

 

In recent months, we purchased preferred stock of both companies.  Our preferred stock represents approximately 21% of our total investment in Fannie and Freddie, or about 1% of net assets. While the substantial majority of our investment historically has been in Fannie/Freddie common stock, we acquired preferred stock recently because (1) we believe that the timing of a favorable outcome for the two companies is more proximate (timing is an important consideration for the preferred shares as they are noncumulative and perpetual), (2)  it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares, and (3) we found the trading  prices of the preferred securities attractive at current levels.  We still prefer our investment in the common shares because the government and taxpayers’ interests, as owners of 79.9% of the common stock of both companies, are aligned with the interests of common shareholders.  If housing reform is successful, we believe that both FNMA and FMCC common and preferred stock will likely be worth multiples of their current share prices.

[rros]

 

let's look at this instead https://assets.pershingsquareholdings.com/media/2018/03/26000442/2017-Annual-Report.pdf

 

In recent months, we purchased preferred stock of both companies.  Our preferred stock represents approximately 21% of our total investment in Fannie and Freddie, or about 1% of net assets. While the substantial majority of our investment historically has been in Fannie/Freddie common stock, we acquired preferred stock recently because (1) we believe that the timing of a favorable outcome for the two companies is more proximate (timing is an important consideration for the preferred shares as they are noncumulative and perpetual), (2)  it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares, and (3) we found the trading  prices of the preferred securities attractive at current levels.  We still prefer our investment in the common shares because the government and taxpayers’ interests, as owners of 79.9% of the common stock of both companies, are aligned with the interests of common shareholders.  If housing reform is successful, we believe that both FNMA and FMCC common and preferred stock will likely be worth multiples of their current share prices.

Is this the reason preferred shares have been collapsing?

Ackman appears to be anti-Midas.

[blackcoffee]

Ackman appears to be anti-Midas.

 

had the same thought