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

[Eye4Valu]

mnuchin on the hot seat, per the WSJ.  since he cant change the fed pick and the Chinese likely don't take him too seriously, hopefully he feels motivated to accomplish something significant, soon, and fair on housing.

 

https://twitter.com/realDonaldTrump/status/1066116263649382400

@realDonaldTrump

I am extremely happy and proud of the job being done by @USTreasury Secretary @StevenMnuchin1. The FAKE NEWS likes to write stories to the contrary, quoting phony sources or jealous people, but they aren’t true. They never like to ask me for a quote b/c it would kill their story.

 

Horse pile coming from the same publication that gave John Carney and Joe Light a job. John, Joe and the Journal, you're fired!!!!!

[muscleman]

https://www.wsj.com/articles/trump-expresses-dissatisfaction-with-treasury-secretary-1543006250?mod=hp_lead_pos2

 

What do you guys think of this?

 

[DRValue]

https://www.wsj.com/articles/trump-expresses-dissatisfaction-with-treasury-secretary-1543006250?mod=hp_lead_pos2

 

What do you guys think of this?

 

https://twitter.com/realDonaldTrump/status/1066116263649382400

[muscleman]

https://www.wsj.com/articles/trump-expresses-dissatisfaction-with-treasury-secretary-1543006250?mod=hp_lead_pos2

 

What do you guys think of this?

 

https://twitter.com/realDonaldTrump/status/1066116263649382400

 

I actually saw Trump's twit first before seeing the WSJ article. It is hard to say. Trump said nice things about a few people but then fired them later anyway.

[DRValue]

https://www.wsj.com/articles/trump-expresses-dissatisfaction-with-treasury-secretary-1543006250?mod=hp_lead_pos2

 

What do you guys think of this?

 

https://twitter.com/realDonaldTrump/status/1066116263649382400

 

I actually saw Trump's twit first before seeing the WSJ article. It is hard to say. Trump said nice things about a few people but then fired them later anyway.

 

Yup agree with that, he's said nice things and then the person ends up getting the boot. Tying this into the GSE's adds even more to speculate on, truth is now I don't think anyone can say what will happen. But it sure seems to me it looks like a recapitalization, its just working out whether the government can screw shareholders while they do it and I'm not sure they can. I'm anticipating GSE details will start appearing in Feb.

 

Bought some more commons the other day  :D

[investorG]

the share prices - with both languishing and the common underperforming - are signaling receivership. 

 

it's hard to believe this is possible as the appropriate solution, but at this point the market is telling us what's on the menu.

[blackcoffee]

the share prices - with both languishing and the common underperforming - are signaling receivership. 

 

it's hard to believe this is possible as the appropriate solution, but at this point the market is telling us what's on the menu.

 

how would that be justified exactly? They keep making money so we have to kill them? Nonsensical. 

[Eye4Valu]

the share prices - with both languishing and the common underperforming - are signaling receivership. 

 

it's hard to believe this is possible as the appropriate solution, but at this point the market is telling us what's on the menu.

 

Wouldn't the preferred be trading much lower if that was the case? I don't think the market is signaling anything.

[Guest cherzeca]

the share prices - with both languishing and the common underperforming - are signaling receivership. 

 

it's hard to believe this is possible as the appropriate solution, but at this point the market is telling us what's on the menu.

 

that was corker.  you are one election cycle late

[allnatural]

The market is signaling status quo IMO. Once it becomes clear that the admin is walking down the path of privatization we should see a nice re-rating.

[investorG]

the share prices - with both languishing and the common underperforming - are signaling receivership. 

 

it's hard to believe this is possible as the appropriate solution, but at this point the market is telling us what's on the menu.

 

how would that be justified exactly? They keep making money so we have to kill them? Nonsensical.

 

I'm guessing there's a legal, political, or lack-of-guts roadblock to canceling the sr pref as repaid.  Perhaps they'd dump the whole existing capital structure into receivership, transfer the operational assets out into companies that look quite similar for a fresh start, and let the courts decide what (if anything) the prior shareholders should get for compensation.  the warrant potential would go away but the govt would likely receive plenty more value from the sr pref seniority in the wind-down, unless the supreme court ended up striking down the NWS in a few years. 

 

the share prices (low, with common underperforming) are speaking that the courts are the play.  if it was april, i gave it a pass that it's not ripe due to mnuchin / phillips comments about nothing getting done in 2018.  but now the opportunity window is close / open and the common is near $1 - which leads me to believe moelis is not happening.

 

 

[Guest cherzeca]

@IG

 

well your guess is as good as mine, but I was thinking that institutions have been buying preferred and hedging by shorting common.  seems to me hedging is as good as any explanation when you see two securities that have some relationship to each other going in different directions.  if it was truly bad news percolating, there would be positive correlation

[Luke 532]

According to David Stevens, errr... Paul Muolo.

 

https://www.insidemortgagefinance.com/imfnews/1_1491/daily/White-House-Contemplating-Calabria-for-fhfa-job-1000048542-1.html

[Guest cherzeca]

Calabria is on record about 5 years ago when he was still at Cato that you should wind the GSEs down.  He is a big time no government involvement in private enterprise guy, distortions and all.  again, this was when he was a pointy head.

 

now that he is advising Pence one needs to ask whether he has gotten a tad more practical in his views.

 

as senate banking chief staff member, he is also credited with being the chief scribe on HERA.  so there is that.

 

my take is that if he becomes FHFA director (has to be confirmed by senate, which will take time but I think is likely), GSEs won't be liquidated etc.  he will understand that the govt has been paid back handsomely and will move forward with some form of a Moelis deal.  but he will be harsh when it comes to GSE capital requirements.

 

correct me if I am wrong, but isn't that IMF rag just a rumor mouthpiece for MBA (as you suggest)?

 

ps:  link behind a paywall and I am surely not paying IMF to read it

 

pps:  he is a grateful dead deadhead, so he cant be all bad

[Luke 532]

ps:  link behind as paywall and I am surely not paying IMF to read it

 

Thanks for the comments, cherzeca.  I registered for free with IMF to read the articles, no payment required.

[Luke 532]

Interesting.  Matthew Whitaker, Acting Attorney General, has represented Fairholme in the past.  Search "Whitaker" in the attached document.

Whitaker-Fairholme.pdf

[Midas79]

Calabria is on record about 5 years ago when he was still at Cato that you should wind the GSEs down.  He is a big time no government involvement in private enterprise guy, distortions and all.  again, this was when he was a pointy head.

 

now that he is advising Pence one needs to ask whether he has gotten a tad more practical in his views.

 

as senate banking chief staff member, he is also credited with being the chief scribe on HERA.  so there is that.

 

my take is that if he becomes FHFA director (has to be confirmed by senate, which will take time but I think is likely), GSEs won't be liquidated etc.  he will understand that the govt has been paid back handsomely and will move forward with some form of a Moelis deal.  but he will be harsh when it comes to GSE capital requirements.

 

Two more recent views from Calabria:

 

(from January 2016): http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

(from November 2017): https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship

 

He certainly seems to have at least taken several steps back from the "kill FnF" ledge. However, that 2016 paper calls out Treasury for lots of bad (and even unlawful) behavior. If Mnuchin really is going to hand-pick the next FHFA director, would he choose Calabria knowing about Calabria's views on Treasury's actions? (of course, Mnuchin wasn't in office then, but he hasn't really acted much different than Lew other than last December's letter agreement)

 

The 2016 paper shows that Calabria is anti-NWS, but would he have enough power to really do anything about it? Would he go so far as to withhold the dividend payments? Things will get interesting soon, and this is a key thread to follow.

[Guest cherzeca]

@midas

 

thanks for reminding us that Calabria was co-writer with Krimminger on that white paper...which was excellent

[rros]

Well... Calabria wants Fannie and Freddie to become banks! Not utilities, no securitization market, no secondary market, no government guarantee. Problem solved. We will all have shares of Fannie and Freddie National Banks. And a corresponding check book.

 

https://www.urban.org/policy-centers/housing-finance-policy-center/projects/housing-finance-reform-incubator/mark-calabria-coming-full-circle-mortgage-finance

... But the goodwill and human capital within the GSEs would remain. Shareholders would also benefit to the extent that the companies had value. This would require the GSEs to meet bank capital levels. Selling off the government’s preferred shares would assist in this regard.

 

Can someone please explain how selling the SRs will help the companies meet bank capital levels? May be he meant declaring them paid off so that GSEs can finally retain earnings?

[Midas79]

Can someone please explain how selling the SRs will help the companies meet bank capital levels? May be he meant declaring them paid off so that GSEs can finally retain earnings?

 

The seniors have to disappear so that the companies can rebuild capital. Getting rid of the seniors gets rid of both the NWS and the 10% dividend requirement. It doesn't actually recap the companies, but it is a necessary step.

 

Until now I have assumed that either a court would force Treasury to cancel the shares, via finding the NWS illegal and recharacterizing past payments, or that Treasury would declare them redeemed. But selling the seniors, or more likely converting them to either junior preferred (pari passu with the existing ones) or common shares could also work, though it makes the recap more difficult. Let me think out loud for a minute.

 

The problem with converting to common is that the senior pref balance, plus Treasury's warrants, would give Treasury an extremely large portion of the total common stock. Like over 99.9%. I believe that would force the government to consolidate FnF's balance sheets onto their own, raising the national debt by $5.5T overnight. I don't know if Treasury could perform some sleight-of-hand, like doing many partial conversions and selloffs to keep Treasury's stake under 80% at all times.

 

In fact, this specter could be part of the reason the common share price keeps dropping. That much dilution would make those shares nigh worthless.

 

The problem with converting to junior preferred is that the dividends on that much par value of preferred shares would eat up a ton of the companies' earnings. In fact, if it eats up all earnings then the NWS would de facto continue, though the companies' earnings would be shared with existing junior preferred shareholders. Common shareholders would never receive a dividend again, perhaps another reason the current share price is so low.

 

If the converted seniors are non-cumulative, they would count towards core capital. Does this amount to an instant recap, even though the giant accumulated deficit currently on the balance sheets would remain? I also don't know if the converted seniors would necessarily have to be pari passu with the current juniors. Perhaps they would remain senior. Bad news for us in that case.

[rros]

Whatever you convert the Srs into, they do not really disappear -just the dividend payment disappears- and the converted shares continue to be property of the US government. Selling the converted Srs (as new commons or new Jrs.)  or directly selling the Srs leads to the same result: it is money that goes to taxpayers (or Treasury's general fund). So it does not help to build capital. There is only one way for that and it is cancelling them. But Calabria did not use that word.

 

This is why Stegman used to say recapitalization comes at a cost to taxpayers. Because taxpayers will have to let *their* Srs. go. I think.

[Midas79]

Whatever you convert the Srs into, they do not really disappear -just the dividend payment disappears- and the converted shares continue to be property of the US government. Selling the converted Srs (as new commons or new Jrs.)  or directly selling the Srs leads to the same result: it is money that goes to taxpayers (or Treasury's general fund). So it does not help to build capital. There is only one way for that and it is cancelling them. But Calabria did not use that word.

 

This is why Stegman used to say recapitalization comes at a cost to taxpayers. Because taxpayers will have to let *their* Srs. go. I think.

 

You're right that conversion, instead of cancellation, doesn't help build capital, but neither does it hurt the capital rebuild. I disagree that cancellation is the only way forward. Conversion just allows Treasury to suck out even more money than they already have while letting the companies out of conservatorship.

 

Given Treasury's past actions, would you really be surprised if they insisted on a conversion? I'm starting to think that cancellation would only happen if a court forces it, and that would be years away because any court-enforced recharacterization would be appealed all the way up to SCOTUS.

[rros]

Whatever you convert the Srs into, they do not really disappear -just the dividend payment disappears- and the converted shares continue to be property of the US government. Selling the converted Srs (as new commons or new Jrs.)  or directly selling the Srs leads to the same result: it is money that goes to taxpayers (or Treasury's general fund). So it does not help to build capital. There is only one way for that and it is cancelling them. But Calabria did not use that word.

 

This is why Stegman used to say recapitalization comes at a cost to taxpayers. Because taxpayers will have to let *their* Srs. go. I think.

 

You're right that conversion, instead of cancellation, doesn't help build capital, but neither does it hurt the capital rebuild. I disagree that cancellation is the only way forward. Conversion just allows Treasury to suck out even more money than they already have while letting the companies out of conservatorship.

 

Given Treasury's past actions, would you really be surprised if they insisted on a conversion? I'm starting to think that cancellation would only happen if a court forces it, and that would be years away because any court-enforced recharacterization would be appealed all the way up to SCOTUS.

I agree with everything you said. But if Calabria gets the post I think he will act differently than Watt and use the full power of FHFA either as receiver or a real conservator, bringing sound and solvency back. Which could mean somehow terminating the commitment. He obviously believes the Srs. are an impediment and an about face of this magnitude is unlikely, in my view. Although everybody who becomes a US official seems to have to cross Lethe, the river of forgetfulness.

[DRValue]

Calabria is on record about 5 years ago when he was still at Cato that you should wind the GSEs down.  He is a big time no government involvement in private enterprise guy, distortions and all.  again, this was when he was a pointy head.

 

now that he is advising Pence one needs to ask whether he has gotten a tad more practical in his views.

 

as senate banking chief staff member, he is also credited with being the chief scribe on HERA.  so there is that.

 

my take is that if he becomes FHFA director (has to be confirmed by senate, which will take time but I think is likely), GSEs won't be liquidated etc.  he will understand that the govt has been paid back handsomely and will move forward with some form of a Moelis deal.  but he will be harsh when it comes to GSE capital requirements.

 

Two more recent views from Calabria:

 

(from January 2016): http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

(from November 2017): https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship

 

He certainly seems to have at least taken several steps back from the "kill FnF" ledge. However, that 2016 paper calls out Treasury for lots of bad (and even unlawful) behavior. If Mnuchin really is going to hand-pick the next FHFA director, would he choose Calabria knowing about Calabria's views on Treasury's actions? (of course, Mnuchin wasn't in office then, but he hasn't really acted much different than Lew other than last December's letter agreement)

 

The 2016 paper shows that Calabria is anti-NWS, but would he have enough power to really do anything about it? Would he go so far as to withhold the dividend payments? Things will get interesting soon, and this is a key thread to follow.

 

I've read the Krimminger-Calabria paper and it points out four important points if Calabria is nominated and appointed;

 

[*]There's a bright line between receivership and conservatorship due to objective tests, i.e. mandatory receivership at balance sheet insolvency

[*]Historical rates for conservatorship "debtor-in-possession" financing is much lower than 10% and only covers FDIC costs. The SPS rate is antithetical to a conservator

[*]Shareholders must only be diluted in proportion to the assistance they received from the conservator

[*]FHFA alone has authority and Treasury has been abusing its power as lender of last resort

 

If you take point one, with the minimum capital buffer of $3 billion per GSE, that means receivership is off the table.

 

Point two, could there be a case for a fourth amendment that reduces the SPSA rate to something more akin to conservator financing, with the remainder re-reimbursed to the GSE's for an immediate capital boost? This would likely be a substantial amount and if you take Moelis as a recap plan, that would reduce the capital required from a common capital raise. I don't think this is out of the question, considering a bill has been raised to do just that. It got nowhere, obviously.

 

Point 3, if something like point 2 is enacted and the financing is gone, is there a case against the warrants? Could a combination of point 2 and a capital raise result in less dilution overall?

 

Point 4, well we know this. But if Treasury does want to get the GSE's out of conservatorship, as evidenced by all the public comments and point one above, then its likely that points 2 and 3 could be considered.

 

I'd feel great about Calabria running the FHFA considering his paper as I think it would be hard for receivership to be justified, or his comments walked back.

 

Getting the government out of housing starts and ends with private companies, back-stop or no back-stop, special funding terms or no special funding terms.

 

 

[rros]

Calabria is on record about 5 years ago when he was still at Cato that you should wind the GSEs down.  He is a big time no government involvement in private enterprise guy, distortions and all.  again, this was when he was a pointy head.

 

now that he is advising Pence one needs to ask whether he has gotten a tad more practical in his views.

 

as senate banking chief staff member, he is also credited with being the chief scribe on HERA.  so there is that.

 

my take is that if he becomes FHFA director (has to be confirmed by senate, which will take time but I think is likely), GSEs won't be liquidated etc.  he will understand that the govt has been paid back handsomely and will move forward with some form of a Moelis deal.  but he will be harsh when it comes to GSE capital requirements.

 

Two more recent views from Calabria:

 

(from January 2016): http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

(from November 2017): https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship

 

He certainly seems to have at least taken several steps back from the "kill FnF" ledge. However, that 2016 paper calls out Treasury for lots of bad (and even unlawful) behavior. If Mnuchin really is going to hand-pick the next FHFA director, would he choose Calabria knowing about Calabria's views on Treasury's actions? (of course, Mnuchin wasn't in office then, but he hasn't really acted much different than Lew other than last December's letter agreement)

 

The 2016 paper shows that Calabria is anti-NWS, but would he have enough power to really do anything about it? Would he go so far as to withhold the dividend payments? Things will get interesting soon, and this is a key thread to follow.

 

I've read the Krimminger-Calabria paper and it points out four important points if Calabria is nominated and appointed;

 

[*]There's a bright line between receivership and conservatorship due to objective tests, i.e. mandatory receivership at balance sheet insolvency

[*]Historical rates for conservatorship "debtor-in-possession" financing is much lower than 10% and only covers FDIC costs. The SPS rate is antithetical to a conservator

[*]Shareholders must only be diluted in proportion to the assistance they received from the conservator

[*]FHFA alone has authority and Treasury has been abusing its power as lender of last resort

 

If you take point one, with the minimum capital buffer of $3 billion per GSE, that means receivership is off the table.

 

Point two, could there be a case for a fourth amendment that reduces the SPSA rate to something more akin to conservator financing, with the remainder re-reimbursed to the GSE's for an immediate capital boost? This would likely be a substantial amount and if you take Moelis as a recap plan, that would reduce the capital required from a common capital raise. I don't think this is out of the question, considering a bill has been raised to do just that. It got nowhere, obviously.

 

Point 3, if something like point 2 is enacted and the financing is gone, is there a case against the warrants? Could a combination of point 2 and a capital raise result in less dilution overall?

 

Point 4, well we know this. But if Treasury does want to get the GSE's out of conservatorship, as evidenced by all the public comments and point one above, then its likely that points 2 and 3 could be considered.

 

I'd feel great about Calabria running the FHFA considering his paper as I think it would be hard for receivership to be justified, or his comments walked back.

 

Getting the government out of housing starts and ends with private companies, back-stop or no back-stop, special funding terms or no special funding terms.

I am not sure about your point #1. It looks to me the Director could easily determine the companies to be "critically undercapitalized" and use the receivership powers.

 

We are still under James Lockhart suspension of capital classifications. But a future Director can unravel this

FHFA classifies the Enterprises as adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. The Enterprises are required by federal statute to meet both minimum and risk-based capital standards to be classified as adequately capitalized. The Director has the authority to make a discretionary downgrade of the capital adequacy classification should certain safety and soundness conditions arise that could impact future capital adequacy. This classification requirement serves no purpose once an Enterprise has been placed into conservatorship.

 

I believe the most important point for us in that paper is his notion that Treasury's commitment was never about financial gain and it was not meant to be a mechanism to profit from. Now that both companies have achieved their 10% return this concept becomes key and I would expect Calabria to stop any future transfer of money or reverse money flows in a receivership. The implication being that any excess being paid out to Treasury will flow straight to the Jrs. if a receivership takes place. And by the end of the year there will be quite a few billions in that category.

So a nomination is bullish, in my opinion.