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

[rros]

Someone asked about John Paulson in the past. Still a preferred shareholder. Close to the end of the interview.

 

https://www.marketwatch.com/story/billionaire-john-paulsons-tip-for-trump-supporters-living-in-new-york-stay-calm-2019-01-23

[Luke 532]

Half a million FMCCL changed hands this morning.  Haven't seen that volume as long as I've followed it.  Only about 5,000,000 shares outstanding.

[rros]

Half a million FMCCL changed hands this morning.  Haven't seen that volume as long as I've followed it.  Only about 5,000,000 shares outstanding.

Two orders. Look they went at the ask.

current bid/ask 15.80/16.00.

270k @ 16.45

270k @ 16.60 

[Luke 532]

Half a million FMCCL changed hands this morning.  Haven't seen that volume as long as I've followed it.  Only about 5,000,000 shares outstanding.

Two orders. Look they went at the ask.

current bid/ask 15.80/16.00.

270k @ 16.45

270k @ 16.60

 

They had to have it.  They got a good deal at just 33% of par.

[DRValue]

https://www.wsj.com/articles/lawmakers-promise-fresh-push-to-overhaul-housing-finance-11548345601

 

Anyone have full text?

[Guest cherzeca]

https://www.wsj.com/articles/lawmakers-promise-fresh-push-to-overhaul-housing-finance-11548345601

 

Anyone have full text?

 

I don't like copy/pasting copyrighted content, but suffice that house financial services minority ranking member ® seems to think he can work with maxine waters and address housing finance.  the otting reporting that he may release a plan soon has obviously caught their attention, and they think congress should be the source of reform (similar to Watt).  imo, this is the typical congressional bloviation.  if house and senate couldn't produce something when Rs had both majorities, how can they realistically think they can do so now?  I don't see otting/mnuchin giving this any credence. article does point out that if otting releases something the senators don't like, then Calabria's confirmation hearing may be compromised...

[Guest cherzeca]

yes, to which judge jones asked if conservator could ignore low income housing mandate, to which T attorney stumbled.  there have been cases from RTC days that held that the RTC could breach laws in resolving cases and couldn't be enjoined, but that did not mean that damages might ensue. 

[DocSnowball]

Someone asked about John Paulson in the past. Still a preferred shareholder. Close to the end of the interview.

 

https://www.marketwatch.com/story/billionaire-john-paulsons-tip-for-trump-supporters-living-in-new-york-stay-calm-2019-01-23

 

Thank you - I listened to him explain his position in a very simple way. This is one part of my thesis that I have not been able to disconfirm - this administration backstabbing its own supporters.

 

Then I listened to the en banc audio and shook my head. And the fact that FHFA lied in the Court briefings was immaterial and not even brought up. Unless there is a court verdict in Ps favor, par seems highly unlikely to me.

[Luke 532]

https://www.politico.com/story/2019/01/24/federal-housing-finance-agency-overhaul-1111874

 

White House will announce a plan by next month to end government control of Fannie and Freddie, per a recording of FHFA Director Otting speaking to agency staff. Significant headway expected within 6-18 mos. WH doesn't think it needs legislation.

 

“This is a path that's been established by the White House and the Treasury, and Mark has signed off on it. I've signed off on it," Acting FHFA Director Otting told staff on plan to release Fannie & Freddie from govt control.

[DRValue]

https://www.politico.com/story/2019/01/24/federal-housing-finance-agency-overhaul-1111874

 

White House will announce a plan by next month to end government control of Fannie and Freddie, per a recording of FHFA Director Otting speaking to agency staff. Significant headway expected within 6-18 mos. WH doesn't think it needs legislation.

 

“This is a path that's been established by the White House and the Treasury, and Mark has signed off on it. I've signed off on it," Acting FHFA Director Otting told staff on plan to release Fannie & Freddie from govt control.

 

I was just about to post that. Based on the comments, I cant see how they don't do something with the SPSA to actually return capital to the GSE's. Maybe changing the interest rate from 10% to 5%? Bullish.

[Midas79]

https://www.politico.com/story/2019/01/24/federal-housing-finance-agency-overhaul-1111874

 

White House will announce a plan by next month to end government control of Fannie and Freddie, per a recording of FHFA Director Otting speaking to agency staff. Significant headway expected within 6-18 mos. WH doesn't think it needs legislation.

 

“This is a path that's been established by the White House and the Treasury, and Mark has signed off on it. I've signed off on it," Acting FHFA Director Otting told staff on plan to release Fannie & Freddie from govt control.

 

Whoa. Am I allowed to say "holy s***" on here? This might be the single most important piece of news, in terms of its specificity and impact, that I have seen in a long time. It's the first time I can remember that an important player even implied a recap. That line about going from $6B to $150-200B has to mean a recap, right?

 

At the same time, there is something in the back of my mind saying that I should sell some of my shares. I cannot explain it, so for now I'm going to ignore it. I will, however, pay very close attention to every detail we hear from Otting and Mnuchin.

[Williams406]

Wasn't Moelis toward the lower end of Otting's 150b-200b GSE capital? Comment suggests that at least FHFA-anticipated capital levels aren't ridiculously high.

[Luke 532]

Whoa. Am I allowed to say "holy s***" on here?

 

Do you mean "Holy Spirit"? Forgot two asterisks.  :-)

 

This might be the single most important piece of news, in terms of its specificity and impact, that I have seen in a long time.

 

Agreed.  The plan is largely in place and they're ready to act on it.

 

That line about going from $6B to $150-200B has to mean a recap, right?

 

Yes, sure seems that way.  I am curious what that would mean for common shares.  I only own prefs and have no plans of owning common, but I am curious.  I think it just depends on how closely the Admin plan lines up with Moelis.

 

[rros]

https://www.politico.com/story/2019/01/24/federal-housing-finance-agency-overhaul-1111874

 

White House will announce a plan by next month to end government control of Fannie and Freddie, per a recording of FHFA Director Otting speaking to agency staff. Significant headway expected within 6-18 mos. WH doesn't think it needs legislation.

 

“This is a path that's been established by the White House and the Treasury, and Mark has signed off on it. I've signed off on it," Acting FHFA Director Otting told staff on plan to release Fannie & Freddie from govt control.

 

Whoa. Am I allowed to say "holy s***" on here? This might be the single most important piece of news, in terms of its specificity and impact, that I have seen in a long time. It's the first time I can remember that an important player even implied a recap. That line about going from $6B to $150-200B has to mean a recap, right?

 

At the same time, there is something in the back of my mind saying that I should sell some of my shares. I cannot explain it, so for now I'm going to ignore it. I will, however, pay very close attention to every detail we hear from Otting and Mnuchin.

Funny this piece comes right after the WSJ piece. The battle of the bastards!

 

So 2 to 4 weeks to see the plan and 6 to 18 months to fully recap, provided nothing comes out of left field. Does this mean staged secondaries? Were it not for the 30 minute recording -secretly recorded, perhaps, in that Jan 17 staff meeting- which Politico obviously had access to I would have thought this was a WH maneuver to pressure Congress into action. But the report by Politico indicates it is for real this time.

 

Like Midas, however, I can't get over the feeling of many years of betrayals and disappointing actions.

 

I still don't like that sellers show up at every spike.

[Luke 532]

This...

Like Midas, however, I can't get over the feeling of many years of betrayals and disappointing actions.

 

...is connected to this...

I still don't like that sellers show up at every spike.

[DRValue]

https://www.wsj.com/articles/lawmakers-promise-fresh-push-to-overhaul-housing-finance-11548345601

 

Anyone have full text?

 

I don't like copy/pasting copyrighted content, but suffice that house financial services minority ranking member ® seems to think he can work with maxine waters and address housing finance.  the otting reporting that he may release a plan soon has obviously caught their attention, and they think congress should be the source of reform (similar to Watt).  imo, this is the typical congressional bloviation.  if house and senate couldn't produce something when Rs had both majorities, how can they realistically think they can do so now?  I don't see otting/mnuchin giving this any credence. article does point out that if otting releases something the senators don't like, then Calabria's confirmation hearing may be compromised...

 

Cheers Chris much appreciated

[Guest cherzeca]

that was a nice piece of news!  great reporting (and given recording, let us stipulate its not fake news).

 

reading between lines, it seems to me like the administrative plan will track Moelis blueprint. loved reading that "mark had signed off on it".  so no reason to wait.  congressional Rs will be in a tizzy.  reply will simply be since when is dicking around for >10 years not long enough?

[rros]

This...

Like Midas, however, I can't get over the feeling of many years of betrayals and disappointing actions.

 

...is connected to this...

I still don't like that sellers show up at every spike.

You are right, Luke :)

[Guest cherzeca]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

[Midas79]

This story resolves a lot of the uncertainty.

 

• The NWS is effectively over. Otting's comment about getting from $6B in capital to $150-200B means a recap, and that can only happen if the NWS stops. Does this mean no settlement for the court cases because the plaintiffs are going to get what they want anyway? If so that would be ironic, that all the cases get dismissed anyway, but due to them being moot instead of more tortured readings of HERA by judges.
  
• Capital requirements will be in the vicinity of Moelis/Watt (3.25% risk-based), unless Otting somehow meant $150-200B as the minimum capital requirement. This sure seems to point to Moelis. And that, in turn, opens the door to an above-par endgame for the prefs if they are offered a nice conversion, be it partial or full.
  
• The recap will not be done with retained earnings alone. The last Otting statement in the article makes that clear. Even though he understated the GSEs' net income, it still isn't nearly enough for a full recap in his timeframe.
  
• The recap process will not be very easy or straightforward, otherwise it wouldn't involve "really heavy lifting". That tells me that either no or very little money will be coming from Treasury to assist. I believe a lot of this "heavy lifting" will be polling the potential secondary offering buyers to see what their total appetite is, and what portion of the company they would want for their money. A delicate process to be sure, and complicated by the existence of the warrants.
  

 

Of course, there are still several outstanding questions:

 

• How long will the companies have to recap? Will they have to be fully recapped before release? Tim Howard thinks not necessarily, but I actually disagree because a faster recap is better than a slower one for both Treasury and FHFA.
  
• What will be the fate of the seniors and the warrants? This is one instance where the outstanding court cases still matter: Treasury would likely prefer to convert or sell the seniors, but if the Fifth Circuit sides with the plaintiffs, the seniors will be extinguished. I think the warrants will be exercised, and before the equity raise(s). It wouldn't be like Treasury to leave that money on the table, and I'm not aware of a solid legal theory as to why exercising the warrants would be illegal. (nevermind those on Seeking Alpha claiming that it would result in a huge damage award to shareholders via a Fifth Amendment takings claim, which always leaves out the specifics of the legal argument)
  
• Will the juniors be offered a conversion? If so, at what rate? A victory in the Fifth Circuit would give the juniors much more leverage.
  
• How does the administration's plan conform with, and diverge from, Moelis?
  
• Do any of the foaming-at-the-mouth common shareholder lawsuits have any teeth once the NWS is removed from the equation? I'm discounting Washington Federal due to the limited scope of relief asked for.
  

 

At this point, what's left to kill the "prefs-to-par" thesis? The (perhaps wildly) optimistic side of me wonders how the prefs don't get par, let alone drop in value from here.

[SnarkyPuppy]

Again.  Another strong signal.  After another.  After another.

 

Unbelievable you can still 2-3x your money here.  A shame all COBF threads > 100 pagers never make any money  ::)

[Luke 532]

Again.  Another strong signal.  After another.  After another.

 

Unbelievable you can still 2-3x your money here.  A shame all COBF threads > 100 pagers never make any money  ::)

 

+1

[TwoCitiesCapital]

https://www.politico.com/story/2019/01/24/federal-housing-finance-agency-overhaul-1111874

 

White House will announce a plan by next month to end government control of Fannie and Freddie, per a recording of FHFA Director Otting speaking to agency staff. Significant headway expected within 6-18 mos. WH doesn't think it needs legislation.

 

“This is a path that's been established by the White House and the Treasury, and Mark has signed off on it. I've signed off on it," Acting FHFA Director Otting told staff on plan to release Fannie & Freddie from govt control.

 

Whoa. Am I allowed to say "holy s***" on here? This might be the single most important piece of news, in terms of its specificity and impact, that I have seen in a long time. It's the first time I can remember that an important player even implied a recap. That line about going from $6B to $150-200B has to mean a recap, right?

 

At the same time, there is something in the back of my mind saying that I should sell some of my shares. I cannot explain it, so for now I'm going to ignore it. I will, however, pay very close attention to every detail we hear from Otting and Mnuchin.

 

Same. I actually sold ~7% of my position back around 27% of par just a few days back. Wanted to hold on to most of it now that the developments seems to be moving our direction BUT that's how it's felt every time and was majorly kicking myself for never having taken advantage of prior ramp-ups before the collapse in value.

 

Now that I've scratched that itch and wont' be as mad at myself if this goes sideways again, I decided to take a look at the entirety of my trade history with this saga - goes all the way back to 2014 for me. I may have never been very good at selling at the tops, but my trade history demonstrates I was VERY good at diligently adding to my positions after the sell-offs. While I've felt like I was losing money on this for 99% of the time I've owned it, my actual annualized IRR is 48% if I were to sell today.

 

This perspective of knowing that I didn't actually waste the market opportunity as they were provided to me (was just buying at the lows instead of selling at the highs) gives me greater confidence to continue holding and makes me less eager to sell now that the market is providing an opportunity to do so. I'll probably hold the remaining 93% of my position for significantly higher prices.

[allnatural]

I expect the jr pfds to trade well over 50% on the NWS being removed (either via the courts or admin). Then like any other transaction, the investment/arb community will have to weigh the timing/execution/etc risks. If its a 2 year recap process, what discount to par would investors be willing to take to account for those risks (this assumes par or close to par equivalent via conversion is the stated treatment for jr pfds)? I think if the recap is scheduled to be completed by 2020 then 80-85c seems appropriate as it accrues to par.

 

Good luck to everyone! We are getting close but at the same time we must be mindful of what may (shall?) go wrong in various scenarios.

[rros]

I invite the board to respond to this query.

 

I am trying to assess what is a realistic near term target price for the prefs under various scenarios.  let's take a current price of 40% of par (which is fnmas).

 

let's assume two scenarios: first, that an administrative plan is announced that indeed seeks to implement a moelis blueprint type plan...nothing is to happen for a few months because it is conditioned on settlement of all litigation, but the proposal is to negotiate a 4th A that rolls back NWS and deems senior prefs paid off.  second, collins en banc decides that NWS violates APA and remands case down to district court for relief (so that actual invalidation of NWS is likely to be relief, but requires district court to issue order).

 

essentially these two scenarios are the same, senior pref very likely to go away in a 3-6 month or so time frame.

 

after either of these announcements, what would you expect a pref which is trading at 40% to trade up to?

Jrs. have the Srs. overhang. How the Srs. are treated (converted, sold or eliminated) will lead to different outcomes just as much as how the remaining portion of the commitment is treated (will these funds become potentially Srs.? or will they be subject to a simple commitment fee?). Otting revealing the Srs. treatment when a plan is disclosed may mean price movement within 2 weeks or so. A reversal of fortunes for the Jrs. could seal their fate as tier 1 capital at a high yield. There are preferred shares and then there may be the Jrs.