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

[investorG]

 

Pref prices are truly unbelievable...

 

Resolving this requires actions/events totally outside our control and outside the cold but certain logic of a bankruptcy court. Having been here a while through the ups and downs, with - in reality - almost zero leverage, I imagine 2/3+ would take a 50% payout on jpf's. I would. In which case pricing of around 30% of par is not out of whack.

 

But of course we hope and talk our book and think we should get par.

 

Just keeping it real lest we all run out and get even deeper into this. Even our most prolific GSE cheerleader Glen Bradford is running out steam and looking at stuff like shldq and ctl. After Glen sells, that's probably when there will be a deal.

 

You're just messin' with us, so please say something useful or move on. If Bradford is considering shldq (i.e., the common), then he is not running out of steam; rather he has lost his mind and any value investing credentials he might claim.

 

Messin' is not my intention. It's a note of caution that there's significant risk. This is much less predictable and has taken much longer than buying run of the mill chap 11 or near chap 11 bonds (done a number of times - ukraine, worldcom, conseco, etc).  It's also my guess than many would take significantly less than par for the jprefs given these factors which suggests a price ceiling if one were to add. If I recall the Citi pref conversion was at 60%.

 

Prudence and price information ... I dunno - doesn't seem useless to me but maybe everyone knows everything already. Glen (100% and margined) and Berkowitz (35% concentration and forced to liquidate half) may have lacked prudence. But it's not over as long as we survive.

 

Cheers!

 

I agree.  Even in a positive scenario, political factors alone would likely dictate a cap (or conversion rate) at some level below par.  everyone would need to sacrifice, and I believe the large holders know this and are fine with it.  I don't want to debate this as it's a purely subjective view but imo forgone dividends aren't likely enough to satisfy the decision makers in the admin or congress.  there's a reason why many smart investors wake up every day and decide to sell a lot of $ of jr preferred: because there's a wide range of outcomes even at this moment.  and on a separate note, picking personal fights with widely-followed reporters isn't helpful.

[Seahug]

 

, picking personal fights with widely-followed reporters isn't helpful.

 

Actually I have a lot of respect and appreciation for Glen Bradford's speed on reporting, diligence in covering legal proceedings and overall effort on this and I've posted that before.

 

My comments were paraphrasing his recent tweets:

 

https://twitter.com/DoNotLose/status/1096325667015270401

 

"Hurry up already. It's hard to sit still anymore. Like what... ~2.5-3x upside on the preferred to par? Waited years and I'm losing my mind. Watching life pass me by shifts to just looking away into outer space"

 

He's also been quite open with having to borrow to fund his position and the accumulated interest adding materially to his cost/pref.

 

 

[investorG]

 

, picking personal fights with widely-followed reporters isn't helpful.

 

Actually I have a lot of respect and appreciation for Glen Bradford's speed on reporting, diligence in covering legal proceedings and overall effort on this and I've posted that before.

 

My comments were paraphrasing his recent tweets:

 

https://twitter.com/DoNotLose/status/1096325667015270401

 

"Hurry up already. It's hard to sit still anymore. Like what... ~2.5-3x upside on the preferred to par? Waited years and I'm losing my mind. Watching life pass me by shifts to just looking away into outer space"

 

I wasn't referring to you and Bradford.  rather the recent attacks on gasparino.  while it's great to point out his arguments' (many imo) flaws, the situation has deteriorated quickly which is unfortunate.

[rros]

 

Pref prices are truly unbelievable...

 

Resolving this requires actions/events totally outside our control and outside the cold but certain logic of a bankruptcy court. Having been here a while through the ups and downs, with - in reality - almost zero leverage, I imagine 2/3+ would take a 50% payout on jpf's. I would. In which case pricing of around 30% of par is not out of whack.

 

But of course we hope and talk our book and think we should get par.

 

Just keeping it real lest we all run out and get even deeper into this. Even our most prolific GSE cheerleader Glen Bradford is running out steam and looking at stuff like shldq and ctl. After Glen sells, that's probably when there will be a deal.

 

You're just messin' with us, so please say something useful or move on. If Bradford is considering shldq (i.e., the common), then he is not running out of steam; rather he has lost his mind and any value investing credentials he might claim.

 

Messin' is not my intention. It's a note of caution that there's significant risk. This is much less predictable and has taken much longer than buying run of the mill chap 11 or near chap 11 bonds (done a number of times - ukraine, worldcom, conseco, etc).  It's also my guess than many would take significantly less than par for the jprefs given these factors which suggests a price ceiling if one were to add. If I recall the Citi pref conversion was at 60%.

 

Prudence and price information ... I dunno - doesn't seem useless to me but maybe everyone knows everything already. Glen (100% and margined) and Berkowitz (35% concentration and forced to liquidate half) may have lacked prudence. But it's not over as long as we survive.

 

Cheers!

 

I agree.  Even in a positive scenario, political factors alone would likely dictate a cap (or conversion rate) at some level below par.  everyone would need to sacrifice, and I believe the large holders know this and are fine with it.  I don't want to debate this as it's a purely subjective view but imo forgone dividends aren't likely enough to satisfy the decision makers in the admin or congress.  there's a reason why many smart investors wake up every day and decide to sell a lot of $ of jr preferred: because there's a wide range of outcomes even at this moment.  and on a separate note, picking personal fights with widely-followed reporters isn't helpful.

Although prudence and downplaying expectations is a smart way to look at this investment, there is another side too.

 

The mortgage/loan market is a mess extending a dark cloud over the real estate market. Reading Christopher Walen's blog makes this apparent. As such, it may be the government who feels pressure to resolve pending stuff. Which may tilt the balance back to shareholders. After all, lawsuits are a real impediment to progress. So while shareholders may see obstacles to realize gains and may be feeling stretched, it is the government who may be facing a grave problem and an urgency.

[Guest cherzeca]

not sure why this thread is now focusing on Bradford and gasparino.  irrelevant to any real analysis of situation

[Seahug]

not sure why this thread is now focusing on Bradford and gasparino.  irrelevant to any real analysis of situation

 

Yes, sorry about that.

 

 

[investorG]

not sure why this thread is now focusing on Bradford and gasparino.  irrelevant to any real analysis of situation

 

while I don't think it should be dwelled on, it's actually relevant imo.  this is as delicate of a political situation as is possible.  perception matters.  creating another carney in gasparino is counterproductive and can actually influence the outcome when he correctly points out (to millions of trump-loving viewers) that the re-election team for trump doesn't want a 'Paulson gets rich' theme as an opposition tool.  this is likely why congress is involved so heavily and perhaps the delays waiting for a potential different court decision.  if it was such a layup, mnuchin and otting could have acted several weeks ago.

[locutusoftexas]

Messin' is not my intention. It's a note of caution that there's significant risk. This is much less predictable and has taken much longer than buying run of the mill chap 11 or near chap 11 bonds (done a number of times - ukraine, worldcom, conseco, etc).  It's also my guess than many would take significantly less than par for the jprefs given these factors which suggests a price ceiling if one were to add. If I recall the Citi pref conversion was at 60%.

 

Prudence and price information ... I dunno - doesn't seem useless to me but maybe everyone knows everything already. Glen (100% and margined) and Berkowitz (35% concentration and forced to liquidate half) may have lacked prudence. But it's not over as long as we survive.

 

Cheers!

 

Sorry, the mention of shldq was a personal red flag, in that I learned long ago that the only possible, rational value play in situations with a negative net asset value, a very low stock price, and possible (or imminent) bankruptcy is to own the debt and not the common. Bruce Berkowitz actually destroyed his credibility and his various managed funds by making the rookie error of buying Sears common late in the game, when the cash burn was accelerating and with Lampert clearly willing to burn up the assets rather than to liquidate. Clearly there was no margin of safety.

 

Bradford has done such a nice job of tracking the GSE situation, I was shocked at the possibility that he would buy the Sears common at this point.

 

Of course, I have pointed out on this board, that the GSE prefs and common did not qualify as classic value plays once the assets had been written down and the NWS had been implemented, especially given the Executive Branch's need for cash at the time (and maybe now). The asset value was effectively zero and the discounted total value of dividends for shareholders has been zero under these circumstances. So no assets, no future dividends -- just hope that politicians and courts will do the right thing. Sorry, that is not a value play by anyone's definition. At a minimum, no margin of safety. Please forgive my lack of faith in politicians and, over the last two years, the demonstrated incompetency or bias (corruption?) of the federal courts.

 

By the way, I definitely hope that I am wrong in my skepticism, since this has become a very fundamental Constitutional issue.

 

[Midas79]

It's also my guess than many would take significantly less than par for the jprefs given these factors which suggests a price ceiling if one were to add. If I recall the Citi pref conversion was at 60%.

 

According to this document, https://www.scribd.com/document/13339335/Citi-Tarp-Conversion, Citi prefs were converted either at par or more. However, I don't know enough else to tell you how it all went down.

 

This article, https://baselinescenario.com/2009/02/27/citigroup-arithmetic-explained/, says that the $3.25 number was likely the product of negotiation, and that the share price immediately prior to the conversion being made public was $2.46, which dropped to $1.57 following the announcement.

 

Again, I don't know how many strong parallels we can draw here, but it fuels my thesis that the juniors have an embedded call option on the commons, which they can exercise by agreeing the settle the lawsuits.

 

As for Glen contemplating other investments, I see that as less of him looking to get out soon, and more of him doing early research on where to put his $3M or so in par value once the juniors get there.

[Guest cherzeca]

@IG

"...perhaps the delays waiting for a potential different court decision.  if it was such a layup, mnuchin and otting could have acted several weeks ago." 

 

I agree with this.  I think a court win makes everything much much easier. this also would come after calabria is confirmed, so waiting for a possible court win would then be able to be reinforced by a FHFA director who is on record (and never revoked) that NWS is invalid...so with a court win that would be a twofer.  which means that whether fhfa appeals in this circumstance is a very twisted question, which would be resolved by the introduction of the admin plan at that time.  plus mnuchin is real busy now. so I do believe we are in wait for collins mode...though whether or not the dividend is paid out will likely come first 

[allnatural]

As optimistic as one can get about Collins case... if we are back to relying on courts for any progress from here... Not a good sign IMO.

[Guest cherzeca]

As optimistic as one can get about Collins case... if we are back to relying on courts for any progress from here... Not a good sign IMO.

 

collins would certainly grease the skids

[hardincap]

I don’t think recap is that controversial? Especially given no one seemed to object in calabrias confirmation hearing. Also Calabria said multiple times as soon as 2015 that receivership is legally required, so I hope otting prevents the possibility of Calabria going rogue by moving to recap before Calabria is confirmed. Releasing f&f after they’ve been recapped however is certainly going to be controversial and here a court opinion would help greatly

[Guest cherzeca]

I don’t think recap is that controversial? Especially given no one seemed to object in calabrias confirmation hearing. Also Calabria said multiple times as soon as 2015 that receivership is legally required, so I hope otting prevents the possibility of Calabria going rogue by moving to recap before Calabria is confirmed. Releasing f&f after they’ve been recapped however is certainly going to be controversial and here a court opinion would help greatly

 

what I heard calabria say was that receivership was available instead of conservatorship and NWS (which he said was illegal). 

 

who knows, but my best guess is that no action by otting who will wait until calabria is confirmed since if admin is going to "bypass" congress, admin will want to do it with an fhfa director that the senate itself confirmed

[hardincap]

https://pbs.twimg.com/media/DzTgayUXQAAz0pM.png

 

admin bypassed congress in allowing 3bn capital buffer. i dont think its controversial to allow them to build more given clear signs global economy is slowing and a real possibility of a downturn next year or two. also, its FHFA's job to ensure sound and solvent

[Guest cherzeca]

https://pbs.twimg.com/media/DzTgayUXQAAz0pM.png

 

admin bypassed congress in allowing 3bn capital buffer. i dont think its controversial to allow them to build more given clear signs global economy is slowing and a real possibility of a downturn next year or two. also, its FHFA's job to ensure sound and solvent

 

with trump "bypassing" congress on wall funding, this has become an intramural spitting match.  congress has no clue what to do with GSE reform, and couldn't pass anything if it did.  I think admin will introduce something that has a role for congress somewhere down the line, but I think it is being careful with optics right now

[investorG]

As optimistic as one can get about Collins case... if we are back to relying on courts for any progress from here... Not a good sign IMO.

 

IF the government is intent on getting something going in 2019, it seems natural that potential upside price targets on both the common and jr preferred would be influenced by the collins case outcome.

 

[investorG]

Silly question - if the new directors direct changes without congressional action, what's to stop future Pres Harris or Pres. Warren from reversing the decision and declaring a large dividend to treasury.

 

fwiw I don't think this is a silly question - unless Congress passes something permanent, there will be a large subset of investors who balk at fronting the $100bn+ in capital likely required for any recap.  and from the administrations point of view, a failed deal is unacceptable.  so they will likely go for the security blanket by using congress with Calabria's help (if confirmed) and see if a dedicated pile of money for affordable housing can bring them along.  after all, many Dems recently voted for Trump's criminal justice reform and perhaps will also vote yes for paid family leave if it comes up this congress.

[Guest cherzeca]

Silly question - if the new directors direct changes without congressional action, what's to stop future Pres Harris or Pres. Warren from reversing the decision and declaring a large dividend to treasury.

 

fwiw I don't think this is a silly question - unless Congress passes something permanent, there will be a large subset of investors who balk at fronting the $100bn+ in capital likely required for any recap.  and from the administrations point of view, a failed deal is unacceptable.  so they will likely go for the security blanket by using congress with Calabria's help (if confirmed) and see if a dedicated pile of money for affordable housing can bring them along.  after all, many Dems recently voted for Trump's criminal justice reform and perhaps will also vote yes for paid family leave if it comes up this congress.

 

once GSEs are out of conservatorship, HERA becomes a pure regulatory statute.  potus warren would have no authority to "reverse decision and declare a large dividend to treasury".  if still in conservatorship when potus warren takes office, it is hard to see how a 180 could be justified.  perhaps however if this is a real concern to potential investors, treasury could insert a poison pill into its recap plan.  there is always a solution...unless you are billy McFarland

[rros]

Silly question - if the new directors direct changes without congressional action, what's to stop future Pres Harris or Pres. Warren from reversing the decision and declaring a large dividend to treasury.

 

fwiw I don't think this is a silly question - unless Congress passes something permanent, there will be a large subset of investors who balk at fronting the $100bn+ in capital likely required for any recap.  and from the administrations point of view, a failed deal is unacceptable.  so they will likely go for the security blanket by using congress with Calabria's help (if confirmed) and see if a dedicated pile of money for affordable housing can bring them along.  after all, many Dems recently voted for Trump's criminal justice reform and perhaps will also vote yes for paid family leave if it comes up this congress.

 

once GSEs are out of conservatorship, HERA becomes a pure regulatory statute.  potus warren would have no authority to "reverse decision and declare a large dividend to treasury".  if still in conservatorship when potus warren takes office, it is hard to see how a 180 could be justified.  perhaps however if this is a real concern to potential investors, treasury could insert a poison pill into its recap plan.  there is always a solution...unless you are billy McFarland

And adding to the pile...

 

The authority for Treasury to invest in the GSEs terminated at the end 2009, as per HERA. So Treasury is really unable to buy any *future* security issued by Fannie and Freddie. Stressing the importance of eliminating the hanging threat of the Seniors. Once removed, it is over. Hopefully, replaced by a line of credit that relies on a commitment fee. But something must be done about the PSPAs so they become "the past" as the future -no possible investments- is already set.

 

HERA has a subchapter where it authorizes the modification of the charters of each company to allow for a Treasury bailout. However, the authority given to Treasury was narrow and temporary.

 

Once all this is fixed (terminated), there should not be any worries about future administrations reinstating a sweep or meddling with dividends. They can't.

[orthopa]

Ill let you guys do the worrying and hand wringing for me. I still think par or just below +/- some arbitrage opportunity is possible.

 

That being said, surprised this hasn't been posted yet but lots of juicy details here. Probably one of the most leveled headed thought out assessments of the current situation in both time frame and price expectation.

 

https://www.realvision.com/tv/shows/trade-ideas/videos/a-new-fannie-mae-play

[Guest cherzeca]

Ill let you guys do the worrying and hand wringing for me. I still think par or just below +/- some arbitrage opportunity is possible.

 

That being said, surprised this hasn't been posted yet but lots of juicy details here. Probably one of the most leveled headed thought out assessments of the current situation in both time frame and price expectation.

 

https://www.realvision.com/tv/shows/trade-ideas/videos/a-new-fannie-mae-play

 

Thanks ortho

 

notice she said it was their understanding (she works at DC firm that advises financial entities on govt policy implications) that treasury is looking for a financial advisor.  this is important. you dont do that unless you have decided to proceed.  advisor can take a little time gear up, but Mnuchin will push them.

she was wrong to say collins Ps only want senior pref written off.  they want the $19B overpayment as well. what Ps get by way of relief in event of a favorable holding is not clear. also I dont know why she thinks that treasury would think a loss in collins would upset the recap and raise? this would be true only if treasury wanted to extract additional value from the senior pref, in addition to the common.  one reason why the "trade" works is that a loss to treasury in collins doesn't frustrate the admin plan.

[rros]

Ill let you guys do the worrying and hand wringing for me. I still think par or just below +/- some arbitrage opportunity is possible.

 

That being said, surprised this hasn't been posted yet but lots of juicy details here. Probably one of the most leveled headed thought out assessments of the current situation in both time frame and price expectation.

 

https://www.realvision.com/tv/shows/trade-ideas/videos/a-new-fannie-mae-play

That was very good. Thank you, orthopa.

[rros]

Looks like Moelis was active today and ACG Analytics was there..

https://twitter.com/ACGAnalytics/status/1097911134236102656

[SnarkyPuppy]

https://livestream.com/accounts/1028220/events/8561696/videos/187617124