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

[orthopa]

back to waiting for godot.....

[investorG]

 

I agree with this as a concern, but I dont share your pessimism.

 

I do agree that this 3-4 year $150B capital raise is a massive endeavor, and it needs a "lead" investor to jumpstart things.  this could simply be in the form of an initial small investment and a backstop commitment, for which backstop commitment the lead investor would get an inducement. alternatively, a core group of existing investors (Blackstone, capital group, Perry, fairholme, Paulson, ackman etc) could form a lead investor group and commit as a group to invest new money.  you have cited a problem for which there is an answer.

 

if treasury comes out strongly in favor of a plan and asks for congressional support without offering congress a veto (which congress doesn't have), congress range of action does not include anything that I expect could kill the capital raise.  do you think, based upon what you watched in the Calabria hearing, crapo or Warner is going to introduce legislation to stop it?  even if corker were still around I would still expect merely sound and fury signifying nothing.  but corker has been corked.

 

potential institutional buyers of tens of billions of dollars in new shares will want either a) some clarity on future year earnings estimates and/or b) a low stock price with excellent risk reward to compensate for the lack of 'a'.  that's just the way it works.

 

over the near/medium term we can't get 'a' without congress acting, as another congress is right around the corner and who knows what they can / would do if this congress does nothing.  If this congress doesnt act then these potential investors fronting tens of billions in the mean time would likely demand a low stock price (ie more shares relative to current common, any potential jr pref converters, and govt warrants / sr pref conversion (potential if we lose collins). 

 

adding it up, this suggests to me that moelis and its price targets are not likely without this congress acting. 

 

[investorG]

For what it's worth...

 

@CGasparino

SCOOP: @WhiteHouse pushing expedited Senate confirmation of new FHFA Chief @MarkCalabria in next 2 weeks to jump-start GSE reform; Calabria likely to take a “scalpel” to GSEs reducing footprint in housing mkt seek Congress approval before ending conservatorship more @FoxBusiness

 

Any thoughts on what approval from congress looks like? Surely they can only implicitly approve it by not explicitly denying it?

Too few words a-la-twit by Gasparino. But it could mean "scalpel" as in really cautious or little, delicate approach... no-big-plan-nothing-to-worry-about. And approval to end c-ship may mean Calabria will seek some comprehensive legislation that will include wrapping things up. Meanwhile, it is possible he will simply recapitalize -partially or totally- the entities. And in the time frame required for this, work with Congress.

 

RE increasing liquidation pref of Srs. by having FF retain full earnings. Why worry? When Watt/Tsy agreed to it the Jrs. ran. What matters really is that money stays with the companies regardless of how much Srs. balance increases. Why? Because if Srs. find -somehow- their way to the toilette, the money is already with FF.

 

the flaw with moelis - and why it's likely just a marketing document to help draw attention to the matter - is that investors are unlikely to front the many tens of billions necessary for recap in a series of equity offerings without A) congressional stamp (permanence) or B) exit from conservatorship whereby the company's mgmt and boards are in charge.  Or both A and B.  And Mnuchin doesn't want to risk failure, the stakes are too high, which is likely one reason why he's acted so timidly on the matter.

 

IMO the one exception to this view is if one or a couple large entities writes a giant check ($25-50bn) overnight at a low price that 1) gets the companies so far down the recapitalization path that its hard to turn back and 2) has such attractive risk-reward profile (ie low stock price) that the upside potential is so great to risk the investment losing material money if political (or economic) winds turn at some point in the future. 

 

If this scenario is even legally and logistically possible, where a huge chunk is raised overnight private equity style, then the returns to shareholders and govt warrants are likely reduced well below moelis numbers.  Otherwise, I'm prepared for Congress (and perhaps Calabria if confirmed) to possibly play a larger role than expected.

It is always difficult to tell whether you are gloomy, optimistic, outright negative, long or short. Not that it matters. But sometimes I am not sure where you are coming from. Though you have been very informative (thanks).

 

I believe the shares are undervalued.  How much so likely depends on the Collins ruling imo.  The Sweeney and Lamberth situations are too uncertain and too far away for the plaintiffs to rely on.  The constitutional angle (including Collins and Bhatti and Rop) seem like long shots.  Thus, I expect current price goals of the main players in terms of a potential 'deal' to stay close to par value if we win Collins outright (and govt doesn't appeal?) and come down to 50-75pct of par if we lose.  for common, collins is also crucial because a loss could lead to sr pref monetization in the form of extra govt shares and dilution, and vice versa. 

 

[Guest cherzeca]

@IG

 

I agree with most of this.  I just think that the GSEs have a very favorable future earnings profile, with the possible risk being competition that this or a future congress might seek to promote.  but the GSEs have such a wide moat that I think even a threat of competition is not a big hangup.  now a threat of a congressional wind down of the GSEs is another matter, but I think that is now safely in the past.  and if you are right and I am wrong, I see investor fear of political risk is just something that negatively impacts price for awhile, but doesn't make the recap flat out undoable.

 

this recap will be a bear no doubt.  I just dont see political risk as a knock out punch if the current administration itself is strongly backing a credible plan

[rros]

For what it's worth...

 

@CGasparino

SCOOP: @WhiteHouse pushing expedited Senate confirmation of new FHFA Chief @MarkCalabria in next 2 weeks to jump-start GSE reform; Calabria likely to take a “scalpel” to GSEs reducing footprint in housing mkt seek Congress approval before ending conservatorship more @FoxBusiness

 

Any thoughts on what approval from congress looks like? Surely they can only implicitly approve it by not explicitly denying it?

Too few words a-la-twit by Gasparino. But it could mean "scalpel" as in really cautious or little, delicate approach... no-big-plan-nothing-to-worry-about. And approval to end c-ship may mean Calabria will seek some comprehensive legislation that will include wrapping things up. Meanwhile, it is possible he will simply recapitalize -partially or totally- the entities. And in the time frame required for this, work with Congress.

 

RE increasing liquidation pref of Srs. by having FF retain full earnings. Why worry? When Watt/Tsy agreed to it the Jrs. ran. What matters really is that money stays with the companies regardless of how much Srs. balance increases. Why? Because if Srs. find -somehow- their way to the toilette, the money is already with FF.

 

the flaw with moelis - and why it's likely just a marketing document to help draw attention to the matter - is that investors are unlikely to front the many tens of billions necessary for recap in a series of equity offerings without A) congressional stamp (permanence) or B) exit from conservatorship whereby the company's mgmt and boards are in charge.  Or both A and B.  And Mnuchin doesn't want to risk failure, the stakes are too high, which is likely one reason why he's acted so timidly on the matter.

 

IMO the one exception to this view is if one or a couple large entities writes a giant check ($25-50bn) overnight at a low price that 1) gets the companies so far down the recapitalization path that its hard to turn back and 2) has such attractive risk-reward profile (ie low stock price) that the upside potential is so great to risk the investment losing material money if political (or economic) winds turn at some point in the future. 

 

If this scenario is even legally and logistically possible, where a huge chunk is raised overnight private equity style, then the returns to shareholders and govt warrants are likely reduced well below moelis numbers.  Otherwise, I'm prepared for Congress (and perhaps Calabria if confirmed) to possibly play a larger role than expected.

It is always difficult to tell whether you are gloomy, optimistic, outright negative, long or short. Not that it matters. But sometimes I am not sure where you are coming from. Though you have been very informative (thanks).

 

I believe the shares are undervalued.  How much so likely depends on the Collins ruling imo.  The Sweeney and Lamberth situations are too uncertain and too far away for the plaintiffs to rely on.  The constitutional angle (including Collins and Bhatti and Rop) seem like long shots.  Thus, I expect current price goals of the main players in terms of a potential 'deal' to stay close to par value if we win Collins outright (and govt doesn't appeal?) and come down to 50-75pct of par if we lose.  for common, collins is also crucial because a loss could lead to sr pref monetization in the form of extra govt shares and dilution, and vice versa.

Thank you for taking the time to clarify your position.

 

If I were a new investor with billions at stake I would absolutely want Congress involvement. I would want Congress to assure me in a bipartisan bill/law that I will never ever hear from them again when it comes to the GSEs.

[Guest cherzeca]

who has more political risk right now, WFC or GSEs? extra credit if you show your work

[muscleman]

I see. So let me ask you this. Do you think FnF will be recapitalized and released from conservatorship?

 

Yes I do, but I have been wrong over and over on fundamentals and I don't place much value on my ability to do fundamental analysis anymore. But as other members pointed out, recap and release may require congressional approval if they want to find $150 bn. The alternative is to just let these companies retain earnings. My guess is that by 3/31, Calabria will announce a plan to retain earnings, but increase senior preferred liquidation value by the same amount. Then nothing will happen for a few months. Then Collins ruling came out, and it will be either big win or big loss for investors.

Before the Lamberth ruling, there was clear technical sign of topping, though Perry ruling came out of nowhere. So there are definitely people who know or smart enough to guess out what's gonna happen, and act in advance.

[muscleman]

Does anyone know any news today? FNMAS and FMCKJ both had a quick spike up of 6-7% in the middle of the day, though they both closed near the low.

[orthopa]

Its my understanding McConnell may move forward with the Senate nomination of Calabria today.

[muscleman]

Its my understanding McConnell may move forward with the Senate nomination of Calabria today.

 

Thank you! When will we know for sure?

[Guest cherzeca]

Its my understanding McConnell may move forward with the Senate nomination of Calabria today.

 

it's been calendared for awhile but I see no movement

[Guest cherzeca]

who has more political risk right now, WFC or GSEs? extra credit if you show your work

 

so my point here is that all banks have some political risk (which is why they spend so much on lobbying), and Wells Fargo has a huge amount of political risk....and WFC is going to chug along just fine (though its execs may get bitch slapped)

 

just thinking if GSEs are along this same continuum of political risk or just in a qualitatively worse position. I ask this now, assuming that the wind down the GSE movement is dead.

[Ahab]

I would argue that the GSEs have far more near-term political risk as an investment than the big banks. However, assuming a recap occurs, I believe the opposite will become true. Every couple of years banks such as WFC are involved in some sort scandal or untoward activity. LIBOR rigging, banking for the cartels, and opening up accounts without consumers' knowledge are the kind of improprieties that end up on CNN, HuffPo, etc... With Fannie & Freddie by contrast, most Americans don't really know what they do or have emotionally intense opinions about them. Thus, in the long run, I envision Fannie and Freddie having less political risk than say WFC.

[Guest cherzeca]

@ahab

 

Fair enough. Now for the GSEs in the short term does your thinking change if you consider that for the next 5 years the fhfa Director is someone who has made clear, and let’s say reiterates, that the NWS is illegal?

[muscleman]

Calabria not on today's closure.  :(

Is there any limitation on how many people can be in a closure? I know there are lots of judges to be confirmed. Can't they put everyone on closure today?

[Ahab]

@cherzeca

These facts certainly color my thinking and I see good reasons for optimism in the administration's approach. Although, in regards to Calabria's confirmation and the start of the recapitalization process, it's not over until the fat lady sings. I think that's why the market refuses to budge too much on the preferred share prices. We as shareholders have been hoping for years to wake up one day to a decisive change (legal or administrative) in the status of these entities. Until that day comes, risk and uncertainty will endure in hearty quantities.

[orthopa]

If Calabria not voted on in time Otting could always stop the sweep too.

[muscleman]

If Calabria not voted on in time Otting could always stop the sweep too.

 

That's true but I don't expect that to happen.

Technical analysis shows me if we don't get a setup within the next two weeks, then there may not be a setup to buy anytime soon. Right now it looks to be getting ready. That's accidentally inline with the 3/31 deadline. I am flat since 2/26. We'll see what happens.

[rros]

Anybody expects:

 

1. a ruling between now and 3/31?

2. announcement by Otting/Calabria by 3/31?

3. a curve ball out of congress before 3/31.

4. a coordinated attack by fellow travelers for the next 2 weeks.

 

Right now, we are about to hit the jackpot quarterly if prices stay here. But history has been of sudden deep reversals. Nerve-wracking spring break. Countdown -T 20160 (minutes).

[Guest cherzeca]

Anybody expects:

 

1. a ruling between now and 3/31?

2. announcement by Otting/Calabria by 3/31?

3. a curve ball out of congress before 3/31.

4. a coordinated attack by fellow travelers for the next 2 weeks.

 

Right now, we are about to hit the jackpot quarterly if prices stay here. But history has been of sudden deep reversals. Nerve-wracking spring break. Countdown -T 20160 (minutes).

 

1. no

2. yes

3. no

4. of course, to no avail

[muscleman]

Anybody expects:

 

1. a ruling between now and 3/31?

2. announcement by Otting/Calabria by 3/31?

3. a curve ball out of congress before 3/31.

4. a coordinated attack by fellow travelers for the next 2 weeks.

 

Right now, we are about to hit the jackpot quarterly if prices stay here. But history has been of sudden deep reversals. Nerve-wracking spring break. Countdown -T 20160 (minutes).

 

1. no

2. yes

3. no

4. of course, to no avail

 

I agree with most of your points, except that #2 may not happen if Calabria is not confirmed by 3/31. Otting announcing anything drastic may impact Calabria confirmation voting, and cause additional delays. We only have two Thursdays before 3/31, so I expect the confirmation voting to happen soon.

[investorG]

It's unrealistic imo to expect a new director to implement such a large change as stopping the sweep in his first few days on the job.  I think it's Mnuchin - Otting or bust for the next 2 weeks.  Sadly, odds favor the sweep continuing again this month as the path of least resistance.  Punt (again) until the Collins verdict. 

 

It would be somewhat of a charade to increase the capital buffer and the sr pref by a likewise amount as the latter action is fairly inconsistent with the administration's stated goals of ending conservatorship and having the companies well capitalized.  So we're most likely left with the option of replacing the sweep with a backstop commitment fee - and I've had my hopes dashed too many times on this to get excited for it now.

 

good luck everyone.

[Midas79]

It's unrealistic imo to expect a new director to implement such a large change as stopping the sweep in his first few days on the job.  I think it's Mnuchin - Otting or bust for the next 2 weeks.  Sadly, odds favor the sweep continuing again this month as the path of least resistance.  Punt (again) until the Collins verdict. 

 

It would be somewhat of a charade to increase the capital buffer and the sr pref by a likewise amount as the latter action is fairly inconsistent with the administration's stated goals of ending conservatorship and having the companies well capitalized.  So we're most likely left with the option of replacing the sweep with a backstop commitment fee - and I've had my hopes dashed too many times on this to get excited for it now.

 

good luck everyone.

 

Except that it already happened once in December of 2017.

 

I don't see anything inconsistent about another similar letter agreement in the next two weeks. All increasing the liquidation preference of the seniors does is stop the $16.1B overpayment, past the 10% moment, from going any higher.

 

I also don't see why Treasury wouldn't just insist on a huge instant capital raise, to get the companies recapped as fast as possible. Then no government backstop is necessary, beyond a catastrophic one that would only kick in if FnF lose more money than they did in 2008.

[investorG]

It's unrealistic imo to expect a new director to implement such a large change as stopping the sweep in his first few days on the job.  I think it's Mnuchin - Otting or bust for the next 2 weeks.  Sadly, odds favor the sweep continuing again this month as the path of least resistance.  Punt (again) until the Collins verdict. 

 

It would be somewhat of a charade to increase the capital buffer and the sr pref by a likewise amount as the latter action is fairly inconsistent with the administration's stated goals of ending conservatorship and having the companies well capitalized.  So we're most likely left with the option of replacing the sweep with a backstop commitment fee - and I've had my hopes dashed too many times on this to get excited for it now.

 

good luck everyone.

 

Except that it already happened once in December of 2017.

 

I don't see anything inconsistent about another similar letter agreement in the next two weeks. All increasing the liquidation preference of the seniors does is stop the $16.1B overpayment, past the 10% moment, from going any higher.

 

I also don't see why Treasury wouldn't just insist on a huge instant capital raise, to get the companies recapped as fast as possible. Then no government backstop is necessary, beyond a catastrophic one that would only kick in if FnF lose more money than they did in 2008.

 

the 2017 agreement if I remember correctly was hastily done to block off a re-jumpstart threat.  the 3bn didn't even ward off the additional draw in early 2018.

 

mnuchin has to worry about trillions of dollars of global GSE related debt remaining calm - an explicit backstop in some form is nice from his angle.

 

[Guest cherzeca]

It's unrealistic imo to expect a new director to implement such a large change as stopping the sweep in his first few days on the job.  I think it's Mnuchin - Otting or bust for the next 2 weeks.  Sadly, odds favor the sweep continuing again this month as the path of least resistance.  Punt (again) until the Collins verdict. 

 

It would be somewhat of a charade to increase the capital buffer and the sr pref by a likewise amount as the latter action is fairly inconsistent with the administration's stated goals of ending conservatorship and having the companies well capitalized.  So we're most likely left with the option of replacing the sweep with a backstop commitment fee - and I've had my hopes dashed too many times on this to get excited for it now.

 

good luck everyone.

 

Except that it already happened once in December of 2017.

 

I don't see anything inconsistent about another similar letter agreement in the next two weeks. All increasing the liquidation preference of the seniors does is stop the $16.1B overpayment, past the 10% moment, from going any higher.

 

I also don't see why Treasury wouldn't just insist on a huge instant capital raise, to get the companies recapped as fast as possible. Then no government backstop is necessary, beyond a catastrophic one that would only kick in if FnF lose more money than they did in 2008.

 

the 2017 agreement if I remember correctly was hastily done to block off a re-jumpstart threat.  the 3bn didn't even ward off the additional draw in early 2018.

 

mnuchin has to worry about trillions of dollars of global GSE related debt remaining calm - an explicit backstop in some form is nice from his angle.

 

if you look at the default rates for the post FC mortgage cohort, it is extremely low.  of course, there haven't been significant financial stress during this time either.  but if FHFA sticks to a watchful regulatory posture and doesn't let GSEs buy crap from banks as per pre-FC, I think you will see the temperature surrounding the creditworthiness of GSE-insured mbs decrease. especially once GSEs are recapped.