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

[Guest cherzeca]

One thing I'm having trouble wrapping my head around-

 

Capital seems to be a fundamental goal of the admin and FHFA - effectively confirmed through multiple statements now (Calabria testimony, Otting leaked comments, Mnuchin written testimony a while back re: any solution requires capital, and today's Carson comments).

 

I'm struggling with how they will efficiently raise capital with "outstanding" legislative uncertainty regarding "new competition/guarantors", changes to charters, and other uncertainties regarding the economics of paying for the government guarantee.  I previously have arrived at the answer of - this has quite literally always been the case pre-conservatorship in that congress could have theoretically passed legislative modifying charters and creating a paid-for guarantee structure. 

 

But the reality is that anyone posting capital will want some certainty regarding the economic viability and potential returns of a more terminal/long term state for the GSEs. 

 

How are you guys squaring the ability to efficiently raise capital with the longer term legislative uncertainty?  I understand that we all believe legislation isn't happening - but we also have variant views from the market on this investment.  Average participant in whatever IPO is going to want to some closure on potential legislative paths, no?  Is this not a realistic roadblock to raising capital?

 

there are two issues here, as I see it. 

 

first is whether the NWS continues as a legal act.  it can be eliminated by treasury and fhfa by agreement, but some investors will worry that it might reappear.  my answer is twofold: collins en banc may invalidate the NWS, and second, once the conservatorship is ended, since the NWS was viewed as a conservator power under HERA, that power for fhfa goes away...unless it becomes a conservator again.  this is a real issue but I expect investors can get over it.  most companies have more hair on them than this. 

 

second, there is potential competition.  I think this is a red herring.  FnF have huge moats and competitive advantages.  I dont see that investors in two giants having $5T in guaranteed assets generating $20B in annual NI need to be overly concerned about upstarts.  if you want to invest in Fannie, are you worried about the competitive threat of Freddie? if not then why some new upstart?

[Cox022]

One thing I'm having trouble wrapping my head around-

 

Capital seems to be a fundamental goal of the admin and FHFA - effectively confirmed through multiple statements now (Calabria testimony, Otting leaked comments, Mnuchin written testimony a while back re: any solution requires capital, and today's Carson comments).

 

I'm struggling with how they will efficiently raise capital with "outstanding" legislative uncertainty regarding "new competition/guarantors", changes to charters, and other uncertainties regarding the economics of paying for the government guarantee.  I previously have arrived at the answer of - this has quite literally always been the case pre-conservatorship in that congress could have theoretically passed legislative modifying charters and creating a paid-for guarantee structure. 

 

But the reality is that anyone posting capital will want some certainty regarding the economic viability and potential returns of a more terminal/long term state for the GSEs. 

 

How are you guys squaring the ability to efficiently raise capital with the longer term legislative uncertainty?  I understand that we all believe legislation isn't happening - but we also have variant views from the market on this investment.  Average participant in whatever IPO is going to want to some closure on potential legislative paths, no?  Is this not a realistic roadblock to raising capital?

 

I am not super confident in the following, but here are some thoughts:

 

I think an administrative approach that takes into consideration how politically palatable any changes are reduces this uncertainty.  The impetus for future legislation is lower the more political consideration is put into administrative reform.  Administrative reform that protects the 30-year mortgage, supports low income mandates, protects taxpayers, and makes at least a small attempt at creating competition seems like a palatable package.  I can't think of anything in that package that a large enough group of lawmakers would dislike so strongly to overcome inertia to legislate change.  The banking lobby would prefer something else, but decision makers in the administration seem to be acknowledging TINA.

 

Also, there is a 90 year history that shows how difficult it is to legislatively change the housing finance system.  I would guess, in lieu of getting congress to act, the administration/treasury would instead make changes that lawmakers wont care enough to do anything about.

 

I think the halo effect of being 'government sponsored' will go along way for incremental capital providers.  Buffett would think twice and ask the same question you are, but not many others.

[Midas79]

Is anyone tempted to sell some shares now in anticipation of a big drop tomorrow if the NWS payment is made? I find it unlikely that the payment won't be made, the letter agreement from late 2017 was made 10 days before that sweep payment was due. Still, I don't like just guessing and would feel foolish if the payment actually wasn't made, or if it is and the price goes up anyway.

[orthopa]

Is anyone tempted to sell some shares now in anticipation of a big drop tomorrow if the NWS payment is made? I find it unlikely that the payment won't be made, the letter agreement from late 2017 was made 10 days before that sweep payment was due. Still, I don't like just guessing and would feel foolish if the payment actually wasn't made, or if it is and the price goes up anyway.

 

I actually have some $$ ready to go if it does go through to add to a dip. Id rather be able to add to a dip knowing what i think the eventual endgame is then chase an illiquid runaway train and incur capital gains on top of it.

 

Seems like market maybe thinking payment is made too as seems like there is a lid on what some thought the gains would be today.

 

That being said it would be a pretty Rich move by treasury to sweep a payment when the president wants a report on appropriate capital levels to get FnF out of conservatorship as soon as practicable . ;D ;D ;D ;D

[buffetteer1984]

Which preferred do most own? I currently have fnmas but a par of 25 doesn't seem as rewarding as the illiquid ones still trading significantly lower.

[Midas79]

A thought on the difficulty of drawing in enough investors to recap the companies that Tim Howard mentioned.

 

One path forward is to implement the second remedy that the Collins plaintiffs have asked for in the Fifth Circuit. Treasury sends $122B back to the GSEs, which restores things to where they would have been if the NWS had never happened but the 10% dividends had been paid every quarter instead. This also leaves the seniors intact. That amount is (coincidentally?) enough to recap the companies in the blink of an eye.

 

Treasury could then convert its seniors into common shares and sell those to whoever will buy them for whatever price they will pay, alongside a release from conservatorship. It remains to be seen if Treasury could recoup the entire $122B from those sales (actually unlikely, otherwise they could raise the $122B in the market instead), but their shares, which I presume would represent at least a 90% stake, would be worth quite a bit. Taking a $30B or so loss on those (selling them for $92B) still means that taxpayers made over $70B in total profit at the end of the day.

 

If this takes the form of a settlement for the Collins case, Treasury wouldn't have to send the full $122B back, only enough to meet the capital requirements. Those won't be released until late July according to Otting, but he can give Mnuchin a ballpark figure right now. They had better hurry in this case, at least telling the Fifth Circuit to hold off on releasing their decisions while settlement talks happen.

 

You're still having to placate buyers for the shares, but this way it is done after release or alongside it, instead of before. The risk of another conservatorship will always be on the table, but it will be much more difficult to put the companies back in rather than keeping them in.

[Guest cherzeca]

I always thought treasury should eliminate senior prefs, exchange all warrants for say $50B of conventional senior pref that it could resell immediately into the institutional market, leave juniors out there, and then raise new common without any treasury ownership of common.  while treasury would haircut its holdings down to $50B, it would get immediate execution and pull $50B out of the companies quickly.  common offering would proceed much easier.

[rros]

Re TH's take.

 

Interesting how he views a possible Kudlow/Mnuchin dispute. But there is an angle he might be missing giving too much credit to Kudlow. Trump has shown time and again he is and wants to be the alpha guy. An alternative reading to TH would be that Trump himself wants to speed up the process (whatever that means) and has embarked the services of Kudlow in a way that does not offend Mnuchin (not having to admit publicly Mnuchin has been too slow). Kudlow, in turn, may have advocated for breaking up the duopoly on his own.

 

While TH may believe Kudlow is now part of the Bank lobby -and TH has a clear anti-bank bias-, it is also possible that Trump sees Kudlow as instrumental in pushing administrative reform and does not care he may insert his own agenda. Is it purely coincidental that there are resemblances to actual events, persons, living or dead? We do not know.

 

But if it is truly Trump who is now demanding results we will see an acceleration next quarter.

 

It is really, really hard to be negative about this process at a time when the WH has officially entered the fray. Not just because Kudlow is powering through. Mulvaney is also in there... pretty close to Trump. And both have been firm supporters of shareholders' rights.

[rros]

Even if there is a dispute it will not be the first for Mnuchin.

 

Mnuchin was never part of the China trade war thing and timidly tried to stir issues to a friendlier camp. Yet, he silently took a back seat when he realized R. Lighthizer and P. Navarro succeeded in building a stronghold around Trump. I can't wait for April, May and June.

[orthopa]

Re TH's take.

 

Interesting how he views a possible Kudlow/Mnuchin dispute. But there is an angle he might be missing giving too much credit to Kudlow. Trump has shown time and again he is and wants to be the alpha guy. An alternative reading to TH would be that Trump himself wants to speed up the process (whatever that means) and has embarked the services of Kudlow in a way that does not offend Mnuchin (not having to admit publicly Mnuchin has been too slow). Kudlow, in turn, may have advocated for breaking up the duopoly on his own.

 

While TH may believe Kudlow is now part of the Bank lobby -and TH has a clear anti-bank bias-, it is also possible that Trump sees Kudlow as instrumental in pushing administrative reform and does not care he may insert his own agenda. Is it purely coincidental that there are resemblances to actual events, persons, living or dead? We do not know.

 

But if it is truly Trump who is now demanding results we will see an acceleration next quarter.

 

It is really, really hard to be negative about this process at a time when the WH has officially entered the fray. Not just because Kudlow is powering through. Mulvaney is also in there... pretty close to Trump. And both have been firm supporters of shareholders' rights.

 

Seems like TH is really getting into the weeds trying to inference who wrote the memo, predicting infighting, and blaming big banks for certain verbage. I give him credit for trying but he seems to be trying to hard. Selfishly all that matters to me as prfd holder is the recap and how it happens. I guess if there is no agreement on a pathway forward that could hinder the recap but Im all for giving up some on the eventual final structure of the GSEs in exhange for a quicker and shareholder friendly recap.

[Guest cherzeca]

Re TH's take.

 

Interesting how he views a possible Kudlow/Mnuchin dispute. But there is an angle he might be missing giving too much credit to Kudlow. Trump has shown time and again he is and wants to be the alpha guy. An alternative reading to TH would be that Trump himself wants to speed up the process (whatever that means) and has embarked the services of Kudlow in a way that does not offend Mnuchin (not having to admit publicly Mnuchin has been too slow). Kudlow, in turn, may have advocated for breaking up the duopoly on his own.

 

While TH may believe Kudlow is now part of the Bank lobby -and TH has a clear anti-bank bias-, it is also possible that Trump sees Kudlow as instrumental in pushing administrative reform and does not care he may insert his own agenda. Is it purely coincidental that there are resemblances to actual events, persons, living or dead? We do not know.

 

But if it is truly Trump who is now demanding results we will see an acceleration next quarter.

 

It is really, really hard to be negative about this process at a time when the WH has officially entered the fray. Not just because Kudlow is powering through. Mulvaney is also in there... pretty close to Trump. And both have been firm supporters of shareholders' rights.

 

Seems like TH is really getting into the weeds trying to inference who wrote the memo, predicting infighting, and blaming big banks for certain verbage. I give him credit for trying but he seems to be trying to hard. Selfishly all that matters to me as prfd holder is the recap and how it happens. I guess if there is no agreement on a pathway forward that could hinder the recap but Im all for giving up some on the eventual final structure of the GSEs in exhange for a quicker and shareholder friendly recap.

 

agreed.  my only hesitation is that I dont know if TH is just harboring past sensitivities or had heard on background something disturbing.  I am guessing more former than latter. TH seems to be taking offense that kudlow is quarterbacking the process. I care more that Mnuchin will be in charge on preparing the GSE side of the plan.  will kudlow receive Mnuchin's work product, say this sucks, and send it back to mnuchin? I dont think so.  I think it actually makes sense for a guy like kudlow to receive both plans, make sure they fit together, and solicit input from elsewhere from the administration (lots of addressees of the memo, though I am not sure the ag dept needs to provide input).

 

any news on dividend?

[rros]

...just harboring past sensitivities or had heard on background something disturbing.  I am guessing more former than latter.

Good point, Chris. I hope you are right.

 

Yes, his sources of information are never to be underestimated. On the other hand, it appears he will only achieve nirvana with full restoration and full exoneration. But is hard to re-write history. The hope is that he is only being biased.

 

It is still a bit troublesome to see the WH stirring towards a multi-guarantor system right after the last 2 hearings. Like... it is not going to happen. Mnuchin appears to be the moderating force, so far.

[hardincap]

craig philips advocated for multi guarantor model end of last year. it could have been the plan all along, perhaps based more on political reality than business merit. re: th sources, he's stated before that he is in regular contact with key players, and i think the prudent assumption is that his opinions and reactions are informed by more (maybe significantly more) than what we see in headlines.

[Eye4Valu]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

[Guest cherzeca]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

 

I think it will reduce objections

[Midas79]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

 

I think it will reduce objections

 

Sustained.

[rros]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

 

I think it will reduce objections

 

Sustained.

I thought I was the only funnyman here.

[Guest cherzeca]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

 

I think it will reduce objections

 

Sustained.

I thought I was the only funnyman here.

 

I thought there were no funnymen here

[orthopa]

With no pre announcement of a new amendment by this time today to agreement safe to say dividend gets swept huh?

[DRValue]

What are your thoughts on how a favorable 5th Circuit decision might influence administrative reform?

 

I think it will reduce objections

 

Sustained.

I thought I was the only funnyman here.

 

I thought there were no funnymen here

 

Move to strike

[rros]

With no pre announcement of a new amendment by this time today to agreement safe to say dividend gets swept huh?

Likely. But less relevant after WH's memo. Key -for me- is Treasury's housing reform plan. Hopefully, it will include a comprehensive solution for sweep, implicit guarantee, recap, warrants and Jrs. treatment. And a benefitial-to-us timeline.

[Guest cherzeca]

With no pre announcement of a new amendment by this time today to agreement safe to say dividend gets swept huh?

 

I have no idea what otting will do, but electing to receive the dividend in kind (dont pay out money, raise pref amount) does not take an amendment...this is something he can do

[allnatural]

Dividend has been paid - https://www.fhfa.gov/datatools/downloads/documents/market-data/table_2.pdf

[Guest cherzeca]

Dividend has been paid - https://www.fhfa.gov/datatools/downloads/documents/market-data/table_2.pdf

 

calabria confirmation insurance.  hefty premium

[rros]

Dividend has been paid - https://www.fhfa.gov/datatools/downloads/documents/market-data/table_2.pdf

On your face, Judge Willett.