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

[allnatural]

As Otting said (speaking on behalf of FHFA at the time), admin already has a plan determined and everyone is on board. I believe Calabrias recent media appearances were purposefully done, as another commentor mentioned, to start getting the market comfortable with the plan and reduce shock and awe when formally announced.

[SnarkyPuppy]

During AB interview he said sept/oct to amend spsa (stop nws), then in fox interview he reiterated that would be completed by the fall. there is nothing inconsistent with those comments. His first half of 2020 comment was regarding an IPO which makes sense timeline wise. I know reading comprehension is hard but this is basic stuff

 

"Calabria = Mnuchin 2.0 .  Lots of excuses as if Calabria has been sleeping for last 10 years when he was the architect of HERA.

 

Bullshit. He first says October, November, then says first half of 2020.  Will keep moving the goalpost. He is ready to make another excuse of elections and into 2021 (Mnuchin had an excuse of Tax Reform and one excuse after other. Jan 6th is long gone, Otting didn't live up to his promise either. Just talk).

 

They need the money.  Period. 

 

If they see they are losing elections, they will wrap it up in first half of 2020. If not, they will not release it for another 4 years. Politics at its worst. Don’t fall for it. The possibility of them losing elections is the best chance for GSE shareholders to get their money back as they will quickly release them on their way out "

 

I just dont know why calabria is saying all of this stuff, unless the treasury plan is complete and investment bankers have been consulted.

 

Everything has been pre-planned and agreed.  Going through motions.  Amendment to the contract has to be "negotiated" (Calabria has purposely used this word over and over again to signal independence).  I believe he takes his job as regulator seriously but at the same time has everything mapped out w Tsy - there guys aren't idiots and they're not risking their names w/ sloppy execution.  Everything's mapped out and they are going through the motions (incremental info to slowly get the market comfortable - boil the frog munger analogy).

 

This is telling by the fact that in parts  of the interview he claims he's barely talked to tsy and needs to arm length negotiate, yet in other parts he's confidently discussing a solidified plan (recap without congress w/ dates).

 

The notion that they are just stepping into the public and winging these statements is just simply not the case. 

[rros]

"Calabria = Mnuchin 2.0 .  Lots of excuses as if Calabria has been sleeping for last 10 years when he was the architect of HERA.

 

Bullshit. He first says October, November, then says first half of 2020.  Will keep moving the goalpost. He is ready to make another excuse of elections and into 2021 (Mnuchin had an excuse of Tax Reform and one excuse after other. Jan 6th is long gone, Otting didn't live up to his promise either. Just talk).

 

They need the money.  Period. 

 

If they see they are losing elections, they will wrap it up in first half of 2020. If not, they will not release it for another 4 years. Politics at its worst. Don’t fall for it. The possibility of them losing elections is the best chance for GSE shareholders to get their money back as they will quickly release them on their way out "

I agree with everybody else. Pre-planned, motions... as per Snarky. Otting's Jan leak was telling.

[rros]

The largest IPO ever, Alibaba, raised 25 billion. More recently, Uber raised 8 billion. How in the world will the government raise 100 billion here (4 Alibabas)? Or even 50 billion? While I agree things are moving along, it is disconcerting that the sweep hasn't been stopped on Calabria's day 1.

[SnarkyPuppy]

The largest IPO ever, Alibaba, raised 25 billion. More recently, Uber raised 8 billion. How in the world will the government raise 100 billion here (4 Alibabas)? Or even 50 billion? While I agree things are moving along, it is disconcerting that the sweep hasn't been stopped on Calabria's day 1.

 

Did you not hear his 25min interview?

[rros]

The largest IPO ever, Alibaba, raised 25 billion. More recently, Uber raised 8 billion. How in the world will the government raise 100 billion here (4 Alibabas)? Or even 50 billion? While I agree things are moving along, it is disconcerting that the sweep hasn't been stopped on Calabria's day 1.

 

Did you not hear his 25min interview?

I did.

 

The interview raises questions. Not showing any sense of urgency upon the task at hand, believing investors will easily fund a secondary is disconcerting. The idea of achieving the capital levels he requires -in such short period of time- is incompatible with his admission that the sweep will go on for another quarter or two. FB, one of the most marketed IPOs in US history, raised 16 billion. That was for a company with growth prospects in a growing industry, as opposed to Fannie and Freddie's prospect of shrinking market share. Retaining earnings asap is imperative.

 

There is a profound disconnect with reality when he dismisses lawsuits to the NWS as trivial, something that will go away. This, in the face of a monumental need for raising capital. With no strong commitment to the rule of law facing possibly the largest need for capital ever for 2 US companies, something doesn't click.

 

It's ok to be opaque while going through the motions. But there is a difference between being opaque and not connecting with reality.

[investorG]

the current decision-makers at Tsy and FHFA appear to want lower FnF share and profits over time.

 

if the capital requirement is ~2.5pct of total assets, that translates into ~ 125bn of capital needed.  some of this amount could come from retained earnings / additional preferred issuances, taking the theoretical amount to be raised in common stock below $100bn.  Ideally, this could be accomplished in a series of transactions, perhaps totalling 3 over 18 months - private equity infusion, re-IPO, follow-on.

 

ironically, the goals of releasing FnF from conservatorship and maximizing the govt's current investment appear contradictory.  in a potential deal, the more the govt receives of the pro forma value of FnF end state, the less new investors would get for their $75-100bn commitment, making it more difficult to complete a capital raise.  and vice versa. 

 

thus, I'm guessing calabria is not incentivized to get the common stock price juicing higher in advance of any potential capital raisings.  the moelis govt windfall amount estimates and pro forma FnF valuations are likely well too high in light of the leaders' stated goals.

 

good luck everyone.

[Guest cherzeca]

the current decision-makers at Tsy and FHFA appear to want lower FnF share and profits over time.

 

if the capital requirement is ~2.5pct of total assets, that translates into ~ 125bn of capital needed.  some of this amount could come from retained earnings / additional preferred issuances, taking the theoretical amount to be raised in common stock below $100bn.  Ideally, this could be accomplished in a series of transactions, perhaps totalling 3 over 18 months - private equity infusion, re-IPO, follow-on.

 

ironically, the goals of releasing FnF from conservatorship and maximizing the govt's current investment appear contradictory.  in a potential deal, the more the govt receives of the pro forma value of FnF end state, the less new investors would get for their $75-100bn commitment, making it more difficult to complete a capital raise.  and vice versa. 

 

thus, I'm guessing calabria is not incentivized to get the common stock price juicing higher in advance of any potential capital raisings.  the moelis govt windfall amount estimates and pro forma FnF valuations are likely well too high in light of the leaders' stated goals.

 

good luck everyone.

 

let's not forget that IF the NWS is to be rolled back so that treasury ends up with receipts as per original deal, there is a $25B credit due GSEs...can be in form of a credit against future taxes.  calabria should be pounding the table for this initial $25B stake in negotiations with treasury, and if he doesn't, shareholders should in demanding this in exchange for settlement.  $25B is 20% there towards capital target

[Midas79]

let's not forget that IF the NWS is to be rolled back so that treasury ends up with receipts as per original deal, there is a $25B credit due GSEs...can be in form of a credit against future taxes.  calabria should be pounding the table for this initial $25B stake in negotiations with treasury, and if he doesn't, shareholders should in demanding this in exchange for settlement.  $25B is 20% there towards capital target

 

Two questions. Isn't it the plaintiffs involved in negotiations, with both Calabria and Mnuchin on the other side? Also, how does that tax credit help towards a recap?

 

What I was thinking is that the Collins plaintiffs are asking for the seniors to be extinguished and the $25B tax credit. Treasury counters with extinguishing the seniors but not granting the tax credit. The plaintiffs accept because they aren't affected by the recap being larger by $25B.

 

If the plaintiffs demand the $25B on top of the seniors being gone, Treasury conceding would give them everything they want. What incentive would Treasury have to take that deal?

[Guest cherzeca]

let's not forget that IF the NWS is to be rolled back so that treasury ends up with receipts as per original deal, there is a $25B credit due GSEs...can be in form of a credit against future taxes.  calabria should be pounding the table for this initial $25B stake in negotiations with treasury, and if he doesn't, shareholders should in demanding this in exchange for settlement.  $25B is 20% there towards capital target

 

Two questions. Isn't it the plaintiffs involved in negotiations, with both Calabria and Mnuchin on the other side? Also, how does that tax credit help towards a recap?

 

What I was thinking is that the Collins plaintiffs are asking for the seniors to be extinguished and the $25B tax credit. Treasury counters with extinguishing the seniors but not granting the tax credit. The plaintiffs accept because they aren't affected by the recap being larger by $25B.

 

If the plaintiffs demand the $25B on top of the seniors being gone, Treasury conceding would give them everything they want. What incentive would Treasury have to take that deal?

 

calabria is empowered by HERA  to act in the interests of the conservatee and fhfa.  it is plainly in interest of conservatee to have $25B in tax savings going forward, which will provide GSEs $25B in more retained earnings that can be applied to their capital target.  if collins goes Ps way then this ask would be stronger.

[Guest cherzeca]

FT reports that sen. brown doesn't expect bipartisan legislation re GSEs.  here is SA's blurb:  https://seekingalpha.com/news/3463049-frannie-privatization-unlikely-says-sherrod-brown-ft?dr=1#email_link

 

I take this as extremely good news...fhfa/treasury are able to proceed with administrative reform without the expectation that congress will gum up the works while GSEs are raising capital.  markets seems to think otherwise.

 

privatization is such an imprecise term.  reports that sen. brown is against "privatization" is not a negative for GSE pref sh, though market seems to think it is...because of loose usage of the term privatization.

 

if anyone disagrees id be interested in the reasoning

[DRValue]

FT reports that sen. brown doesn't expect bipartisan legislation re GSEs.  here is SA's blurb:  https://seekingalpha.com/news/3463049-frannie-privatization-unlikely-says-sherrod-brown-ft?dr=1#email_link

 

I take this as extremely good news...fhfa/treasury are able to proceed with administrative reform without the expectation that congress will gum up the works while GSEs are raising capital.  markets seems to think otherwise.

 

privatization is such an imprecise term.  reports that sen. brown is against "privatization" is not a negative for GSE pref sh, though market seems to think it is...because of loose usage of the term privatization.

 

if anyone disagrees id be interested in the reasoning

 

I was very happy after I got through the clock bait headline as I took it to mean that congress won't pass anything major. To me it says admin recap with little congress input.

 

Buying more today. Seriously concentrated here, lol.

[hardincap]

Calabria specifically said he is obligated by the statute to release after recap. That is a BFD for him to say that. But, FUD like this does make it harder to raise capital, so its net negative, imo

[Guest cherzeca]

Calabria specifically said he is obligated by the statute to release after recap. That is a BFD for him to say that. But, FUD like this does make it harder to raise capital, so its net negative, imo

 

what's FUD? 

 

if this just means that congress doesn't do anything, and having heard that calabria considers himself obligated to restore capital, dont you think this makes institutional investors have fewer rather than more questions in the capital raising process?

[DRValue]

Calabria specifically said he is obligated by the statute to release after recap. That is a BFD for him to say that. But, FUD like this does make it harder to raise capital, so its net negative, imo

 

what's FUD? 

 

if this just means that congress doesn't do anything, and having heard that calabria considers himself obligated to restore capital, dont you think this makes institutional investors have fewer rather than more questions in the capital raising process?

 

Fear, Uncertainty, and Doubt.

 

A value investors best friend, you love it when you see it.

[Guest cherzeca]

Calabria specifically said he is obligated by the statute to release after recap. That is a BFD for him to say that. But, FUD like this does make it harder to raise capital, so its net negative, imo

 

what's FUD? 

 

if this just means that congress doesn't do anything, and having heard that calabria considers himself obligated to restore capital, dont you think this makes institutional investors have fewer rather than more questions in the capital raising process?

 

Fear, Uncertainty, and Doubt.

 

A value investors best friend, you love it when you see it.

 

got it.  and so why net negative?

[hardincap]

i just think antagonistic comments by influential politicians dont help when you're trying to raise 100bn from the market. the market reaction from this mildly negative headline was fairly sharp.. how bad will it be if/when politicians actively try to derail an admin-led release? im expecting a moelis type recap plan to be released next mo, and we'll see what kind of execution risk discount the market puts on f&f. i suspect at that point, the "easy money" will have been made...

 

[Jcmeg35]

Overall, I also agree that the biggest takeaway is that Congress is unlikely to act.

 

I also think that @hardincap and the market's reactions are justified because it highlights the numerous moving parts, number of constituents involved, and how complicated this process is. I think part of the problem is that Calabria & co. have just started the narration process about how they plan to act. I think as we move down the road with TSY response to WH and more details emerge Mnuchin, Calabria, etc. will move into "pitch". I think at that stage, once the wheels are fully in motion, they will discuss how congress etc. are not material risks to investors. This is all to say, I think this will all emerge in time.

 

I also think it is important to keep in mind that while all the talk has been positive, at this stage, there have been no concrete actions that have been taken. I think this is also why Calabria's Fox interview, despite saying some pretty constructive things on IPO, ending NWS, his mandate to R&R, etc. didn't move the price up that much.

[Guest cherzeca]

I agree that there are a lot of moving parts and the most dangerous part is Congress. If I am right and brown is saying he won’t back Crapo then I think the chances that this most dangerous part would  be moving has decreased

[orthopa]

As I think back into the last time treasury had to raise money via TARP style bailouts they sold their warrants. Any chance Treasury converts the Sr to common dilutes common right off the bat, then raises money on top of that? As a sweetener they could sell their warrants after modifying the strike price to something more reasonable. The majority of the value could be in time value of a 5-10 yr warrant and would surely be bought.

[Guest cherzeca]

As I think back into the last time treasury had to raise money via TARP style bailouts they sold their warrants. Any chance Treasury converts the Sr to common dilutes common right off the bat, then raises money on top of that? As a sweetener they could sell their warrants after modifying the strike price to something more reasonable. The majority of the value could be in time value of a 5-10 yr warrant and would surely be bought.

 

treasury will have to decide how much it wants to keep from this transaction, knowing that to date it has been already paid in accordance with original terms plus $25B, understanding that the more it wants to keep the less likely it will be able to execute the transaction in the capital markets

[Ahab]

I'm curious what others think about Fannie Mae common at these levels. My very speculative opinion is that they currently are a better value than the preferreds (currently only in preferreds myself). The common share price reflects a wider dispersion of outcomes. To me, a bet on common is a bet on moderate dilution instead of maximum dilution. Yet, assessing probabilities about the recap's mechanics is what trips me up..

[Guest cherzeca]

I'm curious what others think about Fannie Mae common at these levels. My very speculative opinion is that they currently are a better value than the preferreds (currently only in preferreds myself). The common share price reflects a wider dispersion of outcomes. To me, a bet on common is a bet on moderate dilution instead of maximum dilution. Yet, assessing probabilities about the recap's mechanics is what trips me up..

 

recap mechanics should trip you up since no one knows what the hell is coming.  this board is a bunch of wild and crazy guys who are into the least speculative bet you can make in this name. which is junior prefs, but still plenty speculative.  but then, ahab, you are a hunter for the big whale....

[DRValue]

I'm curious what others think about Fannie Mae common at these levels. My very speculative opinion is that they currently are a better value than the preferreds (currently only in preferreds myself). The common share price reflects a wider dispersion of outcomes. To me, a bet on common is a bet on moderate dilution instead of maximum dilution. Yet, assessing probabilities about the recap's mechanics is what trips me up..

 

recap mechanics should trip you up since no one knows what the hell is coming.  this board is a bunch of wild and crazy guys who are into the least speculative bet you can make in this name. which is junior prefs, but still plenty speculative.  but then, ahab, you are a hunter for the big whale....

 

The more I think of the common the more I like them. I'm heavy in them but hedged with prefs. I've been looking for decent investments for years and they seldom come along so when they do I have to go big. I'm looking for a home run so commons have to be involved for me. Some see this as a risky investment but the way I've always seen it is that these are two of the best businesses in the world in an unsustainable position not of their making. Eventually it'll work out.

Or I'll go back to work...

[Luke 532]

Eventually it'll work out.

 

I think regarding the prefs this statement is accurate.  But perhaps not so much with the common.  Long-term, after dilution, I will strongly consider buying common but to me that is a better bet once the companies are operating normally again, with the prefs being a better bet now.