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

[orthopa]

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..

 

Not knowing the mechanics not doubt keeps me away from the common. Once we get a target capital level from treasury the picture gets a little more clear. Problem is from 2.5%-4.5% your talking about a huge range of values not to mention other possible dilution on top of that as Im sure your alluding too. One could start to maybe argue final value vs preferred now with some trading at 40% of par. Is common worth more then 2.5 times here? Possibly

 

Knowing what we know now Prfd by far is still the safer bet and FWIW I do put a lot of value in Paulson/Mnuchin/Otting connection. As crazy at it seems the way everything has gone has validated the entire suspicion that this all started when Paulson supported Trump early and became an economic advisor. You do for me, I do for you. That being said I think undoubtedly prfd gets the best treatment compared to common due to those at the bargaining table regarding the lawsuits and those in the circle of the money that will make up a recap.

[SnarkyPuppy]

https://www.nar.realtor/sites/default/files/documents/2019-Working-Paper-A-Vision-For-Enduring-Housing-Finance-Reform.pdf

[muscleman]

Is Calabria supposed to talk today? Does anyone know any update?

[Guest cherzeca]

Is Calabria supposed to talk today? Does anyone know any update?

 

he was interviewed by Bethany McLean at NAR conference. dont have much reporting other than he wants

GSEs to build capital

[allnatural]

Positive all around. Good commentary on capital, timing, ending the NWS, and making the lawsuits go away. Pinch me.

 

Fannie, Freddie need strong capital position to exit conservatorship: FHFA chief

By Hannah Lang

Published May 14 2019, 4:01pm EDT

— In his first public policy discussion as director of the Federal Housing Finance Agency, Mark Calabria stressed that a strong capital position will determine the future for Fannie Mae and Freddie Mac, eventually helping to lead them out of conservatorship.

 

The lack of capital at Fannie and Freddie spurred the government to seize control of the government-sponsored enterprises more than a decade ago, so the two will have to build a sufficient amount in order to release themselves, Calabria said Tuesday at a National Association of Realtors legislative conference.

 

“All large, systemically important financial institutions should be well capitalized,” he said, speaking at a regulatory forum with Vanity Fair’s Bethany McLean. “That should seem non-debatable at this point. I think if your objective is not to put the taxpayer at risk, if the taxpayer is at risk, the system is at risk.”

 

“If you don’t have a lot of capital, you can’t take a lot of risk, and that’s a very basic notion that I think is a responsible way to run two companies," said FHFA Director Mark Calabria.Bloomberg News

 

Calabria reiterated his timeline for the first steps toward their release this year, which he said would be negotiating changes to the preferred stock purchase agreements with the Treasury Department in the fall, after Treasury and the Department of Housing and Urban Development put out reports on administrative and legislative reform in response to a recent presidential directive.

 

Treasury has consulted with the FHFA on its response, said Calabria, and after those reports are finalized, he plans to work toward ending the “net worth sweep.” In 2012, the FHFA and Treasury altered the senior agreements to require Fannie and Freddie to deliver nearly all of their profits to the Treasury Department in an effort to repay taxpayers, leaving the GSEs with an incredibly small capital cushion of $3 billion each.

 

“I will engage with Treasury on an equal basis to where we can make changes to the share agreement that would create a path to get out of conservatorship, and that would absolutely require an end to the sweep,” he said. “My hope is we can have this wrapped up where we set a road map … out of conservatorship somewhere later in the year.”

 

But simply allowing the GSEs to retain earnings wouldn’t provide enough capital to safely release Fannie and Freddie from conservatorship, and FHFA will begin to look over data related to a public offering later this year, though the timeline is “not calendar dependent,” said Calabria.

 

“The best thing that can be done for the markets is to create a transparent system where the financials are understandable, they actually translate what the business model is and profitability is, and then investors can decide for themselves whether they want to invest in it,” he said.

 

The GSEs can raise capital without increasing guarantee fees or mortgage pricing, Calabria said.

 

“How do we level the playing field to where all large financial institutions have similar capital so that the GSEs have a successful business model because they have good management, because they have good execution, not because they have lower standards than everybody else?” he said.

 

Stronger capital will also counteract the GSEs’ procyclical tendencies that were present in the run-up to the financial crisis, said Calabria.

 

“Not having enough capital will mean that Fannie and Freddie will pull back,” he said. “If they have sufficient capital, they will keep lending throughout the crisis and we will have mortgage availability through a downturn, which is when we need it most.”

 

Before Fannie and Freddie are released from conservatorship, they will also need to have a strong supervisory framework in place, he said.

 

“I have an agency where almost the entire existence of the agency Fannie and Freddie have been in conservatorship,” he said. “If you really think about it you’re going to be carrying a lot of the weight, moving it from the conservator to the supervision team. I haven’t seen anything to raise any questions in my mind, but for me, a prerequisite to leave conservatorship is I’ve got 100% confidence that the supervisory framework is there.”

 

Meanwhile, Fannie and Freddie will likely curtail risk while they maintain a limited capital buffer in conservatorship, said Calabria.

 

“If you’ve got more capital, you can take more risk,” he said. “If you don’t have a lot of capital, you can’t take a lot of risk, and that’s a very basic notion that I think is a responsible way to run two companies.”

 

The combinations of risk factors in a loan, he said, will have to be “looked at holistically.”

 

“What we can do is dial this back a little bit, hardly noticeable at all in the marketplace," Calabria said. "The vast majority of loans will stay where they are, but we can dial back the riskiest part of it and again reduce a lot of the risk that way."

 

However, Calabria echoed his testimony at a Senate Banking Committee nomination hearing in February, reiterating that loan limits, affordable housing goals and the “duty-to-serve” provisions will stay in place.

 

McLean also asked Calabria about continuing shareholder litigation, which he brushed off.

 

“I think if we can chart a path out of conservatorship … that that makes a lot of those issues go away,” he said.

[SnarkyPuppy]

“I will engage with Treasury on an equal basis to where we can make changes to the share agreement that would create a path to get out of conservatorship, and that would absolutely require an end to the sweep,” he said. “My hope is we can have this wrapped up where we set a road map … out of conservatorship somewhere later in the year.”

 

“I think if we can chart a path out of conservatorship … that that makes a lot of those issues go away,” he said.

 

......................

[allnatural]

More positive commentary from Calabria re: FHFA authority to end the conservatorship and moving forward w/o Congress if they fail to act. https://www.politico.com/story/2019/05/14/fannie-mae-freddie-mac-mark-calarbria-1438457

 

“I really would like to see Congress act,” he said. “Keep in mind, I’ve got two entities, I’ve got the current business model — I’m stuck with that. I can get them out of conservatorship, I can try to make sure they’re better capitalized, better regulated, but essentially, the model is the model.

[DRValue]

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.

 

I've noticed as well that Calabria's timeline indicates a capital raise about a year from today in first half of next year. This ties in with the moelis plan of announcing the companies will be released and then raising capital.

 

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

 

Both positive for commons.

[Midas79]

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

 

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

 

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

 

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

[DRValue]

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

 

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

 

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

 

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

 

If Fannie has a market cap of 165b and common is diluted 92% they're still worth $9.

 

If the company and Treasury are sensible with the capital raise then the company can push back to investors that actually they don't need to raise cash they could just earn their way out of it. I'd prefer that but I don't expect it as treasury will likely want it's cash asap.

 

It's possible to be too pessimistic is what I'm saying.

[Guest cherzeca]

you can go around and around on common valuation and not know where you end up until you see some kind of deal structure announced...and then it might still change once that deal goes to market.  the interesting thing is that treasury has such a good deal, 80% free warrants, that you would think it would give some up in order to ensure deal execution.  may be wishful thinking  though

[rros]

Anybody else nervous about all this talking by Calabria?

 

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

 

We need a material move, less explaining.

[TwoCitiesCapital]

Anybody else nervous about all this talking by Calabria?

 

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

 

We need a material move, less explaining.

 

At my new job, I was given the advice of building consensus and getting an idea approved BEFORE the formal meeting in which you seek it's approval and build the case for it.

 

Seems to me that's what's happening here. Informing the audience, building a consensus, and seeking approval BEFORE taking the official actions.

 

Certainly could be wrong, but I'm not concerned by the recent rise in optics on the situation. 

[DRValue]

you can go around and around on common valuation and not know where you end up until you see some kind of deal structure announced...and then it might still change once that deal goes to market.  the interesting thing is that treasury has such a good deal, 80% free warrants, that you would think it would give some up in order to ensure deal execution.  may be wishful thinking  though

 

Agree. One thing I would say though is that it'll probably work out somewhere between the optimistic and pessimistic valuation.

[orthopa]

Anybody else nervous about all this talking by Calabria?

 

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

 

We need a material move, less explaining.

 

Im just concerned I don't have enough preferred and raising more cash to buy more.

[orthopa]

Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains.

 

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price.

 

There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no.

 

I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

 

If Fannie has a market cap of 165b and common is diluted 92% they're still worth $9.

 

If the company and Treasury are sensible with the capital raise then the company can push back to investors that actually they don't need to raise cash they could just earn their way out of it. I'd prefer that but I don't expect it as treasury will likely want it's cash asap.

 

It's possible to be too pessimistic is what I'm saying.

 

Dilution is more dependent on capital levels then just a straight market cap/share count calculation correct? a .5-1% change in capital levels can really swing valuation as Midas says, and looking at the most recent Calabria discussion he wants capital, and then more capital on top of that. Treasury is going to extract as much as they can, and I can see that as even though it would make perfect sense to stop the sweep ASAP they just keep taking Q after Q. If they are happy to sweep a measly 2-3B a Q they are going to extract as much flesh as they can unless someone(en banc) stops them.

 

Looking at the Tarp bailouts many times treasury changed agreements swapped share classes, sold warrants etc. Unfortunately I doubt it will be as clean as dealing with the Sr Prd and common gets 20% of whats left. I think prfd holders are going to argue if the common is worth anything the prfd is worth par.

[Midas79]

Dilution is more dependent on capital levels then just a straight market cap/share count calculation correct? a .5-1% change in capital levels can really swing valuation as Midas says, and looking at the most recent Calabria discussion he wants capital, and then more capital on top of that. Treasury is going to extract as much as they can, and I can see that as even though it would make perfect sense to stop the sweep ASAP they just keep taking Q after Q. If they are happy to sweep a measly 2-3B a Q they are going to extract as much flesh as they can unless someone(en banc) stops them.

 

Looking at the Tarp bailouts many times treasury changed agreements swapped share classes, sold warrants etc. Unfortunately I doubt it will be as clean as dealing with the Sr Prd and common gets 80% of whats left. I think prfd holders are going to argue if the common is worth anything the prfd is worth par.

 

I agree fully.

 

I still maintain that if it looks like the commons will have a lot of value, the junior pref holders will push for a conversion, and neither FHFA nor Treasury has a reason to tell them no. The juniors have an embedded call option on the commons, which means that the commons cannot outperform.

 

That will only be true as of the conversion date, so I guess the commons could outperform between now and then, but I don't see a reason to believe that they will. It smacks of trying to time the market. If I did, I would sell some prefs to buy commons with the intention of switching back later.

 

I could always be wrong, of course, but this is the way I see it, and it's certainly the way I would act if I was one of the junior pref litigants.

[rros]

Anybody else nervous about all this talking by Calabria?

 

Sherrod Brown's favoring a status quo could mean anything from liking the current conservatorship scheme (nationalization) to simply keeping Fannie and Freddie *as is*. While it is highly unlikely Congress may succeed at tying FHFA/Tsy's hands even if they try, it is not inconceivable that they may take a shot at it. The more Calabria talks...

 

We need a material move, less explaining.

 

At my new job, I was given the advice of building consensus and getting an idea approved BEFORE the formal meeting in which you seek it's approval and build the case for it.

 

Seems to me that's what's happening here. Informing the audience, building a consensus, and seeking approval BEFORE taking the official actions.

 

Certainly could be wrong, but I'm not concerned by the recent rise in optics on the situation.

Well... makes sense.

[Guest cherzeca]

calabria seems to have toned down his "advice" for congress, going from saying competition is desirable to saying that the model he has is the model he's stuck with, and I cant help but think this is driven in part by sen brown saying he won't play ball with Crapo. if I am right, thank goodness.

 

while there is no way to anticipate the roadmap, it does seem likely that treasury will want the junior prefs to convert and, since treasury cant force conversion, one might think the juniors will be given an incentive to convert. if so there might be some upside for juniors beyond par.  if not then par "should" be a floor (although there may also be some hard-nosed negotiating to try to force a discount...but to do this, someone (ie treasury) arguably would need to buy up 60% of a class of juniors to try to modify that class, and I just don't see treasury or anyone else committing capital to do that).  so hard to critique being in the juniors.

[SnarkyPuppy]

TwoCitiesCapital hit the nail on the head.

 

Also keep in mind - Calabria is one side of the equation - and he is the regulator.  He's shoving the idea of capital down the throats of anti-gse crowd/congress because it's difficult to defend against.  I think he provides a subtle hint in mentioning that he will have to sit down and meet in the middle with Treasury in negotiations, as Treasury (80% common holder) wants to maximize its investment. 

 

My speculation is Calabria is acting as a safety/soundness regulator asking for as much capital as possible - and will be "disappointed" when he has to lower his capital standards to execute a recap given negotiations with Treasury. 

 

 

[SnarkyPuppy]

Can someone articulate a practical bear case for the preferreds which would result in permanent loss of capital?

 

I agree there are situations where the returns aren't significant (large haircut to par if we lose 5th circuit en banc, recap primarily through long term retention of earnings)

[allnatural]

I never understood the argument that if shareholders lose Collins, pfd shareholders would have to take a haircut. As much as pfd shareholders need the government to signoff on this, the government needs them more. Is the us government really going to hold up the biggest ipo of the decade which is in their best interests (monetize ~$100b + get taxpayers off the hook) for an extra ~$5b of value that they may be able to extract from shareholders (whom are going to be the participants of the new recap...)? Never made sense to me. Pfds are a small piece of the pie, but unless treated fairly, the admin plan goes nowhere without pfd shareholders signing off on it. That's a position of power if you ask me!

 

More likely result of losing the Collins case is potentially the GSEs not getting the ~$20b+ of tax credits for the overpayments that plaintiffs are asking for in remedy in addition to writing down the senior pfds.

 

 

Can someone articulate a practical bear case for the preferreds which would result in permanent loss of capital?

 

I agree there are situations where the returns aren't significant (large haircut to par if we lose 5th circuit en banc, recap primarily through long term retention of earnings)

[allnatural]

Treasury beginning to line up w/ Calabria.

 

@KatyODonnell_

Craig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.”

 

*PHILLIPS: WE WANT TO GET FANNIE-FREDDIE OUT OF CONSERVATORSHIP

*PHILLIPS: WE'VE HAD WORKING SESSIONS ON RECAPITALIZING GSES

*PHILLIPS: CALABRIA'S PLAN FOR GSES FOOTPRINT HAS BEEN DISCUSSED

*TREASURY'S CRAIG PHILLIPS SAYS COMPETITION WOULD BE GOOD

 

[rros]

Treasury beginning to line up w/ Calabria.

 

@KatyODonnell_

Craig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.”

 

*PHILLIPS: WE WANT TO GET FANNIE-FREDDIE OUT OF CONSERVATORSHIP

*PHILLIPS: WE'VE HAD WORKING SESSIONS ON RECAPITALIZING GSES

*PHILLIPS: CALABRIA'S PLAN FOR GSES FOOTPRINT HAS BEEN DISCUSSED

*TREASURY'S CRAIG PHILLIPS SAYS COMPETITION WOULD BE GOOD

Good news.

[Midas79]

Treasury beginning to line up w/ Calabria.

 

@KatyODonnell_

Craig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.”

 

This has me thinking, how could FHFA and Treasury tap current shareholders for more money? There could be some sort of rights offering, perhaps with current shareholders being given priority either as an incentive to drop the lawsuits or as a reward for being first in (or both). And how would that work for the pref shares? Common shareholders could buy warrants or be forced to put up cash to maintain their position, I think.

 

I beliebe it was Tim Pagliara who said that the government won't screw existing shareholders because they will be providing some of the recap money. That's what started this train of thought.