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

[allnatural]

https://gsesafetyandsoundness.com/

 

For someone that's a casual observer, is there an easy place to learn what the Moelis plan recommended?  Any links to posts, blogs, etc?

[rros]

So next in *motions* should be some Tsy official stating they are exploring exercising the warrants. Just so that commons don't run away too much. Which, in turn, should lift Jrs. even more as any endorsement of commons almost guarantees face value on the Jrs.

 

Calab said "whether we can do some sort of conversion with the preferreds OR whether they would get par value it's way too early to figure that out..."

 

NOTE: Michael Bright thinks there are only 2 viable paths for the GSEs a) permanent conservatorship; b) explicit government wrapper (like Ginnie Mae). He said any other option and global investors will not buy the securities and that the notion that some kind of capital level will bring any reassurance is a mistake. 

[Guest cherzeca]

So next in *motions* should be some Tsy official stating they are exploring exercising the warrants. Just so that commons don't run away too much. Which, in turn, should lift Jrs. even more as any endorsement of commons almost guarantees face value on the Jrs.

 

Calab said "whether we can do some sort of conversion with the preferreds OR whether they would get par value it's way too early to figure that out..."

 

NOTE: Michael Bright thinks there are only 2 viable paths for the GSEs a) permanent conservatorship; b) explicit government wrapper (like Ginnie Mae). He said any other option and global investors will not buy the securities and that the notion that some kind of capital level will bring any reassurance is a mistake.

 

Bright was corker’s boy toy. He’s no longer relevant.

[orthopa]

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

 

Moelis has the large-scale view right, but that doesn't mean its numbers should be taken as gospel.

 

If the juniors insist on a conversion ratio around what we see in the market right now (about 4.5 to 1), then the IPO is done at $5.55 instead of $11.73 or $14.67. In that case, the prefs outperform the commons by a decent margin.

 

The moelis plan is brought by preferred holders so a large chunk of them are presumably ok with the conversion price.

 

Moelis was a stab in the dark first brought to light 1.5 years ago.

 

Yes it was brought by preferred but would they say no to more favorable terms? Or change their tune in negotiations? I think almost every common shareholder is anchoring on the Moelis valuation. Its the dream of riches and validated on paper. To show how imperfect the valuation is Moelis gives 2 wildly different valuations/scenarios.

 

Again if Moelis is brought by preferred holders why would they negotiate or agree to a deal that would benefit another share class greater then their own? Because they are nice guys?

 

Notice Calabria mentions both conversion and par. If preferred holders dont agree to the terms the whole recap train stops.  They will get very favorable terms and I believe that means vs common too.

 

Again not badgering you but what is your logic for swapping 2nd in line property to 3rd in line property and getting a lower return for it? Who the hell would do that?

 

Preferred may very well get the best of both worlds. A favorable swap to common then get to participate in a dilution scenario seen less detrimental to common. It just comes out more ahead this way.

 

[DRValue]

@orthopa

 

I doubt moelis can present plans to and work with treasury and then change the terms at the last minute.

 

They had to sell it to govt to make treasury the maximum return. Presenting something too beneficial to juniors would dilute treasury too much and risk not being taken up.

 

Then again, who says it's moelis

[rros]

So next in *motions* should be some Tsy official stating they are exploring exercising the warrants. Just so that commons don't run away too much. Which, in turn, should lift Jrs. even more as any endorsement of commons almost guarantees face value on the Jrs.

 

Calab said "whether we can do some sort of conversion with the preferreds OR whether they would get par value it's way too early to figure that out..."

 

NOTE: Michael Bright thinks there are only 2 viable paths for the GSEs a) permanent conservatorship; b) explicit government wrapper (like Ginnie Mae). He said any other option and global investors will not buy the securities and that the notion that some kind of capital level will bring any reassurance is a mistake.

 

Bright was corker’s boy toy. He’s no longer relevant.

No, he is not. You are right. But his opinion could be correct which is why I posted it. Here is his full response:

 

Bright:  There are two outcomes for the GSEs that are unambiguously safe for the financial markets. The first is conservatorship. The markets understand conservatorship and accept that the Treasury is backing both GSEs.  Ginnie Mae paper trades at a slight premium to the GSEs, but they are close enough. The market also understands a congressionally authorized credit wrapper as is the case with Ginnie Mae explicitly.  Those are the two extremes that the markets understands.  This is why foreign central banks are comfortable with Ginnie Mae because the governmental wrap is clear and unambiguous.  The middle ground is quite unclear in terms of market acceptance.  The idea that there is some amount of private capital that gets you to the same market acceptance as either conservatorship or an explicit guarantee from Treasury strikes me as wishful thinking.  Any outcome that does not involve explicit credit support for the GSEs runs the risk that markets and particularly global investors will not accept it.

[james22]

In the CNBC interview, Calabria spoke of ensuring the two were safe and sound before offering to investors as well as "we will be suggesting to Congress that Congress come in and do an explicit backstop that is limited, that is defined, that you know where the lines are, that you know who's covered, you know who's not."

 

Don't know if he's certain global investors will buy based on his assurance (and capital level) alone, but don't think he'd allow Congress to keep the offer from being made.

 

 

[Midas79]

In the CNBC interview, Calabria spoke of ensuring the two were safe and sound before offering to investors as well as "we will be suggesting to Congress that Congress come in and do an explicit backstop that is limited, that is defined, that you know where the lines are, that you know who's covered, you know who's not."

 

Don't know if he's certain global investors will buy based on his assurance (and capital level) alone, but don't think he'd allow Congress to keep the offer from being made.

 

I keep hearing that an explicit backstop would require Congress, but the current funding commitment from Treasury comes from the SPSPA agreement, which neither FHFA nor Treasury consulted with before signing.

 

What's to stop FHFA and Treasury from doing another agreement where, in the event of enough losses to deplete all of FnF's capital, Treasury steps in and provides the balance in exchange for another round of senior prefs + 10% dividends? In exchange for this FnF could pay Treasury a fee, in keeping with the presidential memo. This way MBS investors are perfectly safe, while Treasury is only at risk if FnF's losses ever exceed their capital. Strong capital requirements should minimize the risk of the latter.

[Guest cherzeca]

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

[Guest cherzeca]

Also that line was appropriated in HERA. Constitutional issue

[rros]

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop.

[Guest cherzeca]

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop.

 

The current backstop can continue since it has been congressionally appropriated in HERA. I guess it can be modified. But if it is terminated at some point (and I think Treasury will want this) a new backstop will have to come from Congress

 

 

[rros]

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop.

 

The current backstop can continue since it has been congressionally appropriated in HERA. I guess it can be modified. But if it is terminated at some point (and I think Treasury will want this) a new backstop will have to come from Congress

I did not think about that... how about the ole' commitment fee for the remaining of the current backstop? Will they let that die? No backstop at all?

[muscleman]

My TA analysis shows this should now make an accelerated run with small volatility. Hold on tight guys.  :D

[allnatural]

Moelis calls for converting the existing $250 credit line into a last resort catastrophic $250b back stop standing behind $150-$200b of first loss capital. It also envisions the government getting paid a market rate for that backstop (perpetuity income stream of ~$3-5b/yr). This may all be accomplished administratively via HERA as it is a modification to the current senior pfds arrangement.

 

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop.

 

The current backstop can continue since it has been congressionally appropriated in HERA. I guess it can be modified. But if it is terminated at some point (and I think Treasury will want this) a new backstop will have to come from Congress

I did not think about that... how about the ole' commitment fee for the remaining of the current backstop? Will they let that die? No backstop at all?

[Guest cherzeca]

Moelis calls for converting the existing $250 credit line into a last resort catastrophic $250b back stop standing behind $150-$200b of first loss capital. It also envisions the government getting paid a market rate for that backstop (perpetuity income stream of ~$3-5b/yr). This may all be accomplished administratively via HERA as it is a modification to the current senior pfds arrangement.

 

@ Midas

I have thought this but now everyone who wants a backstop wants it at the MBS level and not entity level. Politics I believe

It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop.

 

The current backstop can continue since it has been congressionally appropriated in HERA. I guess it can be modified. But if it is terminated at some point (and I think Treasury will want this) a new backstop will have to come from Congress

I did not think about that... how about the ole' commitment fee for the remaining of the current backstop? Will they let that die? No backstop at all?

 

This is correct. But if you look back over the past year all talk about a continuing govt support for GSEs has been of MBS only. Ties into competition theme so that supporting the securities and not entities.  I don’t see the current backstop lasting after capital is raised

[allnatural]

MBS gaurentee requires congress and is wish list item. Moelis's solution can be seen as compromise while still earning income into perpetuity for taxpayers w/ little to zero risk (if they overcapitalize the GSEs w/ 3%+ of capital).

[orthopa]

@orthopa

 

I doubt moelis can present plans to and work with treasury and then change the terms at the last minute.

 

They had to sell it to govt to make treasury the maximum return. Presenting something too beneficial to juniors would dilute treasury too much and risk not being taken up.

 

Then again, who says it's moelis

 

Your right who says its moelis? You reference it in a previous reply to Midas.  ;)But every common shareholder is wringing that report in their hands and the vast majority of the reason why many have invested. 2nd most argued reason is treasury maximizing their return. I can tell you right now treasury without a doubt will maximize their return and I bet it will fundamentally come separate from the legacy common holder. As a result its not treasury vs prfd but prfd vs common in a conversion scenario and at the bargaining table.

 

A nice sweetener for a prfd conversion would be a favorable conversion ratio and warrant with a lower strike price of common.

[Guest cherzeca]

Broadly speaking it has to be based on moelis blueprint. Which was based on AIG, broadly. There may well be tweaks but no one wants to reinvent the wheel here

[Cox022]

Don Layton, CEO of Freddie.  This was damned informative.  You can infer what is happening behind the scenes.  I'm still digesting so I dont have anything immediate to say. 

 

If you are short on time start at 35:55 and watch until the end (9 minutes).

 

 

edit: one thing i will say is that anyone reporting on his comments today that says he is skeptical about release from conservatorship is totally wrong, imo.

 

[rros]

Don Layton, CEO of Freddie.  This was damned informative.  You can infer what is happening behind the scenes.  I'm still digesting so I dont have anything immediate to say. 

 

If you are short on time start at 35:55 and watch until the end (9 minutes).

 

 

edit: one thing i will say is that anyone reporting on his comments today that says he is skeptical about release from conservatorship is totally wrong, imo.

Thank you. Yes, very informative. He said lawsuits are an impediment to any IPO/recap. He may be right. Perhaps both the sweep and the lawsuits are resolved simultaneously. Berko and Paulson may have some leverage after all.

[Guest cherzeca]

Thanks for posting. For an ex banker he seems pretty underwhelming. Notice how he says stop the sweep but doesn’t say cancel the sr pref and then goes on to say control would be the big issue for new investors. He seems like a good guy but quite a wimp

[Guest cherzeca]

Don Layton, CEO of Freddie.  This was damned informative.  You can infer what is happening behind the scenes.  I'm still digesting so I dont have anything immediate to say. 

 

If you are short on time start at 35:55 and watch until the end (9 minutes).

 

 

edit: one thing i will say is that anyone reporting on his comments today that says he is skeptical about release from conservatorship is totally wrong, imo.

Thank you. Yes, very informative. He said lawsuits are an impediment to any IPO/recap. He may be right. Perhaps both the sweep and the lawsuits are resolved simultaneously. Berko and Paulson may have some leverage after all.

 

Further to my point. Stopping the sweep is not enough if you ever want to get out of conservatorship. Also have to cancel the sr pref which will also settle the lawsuits depending on how the extra $25B beyond the 10% moment is resolved. Either Layton doesn’t understand this or he is too much of a wimp to say it

[james22]

One would have to wonder if we have met or coming very close to the all in moment if one is inclined to do so. Best would be to hold out till midterms later this year then go for the gusto. Seems like time is the biggest impediment to ROI at this point. If you were willing to put 5-10% etc of your portfolio with what we as investors knew 2-3 years ago it seems like a significant increase in exposure would be in order relative to what is thought/known now.

 

I was willing to put up to 10% of my portfolio with a coin flip of whether or not they were going to be "wound down". Where we sit now an increase in exposure should be in order no?

 

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common.

 

If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing.

 

Anyone adding to their position with the recent news?

 

Or waiting for something more "sure" - a court decision, an endorsed plan, etc.?

 

(Count me in the second group - still a speculative position for me.)

[DRValue]

One would have to wonder if we have met or coming very close to the all in moment if one is inclined to do so. Best would be to hold out till midterms later this year then go for the gusto. Seems like time is the biggest impediment to ROI at this point. If you were willing to put 5-10% etc of your portfolio with what we as investors knew 2-3 years ago it seems like a significant increase in exposure would be in order relative to what is thought/known now.

 

I was willing to put up to 10% of my portfolio with a coin flip of whether or not they were going to be "wound down". Where we sit now an increase in exposure should be in order no?

 

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common.

 

If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing.

 

Anyone adding to their position with the recent news?

 

Or waiting for something more "sure" - a court decision, an endorsed plan, etc.?

 

(Count me in the second group - still a speculative position for me.)

 

I will, but at lower prices. I can't decide what will happen here, if the recap is formally announced that would add upward pressure, but if the timeline is too long that could add downward pressure. So the answer is, erm, maybe!