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

[orthopa]

In my humble opinion, the major mistake made by a lot of GSE investors here and elsewhere is the failure to realize the continuity between the Democratic and Republican administrations toward GSE policy. Remember both parties are bankrolled by the same paymasters, which includes the large banks. Both parties have inexorably held to the demonstrably false view that the GSEs failed and/or caused the financial crisis. When I started commenting here in 2016 I was focused on the lawsuits while most others were focused on the politics of the administration. So far, those banking on the latter have been disappointed, while those depending on the former have been pleased. This administration has a few months left; we shall see.

 

Banking on politics is akin to emotional investing. The rule of law is far sturdier ground.

 

I dont think there has been anything similar between this admin and the last admin in regards to GSE policy. Its 180 degrees different.

 

I also am not sure why anyone was under the impression that the capital was not going to be "bank like" Which one of the comments from its regulator led anyone to believe it was not going to be? I can cite probably 10 examples from the FHFA director where it telegraphed it was going to be. The trade off for having an 180 degree view could always have been high capital levels. Outside of politics its hard to argue with "releasing the GSEs" when they are well regulated and safe and sound. Dealing with the high capital levels are a bridge FnF will cross. For now if its a bridge we have to cross so be it.

 

I agree that investing on hope is not a great strategy but since its taken 6-7 years and the case has gone all the way to the SCOTUS its surely up for debate how sound the law is too.

[orthopa]

On Nov 9th MTH wrote: "As one who for the last dozen years has worked to have Fannie and Freddie released from conservatorship in a way that maximizes their value to both homeowners and shareholders (existing as well as new), if you were ask me to choose between a quick settlement of the lawsuits and a release of the companies under a consent decree with terms set by Calabria–and Calabria remaining FHFA director for the next four years–and the invalidation of the net worth sweep by the Supreme Court next spring and the potential for their release under a new FHFA director appointed by Biden, I would unhesitatingly pick the latter. I believe that once the net worth sweep is reversed, the rationale for keeping Fannie and Freddie in conservatorship evaporates, irrespective of who is president. But I also believe that Biden will WANT them released–and functioning effectively–as a matter of public policy (and will do my best to try to convince the Biden economic team of the wisdom of doing that.)

 

This squares with the same point I wrote on October 2: "And a Biden win could see a return to capital requirements that are more realistic. Reduced capital requirements under a GSE-friendly Democratic administration coupled with a SCOTUS win for investors is the catbird seat for holders of preferred."

 

It looks quite good at this point. I doubt there will be much action from the lame duck administration, but there should be a steady upwards march from here.

 

I don't know who MTH is, but he/she is counting on SCOTUS a lot more than I am. I would much rather have a decent settlement now than shoot for the moon with SCOTUS and risk coming away with nothing.

 

Tim Howard.

 

I am focusing on what I see as most likely, which is that the lame duck session doesn't accomplish anything significant. I don't know that for sure so I could be wrong. But the administration can't even decide they're in a lame duck session yet. It's chaos. Unlike most folks here I have no faith in Mnuchin.

 

My point is not what Tim Howard's preference is, it's that he sees this as a good thing, and so should we.

 

If case not settled and goes to SCOTUS and Calabria found removable are you ok with a Biden appointed Treasury Secretary and new FHFA director say Jim Parrot running the show for us? Tim is.

[COBFInfinity]

Tim Howard's goals are not the same as the rest of us here, so I'm not particularly interested in what he would LIKE to happen. I understand that it may happen.

[COBFInfinity]

@orthopa @onyx

I sincerely hope you guys are correct but I don't invest on hope.

The capital plan was a big lie, and that big lie was endorsed by FSOC (Mnuchin). You honestly think they're too stupid to realize the GSEs are not banks? Further, Calabria and Mnuchin have both gone on to say the GSEs "failed." That was a lie also. Further, Mnuchin said in 2016 they will get the GSEs out of Government control "relatively soon." How many more times does the boy need to cry wolf? These are demonstrably verifiable falsehoods, and Tim Howard has cut them to shreds (i.e. bank-like capital, the "failure" of the GSEs). So with all that as history, you think they're telling the truth about ending the conservatorship soon and in a chaotic lame duck session? That's a heavy lift. You may be correct, but...

 

So your view is that everything Calabria has said and done has been a headfake? To what end? If he didn't want to end the conservatorships, he could be doing a lot less.

 

And I guess I could imagine a scenario where Calabria is just wasting everyone's time within the FHFA making busywork capital rules, etc., but where your view doesn't seem to make sense is that JPMorgan and Morgan Stanley were hired as investment banks. That step did NOT need to happen if this is all just a big game and the investment bankers are certainly smart enough to have sniffed out if this was all a hoax. Also, the GSE CEOs seem to believe that Calabria has a real plan.

[Wiggins]

@COBFinity re "So your view is that everything Calabria has said and done has been a headfake?"

Not at all. I was referring to the capital rule perfidy and I am agreeing with what Tim Howard and what other commenters (to the capital rule) have said that it's really not workable. So that is the lie; perhaps a better term would be Calabria is being an ideologue.

 

I really agree with everything SnarkyPuppy wrote above and honestly I agree with most commenters here. I just don't have faith in the current administration to execute. I DO believe, as I have said before, that the current administration has taken receivership off the table which is hugely helpful. But I am not sure they would have done anything without the lawsuits hanging over their heads. I see the lawsuits as impetus to administrative action, and I see the Dems as having their hands tied by the lawsuits. Ergo, how much does it really matter whether it's a D or R administration at this point? Remember Berkowitz and other plaintiffs started lawsuits during Obama's administration, so they thought they could win under an adverse administration.

[COBFInfinity]

@COBFinity re "So your view is that everything Calabria has said and done has been a headfake?"

Not at all. I was referring to the capital rule perfidy and I am agreeing with what Tim Howard and what other commenters (to the capital rule) have said that it's really not workable. So that is the lie; perhaps a better term would be Calabria is being an ideologue.

 

I really agree with everything SnarkyPuppy wrote above and honestly I agree with most commenters here. I just don't have faith in the current administration to execute. I DO believe, as I have said before, that the current administration has taken receivership off the table which is hugely helpful. But I am not sure they would have done anything without the lawsuits hanging over their heads. I see the lawsuits as impetus to administrative action, and I see the Dems as having their hands tied by the lawsuits. Ergo, how much does it really matter whether it's a D or R administration at this point? Remember Berkowitz and other plaintiffs started lawsuits during Obama's administration, so they thought they could win under an adverse administration.

 

Like many others here, I was in this trade before Trump even started his campaign in 2015, so clearly my naive assumption all along was that the courts would be on our side. But while there is a possibility that the courts could finally come through for us, as a preferred holder I would gladly accept a deal between Mnuchin and Calabria to write off the senior preferred and settle the lawsuits. If you hold the common stock, perhaps some would prefer the gamble that the lawsuits yield a bigger payday, but that's a risky play, if you ask me.

[onyx1]

Ergo, how much does it really matter whether it's a D or R administration at this point?

 

 

If we go SCOTUS, it matters to me because I don't see anything to force the UST under Biden to write down the SPS.  Even after a SCOTUS win.

[james22]

On Nov 9th Tim Howard wrote: "...I also believe that Biden will WANT them released..."

 

Delusional.

[Wiggins]

@james22 @onyx1

Given that Timothy Howard, the foremost economic expert of the twins writes this of Calabria: "he is no friend of the companies, and that his price for releasing them from conservatorship is to burden them with capital requirements that will severely constrain their competitiveness, and also to smother them with intrusive regulation. This posture would have a major, and perhaps crippling, negative effect on the companies, even after they are released.", then how do you expect anyone to invest capital to get them out of conservatorship? For those of you still believing in Mnuchin and Calabria, how do you square this? If your answer is that he will get the job done by somehow tweaking the proposed capital rule further by doing an about-face, perhaps after listening to JPM and MS, then that strikes me as more unlikely than thinking Biden would want them released.

 

To me Calabria has potentially done more damage than the NWS, because the NWS can be reversed by the stroke of a justice's pen, whereas the capital rule once finalized will literally take an act of Congress to undo (confirm a new director under the Senate, propose a new capital rule, get buy-in from stakeholders, finalize, etc). Here's another thought: what if the lame duck session only accomplishes finalizing the capital rule, but does not write down the SPS liquidation preference? Then the administration will have accomplished MORE damage to the GSEs in the lame duck session. That's a distinct possibility, and in my view more likely than a SPS write-down.

 

I now see Mnuchin's and Calabria's views as extensions of the Hank Paulson era. Remember HERA and FHFA were created to severely gimp the GSEs at the expense of existing shareholders. That's a fact. Mnuchin and Calabria have furthered that perfectly by 1) issuing this ridiculous capital rule and 2) failing to write down the SPS liquidation preference. Sure they've retained some capital, but they didn't have a good alternative and were otherwise forced by lawsuits. I had some hope in 2016 at the beginning of Trump's presidency like a lot of others. And to suggest that the DOJ in these lawsuits has not been controllable by the Trump administration, who fires administrators left and right on a weekly/hourly basis, is equally absurd.

 

If you want to outsmart your enemies, a great way to do it is let them believe you're their friend. Keep them guessing. That's what Mnuchin has done to GSE shareholders, in my humble opinion. Calabria has been straight-up; he is an enemy of the GSEs, even more recently stating they have among the worst corporate cultures he's ever seen.

 

The Dems have historically supported the twins missions, whereas Rs have not, hence the belief they may be better after a SCOTUS win.

 

(edit: @COBFinfinity re: "I would gladly accept a deal between Mnuchin and Calabria to write off the senior preferred and settle the lawsuits". Sure, I would too. But that's just hope. And yes, Calabria's plan can be described as a hoax... it's absurd)

[james22]

The Dems have historically supported the twins missions, whereas Rs have not, hence the belief they may be better after a SCOTUS win.

 

By taking them?

 

Why would the Dems reverse themselves and set the twins free?

[Guest cherzeca]

GSEs dont cut cleanly along party lines.  you would think Rs, big time capitalists, would want GSEs privatized. You would think Ds, big time low income housing advocates, would want GSEs to prosper to do their mission.  in truth, everyone has a hidden agenda for these massive cash flow generators.  I understand Tim's point about an excessive capital requirement, but on the flip side, this gets all of the Rs on board that the GSEs can do their thing with no more bailouts..etc. some Ds would love for the GSEs to be wholly govt owned, like everything else, but this is what the NWS was about and I expect the NWS won't be around for too much longer, for reasons discussed on this thread.  we are now in wait and see mode for about a month.  more than this I think no one can say.

[DocSnowball]

@COBFinity re "So your view is that everything Calabria has said and done has been a headfake?"

Not at all. I was referring to the capital rule perfidy and I am agreeing with what Tim Howard and what other commenters (to the capital rule) have said that it's really not workable. So that is the lie; perhaps a better term would be Calabria is being an ideologue.

 

I really agree with everything SnarkyPuppy wrote above and honestly I agree with most commenters here. I just don't have faith in the current administration to execute. I DO believe, as I have said before, that the current administration has taken receivership off the table which is hugely helpful. But I am not sure they would have done anything without the lawsuits hanging over their heads. I see the lawsuits as impetus to administrative action, and I see the Dems as having their hands tied by the lawsuits. Ergo, how much does it really matter whether it's a D or R administration at this point? Remember Berkowitz and other plaintiffs started lawsuits during Obama's administration, so they thought they could win under an adverse administration.

 

Like many others here, I was in this trade before Trump even started his campaign in 2015, so clearly my naive assumption all along was that the courts would be on our side. But while there is a possibility that the courts could finally come through for us, as a preferred holder I would gladly accept a deal between Mnuchin and Calabria to write off the senior preferred and settle the lawsuits. If you hold the common stock, perhaps some would prefer the gamble that the lawsuits yield a bigger payday, but that's a risky play, if you ask me.

 

We have no inkling on the stance of the plaintiffs - Berkowitz et al, but one would think they have some incentive to cut a deal with this admin rather than take their chances with SCOTUS or Biden admin. If I was in their shoes, I'd be making some efforts...

[Wiggins]

The Dems have historically supported the twins missions, whereas Rs have not, hence the belief they may be better after a SCOTUS win.

 

By taking them?

 

Why would the Dems reverse themselves and set the twins free?

 

Lawsuits

 

They can't nationalize them (or their securitization functions) which was the plan hatched under Obama due to the lawsuits, so the second best option for Dems is to release them. The third option, preferred by the far right, is to destroy them via onerous regulation (i.e. Calabria's plan). Dems are less likely to choose this than Rs.

[investorG]

The Dems have historically supported the twins missions, whereas Rs have not, hence the belief they may be better after a SCOTUS win.

 

By taking them?

 

Why would the Dems reverse themselves and set the twins free?

 

Lawsuits

 

They can't nationalize them (or their securitization functions) which was the plan hatched under Obama due to the lawsuits, so the second best option for Dems is to release them. The third option, preferred by the far right, is to destroy them via onerous regulation (i.e. Calabria's plan). Dems are less likely to choose this than Rs.

 

fourth option:  indefinite conservatorship

[investorG]

Ergo, how much does it really matter whether it's a D or R administration at this point?

 

 

If we go SCOTUS, it matters to me because I don't see anything to force the UST under Biden to write down the SPS.  Even after a SCOTUS win.

 

what about a negotiated resolution if Plaintiffs win?  Both sides probably wouldn't want to see the $125bn transfer from Tsy to the companies.

[investorG]

@COBFinity re "So your view is that everything Calabria has said and done has been a headfake?"

Not at all. I was referring to the capital rule perfidy and I am agreeing with what Tim Howard and what other commenters (to the capital rule) have said that it's really not workable. So that is the lie; perhaps a better term would be Calabria is being an ideologue.

 

I really agree with everything SnarkyPuppy wrote above and honestly I agree with most commenters here. I just don't have faith in the current administration to execute. I DO believe, as I have said before, that the current administration has taken receivership off the table which is hugely helpful. But I am not sure they would have done anything without the lawsuits hanging over their heads. I see the lawsuits as impetus to administrative action, and I see the Dems as having their hands tied by the lawsuits. Ergo, how much does it really matter whether it's a D or R administration at this point? Remember Berkowitz and other plaintiffs started lawsuits during Obama's administration, so they thought they could win under an adverse administration.

 

Like many others here, I was in this trade before Trump even started his campaign in 2015, so clearly my naive assumption all along was that the courts would be on our side. But while there is a possibility that the courts could finally come through for us, as a preferred holder I would gladly accept a deal between Mnuchin and Calabria to write off the senior preferred and settle the lawsuits. If you hold the common stock, perhaps some would prefer the gamble that the lawsuits yield a bigger payday, but that's a risky play, if you ask me.

 

We have no inkling on the stance of the plaintiffs - Berkowitz et al, but one would think they have some incentive to cut a deal with this admin rather than take their chances with SCOTUS or Biden admin. If I was in their shoes, I'd be making some efforts...

 

efforts, yes.  but the bid-ask is probably too much still with jr pref @ 30pct of par.  By fighting in Court the govt continues to unethically and perhaps illegally turn the screws on tens of thousands of its citizens.

[orthopa]

My bigest worry right now is that Mnuchin is not on board which messes the process. Hope that all things were planned before the election, but the pace of the reform makes me doubt if its too late.

 

In a lame duck period where Trump et al are angry and contesting results who/what becomes the enemy? FnF and ending the conservatorship or Stevens, Demarco, Parrot etc.

 

It would take some really special motivation for Mnuchin(I think there is no way in hell he would) to hand the power over to essentially the previous admin and their housing policy team. I open to anyone changing my mind on that.

 

 

This has GSEs written all over it.

 

https://www.politico.com/news/2020/11/12/trump-lame-duck-concession-436146

[Guest cherzeca]

My bigest worry right now is that Mnuchin is not on board which messes the process. Hope that all things were planned before the election, but the pace of the reform makes me doubt if its too late.

 

In a lame duck period where Trump et al are angry and contesting results who/what becomes the enemy? FnF and ending the conservatorship or Stevens, Demarco, Parrot etc.

 

It would take some really special motivation for Mnuchin(I think there is no way in hell he would) to hand the power over to essentially the previous admin and their housing policy team. I open to anyone changing my mind on that.

 

 

This has GSEs written all over it.

 

https://www.politico.com/news/2020/11/12/trump-lame-duck-concession-436146

 

this could be a remarkable couple of months. yes hopefully for the GSEs, but also consider DOJ actions re Hunter/Brennan/Comey/McCabe.  many admin actions/exec orders will be able to be reversed eventually by Biden admin, but not a 4thA/consent decree, and not appointment of an independent counsel to pursue these investigations/prosecutions....

[Luke 532]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

 

Update: source is telling me capital rule might get pushed to next week.  No update on timing of PSPA.

[Midas79]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

 

Update: source is telling me capital rule might get pushed to next week.  No update on timing of PSPA.

 

Thanks for the update. I take it that no news is good news on the PSPA timing?

[Luke 532]

Thanks for the update. I take it that no news is good news on the PSPA timing?

 

I think it depends on when capital rule is finalized.  Give or take two weeks afterwards is the expectation on PSPA.

[orthopa]

Don't be caught off guard by the finalized capital rule this week (I would guess Friday after market close).  And then, more importantly, about two weeks after finalized capital rule the amendment to the PSPA. Just a hunch.  ;)

 

Update: source is telling me capital rule might get pushed to next week.  No update on timing of PSPA.

 

Back to waiting for Godot. I hate this investment.

[COBFInfinity]

This has GSEs written all over it.

 

https://www.politico.com/news/2020/11/12/trump-lame-duck-concession-436146

 

Except it mentions "immigration, trade, health care, China and school choice", but not housing. Nonetheless, it's been clear for a couple weeks that the Trump admin is making whatever moves it wants now with zero concern about what anyone thinks about it. Senate Republicans are even willing to put the completely unqualified Judy Shelton on the Fed Board just to make Trump happy. So setting aside whether you like or dislike any of these other moves, it does imply that Mnuchin would be willing to finish off the NWS and let the GSEs recapitalize, but will Calabria be scared off by the talk that Biden's Adminstration will target him for removal if he makes any big changes in the next two months? It seems that Calabria has the decision to make - does he want to keep the job or does he want to stamp his legacy on the GSEs while he has the chance?

 

P.S. While all this sounds good, my preferreds remain stuck at about 27% of par value.

[investorG]

This has GSEs written all over it.

 

https://www.politico.com/news/2020/11/12/trump-lame-duck-concession-436146

 

Except it mentions "immigration, trade, health care, China and school choice", but not housing. Nonetheless, it's been clear for a couple weeks that the Trump admin is making whatever moves it wants now with zero concern about what anyone thinks about it. Senate Republicans are even willing to put the completely unqualified Judy Shelton on the Fed Board just to make Trump happy. So setting aside whether you like or dislike any of these other moves, it does imply that Mnuchin would be willing to finish off the NWS and let the GSEs recapitalize, but will Calabria be scared off by the talk that Biden's Adminstration will target him for removal if he makes any big changes in the next two months? It seems that Calabria has the decision to make - does he want to keep the job or does he want to stamp his legacy on the GSEs while he has the chance?

 

P.S. While all this sounds good, my preferreds remain stuck at about 27% of par value.

 

There is a very low chance Calabria can convince a Biden admin to keep him if the FHFA head becomes fire-able at will.

 

But I agree @ 27pct of par value, the market does not even come close to believing in a 4th amendment that the message board and twitter community has mostly convinced themselves is coming.

[Wiggins]

Biden chief of staff a former Fannie lobbyist:

 

https://www.aei.org/op-eds/like-fannie-mae-and-asbestos-youll-love-joe-bidens-revolving-door-chief-of-staff-ron-klain/