Luke 532
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Posts posted by Luke 532
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@luke, where did you see/hear that? Would be curious to hear his thinking.
Just added the twitter link...forgot to post the source initially.
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Apparently Kyle Bass' highest conviction, as of today, is the prefs being worth par. Interesting.
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1.Good thought process here. The one person we have heard NOTHING out of on the whole issue since he was put in place is Kudlow. Could be nothing or something but maybe he is or has been an issue. Apparently the plan gets presented to him via the mandate and he is the "white house" or "administration" as it has been referred to. Calabria was handpicked on purpose, its not him.
I know we're aware of this tweet, and this comment was made before he was part of the Admin, but as a reminder of where he might stand:
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@CGasparino
SCOOP: Housing chief @MarkCalabria remains committed to ending net-worth sweep recapitalizing @FannieMae @FreddieMac possibly ending NWS by year's end as prelude to public offering-sources. Calabria believes GSEs could issue stock while in conservatorship more now @FoxBusiness
2:40 mark of the video... https://finance.yahoo.com/amphtml/video/fhfa-calabria-wants-massive-public-193717583.html
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in order to appreciate just how profitable Fannie and Freddie are, compare Blackrock, which has more assets under management than FnF combined, and whose profits are less than Freddie's
They are phenomenal companies. Will be nice once this fiasco is over to go back and reassess their prospects going forward.
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Really weird price action on the $50's today. Most Fannie's are up, and Freddie's are down (FMCCL, FMCCI).
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@Luke
while this is likely the most profitable reorg ever be done, it is also the reorg with the biggest need in new money going forward, so flattening the cap structure is needed here...what drives this is the need to clean things up for the new money; what makes the new money able to be raised is the profitability
Good point.
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The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare
These are highly profitable companies so they might fit the bill of being a very rare reorg. It would take a long time, but they could retain earnings and build capital themselves.
With that said, I agree it makes more sense to flatten out the cap structure. Could convert prefs, end NWS, deem SPS repaid... that makes it just common stock. Gives Admin a lot more possibilities going forward to do an offering. Trump is all about having options.
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in sum, it's likely mnuchin waited too long and missed the window. my fault for misjudging. I only hope he has the courage in his remaining time to right the wrong from the NWS. after all, the admin mainly hired people who had spoken out against the NWS.
I certainly could see #3 playing out.
If the primary goal of Admin is to have a multi-year capital build via retained earnings, what would be the first step? Ending NWS. Anything other than that? That action alone, if announced in the plan and implemented immediately, would be a very logical starting point to getting bankers more comfortable eventually investing, would end the lawsuits, and would start building capital which everybody on the Admin has said is a priority.
If NWS is ended in September, I can't help but wonder how the share prices would react. Thanks to those that have posted predictions previously of 60%-75% and higher depending on the rest of the plan. Once NWS is ended and we're at a certain percentage of par, calculating a fair discount to par given the time horizon and the other details in the plan would be an interesting exercise.
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Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb):
I think one of the more likely options is:
-The plan is done (Phillips left) and the govt is waiting for en banc decision. For this to be the case, the govt plan would have to differ from a reversal decision en banc. Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally. How can this be viewed as anything other than negative?
I'm throwing this out there, not that I necessarily believe it or not:
Unless the Administration is looking for legal cover. If en banc forces their hand, then they won't receive any negative PR for ending the sweep. If anybody were to receive blame it would be those that implemented the sweep.
If Admin ended the sweep now before the en banc came out, would that really be any different than Admin ending the sweep after en banc says the status quo is fine? After all, many courts so far have said the status quo is fine so what's the difference between Admin ending the sweep after, say, 5 courts say sweep is fine vs. after 6 courts say it's fine?
It has been said (by cherzeca I believe) that the changes in recent weeks by Calabria were embarrassing from a lawyer's perspective. He and his legal team are very likely aware of this. However, they get to go on record for officially keeping the status quo for the reasons I stated in the paragraph above. It does cause a potential delay in the ruling but that might also buy plaintiffs and defendants more time to try to reach a settlement (I don't think Hume's article is published unless there have been some serious discussions about settlement).
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You can convert the current jr pfds to new immediately paying pfds w/ market rate coupon (3-4%) instead of 7-8%. So annual div drops from ~$2b to ~$1b which is easier to digest during a recap period.
I'd agree to that (although my vote would be irrelevant) and more importantly I think the plaintiffs would, too.
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but when he says the contractual rights of the preferred shares should be respected (but not favored over common shares), what specifically is he referring to? if it's not conversion, then either dividends or some other agreement?
Honoring the par value. I think plaintiffs would agree in a heartbeat to par and nothing more. But if they win en banc they'd likely require more than par.
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Possibly a conversation between some plaintiffs and FHFA/Treasury about a settlement that would disproportionately favor the prefs? With Hume going public as a way to refuse to go along with it? I can only speculate, but the existence and timing of his letter makes me think that he either knows or fears something.
I can't get his letter out of my head. I think you nailed the most likely reason he wrote it. As a pref holder I'd obviously be happy if those settlement negotiations are taking place.
Lawyers...is it unusual for an attorney to write a public piece concerning a current case in which they are involved? I would imagine so.
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I don't have a good memory for names who taunted me. But I always remember people who helped me. Let me tell you who I respect the most in this thread. First is Chris. Second is Luke. :)
Thanks, I appreciate that compliment!
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what's the value of a 5 year $25 par value security discounted back for both time value and material event risk? below current prices I assume.
Which is why I think prefs either convert to common in a small IPO fairly soon, or there is an agreement that they will convert at par at some point in the future, or the dividends are turned back on. I don't see any of the litigants going away unless one of those 3 options (and possibly other options) are agreed to.
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imo the timing of exit is less important than canceling the NWS. besides calabria has repeatedly said his job is to set mileposts toward building capital and its up to the companies to get there. and it seems right to me to set expectations for a base case on a very complicated process
I agree with your comment. "Real repairs" could very well be ending the NWS, among other actions... and Calabria says the time is now.
While Calabria sketched a potential five-year time horizon for removing Fannie and Freddie from conservatorship, he added that the government did not have forever to overhaul them and needs to progress while the housing market remains stable.
“The market looks pretty strong now, so that to me is the time when we want to make real repairs, he said.
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"The contractual and legal rights of all shareholders should be left in place and respected equally. Anything else will be seen as playing favorites to Wall Street hedge funds that have invested disproportionately in the junior preferred stock. The contractual rights of those shares should be respected, but not favored over those of common shareholders."
https://www.americanbanker.com/opinion/recap-of-fannie-and-freddie-must-protect-shareholder-rights
perhaps he got wind of a long capital build with no jr pref conversion and wants the jr pref dividends turned on? on the one hand, it makes no sense to pay out $2-2.5bn of annual dividends during a big capital build (33bn x 7%). on the other hand, it could possibly help resolve other areas.
Reads to me like Hume is advocating for the common shareholders to not get unfair treatment, so perhaps he already thinks prefs are going to get preferential treatment (example: dividend turned back on but nothing done for common until 2024).
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Why turn divs back on?
settle lawsuits?
It would be a pretty cheap way to do it... $2B-$2.5B/yr or so instead of paying them all off at par right now. If plaintiffs think this gets the prefs trading near par then why not? Would give the plaintiffs the choice of selling the prefs when they're near par, or keep them while enjoying the dividend.
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CALABRIA SAYS HE WILL RECOMMEND TO CONGRESS THAT THE GOVERNMENT GUARANTEES ONLY FANNIE, FREDDIE MORTGAGE-BACKED SECURITIES, NOT THE COMPANIES @Reuters @michelleprice36 @peteschroeder
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would be about a little over $2bn annually to turn the dividends back on. maybe this explains the Hamish hume article a little.
Meaning Hume's concerned that would be unfavorably good treatment for prefs over common?
"The contractual and legal rights of all shareholders should be left in place and respected equally. Anything else will be seen as playing favorites to Wall Street hedge funds that have invested disproportionately in the junior preferred stock. The contractual rights of those shares should be respected, but not favored over those of common shareholders."
https://www.americanbanker.com/opinion/recap-of-fannie-and-freddie-must-protect-shareholder-rights
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Page 24 of Moelis' updated blueprint created November 2018 estimated exiting conservatorship in 2021 with considerable action in 2018 Q4 (turn off NWS, adjust Senior Pref balance).
Given that the plan is released August/September, and no considerable action like turning off NWS or adjust Senior Pref balance takes place before then, that's pretty much 1 year behind the timeline in the updated Moelis version... so if it is something similar to Moelis we'd be looking at year 2022 for exit from conservatorship.
If that's the plan, Calabria might as well say exit by or near the end of his term in April 2024.
Updated Moelis for your reference: https://gsesafetyandsoundness.com/2018/11/09/oneyearlater/
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Fannie, Freddie to eventually end buying LIBOR mortgages: FHFA's Calabria
NEW YORK (Reuters) - Fannie Mae and Freddie Mac will eventually halt purchases of U.S. home loans linked to the London interbank offered rate as that index is set to be phased out after 2021, Mark Calabria, the head of the Federal Housing Finance Agency, told Reuters on Wednesday.
LIBOR is referenced against $200 trillion worth of U.S. financial products, primarily in interest rate derivatives. There are roughly $1 trillion in adjustable-rate mortgages (ARMs), or about 6.5% of all U.S. home loans outstanding, which are reset against it.
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U.S. HOUSING FINANCE REGULATOR SAYS U.S. GOVERNMENT REPORT ON HOUSING FINANCE REFORM IS "ESSENTIALLY DONE," EXPECTS RELEASE IN LATE AUGUST, SEPTEMBER - INTERVIEW @Reuters @michelleprice36 @peteschroeder
https://mobile.reuters.com/article/amp/idUSKCN1UC2OE?__twitter_impression=true
2024....sounds like a sloooow capital build. Thoughts?
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
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Maybe they anticipated the NWS ending announcement to be in earnings this morning? I think that's foolish because that announcement will come from Treasury, FHFA, White House, etc. and not from the two GSE companies themselves.