orthopa

Maybe Im just drinking the kool aid but Ill let everyone else worry too. I dont think at this point the worry should be whether or not this all goes through but on ultimate return at these prices. Second on my list of worries is just how long it will take to ultimately realize the final upside return and that is only because crazy or not Im contemplating buying more on margin. My biggest prfd holding is trading at 47% of par. In bedded in final return could be a sweetener conversion to common, dividend turn on? (unlikely). At a 7% margin rate borrowing at these prices and holding for a year you would break even on a 50% of par final pay out. So what is coming up? 1. Treasury plan by end of June to end conservatorship? 2. FNMA proposed capital rules by July-Augustish? 3. Amendment by Calabria by fall with treasury to stop sweep by end of year? 4. IPO/recap starting in winter spring of 2020. So 1 year from now you need 50% of par to break even buying on margin at 7% with FNMAH. Ill take that bet all day this point. :) As many has mentioned Calabraia has diarrhea of the mouth and mentioned conversion to common and do prfd holders get par. He also mentions he is very confident he can get to an agreement with Mnuchin. Well of course like Otting said everyone has signed off remember? He speaks and I listen.

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. I'm guessing at this point that Tsy values getting their plan completed > maximizing their return. while Tsy might attempt to do both, one way to increase odds of a potential deal getting done is to give new shareholders a larger portion of the pro forma market cap, perhaps at the expense of Tsy's share (warrants). after already making > $100bn, is it absolutely crucial to the decision makers whether the Tsy makes another $70 vs $40bn in a potential deal? Then why are they happy to sweep 2-3B a quarter while they "formulate a plan"?

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'm torn between adding because outcome appears to be getting more positive than what it was a year ago and Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise. I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me. In your opinion do the prices reflect ending of the NWS and recapitalization? At this point meaning prfd gets roughly par and if converted gets 4 common for each preferred share? For the priced to reflect that, they'd be at or near par. But that doesn't include the discount mechanism for timing or a discount for uncertainty of things like the ratio of what they're converted into and whether or not it's better to own the common today and etc. Ultimately, if we were still sitting at 20-30% of par I'd be a buyer today. But we're not - we're at 40-50% of par. That appreciation has priced in a good bit of the positive developments while still noting the uncertainty of the situation and how many head fakes there have been in the past. Im sorry, I missed typed, roughly half of par I meant in original post and not full as they are not trading there obviously.

I've seen scenarios where the preferreds are paid out at 60% par. Still too speculative in my mind for more than a modest bet at this time. Ok so you agree? We are at 50% of par I do believe par is much more likely to be paid out than 60%. Just unwilling to bet the house on it because being paid out isn't yet that much more likely than not being paid out at all. And still thinking it might be less risky to hold a smaller amount of the commons with the same expected return. 1. Mind elaborating on your thoughts about the preferred being paid out in full and not paid out at all an equal outcome? 2. How does diversifying within the share classes change your risk? My assumption would be only possible return?

He clearly seems to be the mouth piece for the admin and the plan. Mnuchin et al dont seem to have a problem with it though because it continues. I think its like a secret you know but trying as hard as you can to not it but telling everyone you know "something".

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'm torn between adding because outcome appears to be getting more positive than what it was a year ago and Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise. I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me. In your opinion do the prices reflect ending of the NWS and recapitalization? At this point meaning prfd gets roughly par and if converted gets 4 common for each preferred share?

Good questions, I dont have IB (which I believe is the most flexible on OTC stuff) and my broker has balked at some stuff in the past. I will find out now.

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.) Commons are a crapshoot for reasons previously discussed - have to be a madman to own these. Jr prefs on the other hand - I'm struggling to see downside unless the plan is: excessive capital requirements w/ competition and release into the public markets and telling the companies good luck, now capitalize yourselves. seems unlikely given comments on re-ipo, maximizing govt investment (warrants). The IRR on the prefs will fluctuate with deal structure and recap timeliness...but downside below 50% of par seems highly unlikely at this point. Maybe I have a hole in my head since we're still looking at ~100% (bull case) without meaningful downside. The way this administration is talking non par for prfd would be a surprise to me. How do you recapitalize a company that no longer is sweeping profits, is going to raise capital via common and possible more prfd and not have the prfd on record not be worth its contracted price? If you are re ipo'ing the company and raising the vast majority via common the prfd is worth par. No bones about it. That being said heavily contemplating going in on margin with prfd allocation. If unable to due to OTC status will sell some more stuff. At 20% of portfolio now. Margin interest will be 4% and deductible against any gain at tax time. Figure ~6 months to heavy IPO discussion/stopping of NWS and final determination of prfd. The prfd status will be known before IPO so this looks like a 6-8ish month gamble.

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.

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.

http://wallstreetonparade.com/2012/08/the-untold-story-of-the-bailout-of-citigroup/ Interesting read on the govts various TARP investments in Citi. Some snippets. "The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). As a fee for this arrangement, Citigroup would give the government $7.059 billion in perpetual preferred shares, paying 8 percent annual dividends. And where would an insolvent bank get the funds to pay an 8 percent dividend; from another injection of $20 billion in cash from the government. The Fed also agreed to backstop residual risk in the asset pool through a non-recourse loan if necessary. The Treasury was also to receive warrants to purchase 66,531,728 shares of common stock at a price of $10.61 per share. (Adjusting for the company’s 1 for 10 reverse stock split, Citigroup closed yesterday at $2.89 – a far distance from a warrant exercise price of $10.61.) " "The Treasury and the Fed knew exactly whose interests they were protecting. Just 11 months earlier, Citigroup had publicized a capital raising of $12.5 billion in convertible preferred stock in a private placement – meaning the full details were not released to the public. The press release said the investors included Saudi Prince Alwaleed bin Talal and Sandy Weill and the Weill Family Foundation. Following press articles that ran the details in February of 2009, on June 9, 2009, the U.S. Treasury agreed to swap its $25 billion of preferred stock for 7.7 billion shares of common. Common stock ranks at the very bottom of the chain in terms of claims on the assets of a failed institution. The government effectively put the taxpayer behind Citigroup’s creditors, bondholders, and its preferred stockholders. It gave up the taxpayers’ place in line as a preferred stock holder and sent the taxpayer to the back of the line. And, it gave up the 8 percent fixed income stream on the preferred. " "But the plan to bail out the Saudi Prince, Sandy Weill and a select group of “private investors” is cryptically contained in this proxy statement dated June 18, 2009. The private investors, who made their purchases on or around January 15, 2008 were going to be made whole on their $12.5 billion investment on or around March 18, 2009, despite the fact that Citigroup’s stock had fallen by 88 percent in that period of time. (Their preferred stock was convertible into common.) I’ve been reading proxy statement for over 30 years. I have never read a more convoluted, tangled web of unnecessary complexity to arrive at the clear destination: private wealthy individuals were being made whole. Now I can guess the argument that the Treasury and the Fed would make. Citigroup could no longer afford to pay either the government or the private investors the high fixed rate of interest on the preferred stock. To induce these investors to convert to common, they needed an incentive – like being made whole. My argument would be that they would have been wiped out already in November of 2008 if the U.S. government had negotiated properly. Certainly not apples to apples but has the tone of what I believe will happen.

Just to throw my $.02 in so we can all hash this out.... I think what gives a prfd investor a little solace is a bunch of things. 1. The par value is a bench mark and a contract. Once the conservatorship is over /NWS done those contracts should be valid again. 2. If/When Sr. Prfd are considered paid Jr prfd go to top of the food chain and into top bargaining position. Everyone knows a bunch of money needs to be raised and someone is going to lose more then the other. Why would prfd holders agree to a deal that includes returns that supersede their own? They have a negotiable bench mark and all common holders should know that bench mark. 3. To piggy back on 2 if prfd is converted they will convert in a ratio favorable to them. Otherwise why convert? If you getting the better deal in 2. why convert back and lose? They will only convert on favorable terms thus midas's call option. Again your second fiddle. 4. 2. and 3. above show that common is not only at the mercy of treasury's stake but the prfd holders projected return. 5. If your able to mentally get around the above you have an unknown dilution % coming that is >80%, is associated with likely billions of shares of similar class stock forming a supply overhang and at this point unable to really provide any predictive valuation metrics. What the in the hell multiple do you choose? 6. Even in the aftermath of FnF getting back to business as usual earnings have been a little erratic. How will the market reward/punish that? 7. Common doesn't have a seat at the table. Jr Prfd, Treasury and new money do. People would argue they should and at second glance they do, the 80% owner that would sell their soul to the devil to get out as quick as possible and for the most profit for them and "tax payer" 8. Many have argued why would new $$ come in if they were going to be diluted? They wont, they will come in after the initial dilution as subsequent dilution. Because again. Why would they come in if they knew they were going to be diluted? 9. The only thing I have'nt completely rationalized is the exact mechanism treasury goes about this without dragging out their profit for years. Again looking at the previous TARP deals they swapped classes of stock, sold warrants, etc. They could create a new class of stock in exchange for the warrants senior to the legacy common that converts to dilute the common on a ratio basis that they could sell to new money that dilutes old shareholders but not new. These wall street guys are smart fuckers. And what can the common do? Your money is paid in already. They dont need your money. They need the NEW money. My diatribe is not meant to dissuade your position but to rationalize out loud why I only hold prfd for the sake of arguement.

Exactly. His job is done. Everyone signed off remember? cherzeca, I bet you like this part of the article. "Mr. Phillips and other Treasury officials have been meeting with the biggest American banks to determine how best to raise capital for Fannie and Freddie — a prerequisite to releasing them from government control — as well as how the housing finance system might be restructured, according to two people who participated in the meetings." There is the news they are lining up the bankers. Another check on the list. Mnuchins goal of within 6 months or by the end of the year seems intact. Question for me would be do any of the big preferred holders have influence on "Americas biggest banks"?

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.

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

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.

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.

From his Senate hearing testimony statement: https://www.banking.senate.gov/imo/media/doc/Calabria%20Testimony%202-14-19.pdf "I have even brought with me today my nearly decade old, dog-eared personal copy of HERA. Whatever the policy issue, my first question will always be “what does the statute say?”" Now, he says the statute obligates him to get the companies out of conservatorship. I was wrong, receivership is not his plan of action, neither Treasury's who will lose their investment in such scenario - this risk is disconfirmed based on his statements. Therefore, risk zero is gone, yay!. Competitors will be invited via new charters if Congress legislates, who knows if and when but the bank lobby may get it done eventually. FnF may shrink their footprint over time but this is unlikely to be a problem for a preferred investor (smaller footprint = lesser capital raise needed). He mentions NWS is likely to be gone in the new year, and there will be a negotiated agreement between Treasury and FHFA on the plan ahead and its details, along with what Treasury will do with its stake. Inverting to what all will be needed to do a successful capital raise and capital retention is a good mental exercise here for me - the preferred will either stay and wait their turn to get dividends turned on, or be converted to common in some ratio I have no control over, or be called at par. All in all, this is now a reasonable thesis to continue to carry forward administratively. The lawsuits do need to go away for the capital raise to occur smoothly, and thus provide a margin of safety, especially if you are represented. And fwiw what a crisp interview, I'm truly impressed by how well she had prepared and let him do the talking he really likes to do Again outside of just the time of waiting still no excuse in my mind for an ultimate value of par for the preferred. 2/3 scenarios you mention directly relate to par including relation to dividend turn on and by default conversion to common would have to be on a = value to par basis to smooth things out for a capital raise/lawsuits. Calabria continues to see how much he can throw out there and how much flack he gets in return. We have heard and will continue to hear crickets from MBA, Maxine waters, Crapo. Ill go on the record here as saying outside of maybe a charter change or guarantee Congress will have nothing to do with any capital raising etc and Admin will act to the extent that they can. Am I the only one that seems to think this trickle of info via bloombers/scheduled interview on fox /etc is a little calculated? This is no doubt the deluge of juicy details Otting was talking about on the recording. There is a plan and everyone has signed off. Your just getting bits and pieces of it now in a calculated manor that will be adjusted for push-back if any.

So with what we know from Calabria talking anyone have any thoughts why the prfd isnt with par? I think at this point a discussion as to whether or not dividends are eventually turned on is worth a thought too.

Secondly after re reading the Bloomberg article to jump on cherzecas post this is the no bull shit version. 1. FnF can be and will be freed with admin action. 2. Congress can act but we know they wont. 3. We will release FnF without an explicit guarantee and they and the market will function fine. 4. Because of 3. FnF will need a recap which we will do with ratios more in line with other big financial institutions and creditors will be fine with that. 5. Solvency and the capital built will be done before we release them. 6. Capital build will need to be big and will happen in stages. 7. Crapo chimes in and says you will see admin progress this year and hes ok with that because he knows they wont do shit. 8. We will settle the law suits with the stopping the NWS and the hedge funds will be fine with the eventual outcome in exchange for dropping the lawsuits.

FWIW there seems to be a quite a steady stream of somewhat calculated info via calabria. Every time we turn around we are fed a couple more interesting tidbits. Some vague, some more direct. What I find as good news is there has been little to no outrage regarding the hedge fund windfall which I think could possibly shape the outcome due to the ignorant lay persons perception. Secondly since Crapos plan and the panel from a little while back not a peep out of congress. Calabria keeps floating these trial balloons dropping info and no pushback from anyone. No one seems to be mad admin reform is coming. Warner warned everyone at the panel and its fallen on deaf ears. Thankfully for shareholders sake the constant pushback from MBA, Corker, Hensarling, Warner, ie congress and big bank interest via op eds seems to have fizzled out. As much as shareholder fatigue has set in I think just as much has set in on the opposition side. I agree regarding price. Not 100% sure why it trades where it does my regurgitated thoughts around price when at this point seem to really be an opportunity more then anything else. Thinking outloud... 1. If I follow the logic correctly the sr prd have to be declared paid or retired to initiate a recap. 2. The NWS will be stopped to satisfy lawsuits via Calabria comments and to help build capital. 3. Unless possible conversion to common or issues of new Jr. Prfd in recap pfrd stands as once originally issued in capital structure due to 1. and 2. and % of par dictated by dividend turn on at some point. 4. Market believes prfd dividend still matters as outside of some large bid/ask spreads and liquidity premium the higher div prd tend to trade higher. For what ever reason the market seems to still look at the coupon when valuing a prfd possibly for optionality but is still scared off by the time required to realize par or possibly getting crammed down the capital structure. To make this as clean as possible for many reasons I still don't see how the prfd isn't declared whole in the recap. Value maybe +/- absolute par due to dividend. I don't see the logic in organizing this mess, settling the lawsuits per Calabria via the NWS, and then contesting standing of the prfd. We may ultimately find the last couple % points or ultimate value of the prfd comes down to dividend treatment if there is not a plan for conversion. But as short sighted as it looks it seems people just don't want to wait.

Otting said capital rules by July-ish correct? So hopefully we are getting to some of the more specifics of a framework by then. If things start falling in line the June-Sept time period should hopefully be eventful.

Charters and paid-for government guarantee may require legislation. Modifying PSPAs doesn't (commitment fee, nws, etc.). "Charters and paid-for explicit government guarantee may require legislation". I think Calabria's willingness to do an interview on day 1 is good, as is his desire for Treasury to lead off the festivities with its plan. recapping and releasing GSEs will be done w/o congressional action, but congress will be pissed and will want to be told by Calabria all of the things it can do post release (ie competition), none of which can be expected to happen given current political polarization. so Calabria is wise to this (former senate staffer) and will keep talking about future plans while recap and release proceeds administratively Precisely! (explicit/ may)... This will be the year. this tracks from the POTUS memo, which asks for treasury to address in its plan the need for an explicit or implicit guarantee. I may be reading too much into this, but this says to me that the administration is serious about moving forward with an administrative recap/release plan since it knows it cant do an explicit guarantee without congress and knows that the major complaint is that the federal charters imply a federal implicit guarantee, so POTUS is saying fine the GSEs will have to pay for the implicit guarantee, pay for their charters in effect. Do you feel like the WH will act in short order once presented with plans from Treasury/HUD in June-ish time frame from article? This incessant urging and waiting for congress to act/help although good lip service is getting very tiring. The non optimistic part of me see this whole process easily continuing back and forth until the fall. Govts only seem to react to deadlines and the next will be the re election campaign. A part of me also reads the article layout with a time line very convenient for the en-banc opinion either positive or negative.

lots of volume early in the morning in FNMAS FWIW.

Running through my head as I buy more prfd. 1. Calabria in place now and everything that brings with it. 2. Treasury and HUD directed by president to come up with plan to get FnF out of conservatorship and rebuild capital. 3. En Banc hearing decision due in ~60 days with all the positives potentially there. 4. Otting says capital needs out by July/August. If your trying to handicap pricing/outome either the prfd was wickedly expensive a couple years ago or continues to be stupid cheap here. We are no longer dealing with Watt, Corker, Jumpstarts, etc but it trades at the same price as it has with WAY less uncertainty at least in regard to the FHFA director, conservatorship, and the wishes of those now in charge . No way is the market over optimistic at this prices. Tired is the better word.