SnarkyPuppy

As others are discussing on twitter, it's interesting that he delineates between IPO and Private Capital. Private capital could be a rights offering where existing investors contribute (might account for why Berkowitz has been positioning himself so heavily in cash). But it could also mean a Buffett or Blackstone sweetheart deal which could be a risk here. FHFA as regulator can deem current senior prefs repaid while also saying oops you're undercapitalized - and duty to safety/soundness warrants a swift recap - and Buffett/Blackstone put up $150bn in new senior prefs in a private placement with the government. What's stopping FHFA from making this deal while FHFA is in control? Of course this negates the value of the warrants but possible Calabria/Mnuchin don't care?

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher. Where's TA analysis today on no apparent news but a rumored 5th circuit decision? rumored decision? Source? Either way these things to tend to be a predictive in regards to timing. Should be coming way sooner then later. It was on Maloni's blog. Almost definitely bologna.

Wait for news -> wait for stock price to go up -> TA tells you stock will go higher. Where's TA analysis today on no apparent news but a rumored 5th circuit decision?

Great post, thanks for sharing. Echoing these thoughts - thanks for taking the time to share these stories

Why do some seem to think that Tsy and FHFA will agree to execute an IPO 5x the size of the largest IPO of all time under terms that are unreasonable and not certain to garner full private capital buy-in (i.e. unreasonably high capital requirements)? These guys aren't going to close their eyes and hope for the best under this much spotlight. If they genuinely go with recap approach they will acknowledge reality. Reasonable capital requirements and treat prior private capital fairly while providing a decent rate of return for new investors. I can't do chaos math theory but if you remove the noise and think about this using first principles, incentives, and invert the final outcome - what are you worried about? There won't be a failed IPO attempt - just isn't a plausible downside scenario.

In case anyone is wondering what will happen- https://www.americanbanker.com/opinion/give-fannie-freddie-the-same-capital-standards-as-everybody-else

So it's too speculative but you can't clearly articulate a downside scenario for the preferreds? Not sure about your fancy formula but I see a low downside and some uncertain upside scenario becoming more and more certain as each day passes. Some are calling it speculation but the name ain't important if the process is sound. Goal: Raise private capital Constraint: Existing shareholders Constraint: Low risk solution required Constraint: There is no alternative I think people are overcomplicating this and conflating risk w/ uncertainty. The plan is obviously finished and is being teased to gauge reaction prior to formal release. The plan involves recapitalization using new common equity. If you want to recapitalize using new common equity, it seems pretty basic to me that the old preferreds should be worth some amount > 50% of par (not necessarily par to account for time value until dividends turn on and ipo execution risk). Thought of another way, I see no process that has a basis in reality that recapitalizes these things in a re-ipo with junior prefs getting < 50% on the dollar.

Would you mind explaining in clear and concise terms what the hell Chainklink is? And how the hell you value it?

$1.5mm USD in the states gives you about $45k at a 3% withdraw rate. Seems pretty reasonable to me. Probably only a month worth of expenses for some of the high rollers in this thread though.

I'm pretty insensitive to price, given the range of outcomes. I'll have to pay a higher price as uncertainty is resolved, but the risk/reward should only improve. 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'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.

this

The reporters question on the stock did not have to include a response on conversion of jr pref at par. Calabria brought that up on his own.

"Junior preferred conversion" It's moelis isn't it. I mean it is though, isn't it. If Calabria is talking to a reporter about par v conversion to common you know that is being discussed behind the scenes. Boiling frog'd

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria wow

Did anyone catch Calabria on CNBC?

What did you do, grab value line book and start in the 'F' section? It was the 1,245th page in the ten-bagger thread that finally convinced me. You're way behind. It's on the 1249th page now and boy that has improved the arguments. My favorite way of investing is to determine quality of investment by anchoring to COBF page count.

That's true - but I took that as in the context of they hired wall st people (phillips) to come up with a plan. But could be taken the other way as well - but not new info as we know through other quotes treasury has been working w bankers on recap.

Trump spoke maybe a minute on housing finance reform but didn't say anything new. He did emphasize "working on congress to pass things" but next sentence said "do administratively what we need to do to modernize our housing program and get rid of ridiculous regulations". And then talked about how reforms will include less paperwork so we can build our houses with better lumber. So I guess that was new.

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)

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.

“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. ......................

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

Did you not hear his 25min interview?

I just dont know why calabria is saying all of this stuff, unless the treasury plan is complete and investment bankers have been consulted. Everything has been pre-planned and agreed. Going through motions. Amendment to the contract has to be "negotiated" (Calabria has purposely used this word over and over again to signal independence). I believe he takes his job as regulator seriously but at the same time has everything mapped out w Tsy - there guys aren't idiots and they're not risking their names w/ sloppy execution. Everything's mapped out and they are going through the motions (incremental info to slowly get the market comfortable - boil the frog munger analogy). This is telling by the fact that in parts of the interview he claims he's barely talked to tsy and needs to arm length negotiate, yet in other parts he's confidently discussing a solidified plan (recap without congress w/ dates). The notion that they are just stepping into the public and winging these statements is just simply not the case.