Ismael

Have you looked at ICLTF?

In addition to consolidation, there is also more stable demand from credit card rewards programs. There have also been innovations in more effective yield management and segmentation processes. Additionally, these days the planes fly themselves so ideally, over time, society becomes comfortable with only one human pilot instead of two, but I don’t think this last piece is part of their thesis.

@Benchmark & @Spekulatius Any thoughts on the re-contracting risk for BWP? Do you agree with this statement from the AR? "While this result has presented challenges to our ability to remarket this capacity at favorable rates, it may, over the long-term, create opportunities for us to aggregate natural gas supplies at key locations along our pipeline system to provide new and existing end-use customers with attractive and diverse supply options."

@Doc, using the 30 year treasury for the cost of capital I got $66/share NPV.

DC Circuit Judge Kavanaugh wrote an opinion that the CFPB is unconstitutional because it is an independent agency with a single head. The FnF Texas lawsuit is claiming the FHFA is unconstitutional for the same reason.

Weird how the common traded today relative to the preferred. It makes me wonder if the market knows something...

I agree the only risk I can think of entails Mnuchin doing an about face and turning a cold shoulder to the GSEs. From what he has said and what he has done, it would have to be something external that makes him change his tact. “Relatively fast” means he wants to work something out with current shareholders and his past tells us he has no problem letting hedge funds earn a little money in order to fix the GSE problem. There is a lurking risk that some political force makes him change his goals with respect to the GSEs. It could get pretty bad if this political force arises and this thing gets decided in the courts. In that case you would have two administrations from different parties that are both hostile to the shareholders. I have a hard time believing the judges deciding the case wouldn’t (at least a little bit) be influenced by the politics surrounding the GSEs. I guess this risk is what we are getting paid to bear. Not a bad return, but the tail risk makes it tough to load up. @BTshine, Good call, Buffett would be all over this. Its right up his alley.

@Flynnstone5, maybe I am a little slow, but I don't understand how the GSEs can raise capital while the warrant overhang is in place. It seems like the warrants need to go, either by exercising them, or by restructuring them to the point that common holders aren’t exposed to the dilution risk in the future. I don't know why the gov't would just give them up or even take a haircut on them without being compensated to do so. I also don’t understand why the GSE’s couldn’t raise equity if the gov’t converts the warrants. I can see the selling pressure the gov’t would create while it unwinds its position, but I don’t see how that materially changes the economics. Below is my most likely capital raise scenario. 1. Exercise warrants (or restructure and sell to large institutional buyers or whatever other creative solution to warrants issue gets dreamed up) 2. Convert preferred to common (I don’t want this to happen until the warrants get sorted out) 3. Rights offering to current shareholders ($20Bish) 4. Retain earnings four years ($40B) 5. Preferred raise ($20B) Preferred or common, the investment still looks compelling and I want to add to my position, but I don’t want to expose myself to the risk of losing a large portion of my money. I’m having a hard time seeing how this investment does poorly. I guess the administration could make a drug deal to get a vote they need for something else, and then the investment case goes back to the courts. How likely is that? Is there another risk I’m not seeing?

I'm getting common EV of $9.5pps if gov't immediately exercises warrants and recaps. If gov't allows FNMA to retain capital for two years then exercises warrants and recaps I get an EV of $10pps (discounted @15% for two years). This all assumes $60B capital raise which from what I understand is on the high end. If you think a gradual approach will be taken then the common looks like the better bet. Preferred will gradually lose value in that scenario (b/c no dividends), but common will increase in value. @ $60B capital raise, the return of the common and preferred look similar. Are there any estimates of a larger capital raise than this? If capital raise is smaller than $60B it looks like the common is the better bet.

One other thing I have been thinking about is how important the GSEs are to the administration? Is the administration willing to give concessions on the GSE issue in order to gain votes on one of their big promises to their voters?

@Cherzeca, haha, yes, call me ismael. I was thinking the government has to exit its warrant position before the capital raise because no one would want to provide capital knowing that they could get diluted 80% at anytime. I can see the problem with the pricing pressure created by the government trying to exit its common position (the gov't wouldn't want low prices either). I imagine it would be similar to how it exited its AIG position, however AIG wasn't trying to raise capital. I'm sure there are a number of creative solutions to this problem. Hopefully my valuation captures the general economics of the situation. The government could create a known selling schedule and sell its position over time, but it will take time to unwind and capital providers will want a premium to compensate for the selling pressure for the first few years. This may push the per share value to the lower valuations. Maybe the government changes the warrants so they must be exercised during a certain time frame (relatively soon) for a certain $ amount and then sells the warrants to the eventual capital providers. The warrant exercise would raise the needed capital. There wouldn't be any selling pressure on the common from the government. The government would get capital in a short time frame. Would this be enough to push the value to the higher end of the range?

My base case valuation of fnma common. Of course, there could be some creative deals that could improve or worsen the results for the common based off of the various interests of the negotiators. It would be interesting to hear thoughts on how negotiated outcomes would differ from this base case. I have a feeling the administration is going to want to maximize their near term return and use the proceeds on infrastructure spending. Assumptions: 1. Gov’t immediately exercises warrants 2. Senior Preferred is considered paid back with NWS 3. $9B earnings/yr available to common after dividend payments to preferred 4. $60B capital raise after gov’t exercises warrants Per share valuation at various PE ratios for capital raise a. @ 10PE = 200% dilution at $5/share b. @ 12PE = 150% dilution at $7.5/share c. @ 14PE = 100% dilution at $11/share d. @ 16PE = 50% dilution at $14/share *The government’s share of the commons would be between $23B-$65B in the valuation scenarios above.

As for the mortgage interest deduction, I believe someone in Team Trump said they wouldn't fully eliminate it. Looks like today's limit is at $1 million for the mortgage (~$40k interest deductible). Going forward, this might be up to a $300k mortgage, so only the well off are hurt. So, that would hurt home prices in the upper price range, but not in the 'normal' home market. I'm not sure if the tax reform will get passed in its current form, but if it does, the standard deduction will increase by almost 300%. Increasing the standard deduction will change the calculus for a large swath of homeowners, mostly at lower tax brackets, concerning whether to itemize their deductions...so they (essentially) "lose" the interest tax deduction. This will remove a meaningful incentive for new home buyers. Its hard to predict the decrease in home ownership this will cause, but it will result in a smaller number of home loans for F&F to insure. (I doubt the increase in standard deductions compensate for the loss of the home ownership incentive that is lost) Will there be a 10% reduction in home ownership? 5%? Will the profitability of F&F stay the same under these scenarios? If the profitability is unchanged, then you would get (roughly) a percentage reduction in market cap that corresponds to the percentage reduction in mortgages insured. As long as the mortgage market doesn't decrease too much, and the profitability of the firms remains the same, then the investment thesis appears to be largely intact. Say Ackman's valuation of the two firms of ~$200B is correct. If home ownership decreases 10% then the firms should now be worth ~$180B. Preferred stays money good, common takes a hit, but will still do fine. Does anyone have a view about how a significant contraction in market size would affect the cost structure of the firms?

How might the Trump tax reforms affect F&F? What impact will the (in essence) removal of the interest tax deduction have on the housing market? Will the likely decrease in real estate values put pressure on F&F? I saw one study that said average home prices would decrease 6 or 7 percent with removal of interest tax deduction. I would guess a decrease in home prices of this magnitude wouldn’t threaten F&F guarantees much, however, the decreased incentive for home ownership would decrease the size of F&F’s market. It is hard to say by how much the market size will shrink, but the interest tax deduction is a significant factor in most people's purchase decision.