investorG

what's their alternative? do nothing and let otting or Calabria slowly roll back help for affordable housing?

I believe the Moelis plan is unlikely absent legislative reform. Moelis likely realizes this but importantly the team dangled $100bn in taxpayer warrant values to generate attention. It's nearly impossible to re-IPO FnF raising many tens of billions of dollars without some legislative certainty. The outs to this view are large validating check writers like buffett and Tsy (if they return some of excess dividends rather than write down the liquidation preference), but both of these seem like low odds. the moelis plan likely is a placeholder. regarding legislative, the admin and Crapo don't seem too far off. It's then up to Maxine Waters and s brown to decide if they want to play; what's in it for them, knowing that their preference would be to only attack the administration? possibly two things: a) an explicit fund of 10bp or higher (perhaps $5bn or more) for affordable housing subsidies annually and b) the alternative could be bad with otting / calabria having mostly free reign to do as they please.

About the share count: if the juniors all convert at $10, that's 3.3B shares. Added to the 1.8B current shares it's 5.1B. Then the warrants can be exercised for 4x that amount, or 20.4B shares. Why would the juniors agree to a conversion that only gets them 60% of par? And why would the new buyers accept a $10 price? If the companies need to raise $100B, that price only gives them 10B shares out of a total of total of 35.5B (3.3B converted juniors + 1.8B current + 20.4B Treasury warrant + 10B new money). If I were a new buyer I would never accept less than 1/3 of the companies when I'm putting in essentially all of the capital. Instead, IPO the shares at $2. Convert half of the juniors at par: $16.6B of total par divided by $2 = 8.3B new shares. Treasury gets 40.4B shares (1.8B current + 8.3 converted juniors, then times 4), worth $80B in cash. Then the other $100B is raised at $2 a share. The new buyers get 50B out of a total of 100.5B shares, about half the companies. Even that might not be enough! To take it to the extreme, IPO the shares at $0.25. Convert half the juniors at par: $16.6B divided by $0.25 = 66.4B new shares. Treasury gets 272.8B shares (1.8 current + 66.4B converted juniors, then times 4), worth $68.2B in cash. The new buyers get 400B shares for their $100B. Now they get 400B out of a total of 741B shares, for a 54% stake. I don't think we can do offering price estimates like this. A conversion plus warrant exercise just adds too many shares, when you add the condition that the junior conversion price is the same as the IPO price. Maybe we have to start with asking ourselves what percentage of the companies the new buyers will want for their $100B. If it's too high then Treasury starts getting squeezed; will they let that happen? In any case, I wouldn't want to be in the common shareholders' shoes when all this goes down. They're the one party that nobody will be looking out for. Imagine if the warrants actually were cancelled. Then the price could get driven down to a few pennies. The same is true if Treasury lets FnF buy back the warrants for a certain amount of money. That has the advantage of guaranteeing Treasury that amount, regardless of where the market sets the price of the commons later. jr's might agree to convert at discount to par because they have limited leverage in this situation and something is better than nothing. convert @ 60pct (theoretically) or hold some jr pref where dividends might not be turned on for many years. If we go down the recapitalization, I doubt the govt wants to squeeze all the juice out of the existing commoners. it's bad optics and not a lot gained given their market capitalization is so small relative to the final end game value of the companies. i'll leave it here rather than clog the board, I just believe it's most likely that a full Moelis outcome needs either congress or a court win. I know that many FnF supporters believe otherwise.

You may have information I may not or you may hear things I don't. But from where I sit only the political side is not easy. The technical one is simple to solve. Politicians ultimately will not shoot themselves in their feet. At some point, all will come to the understanding that the Srs. in place are a major roadblock to move forward, on any plan. I can't find one reason why anybody will risk their money with that sword over their head. The govt has made ~100bn so far in interest / profits. after structural changes warrants might be worth $50-75bn in some out years. I do not believe they would make another $200bn from the sr pref in the potential scenario I mentioned. Rather, instead of owning around 80pct of the pre-new-money restructured companies (from warrants), maybe that ownership stake would be [90]pct, squeezing out the existing common and jr pref, in some negotiated settlement. Why would they do this? in the absence of a court win or legislative blessing, they might a) want to cap the optics of hf returns and b) gain some modest value from the sr pref so that they are not exposed (legally or politically) to wasting taxpayer assets. are they not at all concerned about being able to raise $0 dollars based on the optics to date? i wish but unfortunately not likely. lots of sharks in DC and wall street.

You may have information I may not or you may hear things I don't. But from where I sit only the political side is not easy. The technical one is simple to solve. Politicians ultimately will not shoot themselves in their feet. At some point, all will come to the understanding that the Srs. in place are a major roadblock to move forward, on any plan. I can't find one reason why anybody will risk their money with that sword over their head. The govt has made ~100bn so far in interest / profits. after structural changes warrants might be worth $50-75bn in some out years. I do not believe they would make another $200bn from the sr pref in the potential scenario I mentioned. Rather, instead of owning around 80pct of the pre-new-money restructured companies (from warrants), maybe that ownership stake would be [90]pct, squeezing out the existing common and jr pref, in some negotiated settlement. Why would they do this? in the absence of a court win or legislative blessing, they might a) want to cap the optics of hf returns and b) gain some modest value from the sr pref so that they are not exposed (legally or politically) to wasting taxpayer assets. I do not understand this math. If they end up owning 90% of a 200+ bill mkt cap investment, doesn't that mean warrants+srs will be worth $180+ bill in common shares that they could possibly sell around this value? Or your belief is that they will get rid of their stake way before companies reach that valuation? new investors get something too. alot of shares for putting up the required capital.

I agree, the Sr pref needs to go away to raise capital. What I'm saying is that absent a court win or congress deeming the sr pref repaid, it's harder for the Tsy scty to merely cancel a $200bn taxpayer asset than many here assume, either legally or politically. in Moelis, let's assume the IPO price is 10. Jr pref get about $33bn in value (assume all convert at par), existing common around $20bn (2bn shares x 10), govt $80bn (8bn shares x 10), and the rest to new buyers. what i'm saying is a potential scenario if no court win and no congress retiring the sr pref is that in addition to the warrants (8bn shares), the govt also converts the whole sr pref (eliminating it) to say another $20bn of common shares at the IPO in a negotiated transaction with all the parties. this comes out of the ~$53bn pot that goes to jr pref and common. so commoners get maybe $5 and jr pref 60% of par.

You may have information I may not or you may hear things I don't. But from where I sit only the political side is not easy. The technical one is simple to solve. Politicians ultimately will not shoot themselves in their feet. At some point, all will come to the understanding that the Srs. in place are a major roadblock to move forward, on any plan. I can't find one reason why anybody will risk their money with that sword over their head. The govt has made ~100bn so far in interest / profits. after structural changes warrants might be worth $50-75bn in some out years. I do not believe they would make another $200bn from the sr pref in the potential scenario I mentioned. Rather, instead of owning around 80pct of the pre-new-money restructured companies (from warrants), maybe that ownership stake would be [90]pct, squeezing out the existing common and jr pref, in some negotiated settlement. Why would they do this? in the absence of a court win or legislative blessing, they might a) want to cap the optics of hf returns and b) gain some modest value from the sr pref so that they are not exposed (legally or politically) to wasting taxpayer assets.

imo it's not as easy (if it's possible at all) as people casually write about for the Tsy scty to simply 'cancel' a nearly $200bn asset (sr pref) of the federal government. if we ever win a court case, that can change. but without that, Mnuchin likely needs Congress to fully retire the sr pref. in the absence of a court win or congress, then we're possibly looking at some negotiated bargain between Tsy, berkowitz (and peers) and Ackman on a restructured company whereby the Tsy has the leverage and converts Sr pref to common in addition to the warrants - which would very likely lead to reduced investor share price targets vs. current expectations for both common and jr preferred. long story short: a Moelis-type plan (and accompanying price targets) likely needs either a court win or out of nowhere a comprehensive and balanced legislative deal.

if they recapitalize as we hope, the buyers of tens and tens of billions of dollars of new stock are likely to be looking for some legislative blessing on the companies and structure which would emerge. after all, mnuchin, otting, and trump won't be in charge indefinitely. bypassing congress has always been likely only a last-ditch solution.

These are both highly plausible. Otting might not have recognized the possibility of his comments being made public because they were made in an internal meeting, so he perhaps was more direct than was prudent. As to b), I actually don't think it will even be possible for Mnuchin to start down any road without knowing the Collins verdict. If the Fifth Circuit reverses the district court and rules the seniors redeemed, that could drastically change the calculus of the recap. However, if the Fifth Circuit affirms then Mnuchin might feel pressure to get something for the seniors rather than writing them off. going further out on a limb here, but there's some chance this was a pre-meditated plan. having otting go big on admin action. release the tape. have the banks / establishment blowback. retreat to congress to allow for the govt guarantee and new charters (which mnuchin likely also wants) with a motivated set of legislators who fear a late 2019 pure admin move if congress fails.

something likely changed during the past 2 weeks. my best two ideas are posted above.

Hello everyone. I've appreciated the recent posts, and it's nice to see hardincap's humble posts return. It appears either a) otting had has equivalent 'mnuchin late 2016 interview moment' in terms of establishment backlash or b) mnuchin wants to see the outcome of collins before moving in a certain direction. or both.

I look at it a little differently. The examples you cited were public / binary events where a typical hedge fund couldn't gain an edge with additional research. The current example is likely different, and the hf sharks -- they are smarter and greedier than many here give credit despite their relative underperformance -- are surely digging in their contacts and avenues to see if something like Moelis is in the cards given the enormous upside potential. and the market is saying for now, that's not the case. of course there are some caveats like mnuchin has the tightest vest possible and hasn't started the process yet but i'm trying to be as realistic as possible even though I strongly wish Moelis was implemented for both fairness and policy reasons.

I'm not responding to the gist of your post, but responding only to say that I'd caution against using market prices as a proxy for value or for what the future may hold. My comment isn't so much for you, but for some reading this board that might have a tendency to read too much into current prices of any security, and especially a situation like the GSE's. I partially agree, it's not fully efficient. especially with the buyer base limited due to the pink sheets. However if you are Mnuchin and are taking the minority shareholders' interests seriously, you'd likely prefer to avoid a press deluge writing on multi-baggers for hedge funds upon any action; rather, you'd likely leak out positives in increments such that the final action is only a modest gain on announcement day. imo our hope is that the clock on this process doesn't really begin until after this congress leaves for good.

Section 1367 of HERA actually gives the FHFA director several ways to impose receivership. Once capital standards are actually put in force, (K) will almost certainly apply immediately, as will (J)(i), (J)(iii) and (J)(iv): with the NWS in place, how can the companies build capital and what possible capital restoration plan could they submit? Ironically, (H) could be twisted around to describe the NWS as an "unsafe or unsound practice or condition" that results in a "substantial dissipation of assets or earnings" and "weaken(s) the condition of the regulated entity". Calabria could also try to strongarm the boards into consent and invoke (I), though I think it's unlikely that tactic will work again. I'm afraid that receivership would be not only possible but rather easy for Calabria to unilaterally impose. thanks, Midas. a blueprint for receivership + some value for the minority shareholders likely already exists, it was probably embedded in corker's plan from a year ago. I believe the Moelis-or-bust supporters are underestimating the deal and reputation risk with raising many tens of billions of dollars, especially with the fact that potential investors will likely need certainty from legislative action first before committing $$$. In fact, I'd bet Paulson and Schwarzman and Moelis view their plan mostly as a negotiating tool to get a better deal in what is now becoming more clearly (but not for sure) some sort of restructuring. separating the GSEs in receivership into two companies -- legacy (wind-down) and operating -- accomplishes many objectives -- (hopefully) providing a fair outcome for minority shareholders in some creative fashion, limiting the $ amount needed to re-IPO the companies, make it easier for competitors to enter the market, and force the congress to act. all that said, it's not for sure that the Moelis plan isn't happening -- but to me, that would require a material up move in the common shares (and jr pref to some degree) ASAP which suggested the price action in recent months was due mainly to forced selling from closing hedge funds / tax loss selling and a lack of investor demand due to a tight-lipped Tsy secretary team mostly holding the cards.

sure. just guessing, and would stop writing on this if someone says why it cant work, but: sweep stops now. commitment fee established to pay for backstop (which is needed). companies into receivership in 2019. operational assets carved out into new companies and re-ipo'd eventually with a clean slate (don't need to raise a lot of $ so more doable). legacy assets (5trn portfolios with some operational assets to wind them down) stay in receivership. normally in receivership all cash flows go to sr pref until paid off, then jr pref, then common gets anything and everything left over (if there is any). in this plan, there'd be a pre-arranged waterfall of cash flows: say sr pref gets 75pct, jr pref 20pct, common 5pct. since the cash flows would expected to be large as the 5trn portfolio runs down, a jr pref shareholder would expect to get par over the course of a few years. lawsuits go away. tsy commitment goes away over time and tsy makes a lot more $ for deficit reduction.

:D ;) :D I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely - 1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that 2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies. My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge. you likely won't get much support on this (and other) boards for this point of view but I think there's a good chance you're right. the common price @ 1.20 with endless re-loading supply indicates so. edit: could they send them through receivership with a pre-arranged ratio of cash flow proceeds directed between the 3 buckets (govt / jr pref / common) rather than the typical full waterfall based on seniority? As long as Calabria/Mnuchin establish the Srs. have been paid off and acknowledge any excess over the 10% return belongs to the companies a receivership scenario with what might be a large waterfall will cover the Jrs. So what really matters is the full removal of the Srs. This would be consistent with all Calabria's prior stance. I don't believe this is likely, rros, because the common would have some very very major upside potential (since jr pref cash flows are capped at par value) in a receivership whereby the sr pref are cancelled - the cash flows could be large. and well the common's not showing that at the moment. if I was a plaintiff and the companies were dumped into a receivership with the legacy assets in wind-down throwing off tons of cash and I was entitled to say 20pct of all cash flows (up to par), i'd likely drop the lawsuit. this way sr pref would still get some more value (taxpayer win), commons also to some degree, and the system could be created as desired going forward by congress without legacy lawsuits.

:D ;) :D I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely - 1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that 2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies. My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge. you likely won't get much support on this (and other) boards for this point of view but I think there's a good chance you're right. the common price @ 1.20 with endless re-loading supply indicates so. edit: could they send them through receivership with a pre-arranged ratio of cash flow proceeds directed between the 3 buckets (govt / jr pref / common) rather than the typical full waterfall based on seniority?

if true and confirmed (big ifs), then I guess Mrs. waters will be interested in negotiation. in the mean time, please stop the sweep.

Looks like a two thirds vote to change terms of the certificates, so it'll come down to institutional ownership. Any way to find which hedge funds own what? I don't want to end up holding preferred that don't get a juicy conversion offer. a potential conversion could be voluntary, with the statement of no dividends for many years as the enticer?

Watt is shining his dance shoes. it appears Emily was correct, Watt may end up a disappointment barring some last minute heroics. Similar to the judges hiding behind the technicalities, he has refused to take material corrective action in deference to Congress even though a) based on his white paper he seems to be a GSE supporter and b) fixing the NWS doesn't preclude legislative solution(s).

anyone else surprised a holder(s) of FNMAS wouldn't sell some @ 6.80 and buy some less liquid securities with the current 35-40pct liquidity (and a slight dividend) premium on the S shares?

thanks. the GSEs were not addressed but I thought it was a good interview where he appeared relaxed and on target.

very close to a 0pct chance. he's likely referring to other documents. unfortunately the hedge fund narrative, among other reasons, prevents a big show in our situation.

last 3 months, fnmas is up 5%, fnma down 35%. (fwiw, S&P 500 down 7%) interesting divergence, but imo not explained by any fear of receivership...which would depress everything across the board. if fnma is more a retail story and prefs an institutional story, then to my mind you are possibly seeing some hedging by pref buyers shorting common, and waning interest in fnma by retail (and ackman is already at 9.9% and not going higher). to extent any institutions own common, you will see loss realization selling into year end to cap common's upside. ok, agree to disagree. hedge funds are sharks. the Moelis plan offers ~ 10x reward. even if you cut it down to 5x, they'd likely be all over this given the low market cap involved and lack of other excellent opportunities in the market. ackman's involved, people love to piggyback him. thus, to me, the mkt is speaking clearly - I love the Moelis plan but for some reason no one in power appears to share that view.