investorG

predictions from the big brains here on this board? i'm guessing at this point he's got to mention more than the standard 'protect taxpayer and 30yr mortgage' line. but I doubt he goes into deep specifics. so I expect somewhere in the middle where he touts or refutes some specific concepts like: explicit govt guarantee, multiple guarantors (i.e. competition), utility model, ginnie mae wrap role, and possibly how the transition to the new system works. he'll likely reiterate their desire to go through congress. I don't think he'll mention warrants in a positive light; at a minimum it's optically best to put proper policy above warrants as the driver of reform.

question: a big if, but if they move on something legislatively or administratively in 2018, is it viable that the govt wouldn't have to settle lawsuits such as the one above in conjunction with such a move? or theoretically the govt could just act with a legal overhang?

throwing the hera constitutional challenge is probably just a tactic to make them realize how egregious the NWS was. if a judge is ever sympathetic to shareholders and justice, then it's more likely they reverse the sweep than throw out hera. I don't think they could remove all future litigation risk but they could remove lots of it with a 4th amendment, imo.

Trump wants $1 trillion. If Merkhet's idea works out, the government could potentially put up $200B and get the private sector to pledge the other $800B. If $100B comes from exercising the warrants and selling the shares (which would require recap and release to make the shares valuable enough) then the government could get a 10x multiplier on its commitment. Telling Congress that they can get $1T worth of infrastructure for $100B is a great way to build political capital, the amount Trump would lose from pissing off Rs about the GSEs notwithstanding. In my opinion that also skews the risk/reward towards the commons. If 80% of the companies are worth $100B then the remaining 20% is worth $25B. Given the current combined market cap of around $5B that's 400% upside. FNMAS, even if you assume it later trades at a 20% premium to par due to high dividends and call protection, has 275% upside at the moment (120% of par is $30, current share price of $8, potential gain of $22, 22/8 = 2.75). Less liquid and lower dividend series have similar upsides: something like FNMAK at 95% of par has an upside of 239%. they just had a summit on infrastructure, it likely would have leaked by now if the intention was to use the warrants. also, it's probably not good public policy to let monetizing warrants drive the bus on the future of housing finance rather than letting any warrant recovery value be a nice secondary benefit of whatever they ultimately decide, if it does lead to any value. i wish i am wrong but I doubt it.

At this point I'm starting to think that Mnuchin is just going to sit on his hands until next January, with the only small action being a special allowance for Fannie's DTA writedown in the vein of the 4th amendment from last month (advance them enough money to keep above water, increase liquidation preference, don't call it a draw). Allowing the GSEs to recap, retiring the seniors, etc. would piss off a lot of Republicans in Congress and Trump is already having enough trouble getting them on board with his agenda. Especially in the Senate where the majority is razor thin. If the Democrats gain control of Congress then no bill will be necessary. Recap and release, with FHFA being a strong regulator not allowing the GSEs to be run like hedge funds, would likely be pleasing to the Democrats. It really would be a bipartisan solution: Mnuchin never said that the Republican half of bipartisan support had to be in Congress. this is now my base case view, mostly. (I believe reform, like turning them into utilities, would need to be added to any potential recap / release in 2019). but I also expect that corker will try to get something through committee at least in 1h 2018. the bank lobby is likely pushing hard. one potential wild card in this scenario: could mnuchin, now that the original 10pct loans have been paid off, make a 4th amendment that ends sweep, retires snr preferred, and puts in it's place an explicit fee paid by the GSEs for the Tsy backstop? this fee would naturally be lower than the full sweep earnings, but the rationale would be mnuchin believes FnF are not going away, and even if Congress is taking its time on the reform, it's best to get going on some capital build as they'll need it eventually. maybe this would settle some lawsuits too?

republican retirements keep rolling in. odds sites have chances of Democratic House in 2019 nearly two in three. are 9 Democratic senators going to agree on something that appeases Jeb henserling when they could wait a year and deal with Maxine Waters? possible, I guess, if they are bribed enough. but becoming increasingly likely that another year goes by without action, imo.

who here thinks trump wants the following headline in an election year? (while acknowledging it's possible, I, personally, do not believe it is the most likely scenario, and despite last week's actions, view the share prices of common and preferred as most likely positively correlated going forward). 'trump signs a bill that pays his buddy Paulson and mnuchin's berkowitz multiples of their investment, billions of dollars, while zeroing out many retail investors and the taxpayers' 80pct warrants, and in the process handing out secondary business to the too big to fail banks'. ackman, assuming he still owns common, has a loud megaphone to the media and investor universe. imo the one flaw to my argument above is if they can wiggle the 80pct warrants into some value in a new-co; but still, with the common mkt cap of FNMA at $2bn in that scenario (rather than ~12bn with warrants), it wouldn't take a lot of absolute $ to throw commoners way in some form to have ackman / media call it a 'fair deal' for all sides.

clearly, if there's a receivership / liquidation, as joe light reported yesterday, then a common holder goes behind a preferreds, which are still trading at big discounts to par - which spooks many big commoners. reasons to switch to common are if you think a solution comes that doesnt involve formal receivership, or if you think no deal gets done this year (as one security has rallied on joe light deal hopes and another has tanked). I am guessing but think there's a decent chance of one the above 2 happening this year.

watt may be the man. created a buffer, and didn't need to drive alone. step 1. we'll see from here...

does anyone know how to see the minutes / transcripts from the Bhatti hearing in Minnesota from last month? from looking around a little, the hearing took 4 hours? and the judge once clerked for scalia, appointed by G W bush. I think this case took a different angle, constitutional.

certainly possible. alternatively, it could align with his preferred outcome (if he likes FnF) and the warrants are used to get others on board.

some good points here. another thing though is the downside if this gets punted again because the bridge between henserling and Sherrod brown is too deep. one security has rallied of late on hopes of a deal and another has not.

midas, are you mnuchin? if so, here's how to do it, become a hero: - cite your expertise in the area again - mention how important FnF are to America - talk about the $100bn made so far on the bailout + future warrant value - govt isn't a pig at some point - cancel the sr pref and sweep in return for all lawsuits settled + an ongoing backstop fee until conservatorship ends - set out the path out of conservatorship in terms of capital ratio requirements - invite congress to write legislation which opens the market to competitors, share securitization platform, set an explicit paid for guarantee etc

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same? would take huge guts to pre-emptively cancel the sr preferred before a deal is attempted between all the parties. I doubt it happens.

the banks likely believe 2018 is their best chance to pass something friendly to them. they need the small banks (who own preferred) on board, as well as the lawsuits (preferred) gone. so they craft a bill in the senate (which leaks through their media guy) that pays them off while creating what appears to be a messy end game for America. mnuchin may be on board, but he may have different priorities than ramming through this bill as described so far. we just don't know. I believe common is good value. and pref also, especially the cheaper ones.

i also dont deal with smoke and mirrors as well as i do with actual language. but the actual language isnt even there. for example, according to the article, the section that would seem to deal with the treatment of of the senior pref is blank and pending further discussion. this basically means to me that the bill is nowhere yet. why it would be that the junior preferred are resuscitated and the common trashed, of which treasury owns 80%, still escapes me. i get that in order to promote competition you have to declaw FnF, but why throw away >$100B in taxpayer value to promote competition when you dont even know if the competition will emerge or promote housing finance as well as it is now with an effective duopoly that can be monitored with utility regulation? fwiw I like the common value here. the best deal is where everyone's a winner, and right now the common value of FNMA is sub $3bn - not a lot of juice to squeeze here.

imo in a liquidation scenario of trillion+ dollar balance sheets, which would likely take many years, predicting npv down to the specific billion-dollar level is lottery-level precision. a lot would also depend on the warrants, do they go with the new company or legacy; if new company, each $1bn (or lack thereof) is $1 of value to commoners. and if legacy, then $6bn = $1 value.

interesting. wish he'd gone further on who 'a lot of people' are.

I wonder if Mnuchin is on board with the Senate - MBA - Joe Light proposal, working with them behind the scenes. If so, we'll get (or not get) whatever they decide. If not, it's probably tempting for him to wait til 2019 to work with Maxine Waters and Sherrod Brown (or someone similar if he loses) on GSE reform. It's shaping up for a Democratic landslide in November.

while it's possible they could severely cram down common to levels below current values while giving par to preferreds, imo this would fail a test of common decency and fairness. if it occurs, this restructuring would happen 10 years post crisis, unlike AIG and the others which were heat of the moment deals. also, the market cap of the outstanding common holders is sub-$5bn, it's not like there's a ton of value to squeeze from them. imo common has been unfairly penalized relative to preferred in recent days. Regardless of moral compass around "decency and fairness", isn't it just the priority in claims? yes, if there's a formal liquidation. a lot of investors are hoping for something besides this. but even in the event of a liquidation waterfall, what are the odds there are proceeds to pay jr preferreds @ full par while leaving 0 for common -- possible but not easy to pull off imo. In WAMUs bankruptcy common got zippo. Preferreds, in comparison, did much better. Actually, we commoners got millions of worthless units of a litigation trust. Maybe one day the units will bitcoin themselves and we will become trillionaries. I have 900k of those. As for the waterfall, it has been looking almost about to reach commons... for the last 9 years. We were considered despicable by J. Dimon. I guess it just comes down to -- if we get a positive outcome -- do you believe in a moelis - blackstone type plan or the benziga article plan.

while it's possible they could severely cram down common to levels below current values while giving par to preferreds, imo this would fail a test of common decency and fairness. if it occurs, this restructuring would happen 10 years post crisis, unlike AIG and the others which were heat of the moment deals. also, the market cap of the outstanding common holders is sub-$5bn, it's not like there's a ton of value to squeeze from them. imo common has been unfairly penalized relative to preferred in recent days. Regardless of moral compass around "decency and fairness", isn't it just the priority in claims? yes, if there's a formal liquidation. a lot of investors are hoping for something besides this. but even in the event of a liquidation waterfall, what are the odds there are proceeds to pay jr preferreds @ full par while leaving 0 for common -- possible but not easy to pull off imo.

while it's possible they could severely cram down common to levels below current values while giving par to preferreds, imo this would fail a test of common decency and fairness. if it occurs, this restructuring would happen 10 years post crisis, unlike AIG and the others which were heat of the moment deals. also, the market cap of the outstanding common holders is sub-$5bn, it's not like there's a ton of value to squeeze from them. imo common has been unfairly penalized relative to preferred in recent days.

I think there's great value still in the preferred securities, especially in light of this week's news. however, in addition to the deal risk (ie what could be received), there's also the time risk --- if the cash flows or dividends are paid out over many years then the NPV is obviously lower than the headline amount. to get a favorable result, i'm guessing the big pref holders are willing to take something that delivers NPV around 2/3 of par - which would make the risk reward strong but not outstanding imo. of course there are other options too, good and bad.

I agree, mel watt prefers to co-operate rather than run solo.

do you think there's a chance they split FNMA into 2 parts: a wind-down business with the legacy book and a new company with a fresh charter? existing shareholders would go with the wind-down legacy portion and get paid as cash flows (minus expenses) come in over future years, and the sr preferred gets morphed into an ongoing commitment fee for providing explicit support until the legacy book winds down? this could settle lawsuits, provide relief for shareholders, and also allow them to craft whatever new company they wanted going forward to satisfy the congressional R's.