HalfMeasure
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Posts posted by HalfMeasure
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This is a topic I've thought about a lot (Canadian, so no tax deduction on interest in my assumptions).
First and foremost, I think about the total cost to me of renting vs. the total cost of buying (assuming a similar property). On the rent side this is pretty straightforward, but on the cost of buying I consider all economic costs ex-principal payments thus: i) interest costs; ii) property tax; iii) insurance; iv) maintenance; v) opportunity cost of down-payment capital. E.g. the monthly cost to buy a $500,000 house with 20% down at call it 3% would be something like i) $1,000/mo in interest; ii) $250-300/mo in property tax (~6-7%); iii) $75/mo in house insurance; iv) many use 1% as a "rule of thumb" so for the sake of illustration call it ~$300-400/mo; v) assuming a low 3% cost of capital (same as mortgage interest) would get you $250/mo in opportunity cost on having $100k tied up. This gets you to something like $1,875 - $2,025. I don't consider principal pay-down an economic cost. While the conventional wisdom is that rent is "money down the drain", it's no more so true for rent than the above expenses.
Now, I think what the above exercise provides is a clear line in the sand on how much money you're putting "down the drain" even if you buy. Then I consider the difference between monthly rent and the true monthly economic burn rate of buying, and I frame it in terms of a liquidity and risk premia that either I'm paying or I'm being paid for. E.g. if my rent costs $2,200/month for a comparable place, you could say I'm paying $200-300/mo to avoid price risk on a house and to avoid illiquidity. Realtor fees look gargantuan compared to this differential in burn rate (how many months of $200-300 incremental burn would it take to justify paying a realtor 4-5% of $500k??). Now, on the flip side maybe my rent is $1,600 but I really want the $500k house because it's my dream home and I plan to live that forever - that's fine, but I would just consider that incremental $300-400/month in economic burn rate as an amount I'm spending on the call it "consumption benefit" of owning the house versus renting, nothing wrong with that as long as I know that's the decision I'm making. Alternatively, maybe I'm really bullish on the housing market and I'm willing to pay up $300-400 on a monthly basis in the second scenario to make a bet on housing.
Don't mean to impute any value judgments or bias in my above analysis because it really all depends on each person's situations, but this is the framework I find most helpful to really parse the decision. Though to be clear, I do feel that conventional wisdom oversimplifies the decision by framing rent as a cost and mortgage payments as an investment.
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Treasury's argument that a recovery for shareholders is possible (unknown and un-timed) is a straight arrow to the heart of the nationalization argument by plaintiff, so it is worrisome. Not to mention an acceptable delay strategy, as a recovery might be possible... within the next 1000 years.
except i didnt see the judge concerned with nationalization buying it
And wouldn't that argument be analogous to something like: "I didn't steal your property, I just took it but I could return it under some nebulous circumstances thus absolving me of theft".
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Thank you!Courtesy of Peter A. Chapman...
The Saxton case was argued before the Eighth Circuit this morning, and an audio recording of the 40-minute hearing is available at http://media-oa.ca8.uscourts.gov/OAaudio/2018/5/171727.MP3 at no charge.
Thanks. Anyone have any thoughts on how the arguments went? Listening now.
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Kudlow was outspokenly in favor of GSEs shareholders. Will he be of any influence should he finally get Cohn's job? Or will he end up being metamorphosized by the government, like Mnuchin/Mulvaney?
tim howard has a comment up to his last post from his book quoting kudlow as being virulently anti-congressional charter for GSEs...wanted them to become pure private companies. but i do believe that given his free market capitalism bent, he would want GSE shareholders to get back to square given the 10% moment has been reached.
Relevant:
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Supreme Court denied hearing. ::)
Does this mean Perry case is officially dead, and the only legal pathway forward is the Sweeney case?
to the lawyers on the board: although they are longshots in their own right, would the other outstanding cases in the 3 appeals courts + rop/bhatti be hurt by this supreme court ruling (ie is it viewed as a 'blessing' of the dc ruling)? thank you.
muscleman, i think it's sweeney (which is years away from any potential positive outcome), delaware appeal, and maybe some pennies from the lamberth remand as remaining legal options. plus the longshot perry look-a-like suits mentioned above sprinkled around the country.
a denial of cert does not touch the merits. if a circuit wanted to rule for Ps (big if) then it would know that its case conflicting with perry would result in a likely grant of cert by scotus. but generally other circuits are inclined to say hey this is an administrative law case, i'll just decide the way the dc circuit decided cause they handle more such cases
Wasn't the cert also rather narrow in its scope anyway?
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I suspect the views' of corker and the message board consensus on the meaning of 'fair' aren't similar.
since the bankers are desperate (crapo led off the whole FSOC meeting talking about GSE reform!), there is some chance the shareholders are bribed to try to pass a bill.
but in that scenario, the bribe wouldn't likely be inserted until later in the process.
i do agree that it's nice for a Senator to recognize shareholders, thank you Senator Corker for that hopefully fresh start on finding a balanced solution for all parties.
Yes, that is what it would take. The existence of the lawsuits is proving to be rather important, I think.
There are many forms the bribe could take:
- Shares in the post-receivership FnF (if they even exist)
- Payouts to all shareholders, common and junior pref
- Payouts to only junior pref holders
- Payouts to only series of junior prefs owned by plaintiffs
- Payouts to only shares owned by plaintiffs
I guess the second to last is the only scenario where it matters what series you own.
I've highlighted this before and was called crazy. I'm very worried about a private check being written (settlement) to litigating shareholders. I understand the counter argument that such a check would be a material proportion to paying out total shareholders, but that gives me little comfort.
Ackman isn't in litigation right? So they can also say that private settlements didn't take care of all hedge funds. Would surprise me that Mnuchin would stab paulson in the back when not doing so would be easy, but we do not have full details into their relationship or mnuchins mindset. Maybe Mnuchin helps make the PR debt whole for paulson instead.
That would be a half-measure that doesn't quite make sense. If they want to clean up the litigation, I believe it would be a comprehensive clean-up, not sub-divided. Why pay most of the money to solve part of the problem?
- Shares in the post-receivership FnF (if they even exist)
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leaked infrastructure plan says nothing about monetizing fnma warrants
leaked draft talks about use of proceeds, all proceeds being sourced from appropriations. if congress doesnt appropriate enough money, then potus may go to fed balance sheet assets. no need to tell congress you might have a alternative source of money before you ask for the appropriation, right?
This is a positive - much better that its appropriations vs. expropriations.
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Huh???
Joe LightVerified account @joelight
Phillips: "There actually aren't shareholders so there's no longer a fiduciary relationship between stakeholders in the traditional way. We sort of see ourselves as the stakeholder at the Treasury" but not represented by the board and employees because of the shares' nature
wtf? :o
Watt said that the SMEs should be shareholder-owned companies. Does Phillips (and Mnuchin) think that current shareholders have no rights at all and will just be washed away? Or just that current shareholders are that only in name because they have no voting rights or ability to participate in company earnings?
Common shares took a small hit just now but not nearly to the extent I would have expected. This news seems to drastically increase the uncertainty behind both commons and juniors, though it is much harder to wipe out (or heavily dilute) the juniors.
Joe Light also tweeted this:
https://twitter.com/joelight/status/954066284362240000
[Phillips] said Mnuchin is committed to ending the conservatorships during this administrationSo if Congress gets nothing done at all Mnuchin will eventually act, but it could take up to 3 more years.
I think you have to contextualize it from the perspective that (I think) he was addressing the governance structure, not necessarily the economics.
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How many common share did Ackman have again? As easy as it is to think "smart money" has been selling out of common due to knowing something about what may happen with common shares its likely just retail selling out.
Seems like too much of a spike in volume for that.
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Entirely correct, deadspace. It has been an unfortunate learning process.I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.long strange trip
The situation is and always has been most analogous to a distressed situation, and those often end up in long investment periods with a lot of noise. It does explain why most investors don't have the stomach for it, but I think there are also investors willing to bear the rabbit hole.
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There was an article on benzinga where some fund manager was discussing possible conversion scenarios. He was modelling the jr prefs converting at 50%, 75% and 100% of par into shares. I am not even going to bother referencing the article as there wasnt much too it. However is there any justification for conversion at less than par. I was under the impression that the AIG conversion happened at par so thought we would get that here too, assuming things even go that way.
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?
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Perry capital files suit in Supreme court
Is there anything on this other than the Carney piece?
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"We are fortunate that two of the most financially sophisticated Senators in Washington, Senators Corker and Warner, have taken the lead on housing finance reform and have suggested that they will put forth new legislation shortly to address this last remaining restructuring of the financial crisis. We believe that this initiative combined with support from the Treasury Secretary has dramatically increased the chances of a favorable resolution for the country and for investors in Fannie and Freddie, including the government, which is not reflected in their current share prices."
uhhh what
Didn't Corker/Ackman set up a meeting with each other at some point and start a dialogue?
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This latest and greatest proposed solution sure is getting a lot of play here. I never even heard of Moelis before thursday, but has anyone determined what shareholders they're actually advising?
I'll be first: They're not advising me.
John Paulson and Blackstone, apparently. See below.
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cherzeca, regarding the 13.5 multiple, if f&f were converted to utilities ( even though it doesn't say that in the Blueprint) don't utilities generally trade at high teens multiples? Or maybe 13.5 or lower is more acceptable given the politics with this thing.
You can't really compare conventional utilities with a utility-like model for Fannie & Freddie - at the end of the day they would still be leveraged financial institutes, essentially insurance companies, not a traditional electrical utility.
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moelis said on CC that they have been retained by certain non-litigating preferred shareholders.
perhaps that would include paulson, who mnuchin is familiar enough with to have been a repeat co-investor.
if so, you might think that mnuchin knew about this retention, and simply said to paulson, "hey get moelis to produce something good so that i have something to work with"
i think moelis did an outstanding job
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I think this will just take time. I don't want to relink it but awhile back I posted an article from Reuters on Mnuchin and fannie. They were quite clear that his strategy is to try to work with congress to come up with a solution and only if that stalls will he step in.
It seems many on this forum are forgetting how long it takes to get things done in bureaucratic agencies. All the massaging, preempting, and managing of the "message", etc.
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How big is John Paulson's position in fannie and freddie preferred shares?
Couldn't find out online - does anyone know?
There are no disclosure requirements for it, so no one really knows exactly. It's material though.
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Can someone post full text or a screenshot of full text?
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Being new to the story... Why is almost everyone assuming that the preferreds have to be converted into common shares? Do they have to be redeemed or they all are perpetual? If they were simply left outstanding, we are looking at an annual payment of roughly $1 billion/year for Fannie which they obviously can cover.
Regarding new capital, both companies obviously don't need any since the government with their Sweep takes everything home and they come back the year after taking again a similar sum with them making the same amount of profits. While I understand that they will need a cushion for leaner years, how much would that be considering that they would build that back relatively quickly without the NWS and their operations being more tightly regulated as they are now. Is Bassel or other applying to them?
Cardboard
FNMA would need at least 75bn of equity on a 3trn balance sheet. they would start from 0 (or actually negative on a tangible equity ratio which doesnt include the DTA). so sending capital out (preferred dividends) would be bad and raising common equity faster (preferred conversion) would be good. i don't think they can force a conversion but if they said no dividends on preferreds for many years, then the voluntary portion might become popular quickly. the one risk to my view is that they would recap with preferred rather than common, which i doubt, but in that case the preferred divs would need to be turned on (rather than any exchange) and/or the legacy preferred called in when appropriate @ par.
I would imagine that capital requirements could be staged, i.e. instead of requiring 250bps of capital immediately, they could raise equity to get to 150bps and then force the companies to retain earnings until they reach 250bps (should take roughly 3 years).
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1. So if its difficult to articulate their long term role in conservatorship then the way you articulate it is by....?
2. I think we can figure out who congress is...but if he wants to explore solutions with stakeholders Who are the current stake holders in Fannie and Freddie in public and private sectors?
1. He already explicitly stated he wanted to take them out of conservatorship (get them out of government control, which implies no more conservatorship).
2. Stakeholder is a very vague term. It includes but isn't limited to stockholders, bondholders, employees, and customers.
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They were temporarily illquid, which is the same as insolvent.
If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.
What a cop out. Illquidity differs from insolvency because it is temporary. I just finished arguing that they were unable to finance their operations in the private markets, which is why I was able to make that statement (I make additional arguments that further supported this posit, with the caveat that my assumptions are correct. Either way, I was clearly making generalizations and not writing a rigorous thesis - Again, context matters). You took this quote out of context, which was vital to being able to make the statement in the first place! If you don't want to or don't think it is worth discussing this (maybe because you don't think I'm qualified to do so), fine, but that's a different statement than what you made. If, like onyx1, you disagree about their access to funding (or any other assumption I made, which are necessary to arrive at my conclusion) then great, we can have that discussion. Maybe I have my history wrong. However, this is a bully move by grabbing a single statement out of context in an attempt to discredit me. Good luck investing with that attitude towards knowledge acquisition.
I snipped just the sentence to avoid the wall of text from quoting the whole post, not to cherry-pick and argue out of context as the context is easy to see a couple posts earlier (we just don't need to keep reposting it). You don't actually argue that they were unable to raise funds to finance their operations, you just state it without any backing. Even in context, the statement of equality between insolvency and illiquidity is wholly inaccurate. Taking your incorrect assertion as fact for the sake of argument and assuming they could not raise other funds, it was still a liquidity problem and not a solvency problem - the ability to raise funds or finance obligations in the short term does not change that.
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They were temporarily illquid, which is the same as insolvent.
If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
Posted
Common value depends more on pro-forma business model and the "out years" - i.e. if the reform materially changes the economics of the business model the equity value could shrink. The preferred however are a prior claim - it's hard to see a scenario where the prefs don't get par or very close to it as long as the conservatorship ends.