Midas79

@cherzeca I know you didn't ask me, but my theory as to why FNMAS went up 7% and FNMA was flat is that the market has decided that FNMAS should be roughly 4.5 times as valuable as FNMA; that's the average over the last three months. That ratio skewed down to just over 4 last Thursday but has now corrected back to that level with today's FNMAS move. I don't think this is a powerful enough trend to trade on, such as shorting one of FNMAS and FNMA and going long the other whenever the ratio varies significantly from 4.5, because big news can cause a big regime change. As an aside, for a while I have tracked what I call the commons' implied ceiling, or what price the commons would trade at if the prefs go to par and the commons gain the same percentage. Compared to the liquid prefs it is around $5.40 right now, and around $6.50 for the less liquid prefs.

treasury and fhfa will want to recap both GSEs, obviously, but from a new money investor point of view, I would rather put my money into Fannie than Freddie. whether this translates into a disparate pricing effect I know not Why do you think new money would want Fannie more? I would like to know this as well. I was of the opposite opinion for two reasons. The CSP should eliminate much of Freddie's competitive disadvantage vis a vis Fannie Freddie is farther past the 10% moment, so if the Fifth Circuit bases an award on that then Freddie will be closer to being fully recapped than Fannie There has been rather little price difference in Fannie's and Freddie's prefs, though Fannie's commons usually trade at a 3-4% premium to Freddie's. The most plausible theory I have heard is that the money flow generally goes FNMA, then FMCC, then FNMAS, then FMCKJ, then to the rest of the prefs.

I can't agree here. A junior conversion doesn't have to disproportinately favor the juniors. Calabria only mentioned it in passing with no specifics about the terms. The Moelis plan involves a partial conversion but disproportinately favors the commons, for example. The timing doesn't make sense. Hume wrote that letter 50 days after Calabria's interview. Why wait that long?

Returning to Hamish Hume's warning about favoring the pref shareholders over the commons: The Moelis plan provides a much higher return to the commons than the prefs. That means Hume could not have been talking about this. In that case, what was he talking about and why did he feel the need to write his letter when he did, or at all? I think it must have been prompted by something he heard. Possibly a conversation between some plaintiffs and FHFA/Treasury about a settlement that would disproportionately favor the prefs? With Hume going public as a way to refuse to go along with it? I can only speculate, but the existence and timing of his letter makes me think that he either knows or fears something.

Who exactly is it that is "arrogant and thinks they are smarter than everyone else in the world?" If you're going to make statements like that, name names. Also, Mr. Market slaps everyone down at some point regardless of personalities or intentions. All your post boils down to is pure schadenfruede, gloating over having made one good move. I really thought you were better than this.

If Treasury cancels the seniors, does the line of credit go back up to $400B, as in $200B for each company? If so, that means even more protection for MBS holders, but even if not then adding capital to FnF only makes them safer than they are today, which is evidently safe enough for MBS investors to not be jittery. And just to be clear, is the following the section of HERA you are referring to?

Explicit guarantee means Congress. If the administration is counting on that then I'm selling everything tomorrow. What I think is more likely is a continuance of the existing implicit guarantee and Treasury line of credit, with FnF paying a commitment fee. This lines up with what was in the presidential memo. The difference is that right now Treasury is only contractually responsible for around $200B of losses, which represents the undrawn money from the PSPA funding commitment. I'm not sure if FHFA and Treasury can legally increase this amount, but it shouldn't be necessary. As I said in my post on Tim Howard's blog (and first said by cherzeca on Twitter), right now we have $6B of capital in front of the $200B line of credit, and after recap and release it would be $150B (or whatever Calabria decides on) ahead of that same line of credit. It's a good enough arrangement now and will be better than good after recap and release. That should be plenty to reassure MBS investors while technically not potentially putting Treaury on the hook for all $5.5T of FnF's liabilities as an explicit guarantee would do.

I watch the price action more closely than most here, mainly in order to trade small amount of prefs around when opportunities present themselves. For example, I was able to sell some FNMAM for $19.99 and immediately turn around and buy the same amount of FNMAK for $19.55. It's picking up pennies, but the steamroller doesn't have a chance to move in between. According to my database, FNMAS's dollar volume (approximated by closing price times volume) has actually exceeded that of FNMA 603 times over those 888 days, and FMCKJ's has exceeded FMCC's 480 times.

By my data, today is the 41st time this has happened out of the 888 trading days since the start of 2016.

Damn if this isn't confusing as all hell. Also bad news with Calabria evidently supporting the continuance of the NWS. Perhaps he wants to be able to negotiate it away with Treasury rather than having it pulled out from under him? Still, isn't it pretty late in the game to be doing stuff like this? I would imagine that the decisions are mostly written at this point. Why jeopardize things at this late juncture? One silver lining is if this really does sway the court, then Calabria can stay on if a new president is elected. However, that new president would have their own Treasury secretary and could thus derail everything. I'm rather surprised that the shares aren't sliding more than they have today.

"Amended adverse terms" cannot be forced. It's right there in the contract, at the end of this paragraph. Now if the government says that nothing can move forward until all junior series convert we might have a different story. But there is no reason for the government to care at what ratio the conversion happens, as long as it happens before the warrants are exercised. If 2/3 of a series' holders choose to convert then the whole series is converted, that's also right there in the contract. The other 1/3 cannot hold out.

I have never understood this reasoning. If Treasury just exercises the warrants in full right now, or any time before the capital raise, how does it affect the capital raise at all? Also, if Treasury is able to keep all the overage money, including last week's NWS payment and probably the one on Sept 30, that's something in the neighborhood of $30B. If they give that money back voluntarily in order to increase the warrants' value, the common share price would have to rise by over $4 to make that course of action more profitable. Treasury would, in nearly all cases, be better off just keeping the money and not worrying about maximizing the value of the warrants. Of course if Treasury is forced to give the money back by the Fifth Circuit then this is out the window.

Yes, Moelis does call for the juniors to be converted at par. However, their projection for the offering price is so high that a FNMAS shareholder would get right around 2 commons per FNMAS share. I don't think that will fly since I agree with orthopa that the preferred holders will want to win versus the commons. They can turn down any conversion offer, and can even potentially convert at above par. I also don't get why the offering would happen at a price so far above today's price. This was probably a sop to Treasury to make it look like they could get a ton of money for their warrants, but I don't think that's realistic at all. I expect Treasury's warrants to be worth $50B if they're lucky, and more like $30B. The rest of your argument is nullified if the conversion happens before the offering, which I (and Moelis) believe will be the case. This protects the offering investors from being diluted by the conversion. The same goes for the warrants, if Treasury is going to exercise them they will do so before the offering. Total par value of all junior preferred shares is $33.24B. It's $19.13B for Fannie and $14.11B for Freddie.

Speaking of the conversion rate, are the juniors going to care what price the IPO is set at as long as they get par? I didn't understand the latest Moelis plan, which called for juniors to get 2 or even fewer than 2 commons for every $25 in par value, even though the market ratio far exceeded that. The comments by orthopa about the preferred holders wanting to win versus the commons, not just getting par, has me thinking. I also don't see why the IPO would be conducted at prices 4-5 times what we see now. Won't the price be set by the market, and if so why assume such a high price? Why would the preferred shareholders behind the Moelis plan come out with something that advantages the commons so much more?

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway. Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in. This is one downside scenario for the commons, especially compared to the juniors.

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

FnF wouldn't buy them back before the raise, they would do it in conjunction with it. Instead of raising, say, $60B in commons with an implied warrant value of $40B, they raise $100B and give $40B of it to Treasury in exchange for the warrants. This gives Treasury some certainty over what they would get and also gets them their money right now, allowing them to "get out" quickly as you say.

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

The report reads as if everything but the introduction was just copied and pasted, with appropriate adjustments, from the Watt-era reports. As Calabria mentions, June 15 is the statutory deadline, so I wouldn't read too much into the contents. Other than the introduction I think it's just a TPS report. there is a 3 page intro letter which talks about competition and refining capital setting process to avoid undesirable workarounds...not sure what that's about Perhaps it's just a platform for Calabria to say what he wants to, not that he needs it. For the rest of the report, I just ask myself "is this something Watt's FHFA would have produced?" The intro is clearly a no, but the parts I skimmed through, especially the Maintain/Reduce/Build conservatorship section is yes. I think Calabria lacked the time, and Otting the inclination (and also time, perhaps), to make wholesale changes to the report's structure and contents. The report also mentions the upcoming CECL standards and how they might push FnF's net worth under zero. The last estimate I saw was $12.5B. I don't think this would become an issue until the end of Q2 2020 though, because the writedown would happen on 1/1/2020 (during Q1 2020) and its effect on net worth wouldn't be reported until the Q1 10-Q is released in May 2020. This could be a deadline for the capital raise to avoid ugly bailout accusations in the middle of campaign and election season.

The report reads as if everything but the introduction was just copied and pasted, with appropriate adjustments, from the Watt-era reports. As Calabria mentions, June 15 is the statutory deadline, so I wouldn't read too much into the contents. Other than the introduction I think it's just a TPS report.

I agree with this. Some articles, like this one, https://nationalmortgageprofessional.com/news/71331/mnuchin-gses-conservatorship-remains-until-housing-finance-reformed jump to the conclusion that "housing reform" necessarily means legislation, but that doesn't have to be the case. Calabria can effect many reforms on his own, this was even part of the presidential memo.

Is this the first time that Mnuchin has mentioned capital retention? I know Calabria had said it a couple of times, but I don't recall Mnuchin doing so before. As for the various lawsuits, if the Collins plaintiffs get what they want (seniors and NWS gone, $20B tax credit with Treasury), will that be enough to get all the other lawsuits dismissed as moot? Or will some of the plaintiffs claim that they are still due damages even on top of all that? I am wondering if it's possible to get rid of the lawsuits without any settlements if the government can convince the judges that the plaintiffs are getting what they want anyway.

The execution risk rises dramatically once the timeline gets pushed out past the next election. A new president can fire Mnuchin, and will likely have the ability to fire Calabria. I think the entire thing, recap and release, needs to be done in the next 12 months at the most. I don't think Trump wants any part of this hanging over his head going into the campaign and election cycle. Therefore I wouldn't count on more than 4 quarters of retained earnings, and probably less. Do you have more info about the Petrobras offering? If they can oversubscribe $70 billion then FnF should be able to easily hit $120 billion. As cherzeca points out, the price of getting this done quickly is probably a rather low offering price. This is one big reason that I own only prefs, the commons can still come out lower than they are now in the end.

Two years is too long. This all needs to be done in the next 12 months imo, if not sooner, so that it doesn't get dragged into the campaign and election cycle. Going past Trump's term adds in the danger that he gets voted out and the new president just quashes the whole thing with a new Treasury secretary and probably a new FHFA director. $30B in new prefs only for Fannie seems way too high. Are they really going to carry $49B worth of prefs on their balance sheet? That alone will push the share price down. If Fannie is going to issue that many prefs I think they convert the existing ones to common. At market rates (4.5:1), that's $19.14B / $25 * 4.5 = 3.45B new shares. That adds in another 75% dilution or so, bringing the commons to $2.50, keeping everything else in your model constant.

To me buying commons now for this reason feels like an attempt to time the market. I avoid that whenever possible because I have no reason to believe I have an edge there. The premise seems to be that you are predicting a dip in the pref-to-common ratio and then a rebound. I think I'd be willing to try this with ~5% of my GSE allocation, but no more. It could very well go the other way: we get Calabria's capital rule before the en banc decision.