Midas79

A couple percent on the common and no movement on the prefs on this "news". This isn't really a scoop, but it might quash some of the chatter about the recap being difficult due to its sheer size. Trump would see a $75-100B equity raise (a yuge number) as a feather in his cap. I would just be afraid that, in order to raise that much money, Treasury and FHFA would have to promise a huge chunk of the equity to the investors. That limits the value of the warrants and pushes the outstanding commons into a corner.

Yes, please. I reckon Buffett would be willing to buy the whole business if he were allowed. I think he's very fond of the core mortgage guarantee business. my thoughts were that Buffett would detoxify the GSEs if he invested. it has been fashionable to hate on the GSEs but if warren buys in, GSEs become apple pie and motherhood I would just be afraid that Buffett's terms would be unfavorable to all current shareholders. He can certainly crush the commons if he gets to dictate the terms, and he could probably find a way to hurt the juniors too if it benefits him/Berkshire enough.

I keep hearing that an explicit backstop would require Congress, but the current funding commitment from Treasury comes from the SPSPA agreement, which neither FHFA nor Treasury consulted with before signing. What's to stop FHFA and Treasury from doing another agreement where, in the event of enough losses to deplete all of FnF's capital, Treasury steps in and provides the balance in exchange for another round of senior prefs + 10% dividends? In exchange for this FnF could pay Treasury a fee, in keeping with the presidential memo. This way MBS investors are perfectly safe, while Treasury is only at risk if FnF's losses ever exceed their capital. Strong capital requirements should minimize the risk of the latter.

Moelis has the large-scale view right, but that doesn't mean its numbers should be taken as gospel. If the juniors insist on a conversion ratio around what we see in the market right now (about 4.5 to 1), then the IPO is done at $5.55 instead of $11.73 or $14.67. In that case, the prefs outperform the commons by a decent margin.

Ackman had $23-47 including the warrants being exercised, but he valued the warrants at or above $300B. I think $50-60B is a more reasonable number (Moelis says $100-125B, but I think they're being too optimistic), so scaling down appropriately gives $4-9 which is right around my target range, though that's mostly coincidence. I don't think Fannie will get anywhere close to 3 years to retain capital. Four quarters max, and most likely less. Also, the extra money from Treasury won't be returned to Fannie if the Collins plaintiffs get what they want, but instead Fannie gets a tax credit (the $20B is also FnF combined, so Fannie itself would get less). I don't know if the tax credit count towards core capital, so I am not including it for now. The reason that the new investors will insist on more equity than their capital contribution is the certainty equivalent. $60B in cash, for example, is worth much more than 50% of the equity in a company that is worth roughly $120B. 40% of the capital could easily demand 2/3 of the equity if not more. Also, these new investors will want the lowest share price possible to maximize their ROI, and they cannot afford to be pushed away lest the entire recap fail. Again, every dollar the existing common shareholders get is one fewer dollar for these new investors. They will fight tooth and nail. The capital structure can't tilt too heavily towards prefs because it chews up income attributable to the commons (leading to a lower offering price too). There's also a 2016 line by Calabria saying that he thinks FnF's capital should mostly be common equity. Converting existing prefs allows new ones to be issued in whatever amount FnF deem appropriate, and more importantly this doesn't cost FnF a dime. I think a conversion is highly likely and will be part of settling the court cases. Since the plaintiffs are mostly pref holders I expect the ratio to be generous, and certainly better than what Moelis projects. Of course! Please don't take my posts personally, I am just stating my case. It is quite possible that I am too ossified in my thinking. If anyone wants to chime in they are more than welcome.

You use lesser earnings and the same share count, but come up with a higher price? That can only mean that your projected multiple is higher. Also, seeing more potential in the commons is a valid reason to own them, but your price point of $1.40 is meaningless. The only thing that matters is where you think they will go from here. My model tops out at around $7 for the commons, but has a worst-case scenario of $0.75 that involves Treasury selling the warrants and the capital raise issuing an enormous number of shares. Therefore I only own prefs because by my projections (which include the new investors insisting on at least a 2/3 stake for their capital) don't include any scenarios in which the commons outperform. This is on top of the embedded call option on the commons that I believe the prefs have. If the new investors do "leave it" then the whole thing gets torpedoed. Having the recap happen with more dilution is more favorable to existing common shareholders than having it all go down in flames, so management might not push for the highest price possible. The best way I have seen this put: every dollar that existing common shareholders end up with is one fewer dollar for the new investors. These new investors didn't get the billions they have to invest by being stupid, or by leaving money on the table. I agree about the ratio, but it was even higher than today's 4.4 to 1 when Moelis released its updated plan. When the first plan came out it was at least in line with the market at the time. I don't know why Moelis thinks the juniors will take such a bad deal now.

I would be very, very careful about basing a common share investment thesis on the Moelis plan, and especially careful about anchoring yourself on that $18 number. 1. There are two projections, and you're taking the higher one ($17.75) and rounding it up while ignoring the lower one ($14.19). Investing based on the best case is a recipe for trouble, especially if you fall victim to the anchoring effect. This zaps a lot of investors that hold on to a bad stock hoping to break even before they sell. 2. Those two prices ($14.19, $17.75) assume that the common stock price rises 10% each of the next two years following recap and release. While this is certainly plausible, optimism doesn't make for a good investment thesis. This is even more true if you plan to sell your position soon after recap and release is complete. The better numbers to anchor on are their IPO prices of $11.73 and $14.67. 3. Moelis assumes that retained earnings all the way through the end of 2021 (and all the way back to Q4 2018) will go towards the recap. This is almost certainly off the table, because it all needs to be done by late 2020 at the latest to assure the Trump administration that they can get it done (and more likely it gets done much sooner to avoid running into the campaign and election cycle). For a new president, keeping FnF in conservatorship is much, much easier than putting them back in. All this means that the capital raise will be even bigger, and the easiest way to do so is to sell more common shares. 4. The new Moelis plan assumes that the juniors will convert at par at the IPO price, for a ratio of either 1.7 to 1 or 2.1 to 1 (divide $25 by the IPO prices). Why would they agree to this when the market ratio is 4.4 to 1 right now? If I was a junior pref holder, and especially if I was a plaintiff, such an offer would insult me; I could have made 2-2.5 times as much if I had converted in the market right now. 5. This plan also has a (then) current price of $1.43, but an IPO price 8-10 times that (and 4-6 times current prices). In reality, offering prices are usually at a discount to that of the market, not at a huge premium. Doing the math on the optimistic scenario (page 29) shows that the final share count breakdown is 1.8B for existing commons, 1.13B for the half of converted juniors, 7.2B for Treasury, and the rest (4.9B) for the new investors. That gives those new investors only about 32.5% of the equity. Are they really going to provide almost all of the recap money for that little of a stake? I wouldn't if I were them, and they are much smarter and more ruthless than me. Treasury needs these new investors; they cannot afford for this to fail. They will need to offer much more than 32.5%. The scenario on page 28 works out to 37%, which is better but still not nearly enough in my opinion. Both of these large effects lead me to believe that the offering price will be much, much lower than Moelis projects, and Treasury will just have to accept the diminishment in warrant value. (as an aside, this is part of why I think Treasury might sell its warrants back to FnF rather than exercise them, but then the floor for the offering price drops out and the commons could lose a lot of money from here) 6. Comparing the projected returns on the prefs and commons is also not completely straight-forward. The naive way to do things is say "prefs go from 40% of par to 100% for a gain of 150%, while the commons go from $2.75 to $17.75 for a gain of 545%". However, taking the conversion into account, the prefs actually go to more than par (around 114%) because they participate in half of the two-year 10% annual gain, which narrows the gap on that end. My other points talk about why I think the $17.75 number is much too high. To summarize, there are many assumptions in the Moelis plan that lead to their valuations for the common shares, and in my opinion almost every single one of them is either at or above the high end of realistic.

Somewhat off-topic, but I found it funny: someone searched all of Gasparino's tweets for the word "basement", and as far as I can tell it is preceded by "mom's" (with or without the apostrophe) every single time. He does this several times a month on average. https://twitter.com/search?f=tweets&vertical=default&q=from%3Acgasparino+basement While I am not a fan of the #Fanniegate movement on Twitter (I think it makes shareholders look stupid, greedy, or both), I don't mind them trolling Gasparino because, well, he deserves it.

In less-liquid news, two 9,000 share blocks of FMCCT changed hands at $20.32 and $20.33, and two 12,200 share blocks of FNMAL changed hands at $20.25 and $20.26 today. Those caught my eye because they are relatively large blocks, but mainly because they mark the first over-$20 trades I have seen on the $50-par series, though FMCCT has had other small blocks trade at $20 and $20.50 today. FMCCT has a somewhat high fixed dividend compared to other series (6.42%), but FNMAL has a low fixed dividend (4.75%). The correlation that I track is still around 0.8 in aggregate, but things are starting to stratify rather than fall along a regression line. The Fannie 50s are all trading near each other despite their different dividend rates, as are the Fannie 25s (I swapped some FNMAJ for FNMAT at near parity just now!). In the Freddie 25s, FMCKL (6.02%) and FMCKI (6.55%) are outperforming, but FMCKO (5.9%) is lagging well behind. The Freddie 50s have a similar pattern, where FMCCT is the clear leader, but FMCCP (6%) for some reason stays much closer to FMCCT than the others (dividends from 5.7-5.81%). I am somewhat loath to part with my now-sizeable FNMAT stake, but it seems that the market is starting to prioritize par value. This makes sense because FNMAT has no call protection, and if any series are to be called it will be first. Note: I only follow the fixed-dividend series because those are the only ones I can buy. Analysis that includes the variable-dividend series will have to be done by someone else.

On the surface, I don't like this. There are still too many moving parts, and Phillips has been one of the main people pushing things along. But perhaps his part of the heavy lifting is already done?

This has me thinking, how could FHFA and Treasury tap current shareholders for more money? There could be some sort of rights offering, perhaps with current shareholders being given priority either as an incentive to drop the lawsuits or as a reward for being first in (or both). And how would that work for the pref shares? Common shareholders could buy warrants or be forced to put up cash to maintain their position, I think. I beliebe it was Tim Pagliara who said that the government won't screw existing shareholders because they will be providing some of the recap money. That's what started this train of thought.

I agree fully. I still maintain that if it looks like the commons will have a lot of value, the junior pref holders will push for a conversion, and neither FHFA nor Treasury has a reason to tell them no. The juniors have an embedded call option on the commons, which means that the commons cannot outperform. That will only be true as of the conversion date, so I guess the commons could outperform between now and then, but I don't see a reason to believe that they will. It smacks of trying to time the market. If I did, I would sell some prefs to buy commons with the intention of switching back later. I could always be wrong, of course, but this is the way I see it, and it's certainly the way I would act if I was one of the junior pref litigants.

I would be very careful here. Treasury didn't always act in such a way as to maximize the value of its common shares with regards to the other bailout recipients. Also, they could sell the warrants back to FnF for a set amount of money, removing Treasury's incentive to prop up the share price. There's also the matter that the investors that will recap FnF have a powerful incentive to drive the share price down as far as possible, and Treasury can't afford to just tell them no. I believe this is why the common price is staying mostly flat, even with all this good news. It will be very sensitive to small changes in the mechanics of the recap.

Two questions. Isn't it the plaintiffs involved in negotiations, with both Calabria and Mnuchin on the other side? Also, how does that tax credit help towards a recap? What I was thinking is that the Collins plaintiffs are asking for the seniors to be extinguished and the $25B tax credit. Treasury counters with extinguishing the seniors but not granting the tax credit. The plaintiffs accept because they aren't affected by the recap being larger by $25B. If the plaintiffs demand the $25B on top of the seniors being gone, Treasury conceding would give them everything they want. What incentive would Treasury have to take that deal?

So Fannie, Freddie will have: 1. No QM advantage 2. No explicit guarantee 3. Bank-like capital reqs 4. No securitization infrastructure advantage 5. Uncertain outlook for future legislation or competitors 2020 IPO roadshow here we come?

Joe Light thinks that an IPO (but really an SPO, why does everyone keep saying IPO??) will be difficult to impossible. https://twitter.com/joelight/status/1126840702577577985 The most interesting tweet in the thread, to me, is this one. https://twitter.com/HoldenWalker99/status/1126843902474977280 It will be tricky, but the most significant variable - #5 - has been a risk since the GSEs were chartered... and a legislatively mandated cap on market share to allow new entrants would result in overcapitalization & return of excess capital to investors. I fully agree that Congress coming in and messing everything up is a significant risk, but this line of thought hadn't occurred to me before. It makes perfect sense, and if this return of capital idea is built in somehow then it will make the capital raise far easier.

https://twitter.com/jenniferisms/status/1126519132986531841?s=21 In a @FoxBusiness exclusive, Prez Trump's new head of the @FHFA , @MarkCalabria told me he sees Fannie & Freddie potentially going public as soon as first half of 2020. More to come. Stay tuned. It looks like the pessimistic interpretation of Calabria's "at least an entire Congress" comment isn't correct after all. Mnuchin said he wants it done in 6 months, now Calabria said it could be as soon as 12. Perhaps they meet in the middle and get it done by January?

In the past I have argued that risks like these won't stop the capital raise from happening, it will just lower the price per share of the offering as compensation for those risks. Do you think the risks involved, especially the possibility of Congress stepping in, are big enough to just scuttle the entire capital raise altogether? If so, what could be done about them? Congress can act at any time. The only one I can think of right now is a promise by Trump to veto any bill that messes with the (post-recap) shareholder structure of FnF. Minor nitpick: I would change "easier" to "possible". The Collins plaintiffs ask for Treasury to cancel the seniors (and thus the NWS) and give FnF a $20B or so tax credit. I can see Treasury countering with an offer to do the same but without the tax credit. That could be Treasury's condition to not appeal whatever ruling the Fifth Circuit issues up to SCOTUS. Would that be enough to get the plaintiffs to settle? Now that I think about it, is it even possible to come to a settlement like that once a ruling has been made?

We didn't even have to wait until the 14th for Calabria to once again taste his own shoes without bothering to take them off first. >:( This stuff about giving Congress a full session just seems like a giant non-starter. They have already had almost 11 years, and waiting even close to that long means that Trump might not be around to see everything through. If Trump loses, the next president (presumably a Democrat) could very easily just have his or her Treasury Secretary put FnF back into deep freeze by refusing to sign off on release from conservatorship, a right granted by the PSPA contract. I wouldn't give him too much grief over the "one fell swoop" comment, though. I see it as a non-answer more than anything else, something that is true but doesn't provide any new information.

https://twitter.com/joelight/status/1126175599507202049

Supposedly the government's final brief in Sweeney's court was due yesterday. Has anyone seen a copy of the filing? I would have expected it to be all over the place by now.

Calabria is set to speak publicly twice in the next couple of weeks, once on May 14 at a talk moderated by Bethany McLean, and once on May 20 at the MBA conference. Calabria's track record suggests that these are just two more opportunities to stick his foot in his mouth. For once, I want the FHFA director to just give non-answers so as not to make things more complicated. There is little he can do without knowing Treasury's plan anyway.

Amended retroactively? All that amounts to is Treasury sending a giant check to the companies. I can't see this happening at all. In fact, I think a highly plausible way to settle the Collins case is to extinguish the seniors and end the NWS, but not give FnF the tax credit that the plaintiffs ask for. Instead Treasury would just keep that overage. Treasury would also net more money by not sending this giant check and having its warrants be worth somewhat less due to dilution from the capital raise. In my opinion any projected course of action that involves Treasury voluntarily sending money out, instead of receiving it, is DOA.

This makes me want to do a really deep dive into the article. It's as if FHFA is sending the best signal it knows how. But I don't know how much more we can glean from it.

My fear is that Calabria will do too much of what Watt did: make no move and wait for Congress. However, I have re-read the article after taking a break, and it isn't as bad as I thought. Calabria has talked about a sense of urgency, and he is committed to getting FnF out of conservatorship. I don't think the article is entirely positive, but I have backed away from the ledge! For the juniors, I agree. But a capital raise could dilute the commons badly, especially if it's large-scale and fast. There will be value added, but much of it could accrete to the new common shareholders.