Midas79

I think Watt's letter is a good reason to sell and/or stay away from the commons, at least for now. https://www.marketwatch.com/story/as-fannie-and-freddie-reform-talk-heats-up-their-regulator-speaks-up-2018-01-18 We now have supportive quotes from David Stevens and Mark Zandi. The former wants FnF neutered and the latter wants them dead. Each are assuredly biased, but they both like Watt's proposal, leading me to believe they see FnF as being severely weakened by it. Even if commons are not diluted via warrant exercise and equity raises, Fannie and Freddie's earning power could be decreased enough with other market entrants to severely limit the common's long-term upside.

It appears to be the wrong link. This is the correct one. https://www.bloomberg.com/news/articles/2018-01-17/fannie-freddie-regulator-calls-for-utility-mortgage-guarantors

I have seen this part brought up in several places. At this point I don't see why the warrants are illegal or on what grounds a lawsuit would be brought if they were exercised. Certainly anyone who bought shares after the conservatorship already knew about the existence (and thus possible future exercise) of the warrants.

On another note, Trump is trying to get the ball rolling on an infrastructure plan. This could be his next major policy goal. http://fortune.com/2018/01/10/us-infrastructure-spending/ 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%.

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.

That "blank space".. more realistically means "blank for the public". Senators don't like the rumoring. Specially, the one that makes our stocks go up. If the Senators drafting the bill are so anti-hedge fund (note: I did not say anti-shareholder) then the blank could very well be a positive. A bill that zeros out all shareholders would cause prices to tank and the Senators would want that to be public. It does seem that none of the anti-GSE power players ever speak out against shareholders as a group, instead (especially David Stevens) using the prospect of hedge fund "windfalls" as an excuse to not allow the GSEs to recapitalize. I have always wondered what David Stevens would say if someone directly asked him "if all hedge funds and institutional investors sold all of their Fannie and Freddie shares would you still be against a recap?"

It could be due to the high readership of the WSJ compared to other sources that have reported on this. I agree that no (new) real news has come out that would justify the drop in commons today.

Pun intended? ;-)

I don't usually pay much attention to daily price action but today has me confused. I didn't see any big news that would justify a 10% drop on the commons. Other than a few big block sells on FNMAT I didn't notice any unusual volume in the prefs. FNMAS volume was low as well. I just saw someone mention on iHub that FNMAS to FNMA ratio is now nearly 4, and is approaching 7:1 for some of the $50s. I had assumed that the conversion factor in the Moelis plan (3:1 for $25s, 6:1 for $50s) was at a premium to then-current market prices to give junior pref holders an incentive to switch. But the lower commons go relative to prefs the higher of a ratio has to be offered, hurting commons even more. In that case even though it looks attractive to swap some of my position into commons, my thesis of a possible conversion actually warns against it.

Replace "low income housing" with "infrastructure" and he gets even more political capital from both parties. Not to mention going a long way towards a stated policy goal of the Trump administration.

Just brainstorming here. What considerations would Treasury be willing to take in return for the seniors being declared repaid and either cancelling or exercising the warrants, allowing a recap to happen using retained earnings and equity issues? Treasury would also have to keep some sort of diminishing backstop in place while the recap happens so that's another thing that would need extra considerations in exchange for. Some portion, let's say 1/5, of all future profits (up to a certain amount to offset Treasury's loss of the seniors and warrants) Another g-fee increase, the proceeds of which go to Treasury (same) No future lobbying Increased support for affordable housing funds (a sop to Democrats for political capital purposes) Mortgage assistance for downtrodden areas (same) Again these are just throwing-stuff-at-the-wall ideas without regard to plausibility or even good sense in some cases. The first two violate all sense of fairness in that the seniors would be re-repaid, but I don't get the vibe from Mnuchin or Trump that that matters at all. Even if these don't seem like enough reason to give up around $300B of claims ($193B of senior liquidation preference and around $100B for warrants), Trump could declare victory already because the GSEs have paid back so much more than they were given, and he can still try to claim releasing them as an anti-Obama act. But the things on this list allow him to declare an even bigger victory, something I can definitely see as attractive to him. Aside: I guess that RNC resolution was basically meaningless? I don't recall hearing it addressed or mentioned by any major player at any point, and prominent Republicans in the Senate, as well as Hensarling, are saying and doing things that run directly counter to the resolution.

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. Well, cancelling the seniors would have to be done in exchange for other considerations and not just a giveaway of $193B in liquidation preference. I always saw cancelling the seniors as a way of settling the lawsuits because it would end the NWS and would avoid Treasury being subject to an unpredictable court-mandated remedy down the road. I just don't know if the plaintiffs would be willing to accept only that in exchange for dropping the suits. Given that the lawsuits are proceedingly very slowly and there is little hope of a near-term catalyst then I concede your point: Mnuchin likely won't take large-scale action like this without negative developments (for Treasury) in the courts.

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?

I assume that your analysis assumed that the seniors were declared repaid? Because otherwise it seems to me that juniors and common get nothing at all. This would be another reason to own the lower-yielding prefs then. I had thought the "flattening of the curve" of price with respect to dividend yield was due to an anticipated conversion to common only based on par/stated value, but receivership that actually leaves enough money for juniors would be another reason. Correct seniors declared prepaid Thanks. How do you account for the seniors disappearing from the balance sheet? Just wipe them away and increase accumulated deficit by the same amount, leaving total equity unchanged? In that case Fannie's last 10-Q showed around $3.8B of total equity, only enough to pay off 20% of the $19B in junior prefs. If you don't mind, how did you come to your conclusion?

I assume that your analysis assumed that the seniors were declared repaid? Because otherwise it seems to me that juniors and common get nothing at all. This would be another reason to own the lower-yielding prefs then. I had thought the "flattening of the curve" of price with respect to dividend yield was due to an anticipated conversion to common only based on par/stated value, but receivership that actually leaves enough money for juniors would be another reason.

Light's piece includes these lines: I believe this is a direct shot at the former FDIC chairman's comments mentioned above. Light tweeted this yesterday, not long afterward: https://twitter.com/joelight/status/948593453511970816 Light's last piece seemed actually somewhat balanced, but I am now seeing the pattern of him including a token opposing viewpoint at the very end while showing quite a lot of bias at the beginning of the story. Case in point: Once again parroting the incorrect view that the Perry appeal was a complete loss.

Oops, I missed the 10-day negotiation. That would make it January 15 adding all the days from November 10. I was also thinking the whole timeline could have moved faster because the plaintiffs didn't have to use every available day. As for the new capital buffer, all money above $3B of net worth for each company still goes to Treasury. It was a one-time withholding that also came with a $3B increase in liquidation preference for Treasury for each company.

Has anything been heard from Sweeney's court about the quick peek and document production? http://www.gselinks.com/Court_Filings/Fairholme/13-465-0394.pdf If the plaintiffs' review started the day after the order (November 10) then adding up all the days after that: 21 days for plaintiffs to review the documents 7 days for plaintiffs to give a list to defendants with which documents they believe should be produced 21 days for defendants to give a list of documents they believe should still be withheld 7 days for plaintiffs to file a motion to compel if they cannot come to an agreement with defendants gives me a date of January 5 for all of this to have happened. It seems that we have not been apprised of the in-between steps happening thus far. I would think a motion to compel would have been submitted by now if it was to happen at all, and we should have seen that. Does this mean the plaintiffs have the documents they want? Or did the process not start until after November 10, pushing the whole timeline back?

Midas79, why do you believe this? Here is language from FMCCT/FMCCS and FMCKJ: Amendments Without the consent of the holders of the Preferred Stock, we will have the right to amend the Certifcate of Designation to cure any ambiguity, to correct or supplement any term which may be defective or inconsistent with any other term or to make any other provisions so long as the amendment does not materially and adversely affect the interests of the holders of the Preferred Stock. Otherwise, we may amend the Certificate of Designation only with the consent of the holders of at least two-thirds of the outstanding shares of Preferred Stock. On matters requiring consent, each holder will be entitled to one vote per share. Am I missing something? Thanks for finding that. It must have been a pretty bad oversight on my part, though I thought I had checked the Freddie circulars. I am seeing the same language that you posted. Here is the post I made about this a while back: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg289728/#msg289728 I had read the "A" pages at the end of the circulars and not the ones at the beginning. My apologies for not being thorough enough and potentially misleading people. The language thing was only ever a tiebreaker for me and I am glad to see that it is moot. I will more freely switch between Fannie and Freddie series from now on. Fannie might still get a slight preference because if a conversion to common is based on par values, Fannie commons are worth slightly more than Freddie commons, but even that could change in the course of the restructuring.

https://www.americanbanker.com/opinion/time-to-reform-fannie-and-freddie-is-now There are many things that have to happen for Fannie and Freddie to get out of government control: Decide the fate of the senior preferred stock Decide the fate of the warrants Come up with a capital target and a plan for how to get there Release the companies from conservatorship or create binding criteria for it (e.g. reaching said capital target) Settle the lawsuits Optional: offer a conversion from junior preferred to common I believe that all of these things need to happen basically simultaneously. Capital will be hard to raise with the uncertainty from the seniors and warrants, and junior pref holders won't accept a conversion offer without all the other details being worked out. None of this requires Congress either.

Why is FNMAT somewhat of an outlier? It lies well above the trend line, at least as of this moment. FNMAJ is 0.875% above FNMAI in coupon and is close to parity with it, FNMAT is 0.875% above FNMAJ but trades at a 10% premium to both. Liquidity does explain some of this; FNMAT has a 200k 30-day average volume which is 10x that of FNMAJ (20k), while FNMAI (9k) is much closer to FNMAJ than FNMAJ is to FNMAT. FNMAS volume, of course, is another order of magnitude higher at 1.5M per day. I have been leaving it out of the linear regression to try and eliminate the volume effect, but I don't know enough about the effect of liquidity to know if this is valid. Perhaps a two-dimensional regression using coupon and liquidity to predict share price is in order. In that case I would need one more set of data (other than just prices) to get a unique solution. The trend line has been flattening out recently. The original point of tracking this was to see if the pref prices (as a % of par) could be split into the price based on liquidation preference and that of coupon anticipation. A steeper line would mean that the market places a higher probability on dividends eventually being reinstated. I'm not sure if this premise is correct but I have been tracking it anyway.

The R^2 on the pref series I follow (FNMAG, FNMAI, FNMAJ, FNMAK, FNMAL, FNMAM, FNMAN, FNMAT, FMCKI, FMCKL, FMCKM, FMCKN, FMCKO, FMCCT) has steadily dropped over the last two weeks (since the spike on December 7), sitting at 0.51 now. This is down from 0.88 just a couple weeks ago and has usually hovered around 0.9 throughout 2017. The only reason the correlation is even this strong is that FNMAT is something of an outlier. FNMAI and FNMAJ have a pretty large coupon difference of 0.875% but trade at near parity. FNMAG, FNMAK, FNMAL, FNMAM, FNMAN have coupons ranging from 4.75% to 5.81% but FNMAK and FNMAM (the two highest coupons) are the cheapest. FMCKI has a coupon nearly 1% higher than FMCKM but trades at near parity as well. This appears to be a sign to me that investors are dividing into two camps: those who want high coupons and those who just want a lot of redemption value. Investors who have straddled the fence in the past appear to be picking one side or the other. This is the case for me as well. I have sold nearly all of my high coupon prefs and have moved mostly into FNMAM and FNMAK due to their relative recent cheapness, decent coupons in case it matters, and that they are Fannie as opposed to Freddie (which I believe affords protection against a forced conversion to common). FNMAG is an outlier as well. It has been really strong lately against the other prefs (in both price and volume) but I don't know why that series in particular is so popular.

I believe that any conversion to common would have to be voluntary given that a bad offer would be against the interest of shareholders and would need 2/3 agreement as per the circular. Though I didn't find that language in Freddie prefs, only Fannie. Does anyone have reason to believe that an involuntary conversion could be forced through? Even the Perry appeal opinion remanded claims relating to junior pref contractual rights, so I think those are still important.

I believe this is the text of the House spending bill that was passed today. http://docs.house.gov/billsthisweek/20171218/BILLS-115HR1370-RCP115-52.pdf Please correct me if I am wrong. Searches for keywords "Fannie", "GSE", "senior", "preferred", "FHFA", etc. gave no results, though I didn't actually read the bill. If this is the actual bill that extends the debt ceiling to January 19 and the Senate passes it as-is, then those favoring a Jumpstart extension have likely lost their chance. I would expect the Senate to go into recess for the remainder of 2017 upon approving this spending bill. This combined with Trump's potential signing of the tax bill tomorrow, triggering an immediate DTA writedown, means that I expect fireworks in the first half of January once the administration finally has its hands untied. Any Jumpstart-type stuff would wait until closer to the deadline on January 19, and the draw date of March 31 would also encourage quick action.

Thank you for posting this. Here are what I think are the most important points: The Fourth Quarter Dividend section says that the entire NWS dividend minus $2.4B will be paid on December 31. If Watt tries to hold back any money the capital reserve immediately falls to zero. The Increase in Liquidation Preference section says that Treasury's liquidation preference has increased by $3B for each company. My initial thoughts: Overall I don't think this is slam-dunk great news, or even very good news at that. Watt basically cannot choose to hold back capital from this point forward; if he does then the reserve amount drops to zero, making it extremely costly (an extra $3B per company added to Treasury's liquidation preference) to do so. The liquidation preference went up by $3B (per company) anyway. This is essentially a draw of $3B for each company, though that section may have only been included so that Treasury "gets something out of the deal." The NWS continues. The only possible positive spin here is that the only purpose of this agreement was to get it in ahead of any HR 4560/Jumpstart language that could be included in an end-of-year spending bill. HR 4560 states that any agreements made between FHFA and Treasury after January 1, 2018 could not change NWS-type language established before that date, so Treasury and FHFA had to act quickly. The language in FHFA's statement is interesting. The words "contemplate" and "exigent circumstances" leave a lot of wiggle room, even though the letters themselves don't seem to.