Midas79

Page A-6, Section 7(b) (partial): It appears a forced conversion would be inconsistent with the first sentence in section 3(d). And we already know that the major preferred holders are willing to fight for their contractual rights in court, so a "we're going to do this anyway, see you in court" stance by the government is unlikely. Update to this post: I looked at the circulars for the Freddie Mac preferreds for this kind of language. FMCKJ Circular Page A-8, Section 8(h) (partial): I checked several series (FMCKJ, FMCKO, FMCKM) and never found any language about not allowing a forced conversion like we saw in FNMAS. It appears the only protection Freddie Mac preferred holders have against forced conversion is the last quoted sentence, which is hard to enforce. Freddie Mac's board could easily argue that a forced conversion is in the best interests of the preferred holders because it would allow for a recap without having to get 2/3 of every series to agree. Does anyone else know of any material differences between the preferred stock of Fannie Mae and Freddie Mac? I can't say that I've read the circulars closely enough to spot any others: I was specifically looking for this forced conversion difference.

Reversal would add a trump (no pun intended) card to Mnuchin's hand: he could invoke the non-severability clause (6.12) in the SPSPA and unwind the entire thing. This has been mentioned on this board before. Mnuchin might need the reversal first so he has the unilateral authority he needs. It would have to be rare for the defendants in a case to suddenly argue in favor of the plaintiffs though. Would Brown/Ginsburg/Millett get suspicious and pore over the case even more, or just go along with it and be glad they don't have to deal with it anymore?

Tim Howard also assumes that the GSEs will have their own custom capital requirement and not be lumped in with the big banks. A 10% requirement for the GSEs would make a full recap basically impossible.

If it only involves deleting one sentence it's possible. But I agree that large changes this late in the quarter are unlikely. I'm not going to panic or even be disheartened if the language about the dividends is in the 10-Q.

Having read the offering circulars for Fannie Mae preferreds, I don't see how a forced conversion can happen at all. FNMAS circular: http://www.fanniemae.com/resources/file/ir/pdf/stock-info/series_s_12062007.pdf Page A-5, Section 3(d): Page A-6, Section 7(b) (partial): It appears a forced conversion would be inconsistent with the first sentence in section 3(d). And we already know that the major preferred holders are willing to fight for their contractual rights in court, so a "we're going to do this anyway, see you in court" stance by the government is unlikely.

By "catch up" I meant using the strike as part of the conversion ratio. $25 par divided by $10 gives the 2.5 ratio in your post on the previous page. I had assumed that you got the $10 from the hypothetical new strike price on the warrant. Apologies if that's not what you meant. Under the (admittedly unrealistic) assumption that Berkowitz could sell any quantity of his holdings in FNMAS for current market prices, he could get 2.45 shares of FNMA for each share of FNMAS. He has chosen to stay entirely in the preferreds. The preferreds offer contractual rights and much more certainty than the commons. I just think the deal would have to be sweetened considerably given that your conversion ratio is achievable in the market right now. As an aside, if the government could force a conversion I think they would have done so by now. That would neuter many of the lawsuits that rely on breach of contract claims.

Thanks for that. I brought it up because I saw the core capital listed in the 10-K as including (junior) preferred par value of $19B. I'm not quite sure what "trading price of pref is 85%" means. Is it the then-current market price of preferreds would be 85% of par (FNMAS is trading at 21.25) preferreds would be offered conversion based on 85% of their par values, or something else? When it comes down to it, I don't own nearly enough shares to actually influence the 2/3 voting of any preferred series. I'm just trying to think of what Berkowitz, et al. would want.

I don't see any reason to believe that the commons would "catch up" to any set strike price. The only purpose of raising the strike price is to recap FnF in a way that doesn't make it obvious that the government is giving back the dividend overpayments. The commons could very well rise because the warrants would finally be gone, but it would take more certainty about the future of the capital structure to have the shares really take off. I got a ratio of 7:1 by looking at the current stock price. The par to common price ratio is about 6:1 right now but I would want a better deal due to the preferred dividends having been off for so long. Edit: put it this way: I could get about 2.25 shares of common for each $25 preferred share right now. If I really wanted to convert to common around that ratio I'd just do it myself.

One thing to note is that a preferred-to-common conversion, or any other amendment to the terms of the preferred contracts, would require the approval of 2/3 of the (share-weighted) holders for each series. To get that sort of approval you would need a much higher ratio than 2.5. I know that I would personally want at least 7 commons per $25 par preferred share to even consider it. And that would be only after the exercise or cancellation of the warrants. If the warrants were to still be outstanding at the time of conversion I would hold out for 35 shares per $25 preferred. This would essentially wipe out the current commons. I would imagine that most people who invested in preferreds chose them over the commons because of safety, mostly due to contractual protection and the lawsuits seeking to enforce it. Those holders would need extremely attractive terms to agree to conversion and would want even more certainty than I would, i.e. warrants are resolved, recapitalization plan in place, reasonable assurance of no near-term secondary common offering, etc. Please correct me if I'm wrong on this, but I believe the (junior) preferreds count as core capital towards a capital requirement, so conversion to common would require $19B more to be raised, a complete nonstarter in my opinion.

My account got approved! 8) I also have my investment accounts with Fidelity, an individual and an IRA. I only use the phone app for trading and only use the desktop site when I have to. Aside: message like good faith violations, etc, only show up on the desktop site and not in the app. I made a rookie mistake and triggered a 90-day settled-cash-only trade restriction due to multiple good faith violations in short order, but I didn't find out until it was too late because I never logged into the desktop site. No more jumping back and forth between preferred series for a while for me.... :( I tried to buy some FNMAH on the app a few months ago and got a message saying that that symbol wasn't available to buy, limited to closing trades only or some such. After a call to the Fidelity rep I found out why: they don't let anyone (even then-President Obama to quote the rep) buy variable-rate preferreds. So if you're trying to buy FNMAS, FNMAH, FMCKJ, etc. hopefully this explains why you're having trouble. I own some commons but mostly preferreds. I started in the low yielders because they were trading at the biggest discount to par: FNMAL, FNMAG, FNMAN. A few weeks ago I started to migrate to the mid yielders: FMCKL, FMCKO, and last week I added on some FNMAJ. I now have about 20% low yielders, 60% mid, 20% FNMAJ. I downloaded historical price data from NASDAQ's website and ran a linear regression using dividend yield as the explanatory variable and the average percentage of par each series traded at between Feb 20, 2008 and Jun 30, 2008 as the dependent variable. I got (% of par) = 25.65 + 9.284 * (div yield) where div yield is in percentage points (i.e. 7.625 for FNMAJ, not 0.07625). The r^2 value was 0.922. According to this, at least as of a few weeks ago, FNMAJ and FMCKL were the best bargains while FNMAL and FNMAT were the worst. I also ran a linear regression using div yield to explain average % of par for Dec 2016 and got r^2 = 0.9240. This tells me that the market seems to mostly assume that dividends will get turned back on rather than entire series of shares being redeemed at par. That's the main reason I started switching out of the low yielders.