DRValue

Mentioning Chainlink once more as Mainnet version 1.0 goes live May 30th. This project is probably the most important in crypto.

I'm pretty insensitive to price, given the range of outcomes. I'll have to pay a higher price as uncertainty is resolved, but the risk/reward should only improve. That's funny, as I'm sensitive to price given the range of outcomes! :) Really? If FNMA is $9-18 next year, I'll wish I'd have added today whether the shares were $2 or $4. Yup, and so will I but I feel more downside protection with an average price at $1.40 and don't want to push it up too high.

Good questions, I dont have IB (which I believe is the most flexible on OTC stuff) and my broker has balked at some stuff in the past. I will find out now. I think you should short commons

@orthopa Can you go short commons?

I'm pretty insensitive to price, given the range of outcomes. I'll have to pay a higher price as uncertainty is resolved, but the risk/reward should only improve. That's funny, as I'm sensitive to price given the range of outcomes! :)

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common. If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing. Anyone adding to their position with the recent news? Or waiting for something more "sure" - a court decision, an endorsed plan, etc.? (Count me in the second group - still a speculative position for me.) I will, but at lower prices. I can't decide what will happen here, if the recap is formally announced that would add upward pressure, but if the timeline is too long that could add downward pressure. So the answer is, erm, maybe!

@orthopa I doubt moelis can present plans to and work with treasury and then change the terms at the last minute. They had to sell it to govt to make treasury the maximum return. Presenting something too beneficial to juniors would dilute treasury too much and risk not being taken up. Then again, who says it's moelis

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. The moelis plan is brought by preferred holders so a large chunk of them are presumably ok with the conversion price.

"Junior preferred conversion" It's moelis isn't it. I mean it is though, isn't it.

Seconded. Twitter must be verified!

I've considered something similar but not in that level of detail. Very interesting idea!

Yup there's risk alright.

@Midas79 Nothing personal I know . Its good to hear opposing views and get a little bit of balance. I did think last night about the pref conversion impacting income to common and you make a good point. There's no doubt it would impact income projections and share count but I'm not sure it's a show stopper. @orthopa You're rationale for owning prefs is very similar to my own and why I bought them originally years ago. The contract and known value are key. I do see the business as having some duty to common in a capital raise as that is who they are working for. To me it's not like these are start-ups losing money and they're going begging. Fannie will likely have 23b in capital imo and be earning 11b a year. If the companies push the timeline back for capital the more strength they have negotiating with new money. They can get this done without a capital raise if they had to, but the regulator would need to agree the timeline. A pref conversion would be beneficial to income as well. Hopefully I'm right but if only half right ($9) I'll still be celebrating. GLTA (especially me )

I don't think so as he projected the warrant valuation as an incentive for treasury to allow his recap. Would need to see his share counts too as a bit fuzzy on that.

@Midas79 Moelis use a price / earnings multiple where I discount the earnings so slightly different. My earnings are the average of moelis projections and actuals combined growing at roe rate * by retained earnings (70pct) at 80pct confidence. That does produce a higher p/e technically if you want to divide the market cap by the share count, yes. But valuations vary. Ackman had them up to 40 doesn't he? My valuation would say he's wildly over pricing them. Thinking about the investors demanding 2/3 stake. If Fannie retains 33b over 3 years, gets 20b from treasury and capital required is 87b why should they get 2/3s of earnings if they provide 40pct of the capital (34b)? I see the pref conversion differently. I don't see how pref conversion failing impacts a common raise Can we agree the common value will be somewhere between 0.75 and 19 a share? :)

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. I'll respond to your numbered points. But first to clarify my valuation is based on a moelis share count and my conservative discounted earnings (less than moelis). It's not in front of me but its something like 19 a share. In any case there's plenty of dilution possible before we go to below 1.40. I just see more potential at this point than in prefs. [*]Covered above. [*]methodology above doesn't rely on 10pct projections [*]calabria has said capital raise earliest h1 next year. And the process could take over 2 years. Then again he's said a lot of things. [*]I'd argue the ratio right now won't be the ratio when reform is settled and recap officially commences. Won't the conversion be an offer by the company to pref holders? They can take it or leave it. Management should take common shareholders into account. [*]partly addressed above but agree the number will be what it will be. Big difference between 1.40. What does buffet say about being roughly right rather than precisely wrong? I'm not sure the regulator would permit the companies to repurchase warrants while in conservatorship. [*]in my pref hedge I only assume par. I'd be happy with a pref getting more in that respect. So summarizing there's a big enough difference between my buy price and maximum valuation for me to be comfortable plus an 80pct shareholder that wants to maximise their return and a regulator who seems comfortable with the companies plotting their own path for capital. I want to buy more but I don't want to pay over $2.50. Put me in the optimist camp.

Link to Trump Live at NAR:

Newb legal question; If the prefs are redeemed prior to the Lamberth trial, would you still have a claim? Assuming it's not settled.

recap mechanics should trip you up since no one knows what the hell is coming. this board is a bunch of wild and crazy guys who are into the least speculative bet you can make in this name. which is junior prefs, but still plenty speculative. but then, ahab, you are a hunter for the big whale.... The more I think of the common the more I like them. I'm heavy in them but hedged with prefs. I've been looking for decent investments for years and they seldom come along so when they do I have to go big. I'm looking for a home run so commons have to be involved for me. Some see this as a risky investment but the way I've always seen it is that these are two of the best businesses in the world in an unsustainable position not of their making. Eventually it'll work out. Or I'll go back to work... How big is "big," DR? And how do you see the (commons) outcome? X% chance of X% loss, X% chance of no change, X% chance of X% gain? Anyone? About 60% of my portfolio. All my common exposure is hedged with prefs and my average common cost is $1.40, I dipped in at $1 in January as i couldn't believe the price was falling as it was all getting more positive. 0% chance of total loss. I cant give a % chance of gain as the way i work is based on having a massive margin of safety between what it could be worth and where i buy in, the idea being you can be wrong but still make money. But my current base case is based on Moelis, so around $18 a share.

Agree. One thing I would say though is that it'll probably work out somewhere between the optimistic and pessimistic valuation.

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. If Fannie has a market cap of 165b and common is diluted 92% they're still worth $9. If the company and Treasury are sensible with the capital raise then the company can push back to investors that actually they don't need to raise cash they could just earn their way out of it. I'd prefer that but I don't expect it as treasury will likely want it's cash asap. It's possible to be too pessimistic is what I'm saying.

I think regarding the prefs this statement is accurate. But perhaps not so much with the common. Long-term, after dilution, I will strongly consider buying common but to me that is a better bet once the companies are operating normally again, with the prefs being a better bet now. I've noticed as well that Calabria's timeline indicates a capital raise about a year from today in first half of next year. This ties in with the moelis plan of announcing the companies will be released and then raising capital. Also, assuming the government exercise the warrants they're then incentived to limit dilution to maximise their gains. Both positive for commons.

recap mechanics should trip you up since no one knows what the hell is coming. this board is a bunch of wild and crazy guys who are into the least speculative bet you can make in this name. which is junior prefs, but still plenty speculative. but then, ahab, you are a hunter for the big whale.... The more I think of the common the more I like them. I'm heavy in them but hedged with prefs. I've been looking for decent investments for years and they seldom come along so when they do I have to go big. I'm looking for a home run so commons have to be involved for me. Some see this as a risky investment but the way I've always seen it is that these are two of the best businesses in the world in an unsustainable position not of their making. Eventually it'll work out. Or I'll go back to work...

what's FUD? if this just means that congress doesn't do anything, and having heard that calabria considers himself obligated to restore capital, dont you think this makes institutional investors have fewer rather than more questions in the capital raising process? Fear, Uncertainty, and Doubt. A value investors best friend, you love it when you see it.

I was very happy after I got through the clock bait headline as I took it to mean that congress won't pass anything major. To me it says admin recap with little congress input. Buying more today. Seriously concentrated here, lol.