allnatural

The number being floated today is $100b-$125b. $6b on the balance sheets today + 2 years of retained earnings gets you $50b. Leaving $45-70b needed in a capital raise. How many capital raises do you think it will take to achieve that? Petrobras raised $70b in one shot (offering was actually oversubscribed!) and thats a much worst business. At an attractive enough valuation that capital raise will get swooped in one shot. even if his analysis is off base, his conclusion on timing might not be, unfortunately. after reading tim rood's twitter commentary yesterday about involving congress, I'm guessing the early feedback from investors is that raising ~$100bn+ is going to be harder than some expected without a congressional foundation. In theory this issue could be somewhat addressed if FnF exit conservatorship in advance or in conjunction with the first potential large capital raise, but I'm not sure if this is logistically possible. disagree. assuming that treasury sometime this month issues a plan that calls for a recap and release of GSEs, then it will be done...painfully, with great difficulty, probably at lower issue price than moelis blueprint assumes etc, but it will begin once FHFA sets capital target. now when it ends I wouldn't care to predict, but it will start with deliberate speed, assuming treasury issues the plan that I think it will, and Calabria starts working and stops talking EDIT: there is inertia to overcome and many investors will have doubts. but once the ball starts rolling, there will be increasing momentum, not least of which is massive fees for Wall Street. from start to finish, this will be a deal of the decade for Wall Street, and assuming we don't go into a recession and that stock market doesn't tank, this will get done the main risk, imo, is that multiple capital raises would be needed. that means the first tranche of investors are exposed to what you describe - an economic or market shock that could derail the completion of the project and leave them in conservatorship much longer than planned. thus, the first new investors would require imo a deal they couldn't refuse, which possibly means either a very low investment price and/or the gov't giving up both the sr pref and perhaps a good bit of option value. it would be easier if the capital requirement was say 50bn in total and in theory they could get out of conservatorship soon after the first and only equity raise.

There is regulatory risk investing in any industry today. At an attractive enough valuation, investors will be willing to underwrite that low probability risk that congress wakes up one day in 5-10 years and decides to alter the charters in some manner. But it all comes back to one conclusion, which is the same reason they havent been able to do anything for the last decade. T I N A Once the recap and release is up and running and the companies are fully capitalized in 2 years, which congressman dare want to risk upsetting the housing market? We will be at the point of no return. No one will want to touch this issue. Its political suicide.

Amazing how clueless some people are

Calabria speech from today: https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-HUD-and-NAHBs-Innovative-Housing-Showcase.aspx "So, I will be taking administrative action where I can. And I will be consulting with Congress, the Administration, and other regulators wherever necessary. "

Your starting point should be 80% dilution (assuming gov exercises its warrants).. then work from there. There are ~5.6b FNMA shares before IPO. I get to 90-95% dilution with IPO raise depending on cap requirements.

Someone must have sent him Calabrias transcripts from the last 2 weeks and he is repeating it as a scoop

Full disclosure i'm still >95% in pfds. I just think the common MAY be interesting here. I'm assuming jr pfds convert at whatever the IPO price ends up being. So in a 50/50 conversion where you get half in new pfds and half in new common, the math works out that you get .5 new shares of a new $25 pfd share w/ market rate coupon, and in the case of a ~$7 IPO, ~1.78x shares of new common, for a total package of $25/shr (PAR).

Pun was intended 8) Careful now.

If (big IF) the capital requirement lines up w/ FHFA's recent proposal pre-Calabria. I have common value at IPO of ~$9 if they win the Collins case (and they receive a $20-25b tax credit), and ~$7 without. This factors in 90-92% dilution (full warrant monetization, 50% of jr pfd converting to new common, and new capital via ipo), 2 years of retained earnings adjusted for commitment fee, and discounting the IPO valuation to 7.5x p/e to entice new investors. Risk is Calabria wants more capital than the original proposal, common could get smoked with 95-98% dilution. But that would go against best interest of a) raising new private capital (# might be too large, I have it now at ~$60-$80b required via IPO) and b) maximizing treasury's warrant value. Common isnt a horrible bet here if you believe common sense will prevail.

Mnuchin full quote from hearing this morning: "I think a lot can be done administratively, we're working on that, we're also working on a report for the President. But I would also encourage there is an opportunity for congress on a bipartisan basis to make some significant reforms. These were not entities that were intended to be under government control forever and funded by taxpayer money forever so I hope that Congress would look at this with us but if not we will do things administratively ... this is a priority of ours." “Our fundamental view is that there should be risk capital in front the government’s money. And whether that’s a government guarantee on securities or treasury line, fundamentally there should be private risk capital that supports a a liquid 30 year mortgage market.”

MBS gaurentee requires congress and is wish list item. Moelis's solution can be seen as compromise while still earning income into perpetuity for taxpayers w/ little to zero risk (if they overcapitalize the GSEs w/ 3%+ of capital).

Moelis calls for converting the existing $250 credit line into a last resort catastrophic $250b back stop standing behind $150-$200b of first loss capital. It also envisions the government getting paid a market rate for that backstop (perpetuity income stream of ~$3-5b/yr). This may all be accomplished administratively via HERA as it is a modification to the current senior pfds arrangement. It's the credit wrapper around MBS that requires legislation (paid-for guarantee). Not any financial backstop. The current backstop can continue since it has been congressionally appropriated in HERA. I guess it can be modified. But if it is terminated at some point (and I think Treasury will want this) a new backstop will have to come from Congress I did not think about that... how about the ole' commitment fee for the remaining of the current backstop? Will they let that die? No backstop at all?

https://gsesafetyandsoundness.com/

Not that I would recommend the commons, but there is a creative way you can create it for free. Pershing square (PSHZF) trades at ~30% discount to nav (all time high) and has a ~10% GSEs position (20% pfds & 80% common). You can buy PSHZF and short out all the the individual pieces ex GSEs (he only has 8-10 liquid positions) or hedge his book against SPY. Voila, free common exposure (you are actually getting paid to own the GSEs at current discount levels). Ackman is also up 40% ytd fwiw.

That's amazing i always assumed Ackman had $40pt bc of zero warrant excercise. $300b in value for government, he really is in lala land! Even at $150b warrant value which is what he claims today thats $20/shr per his valuation.

Ackmans original $40pt assumed that the government would simply do the right thing and forfeit their 80% warrants. No chance.

He also mentioned working with wall street on this because they are very smart people.

From the event he spoke at yesterday. He discusses it after the first question on the GSEs. "@CraigPhillipsDC talking about GSE ($FNMA& $FMCC) reform from 29:30-33:23... vimeo.com/336717859" where is this quote from? link to article/report?

I think this is first time anyone in admin has admitted theyve been fully paid back on GSEs bailout (and more)... Phillips from yesterday.. Claims taxpayer IRR is up to 12%.. Easy to write off senior pfds when you share that view. https://pbs.twimg.com/media/D6yMjFSW0AgFxoT.png:large

If everything goes according to the timeline laid out, we wont hear decision until back half of 2020. Court doc attached... Thank you Luke. I was using my mobile phone when I pasted Glen's twit, and it was hard to attach the pdf from the phone. What's the timeline for this? I'd expect the en banc to come out way ahead of this trial right?

>50% of my portfolio... All pfds... i dont know exact probabilities but market is continuing to price in >50% chance this is a zero vs Par... that continues to be a mispricing as I see it. Common has too many unknown variables to make an educated guess from where i sit. They may be the sacrificial lamb in the whole process. And the more capital required the heavier the dilution (potential for >99% dilution is on the table). 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?

Politico confirmed Phillips "recently wrapped up more than 60 meetings with stakeholders" and "will stay until the completion of the Treasury Housing Reform Plan." Seems like his role has come to an end.

My understanding is his job was to help come up with details for the plan while Mnuchin was working on other things. The plan is being delivered to the White House next month... and he is stepping down next month... as his job is completed and he has nothing left to do at that point. Additionally, the guy is rumored going back to work on wallstreet... ahead of the IPO. Interesting.

Treasury beginning to line up w/ Calabria. @KatyODonnell_ Craig Phillips, Treasury counselor, on GSEs this morning: “The current state is the worst possible state. We can preserve the system and reform it – we want to get Fannie and Freddie out of conservatorship, and we want to use private capital to do that.” *PHILLIPS: WE WANT TO GET FANNIE-FREDDIE OUT OF CONSERVATORSHIP *PHILLIPS: WE'VE HAD WORKING SESSIONS ON RECAPITALIZING GSES *PHILLIPS: CALABRIA'S PLAN FOR GSES FOOTPRINT HAS BEEN DISCUSSED *TREASURY'S CRAIG PHILLIPS SAYS COMPETITION WOULD BE GOOD

I never understood the argument that if shareholders lose Collins, pfd shareholders would have to take a haircut. As much as pfd shareholders need the government to signoff on this, the government needs them more. Is the us government really going to hold up the biggest ipo of the decade which is in their best interests (monetize ~$100b + get taxpayers off the hook) for an extra ~$5b of value that they may be able to extract from shareholders (whom are going to be the participants of the new recap...)? Never made sense to me. Pfds are a small piece of the pie, but unless treated fairly, the admin plan goes nowhere without pfd shareholders signing off on it. That's a position of power if you ask me! More likely result of losing the Collins case is potentially the GSEs not getting the ~$20b+ of tax credits for the overpayments that plaintiffs are asking for in remedy in addition to writing down the senior pfds.