Wiggins

If the same person is buying all of these large blocks and buying them from various sellers, then someone is accumulating. If one person is selling all of these large blocks to various buyers, then someone is liquidating. I'm not sure how you would be able to tell the difference by looking at the charts. It's also possible it's some combination of the two.

FnF's capital has nothing to do with the market price of the commons. There is also no guarantee of any price appreciation after said events, let alone enough to get the price above $4 for 30 days to re-list. For all the good news FnF shareholders got in the last 16 months, the price is around 40% lower than it was at the end of January 2019. A reverse split is the only realistic way to get an over-$4 share price to stick, and I fully expect it to happen later this year. Somewhere between 1:10 and 1:20 is my guess for now. Moelis 2.0 is completely unrealistic anyway. Why would junior pref shareholders sign up for a plan that involves them converting at a re-IPO price in the teens (a far worse ratio than they could get right now in the open market), and giving existing common holders a much greater return than the junior prefs themselves? OK, thanks for correcting me nicely. Stupidly confusing market cap with capital, to say the least.

The $19B of junior par value is already included in the $14B. That is, everything else that contributes to the $14B adds up to a combined negative $5B. Also, the refund from Treasury could come in the form of a tax credit. In that case, I believe that Fannie (and Freddie too, of course) would only add their tax savings to capital as they occur. It could very well take 5-6 years to earn all of that refund. The upshot is that if a capital raise is needed to hit a particular number then the full amount of the refund won't count, only the taxes they would have paid. At best I can see Fannie getting $2.5B of it back per year, and that would be on earnings of around $13B. Also, I think Fannie will make more than $6B this year ($10B imo) but for now I'll use your number. If the capital raise happens a year from now, adjusting your numbers for these things leaves a gap of $56B: your $27B plus the $19B of prefs and $10B of unearned tax credits. Another thing to keep in mind is that $81B is Fannie's risk-based capital requirement. For some reason I can't explain, Calabria decided on a minimum capital standard (he calls it the Leverage Capital Requirement) that's higher than the risk-based one: $89B. Now the gap is $64B if that's the milestone. Similar calculations give a gap of $42B between Freddie's current core capital (once the seniors are dealt with) and their minimum capital requirement of $63B: Freddie has $9B of current equity, $7B of earnings between now and the capital raise, and $5B of earned tax credits. So I'm getting core capital shortfalls of $64B for Fannie and $42B for Freddie, or $106B combined. This would have to be the size of the capital raise if it occurs a year from now and is designed to hit the minimum capital standard. Treasury returning the overpayments in cash instead of tax credits would lower each company's numbers by $10B, for a total capital raise size of $86B. Quick question: are you factoring in price appreciation of common after cancellation of SPS and re-list to NYSE? Moelis had commons in the range of $14-$17 after warrants and JPS conversion dilution. That adds a lot of Tier 1 capital over the current price of ~$2.20.

@Midas Yes I had seen your post about the Citi exchange and thanks for reposting the link to that. It was really an outstanding bit of research on your part. It was good to re-read. I will continue to monitor the commons. I went back and looked and noticed that in December 2018 the FNMAS:FNMA ratio was 7. It's now at 4.5

@Midas re: "why didn't you do the same thing at the end of 2019 as you did in 2018?" The conditions were different. In 2018 the securities had gone down a lot over the year, so there was selling pressure for tax-loss harvesting. Additionally, the commons were really, really low (too much, IMO). One or both went below $1. In 2019 they didn't really lose value over the whole year, so there were likely few losses to be booked by most people. And I don't think there's a lot of selling pressure otherwise because people are waiting for recap or a ruling catalyst, so they're staying in. I should make a distinction between this strategy and the one discussed in Graham's book. In The Intelligent Investor it talks about a strategy to buy stocks in December and sell them in January, regardless of any other factors. There were a few years where people made money but soon a lot of people caught on and overall the practice is roundly discredited. What I am talking about is integrating multiple other factors into the tax-balancing strategy that many people do at year's end already; it's really a distinct strategy. The securities have to be down a lot so that many people are likely wanting to harvest the losses (hence the selling pressure), AND the thesis has to be solid so that folks will get back in them in the new year (buying pressure). All those factors were solidly present in late 2018 for the commons to my thinking. As far as rotating between preferred and common according to a ratio like you're talking about, I guess I do that a little bit and the late 2018 was part of that (some of the funds I rolled into commons came from preferreds, while some other funds came from gains I was forced to book). But I don't employ it as a general strategy because I have no great predicting strategy for it and it seems rather arbitrary and random. Plus, the spreads on preferreds make it difficult. Speaking of spreads, if you were patient you possibly could make money off of buying and selling the preferreds and working the spreads, but I have neither patience nor time for that personally, even if I could make it work which I doubt I could. Lastly, I am worried for the commons that there could be a sudden announcement for conversion of preferreds into common, and it'd be unfortunate if you weren't holding preferreds at that time. Are you worried about that? And isn't that what happened with Citi?

I wish you guys and gals flipping this stuff the best of luck, but since there's a double -> triple at risk from any number of sources I just won't play that game. @Covid Both the common AND the preferred shares in GSEs are speculative investments. In fact, according to "The Intelligent Investor" virtually all stocks are speculative. Everyone's risk tolerance is different. I try not to waste everyone's time by posting all of my personal preferences and risk tolerances unless specifically asked.

https://taibbi.substack.com/p/the-bailout-miscalculation-that-could?r=5c7vv&utm_campaign=post&utm_medium=email&utm_source=copy old news to the informed readers here but it's nice to see Taibbi staying involved with this topic

@Midas I'm not in commons at all anymore because I think we are closer to the finish line and it's a bit risky. But like you, perhaps I will get back in a little bit if it stays favorable or becomes more favorable. My miracle trade (again, 99% luck, 1% skill) was in the fall of 2018 when I loaded up on commons. I then rode them from the low $1s to the high $3s where I sold most. The skill (if you can call it that), was my thesis on this trade based on reasoning for tax losses. At the time, the preferred and commons were significantly lower than they had been earlier in the year, and they were hitting new lows. I knew there would be a lot of selling pressure at tax loss season, which there was. I also thought that in January they would pop up because most people knew the thesis was still intact. For those who wished to harvest tax losses, they key is to do it a bit early (e.g. October or early November) and then buy back in BEFORE the end of the year. I had some tax loss harvesting on some of my positions and that's what I did. This way, you can harvest losses, sit out the required 30 days, but still buy back in before the pop in January. In fact, for those on this thread that are familiar with Benjamin Graham's epic book, he devotes a whole chapter to this strategy. I also lucked out because I was still sitting on that position when the Collins decision came out. Luck, luck, luck. By the way, I find it kind of annoying when people talk about the trade that worked out well after the fact. So, sorry for that as it's not my style. (the trick is to predict, lol!) I only tell the story because I was asked and also I thought some people here would find the tax-loss reasoning interesting, and again it's a Benjamin Graham feature.

thanks for the comments on this everyone (@Midas, @Covid, @cherzeca) @Midas, Thanks for your reply above. It makes a lot of sense to me. I actually have the same general strategy as you, owning mostly mid-range fixed dividend JPS, some 25s and some 50s. That has been my core position for years. I have also picked up FMCKJ and FNMAS along the way when they were low. I have wondered about my strategy on those two that I outlined above, so I'm glad to also have your well-reasoned perspective to add to my own. I have done very well trading in and out of commons (99% luck, 1% skill). @cherzeca I think the most important comments ever made on COBF are the ones that promulgate inclusivity of opinions over excessive stifling of marginal commentary. I know you support this.

Any other thoughts to my post from someone else? Maybe Cherzeca; i believe you said you own FNMAS. Is that just for the liquidity? thanks

The preferred shares have differing dividend rates and redemption terms and these differences may significantly affect the value of these securities as discussed below. Once the NWS goes away, if the GSEs want to clean up the capital structure, they may want to redeem or exchange some of the preferred shares. If they want to exchange them for common at par, or common or cash at some haircut to par, they will need consent from at least 2/3rd of the voters from each series. If they do not get consent, then for most of the series they will have the option to redeem for cash at par plus the quarterly dividend due in the quarter they are redeemed (regardless of whether the dividend is being paid or not). Here's how I see that potentially playing out: For the very-low variable-rate preferred securities (e.g. FMCCS, FMCCJ, FMCCM, FNMAO, FMCCL, FMCCG, FMCCI, FNMAP, FMCCN), there is no incentive to exchange or redeem, even at a haircut. Just turn on the dividends. The dividends are so low on these that they would be valued in the open market at perhaps 1/3rd of par. For all the other securities (except FNMAS and FMCKJ), if they cannot get a vote of 2/3rds of holders, then just redeem at par plus the quarterly dividend. They could refinance at lower rates. For FNMAS and FMCKJ, the GSEs can only redeem (without consent from shareholders) every five years. For FNMAS the next date is 12/31/2020 and for FMCKJ the next date is 12/31/2022. If the dividends are eventually turned back on, FNMAS and FMCKJ will hold more value because they can only be called on these dates. I would bet that after 1/1/2021 FNMAS will go up in value because it will not be redeemable until 12/31/2025, and I expect the GSEs to be released from conservatorship by then. Likewise if FMCKJ is not redeemed by 12/31/2022 then the next date is 12/31/2027. For the above reasons I believe FMCKJ and FNMAS are more valuable than the others. Thoughts? Note: there are other factors such as liquidity and Fannie vs Freddie, etc., which come in to play. But I am just focusing on significance of dividend and redemption terms.

LOL Ask the next tweet why they're not buying. "Ok, please write this guy than: https://twitter.com/SenSchumer/status/1245380988697481216" No thanks. If you're looking for market rationality with the GSEs good luck to you.

GSE shareholders are omnipresent on Twitter and elsewhere. They're viewed as enthusiastic sources of capital at this point, for companies that are bulwarks of the housing finance system. The tides have turned.

Been thinking about this for a while and WSJ had an article spurring the same thoughts: https://www.wsj.com/articles/ppp-loan-terms-amount-to-legalized-fraud-11587422730?mod=hp_opin_pos_2 "the Paycheck Protection Program ... will function as a handout to companies that don’t need it. Billions of ... dollars will never be paid back." Where's all the extra stimulus money going to go once it's clear the economy is coming back to life?

https://www.nhc.org/event/fhfa-to-discuss-covid-19s-impact-on-the-housing-finance-system/

It's clear receivership is off the table. The ACG Zoom call supports this. The housing conference that Metzner referenced is interesting (it was last October, I'll post link below). In that panel hosted by Jim Parrott, the consensus is that the enemies of the GSEs have lost. It's interesting to listen to Jeb Mason. He's a high-level investment advisor in D.C. and a housing specialist, and he's a total lightweight. It shows the idiocy of people that really don't know what the fuck they're talking about wanting to kill the GSEs. Jarod Bernstein is much more compelling. Now, the only real risk to Fannie/Freddie is an absolute Chernobyl-type meltdown of the economy, however, in this sense the situation reminds me of the old joke about a group of campers in the woods being attacked by a bear. You don't have to outrun the bear, you just can't be the slowest runner. Ginnie Mae and others are the slower runners. By the time the GSEs are in trouble everyone else is toast. Treasury and the Fed won't let this happen, so I feel good about where Fannie and Freddie are perched with their 700+ FICO scores. This provides a lot of safety. I'm holding for sure, and maybe adding. (Panel starts at 5:05:30, warning...this thing is boring as it's mostly a bunch of political drivel) https://www.urban.org/events/reimagining-housing-closing-equity-and-supply-gaps The serious risk to the housing market is a result of doing nothing and not having private capital in front of the taxpayer. The risk we are hearing about now relates to mortgage servicers and is manageable and frankly on them/Fed. The majority of what is being discussed relates to capital at FnF and the path to raising it. It does not involve housing policy or the housing market. Your conflating the two.

Thanks Luke. great notes

Perhaps MBA is getting some traction although much of this seems like an extension of what they've been kvetching about for days. I don't have a great sense of the political situation here; I'll admit that. I DO think we're very close to the inflection point for Covid-19. According to this model, that's coming far sooner than most anticipated. If you haven't checked it out yet, you may like it. It's updated every day, you can view different countries, the USA as a whole, or US state by state. If this is anywhere close to being true then it's fantastic news. http://covid19.healthdata.org/united-states-of-america

Hi Muscleman Great call last year. What say you now? Bullish, bearish? I bought on Monday and divulged my call yesterday to the group. Best all... Gloating over what amounts to a lucky guess is poor form. From what I remember, some of us didn't disagree with your conclusions but instead the methods used to come to them. There is nothing to suggest that your investing method produces reliable results. Perhaps you really do have a real alpha-generating system that the rest of us just don't understand. But one data point doesn't prove anything. I have been bullish all the time last year until the end of September, and you call it "one data point"? If that's your understanding of statistics, then I have nothing further to say. I don't believe a pure mechanical system such as one magical moving average crossing another can provide alpha. My analysis is based on the assumption that Mr. Market may have deeper knowledge than us and watching how Mr. Market reacts to major news may tip off what he thinks.

I did ask; thanks for answering. Selecting the hardest hit sectors (airlines, hotels) as representative of the entire economy is pretty absurd. Why not include ZM, NFLX, AMZN? My point is yes, some sectors are screwed for a while. I wouldn't own DAL right now either. But I believe the economy will be solidly on the upswing within 2 months. That's just what I think. I could be wrong. Thanks for your thoughts. Probably just look at petroleum industry to gauge disconnect. You think if it thought this pandemic would be resolved in 2-3 months, a barrel would be selling for $25? Probably not. Good luck and keep your hedges active. Ok. I'd argue but ok. May I interest you in a few hotel cumulative preferreds paying 20+ divi's than? I mean, all you have to do is wait out 2-3 months and you're golden, right? How about Warren selling his airlines near bottom? He would be doing the opposite if this was just a 2-3 month hiccup. Anyway, you asked and that is my answer. No one knows how long this madness will continue. But I will opine that it's going to last a lot longer then 2-3 months.

Not sure this is the best representative given OPEC and Russia's actions of late. They're reversing too little too late Probably just look at petroleum industry to gauge disconnect. You think if it thought this pandemic would be resolved in 2-3 months, a barrel would be selling for $25? Probably not. Good luck and keep your hedges active.

The role Fannie and Freddie play in a downturn is “not to bail out people in the industry,” he said. “Their countercyclical role is to provide mortgage credit, and I see no evidence that that is not happening.” https://www.wsj.com/articles/fannie-freddie-unlikely-to-aid-mortgage-companies-as-payments-dry-up-fhfa-chief-says-11586289067?shareToken=st0a8ee1e33baa4c79a6f7127c67fef349

chickens coming home to roost

I feel very bullish and hopefully it's not simply because I added yesterday and the JPS are up a lot today. My thinking is: Forbearance provides relief to mortgagers and massively reduces the probability of many defaults. GSEs thus get a lot of protection and yet bear little of the costs of this program (e.g. Rosner's "scheduled/scheduled" vs "active/active"). Much of the earlier selloff in JPS was justified, IMO, since we didn't know how Calabria or Congress was going to respond to this crisis. This would have been a golden opportunity to hobble the positive momentum of the GSEs. But it's now clear Calabria intends to protect the assets of the GSEs, and Congress has not slipped any jumpstart type language into relief bills as they could have. Calabria has confirmed recently his belief they will exit conservatorship as planned, perhaps slightly delayed. ACG which has made a lot of good calls in the last year or so remains bullish. Major stakeholders (e.g. Ackman) remain bullish. Holders of JPS are engaged in a largely binary trade: they will do very well if the GSEs survive and very poorly or be wiped out if they fail. So, how well the economy does and how long it takes to recover and other FUD is largely irrelevant. Actually it does contribute to timing, but the major factor is do they survive or not. Given what we know now, the GSEs are very likely to not only survive but thrive. This will become even more evident after Q1 results. Also, EIDL and PPP loans are going to be pumping billions into the economy. IMHO these latest factors are not very well priced in to the securities, so discounts are to be found. I think the sentiment will change with Q1 earnings release as more capital will be added to the balance sheets and the CEOs reiterate that companies will survive, thrive, etc. going forward despite the Coronavirus. Perhaps also we'll be over the hump of deaths and cases which will help dispel some of the FUD. I'm back to wanting the hear a disconfirming thesis, so I welcome those thoughts.

Why do you think this is a good thing? I see it the opposite. There is already a funding commitment from Treasury, and we know how that backstop works. If Calabria insists on going to Congress instead then this would entail Congressional legislation. I doubt that within this legislation there would be provisions to make shareholders whole or that it would somehow be neutral to shareholders which would be continued limbo. If Congress passes a bill, I think it likely shareholders are wiped out. In fact, Calabria has already stated that if they were bailed out again then shareholders would be wiped out. It worries me that Calabria doesn't just state the obvious that there is a funding commitment from Treasury already on the books so we're good. I've made a point to listen for that. In all 3 interviews/articles in the past 10 days he has said "Congress" or "Fed" and hasn't mentioned "Treasury." He is making a point by excluding them as even a possibility.