COBFInfinity

P.S. As I mentioned a few weeks back, I think it's CRAZY that the various preferred series that have floating rates sub 0.50% right now are trading at such modest discounts to the fixed rate preferreds. Absent a settlement with plaintiffs that requires an exchange offer on those series at comparable terms to the other series (which I no longer think is very likely), there is no economic argument for the GSEs to retire those. Post-recap, with dividends turned on, what will they trade at? Maybe 50-60% of par? Seems like a really bad bet to me vs. swapping into fixed rates.

Maybe, maybe not. I've never been willing to pay up for that feature as I'm not sure it does any better in an exchange offer than, say, FNMAG. FNMAG has a 5.38% dividend and trades 5% less in par value and 18% less in market price. Perhaps there are scenarios where FNMAS comes out better than FNMAG, but I just don't see it being worth that premium.

Your view appears to be that existing preferreds will be called with proceeds of new preferred sales. I think this is very wrong for three very simple reasons. First: The capital rule strongly encourages increasing common equity capital over preferred, so it makes sense to transfer preferred capital to common capital bucket. Second: Since preferred has lower value in reaching capital targets, total preferred outstanding is likely to be lower post-recap than it is today. If true, your view means that additional common equity needs to be sold to redeem preferred stock. Why would the GSE's want to add additional amounts to raise in the market when they could just do an exchange? Third: A couple of the largest preferred issues are not callable at will. For example, FNMA Series S (FNMAS) has a 7.75% dividend and can only be called every 5 years on 12/31. Today was a potential call date - the next won't be until 12/31/2025. This is a huge $7 billion issue and FNMA has no intention to every start paying 7.75% on these again. So unless these call dates magically align with other recap timing, they need to be removed from the capital structure well before dividends are turned back on.

I agree with Orthopa that preferred exchange makes no sense at the end of recap. It may not be at the start, but that just means the middle, not the end. I'm not sure why the investment bankers' desire to get paid should influence how fast the GSE's raise capital. I'm sure they're persuasive, but GSE management needs to make those decisions.

P.S. on the warrants. While they have value unexercised, no one knows exactly what it is. If Mnuchin exercises them, they will have transparent value and future Treasury will look bad if they act in a manner to cause the investment to drop in price.

WB_fans82, I've disagreed with you on a few points, but I am coming around to your comments a few weeks back, that Mnuchin will not write down the Sr Pfd. If he wanted to do that, he would have settled the lawsuits. To do it outside of settlement shows no benefit to Tsy investment and opens him up to criticism, maybe even legal challenges (though he would be gone by then). I also don't think Sr Pfd gets converted to equity, because then Tsy owns more than 80% of common and then all the GSE debt goes on U.S. Gov balance sheet and I don't think Mnuchin wants that to be his legacy. So I think your idea of just officially ending the NWS and changing Sr Pfd to non-cumulative is a clean route to take. The question is how do they make sure it gets paid off at some point? Seems like the two options are a high dividend rate that would be desirable to replace with fresh capital or have it convertible into common (assuming that doesn't trigger the 80% ownership if it is at an out-of-the-money strike price). In order to count as capital, it has to be perpetual, so there can't be a mandatory conversion or specified paydown periods. The problem in my mind with this type of solution has always been that it doesn't make the lawsuits "go away", as Calabria once implied. But thinking through my balance sheet analysis (if I can call it that) crystallized that, as long as the NWS is ended, it isn't THAT big of a deal whether the Sr Pfd is written down, because most of that writedown will accrue to the Tsy warrant value anyway. So while we certainly would like to recapture the excessive payments Tsy received, it's not a deal killer if we don't. It will take longer, but it can still get done. So obviously we all wait for SCOTUS opinion, but if shareholders lose, I think it is possible that plaintiffs throw in the towel on litigation so that the recap can begin. Even if shareholders win, they will want a settlement a lot more than Tsy, so in the interest of time value and getting the recap moving, they would probably accept a fraction of what they hoped for. So I am feeling a little more bullish despite my concerns about Mnuchin. I think the PSPA amendment might have a lot fewer moving parts than many people have imagined, but it can work. The one thing I don't see mentioned much is that the warrants either need to be exercised or amended to remove the dilution clause that Tsy retains 79.9% of common even after a capital raise, which is such an obvious recap killer that I think we just take for granted that it will be changed. But does Tsy expect compensation for that? Assuming this is kind of what happens with Mnuchin's "framework", the final big question for Jr pfds is: when will common stock pay a dividend? If they decide that's the way to go to attract more capital on the first common raise, then Jr Pfds (possibly barring those with minuscule yields) likely get exchanged into common somewhat before that. Based on current timelines, that's probably less than a year out (pretty easy way to get rid of the lawsuits, too). If common stock will not pay a dividend for a while, then Jr Pfd have years to go before reaching par.

Even without knowing anything about the GSE conservatorship, you should know this is obviously false. FDIC absolutely has to act in its own interest because it is on the hook to cover insured deposits of an insolvent bank. So the FDIC has discretion to take actions that will minimize the potential for it to lose money, even if it may be less favorable for the bank's creditors. I'm curious what act(s) you think the FHFA did that was "in its own interests" anyway. Quite the opposite of the FDIC, FHFA had no money at risk in the GSE's - it was Treasury that had all of the economic exposure. Is FHFA empowered to act in the interests of Treasury as opposed to its statutory purpose of conserving assets of the GSE's? Hmm...I think there are some lawsuits about that.

how do you think collins is decided? 1) remand (win) on APA and no backwards relief on constitutional 2) immediate relief on constitutional 3) loss on both then I would think about 80% of par (+-), less a 1-2 year discount at your preferred time value of money I thought the question is what are they worth on January 21 with SCOTUS still up in the air and no administrative action. I would guess about 25% of par.

You're ignoring all the clues we've received in the last two years, starting with Joseph Otting saying in January 2019 that Calabria had "signed off" on the White House's reform plan. While all the details were not clear at the time and viewpoints may have changed, I do believe that Mnuchin and Calabria were on the same page as to whatever the plan was. A few months later, Calabria said he thought the lawsuits would "go away" based on whatever changes would occur based on this plan. So you've just laid out a scenario in which the lawsuits definitely do not go away. Therefore, it does not match the plan they have alluded to many times. This would seem to imply two possibilities. 1) The plan changed and we can not rely on prior comments by Mnuchin and Calabria. 2) Mnuchin and Calabria were lying about their intentions all along. Given that either of these possibilities should result in you having no confidence in what Mnuchin and Calabria will do, your view doesn't make much sense to me.

I've been pondering the question of how does Mnuchin justify writing down any of the Senior Preferred without blowback. I'm sure someone else has had these thoughts long ago (investment banking types), but maybe it is easier than I thought to justify a significant, though partial, writedown that is backed by the economics. The following is a very simple balance sheet perspective (i.e., not going to get me a job as an investment banker). Imagine a perpetual scenario with Sr Pfd/NWS (not hard to do, right?) The capital structure is impacted as follows: *Jr Pfd is wiped out *Common stock (and importantly, warrants) is wiped out Now imagine a scenario where the Sr Pfd is paid off and the companies are recapitalized: *All decreases in Sr Pfd accrue dollar for dollar to Jr Pfd until Jr Pfd is worth par *Then, all decreases in Sr Pfd accrue dollar for dollar to Common stock *79.9% of Common stock value accrues to Treasury warrants So let's look at Fannie Mae as of 9/30: *$138 B Sr Pfd *$19.13 B Jr Pfd, but currently worth $0 *Common Stock, worth $0 *Tsy Warrants, worth $0 *Total Value of Tsy investments, $138 B Now we'll look at a scenario where the Sr Pfd is written down to $0: *$0 Sr Pfd *$19.13 B Jr Pfd, worth $19.13 *Common Stock, worth $118.87 *Tsy Warrants, worth $95.096 *Total Value of Tsy investments, $95.096 B Now, Tsy is going to say it is not going to give up value for nothing, so FNMA issues a new Sr Pfd to Tsy at no cost, par value of $42.904 B and a market-based coupon (which should be very low). Result is an end to NWS and a substantial reduction in Sr Pfd, but Tsy's investment is, on paper, unchanged. Yet, the GSEs now have a path to recapitalization without settling the lawsuits or admitting there was ever a problem with the NWS. As Calabria said, maybe the lawsuits just "go away" at that point. As I said, this is too simple to just move around balance sheet numbers, but I can imagine the GSE investment bankers being tasked with estimating the value of the common stock in fully recapitalized entities and then Tsy uses those as offsets to write down some of the Sr Pfd. They could reasonably come close to my scenario if they wanted to (hint, hint). Alright, someone poke holes in this.

Does it really matter where Mnuchin is? Everything could be wrapped up, but they might wait for a specific date to actually release the news. Not sure if it matters where Mnuchin is at that point, as long as he's still alive. And yes, I have worried about whether Mnuchin or Calabria dies before a PSPA amendment! Thats true but if this goes through when he is in the middle east it may look a little weird. It is 2020 though so who knows! I have thought about the death angle but thank god for lackeys below. I have no idea who the lackeys are or whether they would sign off.

Does it really matter where Mnuchin is? Everything could be wrapped up, but they might wait for a specific date to actually release the news. Not sure if it matters where Mnuchin is at that point, as long as he's still alive. And yes, I have worried about whether Mnuchin or Calabria dies before a PSPA amendment!

The GSE endgame has had some parallels to Avengers: Endgame for me. AVENGERS TIMELINE 1. April 23, 2018; Avengers: Infinity War --> Stephen Strange: "We're in the Endgame now." 2. April 26, 2019; we wait a year to get the first "Big Bang" in Avengers: Endgame. These are my current feelings and fears. NATASHA ROMANOFF: This is gonna work, Steve. STEVE ROGERS: I know it will. Cause I don't know what I'm going to do if it doesn't. 3. A few minutes later, Act I ends. Their plan didn't work. Transition to Act II reads, "FIVE YEARS LATER." ****** Comparable GSE TIMELINE? 1. May 8, 2019; GSE Endgame signaled --> Bloomberg reports "He (Calabria) brushed off concerns about the legality of Treasury’s net-worth sweep, which is the focus of legal challenges. “I think that if we can get them out of conservatorship and then we can set a path, I think a lot of those issues will go away,” he said. 2. December 2020; PSPA Amendment? 3. Five years later? :-\

Maybe if you don't care how many years it takes. I care how many years it takes to get my preferred to par value. I also don't see any outside capital being raised for a very long time in this scenario. Mnuchin says he wants outside capital. Your argument is that he doesn't care whether that happens in 2021 or 2031. Possible, but makes no practical sense,

Maybe if you don't care how many years it takes. I care how many years it takes to get my preferred to par value.

It is probably correct that nothing has changed about Mnuchin/Calabria plan. But our guess of what that plan is keeps changing. Since we don't know, the price goes low. I disagree. Until this article, Mnuchin has been on record stating they are deliberating on the issue. Then these statements appear from a late in the day interview in the article - he would have known it will end up on the front page of the WSJ. Puzzling but definitely a negative coming from him (alternative being silence). WHY? Did talks breakdown? Was a decision to punt reached with concern for impact on the financial system? What changed for him to give these statements? Mr Market letting prices freefall along with volume indicate some are getting the message. Look at the actual quotes from Mnuchin in the article. He doesn't say he's not going to do act at all. He just "suggests" that there won't be a consent decree ending the conservatorship. So I don't actually know that his plan has changed. If you gave me two options right now: 1) consent decree with Snr Pfd outstanding or 2) no consent decree with Snr Pfd written off, I'd choose option 2 and assume the GSEs will be released at some point. The market seems to be giving a lot of weight to 3) no consent decree and no Snr Pfd. If that happens, then we are fools for having believed anything he said for 4 years.

It is probably correct that nothing has changed about Mnuchin/Calabria plan. But our guess of what that plan is keeps changing. Since we don't know, the price goes low.

My weak buy setup got nullified by the end of yesterday. Surprised to see the big gap down today. Trump has far more urgent things to worry about than releasing FnF, and if the Supreme Court can rule the Texas vs PA case like that, it can cover its eyes on FnF scandal as well. Lol, you show up after a long absence with a buy signal and support for a fascist coup. The next day after a big drop, you're look, "Just kidding - there was no buy signal. Still dig that fascist coup, though." Please go back and read my prior post. I said I showed up again because after May 2019, I finally got another buy setup, but it is really weak and I am not taking it. You seem to be a Biden supporter. Is that true? I am surprised to see any Democrats believing in law and order for FnF while covering their eyes for all the lawless things that Obama has done over the years. ;) I oppose the theft of the Net Worth Sweep AND I oppose the acts of a career criminal fascist. This is only hard to comprehend if you support the career criminal fascist.

My weak buy setup got nullified by the end of yesterday. Surprised to see the big gap down today. Trump has far more urgent things to worry about than releasing FnF, and if the Supreme Court can rule the Texas vs PA case like that, it can cover its eyes on FnF scandal as well. Lol, you show up after a long absence with a buy signal and support for a fascist coup. The next day after a big drop, you're look, "Just kidding - there was no buy signal. Still dig that fascist coup, though."

I wish Mnuchin would stop talking and just do something, whatever it is. However, my general take is this: Four years ago, Mnuchin arrived on the scene and said, "I'm the quarterback, I'm going to get this done." Today, he says, "I'm the punter, it's not my problem."

Some theoretical possibilities: - Plaintiffs were asking too much pre-SCOTUS hearing (i.e. the full boat, sr pref write down Plus overage) due to over-confidence - He doesn't intend to settle. Rather enter into a PSPA amendment with Calabria outside of legal world - Good public policy for SCOTUS to decide on FHFA head constitutionality even if PSPA amendment meets Collins' demands re: NWS and sr pref - He thinks trump might still win Or, more pessimistically, he plans to do nothing on Sr pref between now and jan20. Thanks for the thoughts. - Were there any actual negotiations where plaintiffs asked for anything? I expect none of us on this board calling for par value is actually Bruce Berkowitz. -But this gets to my concern that no settlement might mean he is willing to let the lawsuits play out, meaning he may not be interested in putting his thumb on the scale enough to write down the Sr Pfd. -Not sure that Mnuchin would care much about FHFA structure constitutionality. -Assuming for a moment that Mnuchin thinks Trump might succeed in stealing the election, why does that make him want SCOTUS case to go forward?

What is underneath my concerns is that I can't figure out why Mnuchin wanted the SCOTUS hearing to occur, then come out and say he's likely to do a PSPA amendment. Was it just to add political cover so that he could write down Sr Pfd? If so, do we actually believe he got that cover? Sure, tough questions were asked of the government, but they were asked of plaintiffs, too. And people like John Carney (him again) or still saying today that nothing has changed - shareholders will lose. So does anyone have a compelling logic as to why the SCOTUS hearing went forward if Mnuchin is going to give us what we want anyway? I'm at a loss.

Anything is possible. But I'd recommend reading footnote 30 of the August 2020 CBO report on recapitalizing the GSEs through Admin options. Also some of Craig Phillips' comments. of course, however, could act isn't the same as will act... Hey, we're all in the same boat hoping here, but I have reasonable doubt as to what will be executed. By far, the most tempting thing said by any of the major players over the past two years was Calabria saying that after the next PSPA amendment, the lawsuits will "go away". In our minds, we know that the lawsuits only go away if the Senior Preferred is written down (at least in part, if not in whole) and we know Calabria is a smart guy with smart people working for him, so we assume that he understood that. But is it possible he didn't? What if thought just ending the NWS without a Sr Pfd writedown was good enough to end the lawsuits? I think it's certainly possible that we have all read more into these bits and pieces than we should have. To be clear, I haven't sold a single share. I think there's a pretty good chance my Jr Pfd go to par in the next couple years. But if we're wrong, we are going to be holding this bag for many more years. Seems logical for a healthy discount to par. If there is a PSPA amendment that wipes out the Sr Pfd, I think the Jr Pfds go straight to 70% of par. That would still leave a discount for the uncertainty as to when Jr Pfd might get exchanged into common or the unlikely scenario where dividends are turned back on.

I don't know. There is a lot of uncertainty left here. Who remembers the General Growth bankruptcy? I bought some stock fairly late in the bankruptcy process, but by then the fog had cleared and it seemed pretty obvious that the equity was worth way more the market price. I think I made 300% in less than six months. I would argue the GSEs still have a lot more fog clouding their futures than GGP did when I bought it, so is it unreasonable for junior preferred to still have 200% upside? I bought into the GSEs because of the legal angle - it seemed so obvious that the NWS would be overturned. But I've been waiting for 6 years already and, as discussed here already, if we "win" in SCOTUS it will likely still mean a few more years in court. So without a PSPA amendment, I can't really say today's prices are wrong. And Mr. Market is obviously demanding action, not talk, out of Mnuchin. He's been talking now for 4 years and we've got little to show for it. He put out a lengthy Treasury plan and signed an interim agreement w/ FHFA to suspend the net worth sweep. He's going to sign the PSPA amendment and the market knows it. Ok, but's what's in the amendment? What if the NWS is ended, but the Senior Preferred isn't written down? If you are 100% sure what's going to happen, you have me beat by about 70%. Prices go down in this case. Lol, that explains why no one is paying more today, doesn't it?

I don't know. There is a lot of uncertainty left here. Who remembers the General Growth bankruptcy? I bought some stock fairly late in the bankruptcy process, but by then the fog had cleared and it seemed pretty obvious that the equity was worth way more the market price. I think I made 300% in less than six months. I would argue the GSEs still have a lot more fog clouding their futures than GGP did when I bought it, so is it unreasonable for junior preferred to still have 200% upside? I bought into the GSEs because of the legal angle - it seemed so obvious that the NWS would be overturned. But I've been waiting for 6 years already and, as discussed here already, if we "win" in SCOTUS it will likely still mean a few more years in court. So without a PSPA amendment, I can't really say today's prices are wrong. And Mr. Market is obviously demanding action, not talk, out of Mnuchin. He's been talking now for 4 years and we've got little to show for it. He put out a lengthy Treasury plan and signed an interim agreement w/ FHFA to suspend the net worth sweep. He's going to sign the PSPA amendment and the market knows it. Ok, but's what's in the amendment? What if the NWS is ended, but the Senior Preferred isn't written down? If you are 100% sure what's going to happen, you have me beat by about 70%.