FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[Gregmal]

I think we're re-litigating old points, and at this point you're either in or out. We're days away from the end after all this time, going over this again won't get us any closer to being right. But remember, you can't screw shareholders with the left hand and then ask for money with the right hand.

 

Yes you can, as long as the shareholders you screwed and the new shareholders are different. It happens all the time.

 

Yea, it happens all the time. Just wipe it out and then re-issue it with a favorable valuation. Will be oversubscribed as well.

[DRValue]

I think we're re-litigating old points, and at this point you're either in or out. We're days away from the end after all this time, going over this again won't get us any closer to being right. But remember, you can't screw shareholders with the left hand and then ask for money with the right hand.

 

Yes you can, as long as the shareholders you screwed and the new shareholders are different. It happens all the time.

 

Fair point. They've already been screwed anyway. If this was all done legally though, meaning no unnecessary warrants, no accounting fraud, no sweep and no overpriced prefs, shareholders would've taken a hit but not screwed imo. So that particular scenario is outside the norm.

 

Man the government really worked the companies over. Makes you sick.

[Midas79]

If existing shareholders are screwed, would you want to be a new shareholder?

 

If I'm the one doing the screwing, obviously yes.

 

As a matter of principle your argument seems valid, but when I dig into the specifics I see a much different picture. The ones who truly got screwed here are those who held in 2008 and those who held in 2012, regardless of it they sold since then. The conservatorship and NWS were both blindside attacks, devastating whoever held shares at the time. On the other hand, right now we know that the companies need to raise a lot of money quickly, and that new common shares is a key part of that. Can you truly say that a hurricane "screws" someone who sees it on the radar and decides not to evacuate?

 

The argument of "who says the government can't do another conservatorship/NWS?" also fails because those events already happened and cannot be undone. There can never be a guarantee that something similar will never happen again. This argument won't keep the new money away entirely, it will just drive the IPO price down even more to compensate the new buyers for that risk.

 

If your idea of "making shareholders whole" involves a payout to only those who currently held shares, you're paying off those who bought recently and shafting those who were hit by the conservatorship or NWS and sold (especially those who were forced to sell). I see this far too often: clamoring for "justice" but then also invoking the "everything travels with the shares" argument. The first is a moral claim, the second legal, and they actually conflict with each other. Conflating the two is what leads to this particular cognitive dissonance.

 

Put it this way: what do you think it would take for current shareholders to not feel screwed? And why would that make the new buyers feel better enough to overcome the fact that they are getting a smaller stake in FnF?

 

Diluting the commons into the ground (with a $0.25 IPO price) while getting the prefs to par can also be twisted around as promoting justice: the (preferred) shareholders were made whole! Dilution is always a threat to a common shareholder.

[Midas79]

On a side note, the correlation between % of par and dividend rate has almost completely collapsed. Whoever is buying the prefs is doing so only with an eye for par value. Right now you can buy FNMAG for $16.00, or FNMAT for $8.10. Even FNMAS is down in the $8.50s. Insanity.

 

The "smart money" appears to be banking on a resolution that awards something based on total par value, either cash or a conversion. They seem to highly doubt that the dividends will ever be turned back on.

 

I had always thought that one possible resolution involved converting some or all of the juniors at a rate of par + X years of dividends, to compensate the big money holders who predominately own the high-div series. However, it appears that the market is pretty heavily discounting that possibility.

[Guest cherzeca]

the only attempt that I have seen to sketch out a recap is moelis blueprint, and one can assume this is a baseline of acceptability for the "non-litigating" shareholders who paid for it (Paulson, Blackstone etc).  one may speculate that the litigating shareholders do not have a lower baseline.

 

I am not aware that treasury has hired another banking firm to do a response, though that may be in the offing.  moelis blueprint has the benefit of being reasonably fair and feasible...using AIG's recap as an example.

 

we can speculate about alternative scenarios, but it certainly did seem that fhfa's capital release tied very closely to the moelis blueprint (3.25% v 3.24%) and, to the extent otting knew what he was talking about, he too seemed to be consistent with moelis blueprint. 

 

[DRValue]

If existing shareholders are screwed, would you want to be a new shareholder?

 

If I'm the one doing the screwing, obviously yes.

 

As a matter of principle your argument seems valid, but when I dig into the specifics I see a much different picture. The ones who truly got screwed here are those who held in 2008 and those who held in 2012, regardless of it they sold since then. The conservatorship and NWS were both blindside attacks, devastating whoever held shares at the time. On the other hand, right now we know that the companies need to raise a lot of money quickly, and that new common shares is a key part of that. Can you truly say that a hurricane "screws" someone who sees it on the radar and decides not to evacuate?

 

The argument of "who says the government can't do another conservatorship/NWS?" also fails because those events already happened and cannot be undone. There can never be a guarantee that something similar will never happen again. This argument won't keep the new money away entirely, it will just drive the IPO price down even more to compensate the new buyers for that risk.

 

If your idea of "making shareholders whole" involves a payout to only those who currently held shares, you're paying off those who bought recently and shafting those who were hit by the conservatorship or NWS and sold (especially those who were forced to sell). I see this far too often: clamoring for "justice" but then also invoking the "everything travels with the shares" argument. The first is a moral claim, the second legal, and they actually conflict with each other. Conflating the two is what leads to this particular cognitive dissonance.

 

Put it this way: what do you think it would take for current shareholders to not feel screwed? And why would that make the new buyers feel better enough to overcome the fact that they are getting a smaller stake in FnF?

 

Diluting the commons into the ground (with a $0.25 IPO price) while getting the prefs to par can also be twisted around as promoting justice: the (preferred) shareholders were made whole! Dilution is always a threat to a common shareholder.

 

I actually agree with your points, especially regarding this potentially happening again as when this is all over, assuming a good outcome I'm considering buying the new preferred and it bothers me.

 

But I guess this is a question of nuance.

 

If treasury say today that the nws is over and they can retain earnings and will be released, what price do commons go to? $3, $5, 15x earnings? What's the dynamic for a capital raise then? 20pct discount to the new share price?

 

That makes me think the dilution won't be too bad. Commons are still screwed compared to 2006 shares outstanding but the cause of that is illegal government action and unnecessary warrant issuance.

 

A "Fair" treatment in that scenario to me is the govt keeping the warrants but the "existing" shareholders not going to effectively 0.

 

You've got me relitigating now!

[Luke 532]

New -- Otting responds to Maxine Waters, Sherrod Brown: “As we begin the journey of evaluating the Enterprises and developing a framework for ending conservatorship, I would welcome your insight and perspective." Doesn't get specific re plan.

[Guest cherzeca]

New -- Otting responds to Maxine Waters, Sherrod Brown: “As we begin the journey of evaluating the Enterprises and developing a framework for ending conservatorship, I would welcome your insight and perspective." Doesn't get specific re plan.

 

I wonder if the framework will be different than a (moelis) blueprint. 

[rros]

New -- Otting responds to Maxine Waters, Sherrod Brown: “As we begin the journey of evaluating the Enterprises and developing a framework for ending conservatorship, I would welcome your insight and perspective." Doesn't get specific re plan.

 

I wonder if the framework will be different than a blueprint.

More emphasis on affordable housing goals?

[Midas79]

Has anyone here actually seen Otting's letter yet? I'm sure it's nothing groundbreaking, but I'm having a very hard time trying to find it. I would like to read it for myself.

[orthopa]

If existing shareholders are screwed, would you want to be a new shareholder?

 

If I'm the one doing the screwing, obviously yes.

 

As a matter of principle your argument seems valid, but when I dig into the specifics I see a much different picture. The ones who truly got screwed here are those who held in 2008 and those who held in 2012, regardless of it they sold since then. The conservatorship and NWS were both blindside attacks, devastating whoever held shares at the time. On the other hand, right now we know that the companies need to raise a lot of money quickly, and that new common shares is a key part of that. Can you truly say that a hurricane "screws" someone who sees it on the radar and decides not to evacuate?

 

The argument of "who says the government can't do another conservatorship/NWS?" also fails because those events already happened and cannot be undone. There can never be a guarantee that something similar will never happen again. This argument won't keep the new money away entirely, it will just drive the IPO price down even more to compensate the new buyers for that risk.

 

If your idea of "making shareholders whole" involves a payout to only those who currently held shares, you're paying off those who bought recently and shafting those who were hit by the conservatorship or NWS and sold (especially those who were forced to sell). I see this far too often: clamoring for "justice" but then also invoking the "everything travels with the shares" argument. The first is a moral claim, the second legal, and they actually conflict with each other. Conflating the two is what leads to this particular cognitive dissonance.

 

Put it this way: what do you think it would take for current shareholders to not feel screwed? And why would that make the new buyers feel better enough to overcome the fact that they are getting a smaller stake in FnF?

 

Diluting the commons into the ground (with a $0.25 IPO price) while getting the prefs to par can also be twisted around as promoting justice: the (preferred) shareholders were made whole! Dilution is always a threat to a common shareholder.

 

I think the hurricane analogy is a great one. Discuss this topic with any fanatic common shareholder and they for some reason believe a wrong will be righted and warrants cancelled yada yada and although that lottery type outcome is very very unlikely to happen they believe very strongly in that thesis. Lottery's are stupid but some people cant stop thinking about the exponential returns. Midas has shown multiple times over how common can just get eviscerated and can have a pound of fleshed pulled from all parties involved, jr prfd, gov, and new money. 

 

I remember back in 2016 ish there was some discussion on the board about the connection with Paulson, Trump, Mnuchin, One West, now Otting etc. There was some legitimate debate about the connections there and investing upon that thesis alone. Say what you want but that has been the most accurate thesis to date.

 

That being said Paulson owns preferred. Own the preferred. Terms will be most favorable for the preferred. If it was going to work out best for the common, he would own the common. He is the most informed person in this entire trade outside of the administration. Even at these prices you can get ~3x your money on most preferred. Is that not enough? Is the allure of 10x or whatever of the common worth a zero?

 

[orthopa]

If existing shareholders are screwed, would you want to be a new shareholder?

 

If I'm the one doing the screwing, obviously yes.

 

As a matter of principle your argument seems valid, but when I dig into the specifics I see a much different picture. The ones who truly got screwed here are those who held in 2008 and those who held in 2012, regardless of it they sold since then. The conservatorship and NWS were both blindside attacks, devastating whoever held shares at the time. On the other hand, right now we know that the companies need to raise a lot of money quickly, and that new common shares is a key part of that. Can you truly say that a hurricane "screws" someone who sees it on the radar and decides not to evacuate?

 

The argument of "who says the government can't do another conservatorship/NWS?" also fails because those events already happened and cannot be undone. There can never be a guarantee that something similar will never happen again. This argument won't keep the new money away entirely, it will just drive the IPO price down even more to compensate the new buyers for that risk.

 

If your idea of "making shareholders whole" involves a payout to only those who currently held shares, you're paying off those who bought recently and shafting those who were hit by the conservatorship or NWS and sold (especially those who were forced to sell). I see this far too often: clamoring for "justice" but then also invoking the "everything travels with the shares" argument. The first is a moral claim, the second legal, and they actually conflict with each other. Conflating the two is what leads to this particular cognitive dissonance.

 

Put it this way: what do you think it would take for current shareholders to not feel screwed? And why would that make the new buyers feel better enough to overcome the fact that they are getting a smaller stake in FnF?

 

Diluting the commons into the ground (with a $0.25 IPO price) while getting the prefs to par can also be twisted around as promoting justice: the (preferred) shareholders were made whole! Dilution is always a threat to a common shareholder.

 

I actually agree with your points, especially regarding this potentially happening again as when this is all over, assuming a good outcome I'm considering buying the new preferred and it bothers me.

 

But I guess this is a question of nuance.

 

If treasury say today that the nws is over and they can retain earnings and will be released, what price do commons go to? $3, $5, 15x earnings? What's the dynamic for a capital raise then? 20pct discount to the new share price?

 

That makes me think the dilution won't be too bad. Commons are still screwed compared to 2006 shares outstanding but the cause of that is illegal government action and unnecessary warrant issuance.

 

A "Fair" treatment in that scenario to me is the govt keeping the warrants but the "existing" shareholders not going to effectively 0.

 

You've got me relitigating now!

 

I think most common holders think that the day the NWS is over and capital is retained that the price will sky rocket and that will allow a quick out for huge profit. I guess my fear would be what if the day the NWS is declared over a comprehensive recap plan comes out similar to what Midas has described and the common is quickly found out by the market to be worth pennies with future or assumed capital raises prices etc. Hell even if its worth $2 a share at todays prices you lost.

 

Im not as fluid on the mechanics of what may happen as Midas but the same day relief is given it maybe taken away from the common with extreme projected dilution via a plan.

 

Is this not possible?

[Midas79]

I think most common holders think that the day the NWS is over and capital is retained that the price will sky rocket and that will allow a quick out for huge profit. I guess my fear would be what if the day the NWS is declared over a comprehensive recap plan comes out similar to what Midas has described and the common is quickly found out by the market to be worth pennies with future or assumed capital raises prices etc. Hell even if its worth $2 a share at todays prices you lost.

 

It seems that, like me, you spend too much time on iHub.  8)

It is impossible to convince anyone there that the commons actually have downside from here via a low offering price, following an appropriately-sized reverse split. Then again, I think that the prefs have around zero downside from here too, but there must some be because otherwise they would be priced higher.

 

Contrary to all the "price will spike when the NWS is ended!" posts, I don't see any way that the administration would announce an end to the NWS without announcing everything else, including at least some mechanics of the capital raise.

 

As for the $2 part, the commons lose relative to the prefs if they come out anywhere south of about $7 (assuming all prefs go to par), and that's without a conversion. 25 / 8.64 = 2.89 (FNMAS closed at $8.64 today so they have a factor of 2.89 to gain to get to par), 2.35 * 2.89 = 6.77 (FNMA closed at 2.35 today, so the breakeven point is FNMA at $6.77). Using other series can get the point even higher: with FNMAM as a reference the breakeven point for FNMA is $7.58. That means the $6.77 is the lowest breakeven point possible. Of course those on iHub think $20 is a "conservative" estimate, but there is never any logic behind it.

[Guest cherzeca]

common may make more short term sense if you think an event will occur in the short term, simply because it is not capped like the prefs at par.  so while there are good financial/risk analysis reasons why you should prefer the prefs over common, the common having "blue sky" appreciation potential may lead to a higher rate of appreciation in connection with that event which, even if unwarranted, would provide a selling opportunity

[DRValue]

Ackman owns common and hedged with preferred. Icahn owned common, but afaik we don't know if he holds now.

 

I'm not looking for warrant cancellation. I would assume on the moelis plan that they have at least spoken to investors about the issue price and capital raise mechanics before publishing.

 

If this was a normal situation and businesses of this quality went to the market, and the market had certainty and confidence, then the common price would be much higher. A capital raise in that scenario wouldn't mean enormous losses for the common.

 

For businesses of this quality I just can't shake the prospect of asymmetric returns. And even then i still have plenty of profit from my preferred position. As the prospects of recap and release went up, the common price went down. Couldn't resist.

 

[Wiggins]

Letter from Otting to Maxine Waters:

 

Bullet point #2 discusses need to maintain adequate capital, which likely indicates the intention or announcement to allow capital build soon.  And the last sentence discusses developing framework for ending conservatorship and invites Congress to take part. I see the invitation as not necessarily a requirement to have House involvement before work is done. Curious what others think, but I would predict ending the NWS and also announcing a plan to end conservatorship. Ending the NWS could be attached with details to soften opposition, such as a concurrent announcement to increase Treasury's liquidation preference, and the announcement to end conservatorship will likely be vague on details.

The letter also talks a lot about the need to follow the law, which is interesting given Calabria's prior statements that the NWS is illegal. It also would dovetail nicely with an en banc win, which would be huge cover for Otting/Calabria to get this done.

 

[Cox022]

Otting's letter looks like he is outlining all the authority FHFA has and he has as director.  No mention of congress.  At the end, he merely said, paraphrasing, 'I intend to accomplish the FHFA's mission.  As we develop a framework to end conservatorship, I welcome your insight and perspective.'

 

 

I dont like reading too much into things, so those are just merely observations.

[Luke 532]

Otting's letter looks like he is outlining all the authority FHFA has and he has as director.  No mention of congress.  At the end, he merely said, paraphrasing, 'I intend to accomplish the FHFA's mission.  As we develop a framework to end conservatorship, I welcome your insight and perspective.'

 

 

I dont like reading too much into things, so those are just merely observations.

 

It seems he is clearly stating who is in charge and who is essentially along for the ride. 

[allnatural]

+1

 

That's how I read it.

 

Otting's letter looks like he is outlining all the authority FHFA has and he has as director.  No mention of congress.  At the end, he merely said, paraphrasing, 'I intend to accomplish the FHFA's mission.  As we develop a framework to end conservatorship, I welcome your insight and perspective.'

 

 

I dont like reading too much into things, so those are just merely observations.

 

It seems he is clearly stating who is in charge and who is essentially along for the ride.

[Guest cherzeca]

lots of fhfa duties and mandate language; no reference to the word, "may"

[rros]

Imaging how different Watt's response would have been.

[Guest cherzeca]

Imaging how different Watt's response would have been.

 

watt would have said, hey babe, it's up to you

[allnatural]

We already know what Watt's response once, he continuously reiterated that its up to CONGRESS to complete housing finance reform, not FHFA. Otting's commentary is complete 180 if you want to compare the two.

 

Imaging how different Watt's response would have been.

[rros]

Imaging how different Watt's response would have been.

 

watt would have said, hey babe, it's up to you

Exactly. Otting's may have been eyebrow-raising to the dems. 

[hardincap]

the last sentence indicates otting is backpedaling a bit.

 

btw - investorsunite conf call now now https://investorsunite.org/investorsunite-teleconference/