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

[Guest cherzeca]

Phillips sounded very coherent, smart and reasonable.  I love that he made the 10%(11.5%) moment point on his own

[DRValue]

@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 )

[orthopa]

http://wallstreetonparade.com/2012/08/the-untold-story-of-the-bailout-of-citigroup/

 

Interesting read on the govts various TARP investments in Citi.

 

Some snippets.

 

"The government was going to guarantee a toxic asset pool at Citigroup up to $306 billion (later reduced to $301 billion). As a fee for this arrangement, Citigroup would give the government $7.059 billion in perpetual preferred shares, paying 8 percent annual dividends. And where would an insolvent bank get the funds to pay an 8 percent dividend; from another injection of $20 billion in cash from the government. The Fed also agreed to backstop residual risk in the asset pool through a non-recourse loan if necessary.

 

The Treasury was also to receive warrants to purchase 66,531,728 shares of common stock at a price of $10.61 per share. (Adjusting for the company’s 1 for 10 reverse stock split, Citigroup closed yesterday at $2.89 – a far distance from a warrant exercise price of $10.61.) "

 

 

 

 

"The Treasury and the Fed knew exactly whose interests they were protecting.  Just 11 months earlier, Citigroup had publicized a capital raising of $12.5 billion in convertible preferred stock in a private placement – meaning the full details were not released to the public.  The press release said the investors included Saudi Prince Alwaleed bin Talal and Sandy Weill and the Weill Family Foundation.

 

Following press articles that ran the details in February of 2009, on June 9, 2009, the U.S. Treasury agreed to swap its $25 billion of preferred stock for 7.7 billion shares of common.

 

Common stock ranks at the very bottom of the chain in terms of claims on the assets of a failed institution.  The government effectively put the taxpayer behind Citigroup’s creditors, bondholders, and its preferred stockholders. It gave up the taxpayers’ place in line as a preferred stock holder and sent the taxpayer to the back of the line. And, it gave up the 8 percent fixed income stream on the preferred. "

 

 

 

"But the plan to bail out the Saudi Prince, Sandy Weill and a select group of “private investors” is cryptically contained in this proxy statement dated June 18, 2009.

 

The private investors, who made their purchases on or around January 15, 2008 were going to be made whole on their $12.5 billion investment on or around March 18, 2009, despite the fact that Citigroup’s stock had fallen by 88 percent in that period of time. (Their preferred stock was convertible into common.)

 

I’ve been reading proxy statement for over 30 years.  I have never read a more convoluted, tangled web of unnecessary complexity to arrive at the clear destination: private wealthy individuals were being made whole.

 

Now I can guess the argument that the Treasury and the Fed would make.  Citigroup could no longer afford to pay either the government or the private investors the high fixed rate of interest on the preferred stock.  To induce these investors to convert to common, they needed an incentive – like being made whole. My argument would be that they would have been wiped out already in November of 2008 if the U.S. government had negotiated properly.

 

 

Certainly not apples to apples but has the tone of what I believe will happen.

[DRValue]

Yup there's risk alright.

[Ahab]

I've really been enjoying the board's commentary this week about commons v. preferreds. The investor in me says stick entirely to the preferreds, they are the safer side of an already incredibly speculative bet. The speculator in me: "Speculative you say? Wait hold my Beer!!"

So, I opened a stake in the commons on Friday (about 20% of my GSE position). My base case is that they are worth $9-12. I see far more dispersion of outcomes than with the preferred stock, but that is a risk I am wiling to take. Anyways, hope everyone has a nice weekend.

[allnatural]

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.

[Ahab]

This is a very creative idea. Thanks for sharing allnatural!

[DRValue]

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.

 

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

[Guest cherzeca]

@allnatural full marks and I think buying a simple SPY put with expiration of your target date for when you think the recap will actually begin should be good enough hedge as you say. Though if the fund discount doesn’t reverse it is a long run for a short slide. And that discount has been persistent in that name.

[muscleman]

@allnatural full marks and I think buying a simple SPY put with expiration of your target date for when you think the recap will actually begin should be good enough hedge as you say. Though if the fund discount doesn’t reverse it is a long run for a short slide. And that discount has been persistent in that name.

 

Agree. Closed end investment funds always tend to have discounts. We can't go over every single closed end fund and do this and claim we suddenly have free exposure to everything.

The core issue is that you can't do a redemption in kind. Otherwise you could do this and do a redemption in kind to redeem all the other securities to cover your short and get a free GSE long exposure.

[Guest cherzeca]

Status: each of Potus Calabria Phillips have said we’re gettIng GSEs out of C. All also think competition would be good but that requires congress and sen brown said he is not convinced this is necessary. Phillips who I was most uncertain of understands that we have hit by his math the 12% moment. Mnuchin has been otherwise engaged but he I worry least about.

 

Many issues to resolve such as capital level and not least can a massive capital raise be executed but I can’t remember a better situation for juniors (spits 3 times)

[Ahab]

https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-Bankers-Association-National-Secondary-Market-Conference-Expo-2019.aspx

 

To paraphrase President John F. Kennedy, the time to repair the roof is not in the middle of a downpour, but when the sun is shining.

Reform shouldn’t have to wait for the next crisis. Reform is about avoiding the next crisis.

And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital. At that point, the path out of the conservatorships will depend not on the calendar but on Fannie and Freddie meeting the mile markers we set out for them.

It was insufficient capital that triggered the conservatorship, and it’s going to be sufficient capital that triggers an exit.

I will continue to consult with Congress on legislative reforms. And I’m hopeful that we’ll be able to find broad bi-partisan agreement on some key issues, as we have in the past.

But while I’m committed to working with Congress, I’m not going to wait on Congress.

In fact, if you look at the statute, it contemplates an end to the conservatorships. The model is very similar model to how the FDIC operates. The law requires me to do what I can within my powers to fix the GSEs and then release them from conservatorship – and that’s exactly what I intend to do.

The FHFA conservatorship has lasted far longer than anyone expected. Back in 2008, as it was being debated and developed, I remember thinking that any conservatorship was unlikely to last more than 6 months.

It has now been more than a decade. And while leaving Fannie and Freddie in this state of limbo may be comfortable for some, it is unsustainable as a matter of economic policy and it is unfair to American taxpayers and families.

As a regulator, my primary concern is that the GSEs maintain capital levels commensurate with their risk profiles. And over time I think Fannie and Freddie ought to operate under essentially the same capital rules as other large financial institutions.

 

Areas of concern for shareholders: discussion of bank-like capital standards (yet he was speaking to the Mortgage Bankers Association after all), stating that 10 GSEs would be preferable to 2 because market competition is generally desirable (new congressional charters would be necessary).

[rros]

Is Calabria announcing that an announcement is coming where he will announce that some announcement will be made one day? Or are we on track with the motions?

[Ahab]

Couldn't have put it better myself. Personally, I think we are at the announcement of an announcement stage of the GSE reform plan  /s.

[SnarkyPuppy]

Did anyone catch Calabria on CNBC?

[DRValue]

Did anyone catch Calabria on CNBC?

 

Seconded. Twitter must be verified!

[SnarkyPuppy]

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria

 

wow

[DRValue]

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria

 

wow

 

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

[Guest cherzeca]

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria

 

wow

 

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

[/quote

If Calabria is talking to a reporter about par v conversion to common you know that is being discussed behind the scenes.

[Jcmeg35]

Seems pretty clear to me that Calabria, Mnuchin, Phillips have a plan in place that they want to execute on and are methodically letting out information in a continued stream. Each time one of them speaks they disclose a new tidbit of the plan, or expand on what has been said previously. While it is never a good idea to get too excited, each subsequent appearance/interview has info that overall is positive for preferred shareholders.

 

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria

 

wow

 

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

[/quote

If Calabria is talking to a reporter about par v conversion to common you know that is being discussed behind the scenes.

[Midas79]

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

 

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.

[SnarkyPuppy]

Seems pretty clear to me that Calabria, Mnuchin, Phillips have a plan in place that they want to execute on and are methodically letting out information in a continued stream. Each time one of them speaks they disclose a new tidbit of the plan, or expand on what has been said previously. While it is never a good idea to get too excited, each subsequent appearance/interview has info that overall is positive for preferred shareholders.

 

 

https://www.cnbc.com/video/2019/05/20/fhfa-chief-wont-wait-for-congress-to-take-frannie-and-freddie-public.html?&qsearchterm=mark%20calabria

 

wow

 

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

If Calabria is talking to a reporter about par v conversion to common you know that is being discussed behind the scenes.

 

Boiling frog'd

[SnarkyPuppy]

The reporters question on the stock did not have to include a response on conversion of jr pref at par.  Calabria brought that up on his own. 

[DRValue]

"Junior preferred conversion"

 

It's moelis isn't it. I mean it is though, isn't it.

 

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.

[BTShine]

For someone that's a casual observer, is there an easy place to learn what the Moelis plan recommended?  Any links to posts, blogs, etc?