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

[investorG]

Occam razer suggests he was simply giving his clients a voice on workable terms and that his conversion comment was in response to calabrias CNBC interview. I wouldn’t read too much into it

 

perhaps he was simply standing up for his common shareholder clients to prevent excessive dilution.  but when he says the contractual rights of the preferred shares should be respected (but not favored over common shares), what specifically is he referring to?  if it's not conversion, then either dividends or some other agreement?

[Midas79]

Occam razer suggests he was simply giving his clients a voice on workable terms and that his conversion comment was in response to calabrias CNBC interview. I wouldn’t read too much into it

 

I can't agree here.

 

• A junior conversion doesn't have to disproportinately favor the juniors. Calabria only mentioned it in passing with no specifics about the terms. The Moelis plan involves a partial conversion but disproportinately favors the commons, for example.
  
• The timing doesn't make sense. Hume wrote that letter 50 days after Calabria's interview. Why wait that long?
  

[Luke 532]

 

but when he says the contractual rights of the preferred shares should be respected (but not favored over common shares), what specifically is he referring to?  if it's not conversion, then either dividends or some other agreement?

 

Honoring the par value. I think plaintiffs would agree in a heartbeat to par and nothing more. But if they win en banc they'd likely require more than par.

[investorG]

 

but when he says the contractual rights of the preferred shares should be respected (but not favored over common shares), what specifically is he referring to?  if it's not conversion, then either dividends or some other agreement?

 

Honoring the par value. I think plaintiffs would agree in a heartbeat to par and nothing more. But if they win en banc they'd likely require more than par.

 

how would they come up with $33bn for a par payment?  I doubt the govt is fronting that and FnF need more capital not less.  and hume doesn't want conversion.

[allnatural]

You can convert the current jr pfds to new immediately paying pfds w/ market rate coupon (3-4%) instead of 7-8%. So annual div drops from ~$2b to ~$1b which is easier to digest during a recap period.

 

Maybe attach some rights to it to participate in IPO.

[Luke 532]

You can convert the current jr pfds to new immediately paying pfds w/ market rate coupon (3-4%) instead of 7-8%. So annual div drops from ~$2b to ~$1b which is easier to digest during a recap period.

 

I'd agree to that (although my vote would be irrelevant) and more importantly I think the plaintiffs would, too. 

[investorG]

You can convert the current jr pfds to new immediately paying pfds w/ market rate coupon (3-4%) instead of 7-8%. So annual div drops from ~$2b to ~$1b which is easier to digest during a recap period.

 

that's interesting but those securities likely wouldn't trade @ par in the secondary market.  would probably need to raise a pile of private $ in perhaps a low/zero coupon convertible preferred with the proceeds used to redeem the existing jr pref and also possibly some of the govt warrants.  interesting thoughts but probably not where they or hume are focused now.

[WB_fan82]

re: prefs getting divs... guys, this isn't going to happen while we are in conservatorship.  Safety/soundness and conserving/preserving assets is not compatible with dividends.  Any NWS halt will follow that reasoning, so why would the public prefs get paid?

 

re: Hume, why not offer the preferred a rights offering to recap the common?

 

Govt currently owns $18B of value via the warrants.

 

Give the Jr prefs a rights offering to invest up to $30B.

The Govt via Sr. prefs invests $120B to keep its 80% ownership static.

 

Voila, $150B of capital raised.  The prefs as a class could easily find $1 of rights offering money for every $1 of par value and the govt has infinite pockets.

 

The only one getting screwed would be the diluted common holders.  One of the wrinkles here is people are annoyed by hedge funds making money, so the political optics of the common losing their shirts could be desirable.

 

This situation is so fun to follow.  There are many creative solutions available that haven't been discussed, b/c they would never be a conventional option in any kind of normal paradigm (which this is definitely not).

 

[orthopa]

re: prefs getting divs... guys, this isn't going to happen while we are in conservatorship.  Safety/soundness and conserving/preserving assets is not compatible with dividends.  Any NWS halt will follow that reasoning, so why would the public prefs get paid?

 

re: Hume, why not offer the preferred a rights offering to recap the common?

 

Govt currently owns $18B of value via the warrants.

 

Give the Jr prefs a rights offering to invest up to $30B.

The Govt via Sr. prefs invests $120B to keep its 80% ownership static.

 

Voila, $150B of capital raised.  The prefs as a class could easily find $1 of rights offering money for every $1 of par value and the govt has infinite pockets.

 

The only one getting screwed would be the diluted common holders.  One of the wrinkles here is people are annoyed by hedge funds making money, so the political optics of the common losing their shirts could be desirable.

 

This situation is so fun to follow.  There are many creative solutions available that haven't been discussed, b/c they would never be a conventional option in any kind of normal paradigm (which this is definitely not).

 

Well spill the beans. What are the possibilities you can think of? :D

[muscleman]

I'm going to add more commons and prefs aren't I?

 

@MM what's the bottom target in the next 4 weeks?

 

I don't see any sign of bottom yet. However I don't have much skills picking bottoms.

 

Looking at the chart since Jan 19, $2.50 looks like support to me. There aren't any catalysts until the plan late August unless something leaks, and the timeline has potentially been pushed out. Trading should probably follow the trend until more news. No idea where we end up if we breach $2.50.

I haven't the tools to see what a moving average would suggest. Any thoughts?

 

If you are not a TA expert, then you shouldn't try to do TA like this.

The bottom could happen at a previous bottom, or it could happen somewhere between that 2.5 bottom to the $14 top. (Some TA uses fibonacci levels to draw various lines between a major bottom to major top, which I think is voodoo.). Or it could happen below 2.5. Who knows.

The only thing I know is that a bottom will form when there are large buying forces, and we don't know it until we see large buying happening. I am not interested in studying bottom picking, and I haven't found many TAs who succeed in it. I once saw an interview with Paul Tutor Johns (Or maybe someone else. I am bad at names), who said journalists like to write sensational headlines like "Paul picked the Dow futures bottom within 2 ticks", but the reality is that he finally picked that bottom within 2 ticks, on the 6th try. His first 5 tries all got stopped out.

 

[orthopa]

I was never pissed by rude comments from them because I know sooner or later Mr market will slap people who are arrogant and think they are smarter than everyone else in the world.

 

Who exactly is it that is "arrogant and thinks they are smarter than everyone else in the world?" If you're going to make statements like that, name names.

 

Also, Mr. Market slaps everyone down at some point regardless of personalities or intentions. All your post boils down to is pure schadenfruede, gloating over having made one good move. I really thought you were better than this.

 

I don't have a good memory for names who taunted me. But I always remember people who helped me. Let me tell you who I respect the most in this thread. First is Chris. Second is Luke.  :)

 

Im late to this as was busy all day so not try to rehash....

 

I don't think people were intentionally taunting you but I think the issue people take up are one of a couple.

 

1. This is a news/event driven trade that really is probably the poorest technical choice I can think of in recent memory. One could wake up to a day like today stuck with a wide bid ask with no volume. No technical trader in their right mind would technically trade this. Seriously. If your a news/momentum trader I think your approach is reasonably consistent with that but lets face it. If you cant predict the future or even try (ie future price target, buy/sell level)as you say, have never mentioned support, MAs, indicators, oscillators etc your not a technical trader.......because that what technical trading is.

 

2. Obviously this is a FA website but this investment isnt about fundamentals in the true sense of valuing a company regarding earnings, multiple etc. This is a news/event driven investment. That meaning the other people in this thread are in the SAME exact boat as you regarding news flow. You get it when/Me, Luke, Midas, Chris, beaufort, hardincap, InvestorG, and ahab get it. That being said any conclusion you make is an opinion and that alone unless you part of FHFA, the treasury and the white house. Your interpretation or guess worked out recently congrats. But it was just that, a guess and to draw conclusions otherwise I think upsets people when its presented as an absolute, especially when referring in hindsight, I mean how easy is that?

 

3. I think everyone except for maybe you is in this for the long haul ie the end. That being either the day the preferred trades at or near par, the common is at a satisfactory price and one hits the sell button, or equal or greater value is given for what is held. I think people do value the discussion and in an investment like this that's all you can really do...talk about what happens.  People become incredulous when someone says they "knew", because face it, no one knows.

 

I don't have an issue with you at all and I used to trade technically for a while so I respect/believe some points but lets face it. To trade on tweets, feelings, wishes, guesses etc is a little nuts, especially with whats at stake for both sides and the information that they could put out, the incentives for both and the fact that EVERYONE is in the dark. Maybe this wasn't necessary to explain but this is a frustrating investment for nearly all of those involved.

[orthopa]

I'm going to add more commons and prefs aren't I?

 

@MM what's the bottom target in the next 4 weeks?

 

I don't see any sign of bottom yet. However I don't have much skills picking bottoms.

 

Looking at the chart since Jan 19, $2.50 looks like support to me. There aren't any catalysts until the plan late August unless something leaks, and the timeline has potentially been pushed out. Trading should probably follow the trend until more news. No idea where we end up if we breach $2.50.

I haven't the tools to see what a moving average would suggest. Any thoughts?

 

If you are not a TA expert, then you shouldn't try to do TA like this.

The bottom could happen at a previous bottom, or it could happen somewhere between that 2.5 bottom to the $14 top. (Some TA uses fibonacci levels to draw various lines between a major bottom to major top, which I think is voodoo.). Or it could happen below 2.5. Who knows.

The only thing I know is that a bottom will form when there are large buying forces, and we don't know it until we see large buying happening. I am not interested in studying bottom picking, and I haven't found many TAs who succeed in it. I once saw an interview with Paul Tutor Johns (Or maybe someone else. I am bad at names), who said journalists like to write sensational headlines like "Paul picked the Dow futures bottom within 2 ticks", but the reality is that he finally picked that bottom within 2 ticks, on the 6th try. His first 5 tries all got stopped out.

 

I believe what we have been seeing for the past week or so is a lot people getting stopped out which IMO is ludicrous. Having a stop on an investment like this only shows lack of conviction which is the antithesis of what you need to even look at this investment.

 

So large buying forces like when the price goes up? I mean honestly would'nt we all know the bottom is in at that point?

[muscleman]

orthopa and others, I think I'll give up trying to help.

As Buffet said, for value investing, either people get it instantly, or you can keep talking about it for the rest of your life, and people won't get it.

I think the same applies to other styles of investing, or trading, if you want to label it that way.

 

I have been quietly lurking this thread for many years, wondering what I can contribute. I finally thought I could be helpful earlier this year, but all I got was disbelief and people taunting at me. I think Buffet is right on this aspect. Time to stop wasting you FA experts time and distraction on my little

voodoo.

 

[james22]

... this is a frustrating investment for nearly all of those involved.

 

Has been. But I've turned the corner.

 

This situation is so fun to follow.

 

Might as well be entertained. I'm paying for it.

[SnarkyPuppy]

Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb):

 

I think one of the more likely options is:

-The plan is done (Phillips left) and the govt is waiting for en banc decision.  For this to be the case, the govt plan would have to differ from a reversal decision en banc.  Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally.  How can this be viewed as anything other than negative?

 

The other two likely alternatives:

- Someone on the inside is a roadblock.  Either Calabria or Kudlow.  Both have spoken favorably towards shareholders in the past but at the same time would wipe us out in a heartbeat.  Both seem to lack a sense of realistic constraints - but nonetheless this presents an issue in moving to the next step.  I think it's unlikely Calabria is the problem - why signal so strongly off the bat? 

- Bankers when pressed to begin working on IPO mechanics expressed hesitation on execution risk - and one way of reducing that risk is to retain earnings and build a buffer for a couple of years + giving congress time to act prior to IPO

[investorG]

Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb):

 

I think one of the more likely options is:

-The plan is done (Phillips left) and the govt is waiting for en banc decision.  For this to be the case, the govt plan would have to differ from a reversal decision en banc.  Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally.  How can this be viewed as anything other than negative?

 

The other two likely alternatives:

- Someone on the inside is a roadblock.  Either Calabria or Kudlow.  Both have spoken favorably towards shareholders in the past but at the same time would wipe us out in a heartbeat.  Both seem to lack a sense of realistic constraints - but nonetheless this presents an issue in moving to the next step.  I think it's unlikely Calabria is the problem - why signal so strongly off the bat? 

- Bankers when pressed to begin working on IPO mechanics expressed hesitation on execution risk - and one way of reducing that risk is to retain earnings and build a buffer for a couple of years + giving congress time to act prior to IPO

 

I choose your scenario 3.  likely either kudlow/trump called it off for political purposes and/or the bankers said it was too hard for an 2020 IPO because the amount raised was too much relative to the remaining amount needed to be released from conservatorship.  it's tough, as don Layton has said, to veer from the 4 year plan.

 

mnuchin on june 10 started the downtrend with his comments to Bloomberg from the g10 summit in Asia.  it was fairly random, he probably saw the stock price getting ahead of reality and decided to stop the train.  anyway, in that interview he mentioned private capital as a mechanism along with IPO.  so likely the best we can hope for over the next 18 months is the sr pref being dealt with and perhaps some private capital raise with buffett or private equity that makes it hard for a potential new administration to reverse.

 

in sum, it's likely mnuchin waited too long and missed the window.  my fault for misjudging.  I only hope he has the courage in his remaining time to right the wrong from the NWS.  after all, the admin mainly hired people who had spoken out against the NWS. 

 

[Luke 532]

Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb):

 

I think one of the more likely options is:

-The plan is done (Phillips left) and the govt is waiting for en banc decision.  For this to be the case, the govt plan would have to differ from a reversal decision en banc.  Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally.  How can this be viewed as anything other than negative?

 

I'm throwing this out there, not that I necessarily believe it or not:

Unless the Administration is looking for legal cover.  If en banc forces their hand, then they won't receive any negative PR for ending the sweep.  If anybody were to receive blame it would be those that implemented the sweep.

 

If Admin ended the sweep now before the en banc came out, would that really be any different than Admin ending the sweep after en banc says the status quo is fine?  After all, many courts so far have said the status quo is fine so what's the difference between Admin ending the sweep after, say, 5 courts say sweep is fine vs. after 6 courts say it's fine?

 

It has been said (by cherzeca I believe) that the changes in recent weeks by Calabria were embarrassing from a lawyer's perspective.  He and his legal team are very likely aware of this.  However, they get to go on record for officially keeping the status quo for the reasons I stated in the paragraph above.  It does cause a potential delay in the ruling but that might also buy plaintiffs and defendants more time to try to reach a settlement (I don't think Hume's article is published unless there have been some serious discussions about settlement).

[investorG]

Here's a negative way of viewing the situation (playing devils advocate - its increasingly difficult to not add more but position sizing is becoming dumb):

 

I think one of the more likely options is:

-The plan is done (Phillips left) and the govt is waiting for en banc decision.  For this to be the case, the govt plan would have to differ from a reversal decision en banc.  Otherwise - waiting would be a pointless exercise as the plan could simply absorb the changes en banc naturally.  How can this be viewed as anything other than negative?

 

I'm throwing this out there, not that I necessarily believe it or not:

Unless the Administration is looking for legal cover.  If en banc forces their hand, then they won't receive any negative PR for ending the sweep.  If anybody were to receive blame it would be those that implemented the sweep.

 

If Admin ended the sweep now before the en banc came out, would that really be any different than Admin ending the sweep after en banc says the status quo is fine?  After all, many courts so far have said the status quo is fine so what's the difference between Admin ending the sweep after, say, 5 courts say sweep is fine vs. after 6 courts say it's fine?

 

It has been said (by cherzeca I believe) that the changes in recent weeks by Calabria were embarrassing from a lawyer's perspective.  He and his legal team are very likely aware of this.  However, they get to go on record for officially keeping the status quo for the reasons I stated in the paragraph above.  It does cause a potential delay in the ruling but that might also buy plaintiffs and defendants more time to try to reach a settlement (I don't think Hume's article is published unless there have been some serious discussions about settlement).

 

no offense but why is trying to keep your job for a full 5 year term embarassing from a lawyer's perspective? seems quite rational especially in light of the timing delay we've now discovered.

 

[Luke 532]

in sum, it's likely mnuchin waited too long and missed the window.  my fault for misjudging.  I only hope he has the courage in his remaining time to right the wrong from the NWS.  after all, the admin mainly hired people who had spoken out against the NWS. 

 

I certainly could see #3 playing out. 

 

If the primary goal of Admin is to have a multi-year capital build via retained earnings, what would be the first step?  Ending NWS.  Anything other than that?  That action alone, if announced in the plan and implemented immediately, would be a very logical starting point to getting bankers more comfortable eventually investing, would end the lawsuits, and would start building capital which everybody on the Admin has said is a priority.

 

If NWS is ended in September, I can't help but wonder how the share prices would react.  Thanks to those that have posted predictions previously of 60%-75% and higher depending on the rest of the plan.  Once NWS is ended and we're at a certain percentage of par, calculating a fair discount to par given the time horizon and the other details in the plan would be an interesting exercise.

[Guest cherzeca]

@ig. If you have ever seen another case where a party has done a 360 let me know. Judges are laughing in their robes

 

If no banker has gotten a mandate don’t see how any market feedback has been received.

[Guest cherzeca]

In reorgs one flattens the capital structure before one raises new money. Argument is not over what you get (common) but how much you get. That should be the playbook here. As for market hesitancy to buy stock in an issuer in conservatorship,  one thing new money can insist on is conv pref.  Which is why you first flatten the capital structure. Once you have flattened the cap structure then new money conv pref has first claim on >$20b ofcash flow. No banker would say no to a mandate to do that. This is a huge fee mandate.

 

The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare

[Luke 532]

The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare

 

These are highly profitable companies so they might fit the bill of being a very rare reorg. It would take a long time, but they could retain earnings and build capital themselves. 

 

With that said, I agree it makes more sense to flatten out the cap structure.  Could convert prefs, end NWS, deem SPS repaid... that makes it just common stock.  Gives Admin a lot more possibilities going forward to do an offering.  Trump is all about having options.

[investorG]

In reorgs one flattens the capital structure before one raises new money. Argument is not over what you get (common) but how much you get. That should be the playbook here. As for market hesitancy to buy stock in an issuer in conservatorship,  one thing new money can insist on is conv pref.  Which is why you first flatten the capital structure. Once you have flattened the cap structure then new money conv pref has first claim on >$20b ofcash flow. No banker would say no to a mandate to do that. This is a huge fee mandate.

 

The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare

 

yes. we can only dream of a deal where the sr pref gets taken care of some way and then a ~ $50bn infusion of zero coupon preferred from some big private players in 2020 that takes out the 33bn of jr pref (say at 80pct of par, so only ~25bn of cash needed) and uses the other 25bn to buy out half the govt warrants with the other half retired.  govt wins with up front payment and no lawsuit overhang, jr pref wins to exit this mess, and common's dilution is materially reduced. 

[Guest cherzeca]

In reorgs one flattens the capital structure before one raises new money. Argument is not over what you get (common) but how much you get. That should be the playbook here. As for market hesitancy to buy stock in an issuer in conservatorship,  one thing new money can insist on is conv pref.  Which is why you first flatten the capital structure. Once you have flattened the cap structure then new money conv pref has first claim on >$20b ofcash flow. No banker would say no to a mandate to do that. This is a huge fee mandate.

 

The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare

 

yes. we can only dream of a deal where the sr pref gets taken care of some way and then a ~ $50bn infusion of zero coupon preferred from some big private players in 2020 that takes out the 33bn of jr pref (say at 80pct of par, so only ~25bn of cash needed) and uses the other 25bn to buy out half the govt warrants with the other half retired.  govt wins with up front payment and no lawsuit overhang, jr pref wins to exit this mess, and common's dilution is materially reduced.

 

@IG

 

good god, man.  I just wrote that everyone (jps) goes to common first.  can you read?

 

@Luke

 

while this is likely the most profitable reorg ever be done, it is also the reorg with the biggest need in new money going forward, so flattening the cap structure is needed here...what drives this is the need to clean things up for the new money; what makes the new money able to be raised is the profitability

[investorG]

In reorgs one flattens the capital structure before one raises new money. Argument is not over what you get (common) but how much you get. That should be the playbook here. As for market hesitancy to buy stock in an issuer in conservatorship,  one thing new money can insist on is conv pref.  Which is why you first flatten the capital structure. Once you have flattened the cap structure then new money conv pref has first claim on >$20b ofcash flow. No banker would say no to a mandate to do that. This is a huge fee mandate.

 

The only exception to this flattening principle is where a reorg doesn’t need new money going forward which is very rare

 

yes. we can only dream of a deal where the sr pref gets taken care of some way and then a ~ $50bn infusion of zero coupon preferred from some big private players in 2020 that takes out the 33bn of jr pref (say at 80pct of par, so only ~25bn of cash needed) and uses the other 25bn to buy out half the govt warrants with the other half retired.  govt wins with up front payment and no lawsuit overhang, jr pref wins to exit this mess, and common's dilution is materially reduced.

 

@IG

 

good god, man.  I just wrote that everyone (jps) goes to common first.  can you read?

 

@Luke

 

while this is likely the most profitable reorg ever be done, it is also the reorg with the biggest need in new money going forward, so flattening the cap structure is needed here...what drives this is the need to clean things up for the new money; what makes the new money able to be raised is the profitability

 

lol.  sorry, I misunderstood and read it poorly.  while I prefer my plan better, ok on yours too.  I just don't see conversion without IPO happening and I don't see a $20bn IPO occurring that leaves $80bn left to raise -- likely need a private infusion first, as mnuchin referenced.