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

[Luke 532]

What am I missing?

 

Maybe because markets down big last two days?

[investorG]

I can't believe the prefs didn't move up significantly today.

 

He straight said that he won't wipe out shareholders, and that will dilute common and go public. Can't get any more plain English than that!

 

Even blamed the liquidation preference increasing for building capital on lawyers.

 

What am I missing?

 

Basically the all-important potential 4th amendment keeps getting delayed for either political or legal or greed reasons despite material leadership turnover risk. 

 

Shockingly Calabria even talked about another letter agreement extension which I guess is now the base case if Trump wins and Seila doesn't produce backward-looking relief that is also applicable to Collins.  In this potential scenario, they'll likely want to hear the APA case resolution from SC before potential 4th amendment action. 

 

And if Trump loses, then then we enter the lame duck period having little leverage.

[orthopa]

I can't believe the prefs didn't move up significantly today.

 

He straight said that he won't wipe out shareholders, and that will dilute common and go public. Can't get any more plain English than that!

 

Even blamed the liquidation preference increasing for building capital on lawyers.

 

What am I missing?

 

Basically the all-important potential 4th amendment keeps getting delayed for either political or legal or greed reasons despite material leadership turnover risk. 

 

Shockingly Calabria even talked about another letter agreement extension which I guess is now the base case if Trump wins and Seila doesn't produce backward-looking relief that is also applicable to Collins.  In this potential scenario, they'll likely want to hear the APA case resolution from SC before potential 4th amendment action. 

 

And if Trump loses, then then we enter the lame duck period having little leverage.

 

I agree, FWIW this has become a legally driven investment again. Outcome is a coin flip, we wont know outcome till the fall of a case not brought by shareholders but will impact our claims. Until proven otherwise all time lines mentioned by participants are void and mean nothing.

[SnarkyPuppy]

Let’s say every legal case was negated today- no potential legal success.  How does the administration realistically recapitalize the entities w/ re-IPOs of the common equity without the junior preferred doing decent from here? 

[orthopa]

Let’s say every legal case was negated today- no potential legal success.  How does the administration realistically recapitalize the entities w/ re-IPOs of the common equity without the junior preferred doing decent from here?

 

I don't think they can and I think both Calabria and at times Mnuchin have made it pretty clear that will be the case. The problem IMO is the market doesn't believe them and frankly the preferred could do decent but in 1-2-3 years.

 

I wonder if losing all of these cases would have put preferred holders in a different position. We obviously would have less leverage at the table but would probably be further along in the process.

[investorG]

Let’s say every legal case was negated today- no potential legal success.  How does the administration realistically recapitalize the entities w/ re-IPOs of the common equity without the junior preferred doing decent from here?

 

Likely you know the answer to this question with an election in 8 months and recent delay announcements.

 

Our 2020 hopes seem to rest on Rule of Law's Seila analysis proving accurate.   

 

I wish everyone good luck.

 

[muscleman]

with Trump’s awful PR last night about the corona virus, if the outbreak happens in the US, that might be the reason he loses the reelection.

[SnarkyPuppy]

Let's all take a breath lol - we're in the best position we've ever been in

[Guest cherzeca]

with Trump’s awful PR last night about the corona virus, if the outbreak happens in the US, that might be the reason he loses the reelection.

 

well, we can always hope that the D candidate catches it...

[Luke 532]

Let's all take a breath lol - we're in the best position we've ever been in

 

+1

[investorG]

Let's all take a breath lol - we're in the best position we've ever been in

 

+1

 

I respectfully disagree.

 

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

In that scenario the courts and/or a negotiated settlement would likely decide any potential value for shareholders, if any.

 

 

[Luke 532]

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

Fair enough. I'm genuinely curious what percentage chance you would place on them being nationalized?  I know it's impossible to quantify odds with something like that, but what's your best guess?  Thanks.

[investorG]

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

Fair enough. I'm genuinely curious what percentage chance you would place on them being nationalized?  I know it's impossible to quantify odds with something like that, but what's your best guess?  Thanks.

 

If a Democrat wins the election --- whatever odds you place on that -- nationalization now appears to be the base case to me.  I'd welcome other views but $45bn (if they get to that) doesn't seem like enough escape velocity even if there's a 4th amendment in the lame duck given the Dems preference for nationalization (and of course many R's dislike current structure).  Maybe $75-100bn would be enough (?) but that would require a large private equity infusion in 2020 that I advocate but don't now expect.    There's a roster of think tankers that are likely ready to take on this task in 2021 if assigned.

 

The combined current market cap of jr pref + public common is not enormous, ~$18bn at the moment, and so your guess is as good as mine what value - if any - would flow to shareholders from the legal system or political settlement in a potential nationalization.  Of course I believe a fair outcome allows shareholders to participate in the financial upside that the govt has achieved since 2012 (in addition to the indirect systemic benefits FnF provided in 2008-2012).

 

 

[Luke 532]

Posted with permission from Todd Sullivan:

http://www.valueplays.net/2020/02/28/subs-fhfa-is-looking-for-lawyers/

FHFA is looking for a law firm. The backstory that I am hearing is that they are not satisfied with the current pace of negotiations with shareholders. As we’ve said many times before, with the litigation outstanding, there is no way the GSE’s can emerge from conservatirship.

 

Here is the solicitation: https://valueplays.net/wp-content/uploads/RFP-FHF-20-R-0029.pdf

 

Scope of work: https://valueplays.net/wp-content/uploads/Attachment-A-Statement-of-Work.pdf           

[Guest cherzeca]

Posted with permission from Todd Sullivan:

http://www.valueplays.net/2020/02/28/subs-fhfa-is-looking-for-lawyers/

FHFA is looking for a law firm. The backstory that I am hearing is that they are not satisfied with the current pace of negotiations with shareholders. As we’ve said many times before, with the litigation outstanding, there is no way the GSE’s can emerge from conservatirship.

 

Here is the solicitation: https://valueplays.net/wp-content/uploads/RFP-FHF-20-R-0029.pdf

 

Scope of work: https://valueplays.net/wp-content/uploads/Attachment-A-Statement-of-Work.pdf           

 

I am not aware that there have been any negotiations.  Todd can be "off" at times

[Guest cherzeca]

@IG

 

if a D wins election and nationalization is something that can get 60 votes in senate, then there will be a massive takings suit which will result in a massive payout if Ps win either of APA or const claims, or there is a settlement and consent decree reached before 1/2021.  I put this pathway odds at <10%, which means I wont consider it much further

[Wiggins]

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

Fair enough. I'm genuinely curious what percentage chance you would place on them being nationalized?  I know it's impossible to quantify odds with something like that, but what's your best guess?  Thanks.

 

If a Democrat wins the election --- whatever odds you place on that -- nationalization now appears to be the base case to me.  I'd welcome other views but $45bn (if they get to that) doesn't seem like enough escape velocity even if there's a 4th amendment in the lame duck given the Dems preference for nationalization (and of course many R's dislike current structure).  Maybe $75-100bn would be enough (?) but that would require a large private equity infusion in 2020 that I advocate but don't now expect.    There's a roster of think tankers that are likely ready to take on this task in 2021 if assigned.

 

The combined current market cap of jr pref + public common is not enormous, ~$18bn at the moment, and so your guess is as good as mine what value - if any - would flow to shareholders from the legal system or political settlement in a potential nationalization.  Of course I believe a fair outcome allows shareholders to participate in the financial upside that the govt has achieved since 2012 (in addition to the indirect systemic benefits FnF provided in 2008-2012).

 

Nationalization is not only risky but is not necessary for the Dems to accomplish their housing goals, IMO. Biden, Warren, and Sanders all reference utilizing the GSEs to advance their housing plans: fund the Housing Trust Fund and reduce foreclosures. This can be done with private, regulated GSEs just like before 2008. Bloomberg wants to nationalize them, but his chances of being elected are around zero. Imagine Trump putting out an ad and playing the verified recording of Bloomberg saying that the bankers are "his peeps" and they're responsible for creating all the jobs in this country! LOL https://www.independent.co.uk/news/world/americas/us-politics/michael-bloomberg-goldman-sachs-bank-wall-street-leaked-audio-a9356721.html

 

FWIW, Cowen agrees:

https://news.bloomberglaw.com/banking-law/fannie-freddie-oversight-can-end-even-under-sanders-cowen-says

 

 

 

[DocSnowball]

Let's all take a breath lol - we're in the best position we've ever been in

 

+1

 

Agree. Staying put at 5% of portfolio. Statements from key stakeholder FHFA/ Calabria have been positive, except for timeline - acknowledgement of overpayment, "there isn't going to be that big of a windfall", receivership being out as per Calabria are all big positives. Even if JPS stay put for 2 years they will still beat the market, or at least my alternative picks. Add the fact that this is not correlated with broader market risk, and remains a mispriced bet. Still on the 20 punch card list for me, albeit with a reasonable position size.

 

[Guest cherzeca]

Let's all take a breath lol - we're in the best position we've ever been in

 

+1

 

Agree. Staying put at 5% of portfolio. Statements from key stakeholder FHFA/ Calabria have been positive, except for timeline - acknowledgement of overpayment, "there isn't going to be that big of a windfall", receivership being out as per Calabria are all big positives. Even if JPS stay put for 2 years they will still beat the market, or at least my alternative picks. Add the fact that this is not correlated with broader market risk, and remains a mispriced bet. Still on the 20 punch card list for me, albeit with a reasonable position size.

 

agreed.  one of the few non index equities I own, and given current interest rate environment, GSEs' business will be strong with wide moats.  and I like the litigation as a backdrop to administrative reform

[investorG]

@IG

 

if a D wins election and nationalization is something that can get 60 votes in senate, then there will be a massive takings suit which will result in a massive payout if Ps win either of APA or const claims, or there is a settlement and consent decree reached before 1/2021.  I put this pathway odds at <10%, which means I wont consider it much further

 

unfortunately it's not unrealistic imo that there are no wins on constitutional, APA, nor a 'permanent' consent decree over the next 11-15 months.  the economic landscape could also look a lot different over that time period in the scenario that Trump loses.

[investorG]

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

Fair enough. I'm genuinely curious what percentage chance you would place on them being nationalized?  I know it's impossible to quantify odds with something like that, but what's your best guess?  Thanks.

 

If a Democrat wins the election --- whatever odds you place on that -- nationalization now appears to be the base case to me.  I'd welcome other views but $45bn (if they get to that) doesn't seem like enough escape velocity even if there's a 4th amendment in the lame duck given the Dems preference for nationalization (and of course many R's dislike current structure).  Maybe $75-100bn would be enough (?) but that would require a large private equity infusion in 2020 that I advocate but don't now expect.    There's a roster of think tankers that are likely ready to take on this task in 2021 if assigned.

 

The combined current market cap of jr pref + public common is not enormous, ~$18bn at the moment, and so your guess is as good as mine what value - if any - would flow to shareholders from the legal system or political settlement in a potential nationalization.  Of course I believe a fair outcome allows shareholders to participate in the financial upside that the govt has achieved since 2012 (in addition to the indirect systemic benefits FnF provided in 2008-2012).

 

Nationalization is not only risky but is not necessary for the Dems to accomplish their housing goals, IMO. Biden, Warren, and Sanders all reference utilizing the GSEs to advance their housing plans: fund the Housing Trust Fund and reduce foreclosures. This can be done with private, regulated GSEs just like before 2008. Bloomberg wants to nationalize them, but his chances of being elected are around zero. Imagine Trump putting out an ad and playing the verified recording of Bloomberg saying that the bankers are "his peeps" and they're responsible for creating all the jobs in this country! LOL https://www.independent.co.uk/news/world/americas/us-politics/michael-bloomberg-goldman-sachs-bank-wall-street-leaked-audio-a9356721.html

 

FWIW, Cowen agrees:

https://news.bloomberglaw.com/banking-law/fannie-freddie-oversight-can-end-even-under-sanders-cowen-says

 

I don't have access to that article and I admit I don't know all the details but Congress would have a material say here.  Waters, Brown, many others have mentioned their admiration of the status quo (ie quasi-nationalized).  Not to mention the new FHFA head who has tremendous power and the army of anti-private-GSE DC swampers (esp if Biden wins). 

[Guest cherzeca]

There is a reasonable chance the window has closed and the companies will be nationalized in 2021+.

 

Fair enough. I'm genuinely curious what percentage chance you would place on them being nationalized?  I know it's impossible to quantify odds with something like that, but what's your best guess?  Thanks.

 

If a Democrat wins the election --- whatever odds you place on that -- nationalization now appears to be the base case to me.  I'd welcome other views but $45bn (if they get to that) doesn't seem like enough escape velocity even if there's a 4th amendment in the lame duck given the Dems preference for nationalization (and of course many R's dislike current structure).  Maybe $75-100bn would be enough (?) but that would require a large private equity infusion in 2020 that I advocate but don't now expect.    There's a roster of think tankers that are likely ready to take on this task in 2021 if assigned.

 

The combined current market cap of jr pref + public common is not enormous, ~$18bn at the moment, and so your guess is as good as mine what value - if any - would flow to shareholders from the legal system or political settlement in a potential nationalization.  Of course I believe a fair outcome allows shareholders to participate in the financial upside that the govt has achieved since 2012 (in addition to the indirect systemic benefits FnF provided in 2008-2012).

 

Nationalization is not only risky but is not necessary for the Dems to accomplish their housing goals, IMO. Biden, Warren, and Sanders all reference utilizing the GSEs to advance their housing plans: fund the Housing Trust Fund and reduce foreclosures. This can be done with private, regulated GSEs just like before 2008. Bloomberg wants to nationalize them, but his chances of being elected are around zero. Imagine Trump putting out an ad and playing the verified recording of Bloomberg saying that the bankers are "his peeps" and they're responsible for creating all the jobs in this country! LOL https://www.independent.co.uk/news/world/americas/us-politics/michael-bloomberg-goldman-sachs-bank-wall-street-leaked-audio-a9356721.html

 

FWIW, Cowen agrees:

https://news.bloomberglaw.com/banking-law/fannie-freddie-oversight-can-end-even-under-sanders-cowen-says

 

I don't have access to that article and I admit I don't know all the details but Congress would have a material say here.  Waters, Brown, many others have mentioned their admiration of the status quo (ie quasi-nationalized).  Not to mention the new FHFA head who has tremendous power and the army of anti-private-GSE DC swampers (esp if Biden wins).

 

if GSEs are released from conservatorship into a consent phase, fhfa no longer can act as a conservator with powers that a new D director may claim he/she has, but which 5th C has said doesnt have.  so if you are trying to spin possibilities, go right ahead.  if you are trying to spin probabilities I think you are off base

[james22]

Add the fact that this is not correlated with broader market risk...

 

A significant advantage, one would think. But it seems to fall with the market as the hedge fund owners need cash.

[TwoCitiesCapital]

Add the fact that this is not correlated with broader market risk...

 

A significant advantage, one would think. But it seems to fall with the market as the hedge fund owners need cash.

 

I haven't checked all of the preferreds, but the share class I own still seems to be trading in the range it has set for itself the last several months.

 

It is nice to know that even though this thing moves 10-20% at a time, oftentimes, that it didn't do it the same time the market was off 10-20%.

[Luke 532]

Calabria revealed A LOT this week, but not many people noticed because the market was/is in a freefall.

 

On Monday, Calabria said "go to the market" and "an external capital raise" which makes sense given what he was discussing, but then on Tuesday he says "when we raise capital" in the same sentence as the "heavily diluted" comment.

 

What's the difference between Monday and Tuesday, if any?  Well, I see two separate things he's discussing.  External capital raise/go to market (Monday quotes) and internal capital raise (Tuesday quote)... and I think that's what he was referencing on Tuesday, the internal raise.  It makes sense that an internal raise would correspond with heavy dilution.  In other words, I fully expect junior preferred shares to be converted into common, warrants exercised to skyrocket the share count, etc.

 

Additionally, when discussing on Tuesday what I believe is the internal capital raise, he says "will be heavily diluted when we raise capital"... it wasn't "might be" heavily diluted or "if" we raise (internal) capital.  It was very matter of fact, and if you watch the interview you'd likely get that impression as well.  It almost seemed like the internal capital raise is a done deal.

 

And to me, a junior preferred shareholder, the timing of the external raise is inconsequential.  The only thing that matters to me is when the internal raise takes place.  Yes, I realize that in certain circumstances the planned timing of an external capital raise can impact the urgency, or lack thereof, of an internal capital raise.  I find Calabria's comments this week very encouraging.

 

Monday:

“FHFA’s capital rule will be a critical mile marker. It must be in place before Fannie and Freddie can go to the market to raise capital. I expect we will have re-proposed the capital rule very soon. Our goal is to publish the final rule by the end of 2020.” Director Calabria

 

“Based on this timeline, 2021 is the most likely target for an external capital raise by the Enterprises. However, let me emphasize that this effort will continue to be process dependent, not calendar dependent.”

 

Tuesday:

"the shareholders will be heavily diluted when we raise capital... so at the end of the day I am not focused on whether there’s a windfall, because I don’t think there’s really going to be that big of a windfall"