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

[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"

[Guest cherzeca]

Luke, I appreciate your close analysis but I would point out he never uses the term "internal".  he just didn't use external Tuesday.  you have to expect this ambiguity from calabria since, although he is clearly very smart and working hard, he has never done anything like a capital raise before.  so a little bit of flying by the seat of his pants

[Luke 532]

Luke, I appreciate your close analysis but I would point out he never uses the term "internal".  he just didn't use external Tuesday.  you have to expect this ambiguity from calabria since, although he is clearly very smart and working hard, he has never done anything like a capital raise before.  so a little bit of flying by the seat of his pants

 

I know he didn't say "internal" and I was trying to be careful in my post to make that point, and that is merely what I think he was referencing. Perhaps I'm reading into his comments too much, but I still find his talks this week encouraging.

[hardincap]

its pretty clear to me f&f are going to be building capital via earnings and then do a secondary offering. they may do a private placement in addition/prior to SPO but that is up to the companies, not calabria.

 

on the face of it, his statements were positive--specifically that shareholders aren't going to be wiped out, 4th amendment is WIP, and there are legal hurdles that is WIP by treasury.

 

BUT if there is an admin change, they might as well throw whatever plan they have out the window. maybe there is urgency behind closed doors because of this, maybe not, but i think markets are right in pricing this in.

[Guest cherzeca]

my take on the pace of developments is that the administration wants to appear thoughtful and deliberate.  be able to defend process in front of congress.  while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight.  so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone.  what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)

[investorG]

my take on the pace of developments is that the administration wants to appear thoughtful and deliberate.  be able to defend process in front of congress.  while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight.  so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone.  what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)

 

your last sentence is key and to date I haven't heard a conclusive rationale as to why any potential consent order executed during the lame duck is permanent when a new FHFA head takes over in 2021 (if Dem wins).  I wonder if a moderate bank friendly Dem president would keep Calabria.  Doubtful Bernie would.

[muscleman]

my take on the pace of developments is that the administration wants to appear thoughtful and deliberate.  be able to defend process in front of congress.  while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight.  so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone.  what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)

 

your last sentence is key and to date I haven't heard a conclusive rationale as to why any potential consent order executed during the lame duck is permanent when a new FHFA head takes over in 2021 (if Dem wins).  I wonder if a moderate bank friendly Dem president would keep Calabria.  Doubtful Bernie would.

 

 

Watch out for Coronavirus. If we get a wide spread infection, it may cause Trump to lose the re-election.

[allnatural]

Whether or not consent decree is allowed to be rolled back by new FHFA director, a PSPA amendment / settlement that wipes out the snr pfds liq balance is not. At that point Jr pfds will sit atop of the cap structure with close to $40b of built of capital (total jr pfd principal is ~$33b).

 

my take on the pace of developments is that the administration wants to appear thoughtful and deliberate.  be able to defend process in front of congress.  while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight.  so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone.  what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)

 

your last sentence is key and to date I haven't heard a conclusive rationale as to why any potential consent order executed during the lame duck is permanent when a new FHFA head takes over in 2021 (if Dem wins).  I wonder if a moderate bank friendly Dem president would keep Calabria.  Doubtful Bernie would.

[investorG]

Whether or not consent decree is allowed to be rolled back by new FHFA director, a PSPA amendment / settlement that wipes out the snr pfds liq balance is not. At that point Jr pfds will sit atop of the cap structure with close to $40b of built of capital (total jr pfd principal is ~$33b).

 

my take on the pace of developments is that the administration wants to appear thoughtful and deliberate.  be able to defend process in front of congress.  while I found that C/M did not respond that substantively to the D senators questions, their written response seemed dripping for respect for the role congress can play in the process, to the extent it wants to do something...and that includes oversight.  so this moving of the goalposts to 2021 for external capital raise seems consistent with this approach, extend the period for earnings retention, obtain additional time to get ducks in a row for external capital raise and, oh btw, give courts additional time to clarify things for everyone.  what is left unsaid is that if the administration wants to if trump loses, enough can be done to cement the process in place by end of year (even if no external capital raise by then)

 

your last sentence is key and to date I haven't heard a conclusive rationale as to why any potential consent order executed during the lame duck is permanent when a new FHFA head takes over in 2021 (if Dem wins).  I wonder if a moderate bank friendly Dem president would keep Calabria.  Doubtful Bernie would.

 

Ok.  But if new FHFA head halted progress towards release from conservatorship and they stayed as wards of the state for many years with no dividends, thats not good.  Or ran them through receivership because they deemed 40bn was still under-capitalized given a weakening economy.  IMO by waiting the admin has put the process under unnecessary risk.  The share prices reflect that.

[investorG]

rule of law guy's latest:  https://seekingalpha.com/article/4324008-for-fannie-and-freddie-shareholders-road-to-litigation-settlement-runs-through-seila

 

If they do as you suggest, grant backward looking instead of forward looking relief, what's to stop every party going forward who gets targeted by cfpb/fhfa to make a timely legal claim against the agency?    would ruling as you suggest effectively strip the agency of all powers going forward? thank you.

[allnatural]

If you care to learn more, the answer to your question can be found in both of these well written amicus curiae:

 

1) https://www.supremecourt.gov/DocketPDF/19/19-7/125744/20191216173550908_SeilaLaw.CenterRuleLawAmicusBrief.SupremeCourt.pdf

 

2) https://www.supremecourt.gov/DocketPDF/19/19-7/125587/20191216122131520_19-7%20Amicus%20Brief%20of%20Patrick%20J.%20Collins%20et%20al..pdf

 

rule of law guy's latest:  https://seekingalpha.com/article/4324008-for-fannie-and-freddie-shareholders-road-to-litigation-settlement-runs-through-seila

 

If they do as you suggest, grant backward looking instead of forward looking relief, what's to stop every party going forward who gets targeted by cfpb/fhfa to make a timely legal claim against the agency?    would ruling as you suggest effectively strip the agency of all powers going forward? thank you.

[Guest cherzeca]

" IMO by waiting the admin has put the process under unnecessary risk.  The share prices reflect that."  this is true.  this may be as fast as this administration can move.  on the flip side, by waiting, the court cases proceed.  the collins APA claim as well as backward relief can be pursued, both of which kill the NWS. so there is a benefit to waiting too, since no new administration can tell scotus how to decide these cases.

[Midas79]

rule of law guy's latest:  https://seekingalpha.com/article/4324008-for-fannie-and-freddie-shareholders-road-to-litigation-settlement-runs-through-seila

 

If they do as you suggest, grant backward looking instead of forward looking relief, what's to stop every party going forward who gets targeted by cfpb/fhfa to make a timely legal claim against the agency?    would ruling as you suggest effectively strip the agency of all powers going forward? thank you.

 

My understanding (though someone please correct me if I'm wrong) is that once one plaintiff has received a remedy for a particular constitutional violation, no future plaintiff can receive a different remedy for the same violation, kind of like double jeopardy.

[orthopa]

https://www.bloomberg.com/news/articles/2020-03-02/fannie-mae-and-freddie-mac-s-fate-is-in-the-hands-of-one-man. Couple more clues released but looks like Capital Rule maybe later then 1st quarter. Ho hum.

[Jcmeg35]

https://www.bloomberg.com/news/articles/2020-03-02/fannie-mae-and-freddie-mac-s-fate-is-in-the-hands-of-one-man. Couple more clues released but looks like Capital Rule maybe later then 1st quarter. Ho hum.

 

Given how he has consistently missed his own timelines, I don't doubt it will be later. I will note that the piece says:

"in an interview during a visit to the National Association of Home Builders annual trade show in January".

 

So clearly his mos recent comments are more timely. Hopefully, it happens within the next month, if not the next two, but I won't hold my breath...

[undervalued]

anyone have any idea why gselinks stop making updates?

[investorG]

" IMO by waiting the admin has put the process under unnecessary risk.  The share prices reflect that."  this is true.  this may be as fast as this administration can move.  on the flip side, by waiting, the court cases proceed.  the collins APA claim as well as backward relief can be pursued, both of which kill the NWS. so there is a benefit to waiting too, since no new administration can tell scotus how to decide these cases.

 

ok.  today's the day.

 

if the SC follows the WSJ recommendation and dismantles the whole CFPB (FHFA?) agency, what logistically would that mean for our situation?

 

on the other end of the spectrum, would it be net beneficial for us if they deemed agency constitutional as is?  Lose the Collins constitutional argument but less theoretical political risk from a presidential transition regarding calabria?

 

I think some suggested to pass on this case and go to Collins, I could see that playing out in addition to the other 2 base case alternatives of unconstitutional with prospective or backward looking relief.

[Guest cherzeca]

I expect the transcript for the seila oral argument to breast posted here: https://www.supremecourt.gov/oral_arguments/argument_transcript/2019

sometime Wednesday

[Luke 532]

I expect the transcript for the seila oral argument to breast posted here: https://www.supremecourt.gov/oral_arguments/argument_transcript/2019

sometime Wednesday

 

Thanks for posting.

 

CNBC's take, FWIW: https://www.cnbc.com/2020/03/03/supreme-court-looks-to-weaken-consumer-financial-protection-bureau.html

[investorG]

I expect the transcript for the seila oral argument to breast posted here: https://www.supremecourt.gov/oral_arguments/argument_transcript/2019

sometime Wednesday

 

Thanks for posting.

 

CNBC's take, FWIW: https://www.cnbc.com/2020/03/03/supreme-court-looks-to-weaken-consumer-financial-protection-bureau.html

 

thanks. 

 

if Roberts sympathizes with liberals regarding cfpb but doesn't like the solution kavanaugh advocates, should we root for a punt (and take up collins) or deeming cfpb/fhfa constitutional (lose our case but calabria theoretically more entrenched)?

[Midas79]

I expect the transcript for the seila oral argument to breast posted here: https://www.supremecourt.gov/oral_arguments/argument_transcript/2019

sometime Wednesday

 

Thanks for posting.

 

CNBC's take, FWIW: https://www.cnbc.com/2020/03/03/supreme-court-looks-to-weaken-consumer-financial-protection-bureau.html

 

thanks. 

 

if Roberts sympathizes with liberals regarding cfpb but doesn't like the solution kavanaugh advocates, should we root for a punt (and take up collins) or deeming cfpb/fhfa constitutional (lose our case but calabria theoretically more entrenched)?

 

I was about to start pontificating on how Calabria can't really do much towards recap and release if the Treasury Secretary is hostile to the process, which is what I have thought for a long time, but now I am not so sure. Assuming that Trump is voted out, if Mnuchin can get Treasury's part done before Trump leaves office (cancel seniors, exercise warrants, agree to release FnF or amend the PSPA to remove Treasury's release veto power) then Calabria could conceivably do the rest himself (the actual recap and release part).

 

If that is the case, we really should be rooting for the CFPB's leadership structure to be ruled constitutional after all, giving Calabria some tenure protection. Of course, a new president could just fire him anyway and deal with the consequences later. For a while I thought Trump would do that with Watt.

 

It would be ironic if the Collins case ends up being what scuttles recap and release rather than being what allows it, if it gives a new president the ability to fire Calabria immediately. That's somewhat of a parlay, but a plausible one imo.

[Luke 532]

Will the Seila Law case mean no more CFPB? Our expert says no. Check back later at http://respanews.com  for our reaction piece.