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

[Guest cherzeca]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

[orthopa]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

 

It seems Milbank was brought on for more of what seems the recap aspect then the litigation. Does Milbank replace Arnold & Porter at some point in entirety? I appreciate the Milbank advising FHFA what the bad new would be but would the DOJ do the same for Treasury? They seem to be the most stubborn.

[Midas79]

@midas

 

you are missing my point.  under what authority does treasury have to write a >$120B check to the GSEs?  this is a little removed from altering the terms of the senior pref, n'est-ce pas?

 

I don't know the answer to your question. The reason I brought up alternatives to Treasury writing that huge check is to show that the senior cramdown remedy is possible without it.

[Guest cherzeca]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

 

It seems Milbank was brought on for more of what seems the recap aspect then the litigation. Does Milbank replace Arnold & Porter at some point in entirety? I appreciate the Milbank advising FHFA what the bad new would be but would the DOJ do the same for Treasury? They seem to be the most stubborn.

 

if Milbank is substituted for A&P that will be headline news.  but it wont happen.

 

recap v. litigation is a false dichotomy.  Milbank HAS to develop a view and advise FHFA re litigation prospects in order to advise FHFA re recap, which necessarily involves settlement prospects. this in my mind is very important.

[orthopa]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

 

It seems Milbank was brought on for more of what seems the recap aspect then the litigation. Does Milbank replace Arnold & Porter at some point in entirety? I appreciate the Milbank advising FHFA what the bad new would be but would the DOJ do the same for Treasury? They seem to be the most stubborn.

 

if Milbank is substituted for A&P that will be headline news.  but it wont happen.

 

recap v. litigation is a false dichotomy.  Milbank HAS to develop a view and advise FHFA re litigation prospects in order to advise FHFA re recap, which necessarily involves settlement prospects. this in my mind is very important.

 

I see so how does this happen? FHFA just keeps fighting the lawsuits half heartedly until they release a recap plan?

[Guest cherzeca]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

 

It seems Milbank was brought on for more of what seems the recap aspect then the litigation. Does Milbank replace Arnold & Porter at some point in entirety? I appreciate the Milbank advising FHFA what the bad new would be but would the DOJ do the same for Treasury? They seem to be the most stubborn.

 

if Milbank is substituted for A&P that will be headline news.  but it wont happen.

 

recap v. litigation is a false dichotomy.  Milbank HAS to develop a view and advise FHFA re litigation prospects in order to advise FHFA re recap, which necessarily involves settlement prospects. this in my mind is very important.

 

I see so how does this happen? FHFA just keeps fighting the lawsuits half heartedly until they release a recap plan?

 

I have been involved in contested transactions that have been litigated.  at some point the worm turns from pursuing adversity to pursuing common interest.  settlement is a momentum building process, and each transaction has its own profile. here, we have a FHFA that is very much on record as seeking a conservatorship release...very different from the FHFA that hired A&P to defend litigation.  so it goes

[orthopa]

all this is well put, but me?  I am waiting for Seila. 

 

now, even if Seila comes down as I expect, as a favorable and directly applicable precedent to invalidate the NWS (I can see no substantial reason why Seila doesnt have its CID voided), the more interesting thing to consider is the different reactions one can expect from Arnold & Porter, and Milbank.  A&P will immediately start to divine differences between the Seila holding and the Collins situation so as to neuter Seila, and all good litigators are very good at doing this, and so the litigation beat goes on so far as A&P is concerned.  I would expect Milbank to take a very different approach, advisory rather than litigious.  and if Seila comes down the way I expect, I also expect Milbank to advise FHFA that Seila is the bad news that we all want FHFA to think it is.

 

It seems Milbank was brought on for more of what seems the recap aspect then the litigation. Does Milbank replace Arnold & Porter at some point in entirety? I appreciate the Milbank advising FHFA what the bad new would be but would the DOJ do the same for Treasury? They seem to be the most stubborn.

 

if Milbank is substituted for A&P that will be headline news.  but it wont happen.

 

recap v. litigation is a false dichotomy.  Milbank HAS to develop a view and advise FHFA re litigation prospects in order to advise FHFA re recap, which necessarily involves settlement prospects. this in my mind is very important.

 

I see so how does this happen? FHFA just keeps fighting the lawsuits half heartedly until they release a recap plan?

 

I have been involved in contested transactions that have been litigated.  at some point the worm turns from pursuing adversity to pursuing common interest.  settlement is a momentum building process, and each transaction has its own profile. here, we have a FHFA that is very much on record as seeking a conservatorship release...very different from the FHFA that hired A&P to defend litigation.  so it goes

 

Great insight, thanks.

[Luke 532]

Thoughts?

Fannie & Freddie reportedly submitted plans to the FHFA to provide liquidity to MBS servicers. It's just waiting on approval: https://t.co/h2t9JilXrW

[beaufort]

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset?

 

Treasury doesn't send out any money.  NWS is done.  Seniors are gone.  Servicers get liquidity.  Recap stays on pace?

 

 

[Guest cherzeca]

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset?

 

Treasury doesn't send out any money.  NWS is done.  Seniors are gone.  Servicers get liquidity.  Recap stays on pace?

 

I get your thinking, but I just think the credit markets will give credit to that prepaid asset and lend as if a discounted amount of that asset was actual capital on the b/s.  that prepaid asset is money good over the period needed to earn it out

[Guest Covid-19_Survivor]

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset?

 

Treasury doesn't send out any money.  NWS is done.  Seniors are gone.  Servicers get liquidity.  Recap stays on pace?

 

Why would they also issue a future credit of $30B if they'd already be resolving to writing off $200B? All they owe is the $118B they stole. Why would they do that, fear of treble damage? sweeet!

[Midas79]

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset?

 

Treasury doesn't send out any money.  NWS is done.  Seniors are gone.  Servicers get liquidity.  Recap stays on pace?

 

I get your thinking, but I just think the credit markets will give credit to that prepaid asset and lend as if a discounted amount of that asset was actual capital on the b/s.  that prepaid asset is money good over the period needed to earn it out

 

I'm more concerned with whether this asset would end up increasing core capital by that amount.

 

I don't think the PSPA amendment and potential $30B return (no matter what form it takes) will happen nearly quickly enough, though. That seems like a Q4 thing to me.

[Guest Covid-19_Survivor]

Sure anything is possible like you said and all scenarios should be considered. I appreciate the apprehension and its been good to have all along as these securities have never really seemed to trade in lockstep with reality. That being said all scenarios are not realistic. Sure Treasury could take steps as you say but a lot of those scenarios are very unproductive and interfere with a recap which I really think is just the opposite goal of Treasury/FHFA.

 

The path of least resistance for both sides will be the most likely and FWIW the closer we get to the election the more both sides are incentivized to move this along due to uncertainty on November 3rd. 

 

What holes do you see in Treasury/FHFA goals or actions thus far?

 

Isn't the recap solely for the purpose of getting FnF on their own two feet and with plenty of capital cushion? And didn't cherzeca suggest that it's probable that blowback was experienced with earlier plans?

 

So plan A may not be solution anymore.

Plan B:

1) Sufficient capital

2) Resolve lawsuits

3) Make some sweet money for taxpayers

 

That can be accomplished without seniors (and warrants) being cancelled. I still contend that those seniors are not just going away. Wish I was smart enough to know how they're not and we'll be fine regardless, but I'm  not.

 

[beaufort]

If the PSPA was amended to reflect a write down of SPS to 0 (and end NWS), along with future credit of a prepaid asset for the return of the 30B or so in overpayment to the GSEs, I wonder if a commercial lender/Fed would provide a line against the 30B sitting on the balance sheet as a prepaid asset?

 

Treasury doesn't send out any money.  NWS is done.  Seniors are gone.  Servicers get liquidity.  Recap stays on pace?

 

I get your thinking, but I just think the credit markets will give credit to that prepaid asset and lend as if a discounted amount of that asset was actual capital on the b/s.  that prepaid asset is money good over the period needed to earn it out

 

I'm more concerned with whether this asset would end up increasing core capital by that amount.

 

I don't think the PSPA amendment and potential $30B return (no matter what form it takes) will happen nearly quickly enough, though. That seems like a Q4 thing to me.

 

Perhaps the Fed, if not commercial banks.  But I also don't forget about the income producing assets these amazing businesses have.

 

My scenario is credit by another name - but it's not the PSPA line, which seems to be where Calabria has drawn a line in the sand.  I don't know how it would be treated for core capital purposes. 

 

It's a grand bargain of the kind we have speculated about recently.  Midas, to your point, my continual disappointment has been that this has not been quick enough and I think you are likely to continue to be right. 

 

[orthopa]

Sure anything is possible like you said and all scenarios should be considered. I appreciate the apprehension and its been good to have all along as these securities have never really seemed to trade in lockstep with reality. That being said all scenarios are not realistic. Sure Treasury could take steps as you say but a lot of those scenarios are very unproductive and interfere with a recap which I really think is just the opposite goal of Treasury/FHFA.

 

The path of least resistance for both sides will be the most likely and FWIW the closer we get to the election the more both sides are incentivized to move this along due to uncertainty on November 3rd. 

 

What holes do you see in Treasury/FHFA goals or actions thus far?

 

Isn't the recap solely for the purpose of getting FnF on their own two feet and with plenty of capital cushion? And didn't cherzeca suggest that it's probable that blowback was experienced with earlier plans?

 

So plan A may not be solution anymore.

Plan B:

1) Sufficient capital

2) Resolve lawsuits

3) Make some sweet money for taxpayers

 

That can be accomplished without seniors (and warrants) being cancelled. I still contend that those seniors are not just going away. Wish I was smart enough to know how they're not and we'll be fine regardless, but I'm  not.

 

Where is that sweet money for the taxpayers going to come from? Someone who wants to buy common just off of a freshly removed NWS for 12 years and a huge overhang from still in place Sr Preferred?

 

Who the hell would do that? No one in their right mind or group of people with enough money to account for the largest IPO in history staged or not will put up Billions of dollars with the Sr. Preferred in place.

 

I highly question why you are invested in this if you don't believe they get resolved in some fashion, esp if your holding preferred. Common is its own story and discussion.

 

If you think the Sr. Preferred do not go way plus/minus some return of overage you better sell when the market opens Monday.

[orthopa]

Thoughts?

Fannie & Freddie reportedly submitted plans to the FHFA to provide liquidity to MBS servicers. It's just waiting on approval: https://t.co/h2t9JilXrW

 

1. Its coming from the MBS rag

2. Calabria has made it clear its not Fannie and Freddies problem and has doubled down with the CFPB to really pile on the servicers

3. Calabria is following HERA, HERA does not allow Fannie/Freddie to be a liquidity source for the servicers. Preserve and Conserve.

 

At this point I wouldnt pay much mind to it. The economy is slowly starting to re open thank god, housing prices are staying firm and Treasury/Fed are watching this. Calabria has made clear where he stands on this.

 

 

[Guest Covid-19_Survivor]

Sure anything is possible like you said and all scenarios should be considered. I appreciate the apprehension and its been good to have all along as these securities have never really seemed to trade in lockstep with reality. That being said all scenarios are not realistic. Sure Treasury could take steps as you say but a lot of those scenarios are very unproductive and interfere with a recap which I really think is just the opposite goal of Treasury/FHFA.

 

The path of least resistance for both sides will be the most likely and FWIW the closer we get to the election the more both sides are incentivized to move this along due to uncertainty on November 3rd. 

 

What holes do you see in Treasury/FHFA goals or actions thus far?

 

Isn't the recap solely for the purpose of getting FnF on their own two feet and with plenty of capital cushion? And didn't cherzeca suggest that it's probable that blowback was experienced with earlier plans?

 

So plan A may not be solution anymore.

Plan B:

1) Sufficient capital

2) Resolve lawsuits

3) Make some sweet money for taxpayers

 

That can be accomplished without seniors (and warrants) being cancelled. I still contend that those seniors are not just going away. Wish I was smart enough to know how they're not and we'll be fine regardless, but I'm  not.

 

Where is that sweet money for the taxpayers going to come from? Someone who wants to buy common just off of a freshly removed NWS for 12 years and a huge overhang from still in place Sr Preferred?

 

Who the hell would do that? No one in their right mind or group of people with enough money to account for the largest IPO in history staged or not will put up Billions of dollars with the Sr. Preferred in place.

 

I highly question why you are invested in this if you don't believe they get resolved in some fashion, esp if your holding preferred. Common is its own story and discussion.

 

If you think the Sr. Preferred do not go way plus/minus some return of overage you better sell when the market opens Monday.

 

That sweet money could come from IPO'ing seniors and I'll disagree that no one would buy them. For starters, with nirp a very real possibility, state pension funds should buy them hand over fist. But no, I don't think that's going to happen because if would leave FnF with too much a burden. I'm just acting as devils advocate. Will they just be cancelled though? Not likely. Will they be converted to commons? Not likely. I'd like to read of a more logical solution to them.

 

[Guest cherzeca]

Thoughts?

Fannie & Freddie reportedly submitted plans to the FHFA to provide liquidity to MBS servicers. It's just waiting on approval: https://t.co/h2t9JilXrW

 

1. Its coming from the MBS rag

2. Calabria has made it clear its not Fannie and Freddies problem and has doubled down with the CFPB to really pile on the servicers

3. Calabria is following HERA, HERA does not allow Fannie/Freddie to be a liquidity source for the servicers. Preserve and Conserve.

 

At this point I wouldnt pay much mind to it. The economy is slowly starting to re open thank god, housing prices are staying firm and Treasury/Fed are watching this. Calabria has made clear where he stands on this.

 

correct!  that is why I call IMF a "rag".  it is a pure industry puff piece of crap, and it doesnt even try to report straight industry news.  do GSEs have some plan tucked away in some hard drive to save servicers servicing on behalf of GSEs? likely so as a contingency in more normal times.  will it be implemented now?  NO. so IMF is just trying to make Calabria look bad and incite more letters to senator Warner 

[Midas79]

That sweet money could come from IPO'ing seniors and I'll disagree that no one would buy them. For starters, with nirp a very real possibility, state pension funds should buy them hand over fist. But no, I don't think that's going to happen because if would leave FnF with too much a burden. I'm just acting as devils advocate. Will they just be cancelled though? Not likely. Will they be converted to commons? Not likely. I'd like to read of a more logical solution to them.

 

The seniors must be either extinguished or converted to a form of capital that counts as core capital (non-cumulative prefs or commons). This would add $193B to core capital instantly.

 

FnF's core capital was negative $170B at the end of 2019. They will never get to a reasonable core capital number (Watt wanted either $103.5B or $139.5B) without such treatment of the seniors.

 

Getting rid of the seniors also ends the NWS because NWS dividends are payable to the holders of the seniors.

 

Bottom line: recap and release cannot happen with the seniors in place. Getting rid of them (via a PSPA 4th amendment) is the single biggest step Calabria and Mnuchin can take, and the single most important one to us FnF shareholders. Not to mention that a future administration could not reinstate them, at least not easily.

 

 

 

On this note, I think Treasury converting the seniors to 0%, non-cumulative, convertible prefs is better than converting them straight to commons. Treasury could then unwind its position at its own pace and never have to worry about the 80% balance sheet consolidation threshold, the 50.1% controlling shareholder threshold, or having any voting rights. Just put in a provision that Treasury itself can never exercise the conversion option, only whoever buys them from Treasury (who could do so at any time, and presumably would do it immediately because 0% prefs themselves aren't worth much).

 

If Treasury can offload enough of them fast enough, they could structure things so that they send some or all of the proceeds to FnF up to $125B (or whatever number they agree on), which accomplishes the recap in full.

[Luke 532]

Agree with you guys on IMF's suspect motives, but it is a bit alarming to me that F&F would submit plans to FHFA even after Calabria told them he's not helping out the servicers.

 

Fannie & Freddie reportedly submitted plans to the FHFA to provide liquidity to MBS servicers. It's just waiting on approval:

[allnatural]

The article reads stale / like a rehash of the original article that said everyone was waiting for FHFA to signoff and Calabria surprisingly put his foot down. I imagine this headline is just referencing that event. Calabrias approval (which has been pending for 2-3 weeks now?) won't come bc he already decided on what is his duties as conservator are.

 

 

Agree with you guys on IMF's suspect motives, but it is a bit alarming to me that F&F would submit plans to FHFA even after Calabria told them he's not helping out the servicers.

 

Fannie & Freddie reportedly submitted plans to the FHFA to provide liquidity to MBS servicers. It's just waiting on approval:

[Guest Covid-19_Survivor]

That sweet money could come from IPO'ing seniors and I'll disagree that no one would buy them. For starters, with nirp a very real possibility, state pension funds should buy them hand over fist. But no, I don't think that's going to happen because if would leave FnF with too much a burden. I'm just acting as devils advocate. Will they just be cancelled though? Not likely. Will they be converted to commons? Not likely. I'd like to read of a more logical solution to them.

 

The seniors must be either extinguished or converted to a form of capital that counts as core capital (non-cumulative prefs or commons). This would add $193B to core capital instantly.

 

FnF's core capital was negative $170B at the end of 2019. They will never get to a reasonable core capital number (Watt wanted either $103.5B or $139.5B) without such treatment of the seniors.

 

Getting rid of the seniors also ends the NWS because NWS dividends are payable to the holders of the seniors.

 

Bottom line: recap and release cannot happen with the seniors in place. Getting rid of them (via a PSPA 4th amendment) is the single biggest step Calabria and Mnuchin can take, and the single most important one to us FnF shareholders. Not to mention that a future administration could not reinstate them, at least not easily.

 

 

 

On this note, I think Treasury converting the seniors to 0%, non-cumulative, convertible prefs is better than converting them straight to commons. Treasury could then unwind its position at its own pace and never have to worry about the 80% balance sheet consolidation threshold, the 50.1% controlling shareholder threshold, or having any voting rights. Just put in a provision that Treasury itself can never exercise the conversion option, only whoever buys them from Treasury (who could do so at any time, and presumably would do it immediately because 0% prefs themselves aren't worth much).

 

If Treasury can offload enough of them fast enough, they could structure things so that they send some or all of the proceeds to FnF up to $125B (or whatever number they agree on), which accomplishes the recap in full.

 

Must is a too strong a term.  Your calculations do not include any resolution to the $126B (2020 ye) stolen. Also, $45B is the more realistic core figure and their warrants have a street value of $30B. All three could be accomplished without accusations of enriching hedge funds.

 

So... A $59B hole with earnings of $20B/year, and with seniors @ 10% and a market value of $200B.

 

Good post. Will stew on it.

[Guest cherzeca]

"Freddie Mac (OTCQB:FMCC) has priced its new 0.375% three-year USD Reference Notes security due on April 20, 2023 at 99.75 to yield 0.459%, 22 basis points more than the yield on three-year U.S. Treasury Notes."  from SA

 

this is amazing, 3 year notes <0.5%, just 22bps above treasuries.  while I understand that there is a huge desire for safety, it is nice to know GSEs are viewed to be in safety bucket

[Midas79]

"Freddie Mac (OTCQB:FMCC) has priced its new 0.375% three-year USD Reference Notes security due on April 20, 2023 at 99.75 to yield 0.459%, 22 basis points more than the yield on three-year U.S. Treasury Notes."  from SA

 

this is amazing, 3 year notes <0.5%, just 22bps above treasuries.  while I understand that there is a huge desire for safety, it is nice to know GSEs are viewed to be in safety bucket

 

According to GSE haters this is solely due to them being in conservatorship.

 

The correct view, of course, is that FnF debt is viewed as this safe with $23B of capital and a $250B Treasury backstop. It stands to reason that it would be viewed as even safer with $150B of capital and a similar or larger Treasury backstop.

 

(I know I'm preaching to the choir here; I made that last comment on Twitter a while back)

[DRValue]

https://www.zerohedge.com/personal-finance/very-ugly-setup-unemployment-claims-rise-missed-mortgage-payments-soar

 

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