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

[Luke 532]

Mnuchin testifies twice this week:

- Tomorrow, 10am before Senate banking

- Wednesday 10am before House financial services

Per @USTreasury public engagements calendar

[orthopa]

Mnuchin testifies twice this week:

- Tomorrow, 10am before Senate banking

- Wednesday 10am before House financial services

Per @USTreasury public engagements calendar

 

It looks like this is regarding CARES with Powell. I would not be surprised to see someone on the committee (warner) ask about the GSEs with his letter out there needing a response. Expections for anything in the near term before wed should be low.

[Guest cherzeca]

Mnuchin testifies twice this week:

- Tomorrow, 10am before Senate banking

- Wednesday 10am before House financial services

Per @USTreasury public engagements calendar

 

It looks like this is regarding CARES with Powell. I would not be surprised to see someone on the committee (warner) ask about the GSEs with his letter out there needing a response. Expections for anything in the near term before wed should be low.

 

could go either way.  Mnuchin may prefer to face the questioning with a press release out, to which he would just refer

[investorG]

Re: Collins you have it backwards. There are 2 scenarios here:

 

1) Collins case is dropped (as a result of PSPA amendment and/or settlement). Calabria's job would be safe until this issue is re-litigated by Biden back to SCOTUS (probably sometime in 2022 as it would have to make its way through the DC circuit first).

2) Collins case isn't dropped (no PSPA/settlement). Calabria will be removable by Biden as soon as the Collins ruling is released (May-June).

 

As you can see the Admin and Calabria have a large incentive to get rid of the Collins case during the lame duck. Regardless, the earliest Calabria gets removed is May/June, and potentially into 2022 if the Collins case goes away shortly (by giving shareholders the remedy they desire via a PSPA amendment).

 

They waited until the last possible day for the letter agreement.  January is likely the decision point on whether a 4th amendment occurs.

 

From commentary on this board it appears the Collins case probably needs to go ahead on Dec 9 to avoid a quick firing of Calabria at will soon after Biden's inauguration.

 

Interesting.  That's not how others have described it but I can't say your view sounds wrong.

[investorG]

Mnuchin testifies twice this week:

- Tomorrow, 10am before Senate banking

- Wednesday 10am before House financial services

Per @USTreasury public engagements calendar

 

It looks like this is regarding CARES with Powell. I would not be surprised to see someone on the committee (warner) ask about the GSEs with his letter out there needing a response. Expections for anything in the near term before wed should be low.

 

could go either way.  Mnuchin may prefer to face the questioning with a press release out, to which he would just refer

 

If it's not the last moment possible, it's fruitless to anticipate potential action - based on their own behavior.

[Guest cherzeca]

here is an interview with ackman on GSEs posted 11/27/20: 

 

bill is very smart and successful, and he seems untroubled by the notion that there might be no 4thA...in part because of the collins scotus case...and he further seems untroubled by the notion that Ps might even lose collins, because he thinks the Biden administration will continue with the GSE recap and eventual release.

 

all of this I agree with for the most part, but his short term view of common, an opportunity for a $10 fnma common within 12 months, is something I cant understand, since I cant figure out what the terms of any recap will be...and it is the common that is directly affected by the recap.  if I had an expectation as to what those terms would be prior to the cap rule, that analyis has been rendered useless by the cap rule's conservatism.  I just dont see how he can have any conviction as to price in face of such a stringent cap rule.  what am I missing?

[onyx1]

here is an interview with ackman on GSEs posted 11/27/20: 

 

bill is very smart and successful, and he seems untroubled by the notion that there might be no 4thA...in part because of the collins scotus case...and he further seems untroubled by the notion that Ps might even lose collins, because he thinks the Biden administration will continue with the GSE recap and eventual release.

 

all of this I agree with for the most part, but his short term view of common, an opportunity for a $10 fnma common within 12 months, is something I cant understand, since I cant figure out what the terms of any recap will be...and it is the common that is directly affected by the recap.  if I had an expectation as to what those terms would be prior to the cap rule, that analyis has been rendered useless by the cap rule's conservatism.  I just dont see how he can have any conviction as to price in face of such a stringent cap rule.  what am I missing?

 

I struggle to get to $10 as well.  Only when I make the most rosy assumptions on variables like commitment fees, G-fees, market cap, conversion terms, and sub debt issuance do I approach $10.  Plausible? Yes, but I can also make a plausible case for <$2/share.  There are too many unknowns at this point. That's why he has to add a qualifying "may be worth" to his statement about $10/share.

 

Nevertheless, common buyers jumped in head first today.  Ackman is a smart guy but when he makes public price prognostications I almost always discount them.

[WB_fan82]

The upside case for the common is recap over time, no extra dilution.  I.e. kill the NWS but no recaps.  OR small dilution in a couple years at a much higher stock price.

 

The common trades for 1x earnings.  It doesn't matter if it takes 8 years, that value builds up to the common over time.

 

It's not a great scenario for prefs who could be sitting for all that time and "only" playing for 120% upside.

[investorG]

here is an interview with ackman on GSEs posted 11/27/20: 

 

bill is very smart and successful, and he seems untroubled by the notion that there might be no 4thA...in part because of the collins scotus case...and he further seems untroubled by the notion that Ps might even lose collins, because he thinks the Biden administration will continue with the GSE recap and eventual release.

 

all of this I agree with for the most part, but his short term view of common, an opportunity for a $10 fnma common within 12 months, is something I cant understand, since I cant figure out what the terms of any recap will be...and it is the common that is directly affected by the recap.  if I had an expectation as to what those terms would be prior to the cap rule, that analyis has been rendered useless by the cap rule's conservatism.  I just dont see how he can have any conviction as to price in face of such a stringent cap rule.  what am I missing?

 

potentially,

a) some creative warrant alteration

b) capital rule buffer relaxation with new FHFA head

c) no action which allows capital to build organically

 

Also, I suspect some long pref holders short common as a hedge and chose to cover.

 

We have invested alongside mostly hedge funders in the jr pref -- many of them are a) trapped longs and/or b) fearful of ruining their year with a gap down.

[TonyG]

https://www.bloomberg.com/news/articles/2020-12-01/trump-s-time-is-short-to-redo-fannie-freddie-as-hedge-funds-want?utm_source=twitter&cmpid=socialflow-twitter-business&utm_content=business&utm_medium=social&utm_campaign=socialflow-organic

 

just hedge funds want this..lol

 

"The preferred shares they own would likely soar if the Treasury Department relinquished or altered the terms of its roughly $220 billion stake of senior preferred shares in Fannie and Freddie -- a move Calabria is urging."

[orthopa]

The upside case for the common is recap over time, no extra dilution.  I.e. kill the NWS but no recaps.  OR small dilution in a couple years at a much higher stock price.

 

The common trades for 1x earnings.  It doesn't matter if it takes 8 years, that value builds up to the common over time.

 

It's not a great scenario for prefs who could be sitting for all that time and "only" playing for 120% upside.

 

Not true and that's the beauty of the upside for the preferred. It takes 8 years  there is no way preferred don't get converted to enjoy that common upside with a conversion.  The benefit to building capital that divs are not paid. If not converted (which makes no sense because it counts towards capital and levels the playing field if Srs gone for all parties involved) You have some preferred with a 25%+ div yield on cost that can compound with that upside. The capital rule has an exception for div payments which protect preferred in this regard.

 

What many who hold common dont realize is that the preferred is defacto common with protection, preference in the cap structure, and optionality. If one wanted the upside of common right now you would just hold preferred (at least the high div series) because there is very little chance IMO they are not converted and to there benefit to do so.

 

Like I said before those higher up in the cap structure will make sure they extract their pound of flesh before leveling the playing field. No way they advocate for others to have returns higher then their own from the start.

 

There are many previous examples of this happening and nearly every projection and back of the envelope calculation that has been published assumes the same. If you hold both common and preferred you are holding the same thing except the one hasn't diluted the other to its benefit yet. Of course you could try to trade around these two but that maybe a fools errand.

[orthopa]

https://www.bloomberg.com/news/articles/2020-12-01/trump-s-time-is-short-to-redo-fannie-freddie-as-hedge-funds-want?utm_source=twitter&cmpid=socialflow-twitter-business&utm_content=business&utm_medium=social&utm_campaign=socialflow-organic

 

just hedge funds want this..lol

 

"The preferred shares they own would likely soar if the Treasury Department relinquished or altered the terms of its roughly $220 billion stake of senior preferred shares in Fannie and Freddie -- a move Calabria is urging."

 

With all the op eds, these bloomberg articles, Bright talking, parrot, stevens etc we have to be close.

[COBFInfinity]

The very low yielding (in some cases, 0%) preferreds have closed most of the price gap with those with 5-6% yields. It sure looks like some form of equal treatment is being considered more likely by the market. I've never owned those low yields, but if I did I sure would be trying to swap into some of the higher yields at this point just in case the dividend rates end up mattering.

[WB_fan82]

There are several scenarios where the common do far better than the preferred.

 

If the jr preferred gets converted to common, it won't be when the common are trading at $2-3 per share.  The common will be trading far higher than that.  This is an ultra reflexive scenario with respect to common share price, and extrapolating common price at current 1x earnings is a mistake.  And keep in mind there is no real reason or urgency for this to happen until the very end of recap.  As earnings retain, the common stock goes up while the pfd patiently wait for this conversion.  It's not going to happen early in the process.

 

Converting the sr pfds is the "right" economic scenario, but it's also messy.  Time might be up for this one.  That leaves other scenarios with amending the sr pfd that are far more favorable to the common and earnings retention scenarios, and also far easier to Mnuchin to do.

 

 

 

 

 

[Guest cherzeca]

"

(Bloomberg Intelligence) -- RECENT EVENT

REACTION: Comments by Treasury Secretary

Steven Mnuchin, Fed Chair Jerome Powell and

Senate Banking Chair Mike Crapo at a CARES

Act hearing on Dec. 1 increase our confidence

that Treasury remains willing and able to

execute a fourth PSPA amendment before Jan. 20 to restructure Treasury's stake in Fannie Mae and Freddie Mac, augment the GSEs' retained capital, and settle some ongoing litigation, without technically ending the conservatorships. (12/01/20)”

 

[DocSnowball]

https://www.bloomberg.com/news/articles/2020-12-01/trump-s-time-is-short-to-redo-fannie-freddie-as-hedge-funds-want?utm_source=twitter&cmpid=socialflow-twitter-business&utm_content=business&utm_medium=social&utm_campaign=socialflow-organic

 

just hedge funds want this..lol

 

"The preferred shares they own would likely soar if the Treasury Department relinquished or altered the terms of its roughly $220 billion stake of senior preferred shares in Fannie and Freddie -- a move Calabria is urging."

 

This kind of journalism is so pathetic imho...if they wanted to do it for hedge funds wouldn't it be years ago. Instead of looking at the merit of the proposal, they come out with all sorts of garbage. Security prices go up all the time with event based investments; it seems this is just an excuse for journalists pushing an agenda.

 

Edit: also to invert the argument, if/when a PSPA and consent order is done, one could argue any rollback to that path can seriously set back the mortgage market as well, and with more lawsuits to boot.

[undervalued]

https://www.bloomberg.com/news/articles/2020-12-01/trump-s-time-is-short-to-redo-fannie-freddie-as-hedge-funds-want?utm_source=twitter&cmpid=socialflow-twitter-business&utm_content=business&utm_medium=social&utm_campaign=socialflow-organic

 

just hedge funds want this..lol

 

"The preferred shares they own would likely soar if the Treasury Department relinquished or altered the terms of its roughly $220 billion stake of senior preferred shares in Fannie and Freddie -- a move Calabria is urging."

 

This kind of journalism is so pathetic imho...if they wanted to do it for hedge funds wouldn't it be years ago. Instead of looking at the merit of the proposal, they come out with all sorts of garbage. Security prices go up all the time with event based investments; it seems this is just an excuse for journalists pushing an agenda.

 

Edit: also to invert the argument, if/when a PSPA and consent order is done, one could argue any rollback to that path can seriously set back the mortgage market as well, and with more lawsuits to boot.

 

The article also mentioned if Biden is able to remove Calabria at will then he'll also be able to undo most of the changes that Mnuchin/Calabria is about to do. The question is how much can Biden undo?

[orthopa]

There are several scenarios where the common do far better than the preferred.

 

If the jr preferred gets converted to common, it won't be when the common are trading at $2-3 per share.  The common will be trading far higher than that.  This is an ultra reflexive scenario with respect to common share price, and extrapolating common price at current 1x earnings is a mistake.  And keep in mind there is no real reason or urgency for this to happen until the very end of recap.  As earnings retain, the common stock goes up while the pfd patiently wait for this conversion.  It's not going to happen early in the process.

 

Converting the sr pfds is the "right" economic scenario, but it's also messy.  Time might be up for this one.  That leaves other scenarios with amending the sr pfd that are far more favorable to the common and earnings retention scenarios, and also far easier to Mnuchin to do.

 

There wont be urgency to recap the company as soon as possible? Why, to pay out an exorbitant % of earnings in commitment fee to treasury? To withhold dividends as long as possible to current and new investors? To keep a lid of CEO pay? That makes no sense and you know it. That only makes sense to the retail common investor who hasn't read the capital rule.

 

Preferred get converted early and enjoy the upside of the common not at the end. Where has preferred getting converted at the end happened? C? AIG? and why does where the common trade in relation to eps matter now all of a sudden?

 

Place in the capital stack matters as will be shown in the recap plans. Maybe its warrants, maybe its a better then market conversion but preferred holders, hold preference in the capital stack and a 33B key to getting out of conservatorship early. What do common hold? Just the pie that will be taken from.

 

No way the preferred holders that have ridden these cases up to the SCOTUS for the benefit for all involved don't come away with a sweet deal in the recap. You think Paulson, Berkowitz et al are doing this for the good retail common holder when they will have a seat at the table with the GSEs in recap? For "the rule of law"? Get out of here. You think he was throwing $150,000 plate fund raisers for Trump 4 years ago trying to get to make the retail common holder a millionaire while he holds preferred? Nope. This is for him, its simple, hold what he holds.

 

[orthopa]

https://www.bloomberg.com/news/articles/2020-12-01/trump-s-time-is-short-to-redo-fannie-freddie-as-hedge-funds-want?utm_source=twitter&cmpid=socialflow-twitter-business&utm_content=business&utm_medium=social&utm_campaign=socialflow-organic

 

just hedge funds want this..lol

 

"The preferred shares they own would likely soar if the Treasury Department relinquished or altered the terms of its roughly $220 billion stake of senior preferred shares in Fannie and Freddie -- a move Calabria is urging."

 

This kind of journalism is so pathetic imho...if they wanted to do it for hedge funds wouldn't it be years ago. Instead of looking at the merit of the proposal, they come out with all sorts of garbage. Security prices go up all the time with event based investments; it seems this is just an excuse for journalists pushing an agenda.

 

Edit: also to invert the argument, if/when a PSPA and consent order is done, one could argue any rollback to that path can seriously set back the mortgage market as well, and with more lawsuits to boot.

 

It is pathetic but so true. This is all for Paulson and always has been. He tried by lobbying before the 2016 election, supporting Trump early, becoming an economic advisor on housing for Christ sakes early in the admin that conveniently chose Mnuchin, a former MBS trader and partner of Pauslon as Treasury Secretary. Then you throw in an architect of HERA and critic of the NWS in Calabria and whalah 4 years later you make Billions, and Billions of dollars. It was a long shot no doubt that Trump got in but so was this.

 

I still have yet to hear a convincing argument why Mnuchin felt so strongly about releasing FnF the day after the election and why it just so happens Calabria with his past was nominated for FHFA. No mention of FNF during Trumps 2016 campaign but the day after the election the former MBS trader who is buddies with Paulson says it has to be done. OK!!! How did Mnuchin rise up from a no name campaign finance guy to being Treasury Secretary to lo and behold also be the final say in the 4th amendment 4 years later. Wow, what a god damn coincidence!!!

 

https://theintercept.com/2016/11/22/hedge-fund-managers-expect-a-return-on-their-investment-in-donald-trump/

 

After reading the article ask yourself, is it really a coincidence we are were we are 4 years later in regards to a 4th amendment and releasing FnF? I think not and Im aligning myself with the guy thats going to eat first.

[Luke 532]

Everybody should read what Orthopa said in his previous two posts.  Then read it again.  And again, until it sinks in.  Don't overthink it, folks.

[TwoCitiesCapital]

Everybody should read what Orthopa said in his previous two posts.  Then read it again.  And again, until it sinks in.  Don't overthink it, folks.

 

+1

[Guest cherzeca]

Everybody should read what Orthopa said in his previous two posts.  Then read it again.  And again, until it sinks in.  Don't overthink it, folks.

 

agree, orthopa is on a roll...and I like to eat first

[undervalued]

https://www.c-span.org/video/?478323-1/treasury-secretary-mnuchin-federal-reserve-chair-powell-testify-covid-19-response

 

FYI, 01:16:03 mark is when Mnuchin start addressing FNMA conservatorship.

[DocSnowball]

https://www.c-span.org/video/?478323-1/treasury-secretary-mnuchin-federal-reserve-chair-powell-testify-covid-19-response

 

FYI, 01:16:03 mark is when Mnuchin start addressing FNMA conservatorship.

 

MBA features as one of the campaign contributors to Mike Rounds, the Senator who asked the question. "Commercial banks" as well.

https://www.opensecrets.org/members-of-congress/summary?cid=N00035187&cycle=2020&type=C

[WB_fan82]

There are several scenarios where the common do far better than the preferred.

 

If the jr preferred gets converted to common, it won't be when the common are trading at $2-3 per share.  The common will be trading far higher than that.  This is an ultra reflexive scenario with respect to common share price, and extrapolating common price at current 1x earnings is a mistake.  And keep in mind there is no real reason or urgency for this to happen until the very end of recap.  As earnings retain, the common stock goes up while the pfd patiently wait for this conversion.  It's not going to happen early in the process.

 

Converting the sr pfds is the "right" economic scenario, but it's also messy.  Time might be up for this one.  That leaves other scenarios with amending the sr pfd that are far more favorable to the common and earnings retention scenarios, and also far easier to Mnuchin to do.

 

There wont be urgency to recap the company as soon as possible? Why, to pay out an exorbitant % of earnings in commitment fee to treasury? To withhold dividends as long as possible to current and new investors? To keep a lid of CEO pay? That makes no sense and you know it. That only makes sense to the retail common investor who hasn't read the capital rule.

 

Preferred get converted early and enjoy the upside of the common not at the end. Where has preferred getting converted at the end happened? C? AIG? and why does where the common trade in relation to eps matter now all of a sudden?

 

Place in the capital stack matters as will be shown in the recap plans. Maybe its warrants, maybe its a better then market conversion but preferred holders, hold preference in the capital stack and a 33B key to getting out of conservatorship early. What do common hold? Just the pie that will be taken from.

 

No way the preferred holders that have ridden these cases up to the SCOTUS for the benefit for all involved don't come away with a sweet deal in the recap. You think Paulson, Berkowitz et al are doing this for the good retail common holder when they will have a seat at the table with the GSEs in recap? For "the rule of law"? Get out of here. You think he was throwing $150,000 plate fund raisers for Trump 4 years ago trying to get to make the retail common holder a millionaire while he holds preferred? Nope. This is for him, its simple, hold what he holds.

 

I agree with you that common has the pie that everyone wants to eat.  But at this late hour, scenarios where the pie gets devoured (jr pref exchange, sr pref exchange) start withering and the pie might be getting put in the fridge.  Amending sr pfd to kill NWS but leaving the pref outstanding, for example, turns time into the friend of the common shareholders.  Recapping over time is far better for the common than the preferred.

 

Your best point is that the incentives of the companies and the management team favor recapping ASAP.  In a scenario where TSY steps out of the picture  and a consent decree with FHFA is signed, I agree.  But you need both of those things to happen to raise private capital.

 

If that doesn't happen, the common at 1x earnings could easily do better than prefs at 40c on the dollar.  Imagine if TSY amends PSPA, changes its prefs to non cumulative, reverts the dividend back to 10%, and says thou shalt not exit c-ship nor sign a consent decree until minimum capital requirements met.  Now you have recap over retained earnings, you run through SC (if $125B of NWS overage comes back, that's to the common), etc.  Prefs are in time out while this happens.  And what happens if Calabria is replaced?!  At least the common accrue value over time.  At 1x you're paid to wait.  At 40c on the dollar, you get paid a lot less in the prefs.

 

Unfortunately, Jr preferred do not have a seat at the GSE recap table.

 

Look, I own a ton of jr pfds.  I've never been tempted by the common shares until now.  But I find it hard to imagine a complicated recap/exchange offer happening with no momentum.  And unfortunately the optics still matter since the Senate is in play in Georgia, so Mnuchin might not do anything until the last two weeks of lame duck.

 

I'd love to be wrong, but I've lost a little love for my jr pfd position.