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

[WB_fan82]

Yes that is how liquidation preference works.  You can find it easily in the certificates.  Then current dividend rates * then current liquidation preference = amount of dividend owed.

 

They use the book value amount b/c core capital is just a formula that looks at the equity statement in the financials.  The "extra" liquidation preference is not in that section.  That's why it's sort of a capital fiction.

 

If the GSEs earn $5B in Q4 and pay an in-kind liquidation preference div, retained earnings goes up $5B and there is no entry on the books.

 

Compare to the GSEs sell $5B of sr pfd in the same quarter.  Still the same $5B into the company, but now there is a corresponding increase in the sr pfd entry.

 

In each case, the companies have $5B more.  In each case, the sr liquidation preference is $5B higher.  But only in one case does it increase the capital, per the formulas.

 

That's why I say, even if the accounting is technically correct, it's misleading.

[Williams406]

Looks like after close is the time per Gasparino. 2 weeks ago we were told there wouldn't be a PSPA agreement and not enough time to get anything done before Biden gets in. Now we are told there is a plan (surprise!) but its a pathway out of conservatorship that will not benefit common/preferred shareholders whatever that means.  As of yesterday treatment of the Sr Preferred up for debate at the WH but per Gasparino to not expect much. Honestly sounds like no one knows anything concrete but we will all find out soon enough.

 

+1 and if there is a pathway out of conservatorship how on earth SPdfs are not dealt? I think we are just getting nuked with pieces of misinformation.

 

My best gin waiting in the fridge in case we have a happy ending LOL

 

And your best gin is?

[investorG]

Yes that is how liquidation preference works.  You can find it easily in the certificates.  Then current dividend rates * then current liquidation preference = amount of dividend owed.

 

They use the book value amount b/c core capital is just a formula that looks at the equity statement in the financials.  The "extra" liquidation preference is not in that section.  That's why it's sort of a capital fiction.

 

If the GSEs earn $5B in Q4 and pay an in-kind liquidation preference div, retained earnings goes up $5B and there is no entry on the books.

 

Compare to the GSEs sell $5B of sr pfd in the same quarter.  Still the same $5B into the company, but now there is a corresponding increase in the sr pfd entry.

 

In each case, the companies have $5B more.  In each case, the sr liquidation preference is $5B higher.  But only in one case does it increase the capital, per the formulas.

 

That's why I say, even if the accounting is technically correct, it's misleading.

 

ok, thanks.  I do see what you say, it's in the 3rd amendment only.  So the benefit of the sep30 2019 letter agreement was to reduce odds of receivership by showing some phantom common equity?   

[investorG]

My prediction on what Mnuchin does:

 

1.  Kill the retained caps

2.  Keep the variable div (NWS) in place

3.  BUT, make the sr pfd non-cumulative

4.  Make the srs repayable at par (except for the $1B needed to maintain the lines).  Dividend goes from NWS to 10% once liquidation preference is down to $1B.

5.  TSY permission not needed to release GSEs from c-ship as long as GSEs meet minimum capital requirements

6.  Charge an FDIC-like fee on the committed lines

 

This puts them on the path to exit via truly retaining earnings.  It lets the GSEs raise external capital to exit c-ship.  And it provides maximum return to the taxpayer possible while allow the two things above.

 

what about making the sr pref non-cumulative and changing fixed dividend to 1%.  in theory could pay sr pref down over much longer time period while still turning divs back on in a few years.  $2.2bn per year is more manageable. 

[WB_fan82]

The benefit of the 3rd amendment was twofold.  First, it let the companies build up capital under the formulas that define what capital is.  Second, it makes it far easier to recapitalize them down the road.  Building up the liquidation preference is like letting water pool behind a dam.  At some point in the future, the dam will break and all of that liquidation preference can convert to common.  Without the 3rd amendment, the water never pools.  It just leaks out every quarter.

[WB_fan82]

IG:

 

Why not 5%?  4%?  1%?  0%?

 

Think about this from the standpoint of Mnuchin, not the standpoint of what would be good for you (us).

 

It's all the same reasons.

 

And Calabria will not declare a penny to anyone while in c-ship.  If the prefs go non-cum, it doesn't really matter what the rate is.  So it's best to assume what would be the best for the taxpayer and involve as little "movement" as possible since we are at the 11th hour.  That would be just keeping the NWS as is.  Not justifying some alternative rate (though it would be easy to go back to 10%...).  Keeping the NWS also means nobody gets a shiny penny before the govt gets all their money back.  That's a very simple and reasonable position, and therefore likely in my mind.

 

Bberg article said it's framed as "ending the net worth sweep".  Non-cum would do that.  But so would cumulative fixed rate divs.  Hopefully we'll find out in a couple hours...

 

 

[investorG]

IG:

 

Why not 5%?  4%?  1%?  0%?

 

Think about this from the standpoint of Mnuchin, not the standpoint of what would be good for you (us).

 

It's all the same reasons.

 

And Calabria will not declare a penny to anyone while in c-ship.  If the prefs go non-cum, it doesn't really matter what the rate is.  So it's best to assume what would be the best for the taxpayer and involve as little "movement" as possible since we are at the 11th hour.  That would be just keeping the NWS as is.  Not justifying some alternative rate (though it would be easy to go back to 10%...).  Keeping the NWS also means nobody gets a shiny penny before the govt gets all their money back.  That's a very simple and reasonable position, and therefore likely in my mind.

 

Bberg article said it's framed as "ending the net worth sweep".  Non-cum would do that.  But so would cumulative fixed rate divs.  Hopefully we'll find out in a couple hours...

 

zero coupon (or close) non-cumulative would allow a) tsy to get paid back in full eventually if they win court cases and b) new 3rd party capital to come in easier and quicker bc exit conservatorship and turn on divs sooner with proceeds not used hurriedly to pay down the sr pref which can stay outstanding for longer at a non-punitive div rate. 

 

I hear you on Tsy motives but at some point the greed is outrageous (i'd argue it already is, on the back of US citizens).    Anyway, doesn't matter what we think with only 6 days left sadly it is what it is.

 

[beaufort]

We may eat crow but it very hard to accept  that Trump, who won’t attend Biden’s inauguration, will leave him the NWS in place in some fashion and the SPS to negotiate and monetize.

 

The NWS that Trump is not currently using. 

 

Set up Biden and stick it to donor Paulson.  It doesn’t make sense. 

 

 

[orthopa]

We may eat crow but it very hard to accept  that Trump, who won’t attend Biden’s inauguration, will leave him the NWS in place in some fashion and the SPS to negotiate and monetize.

 

The NWS that Trump is not currently using. 

 

Set up Biden and stick it to donor Paulson.  It doesn’t make sense.

 

 

+1

 

Listen to this. This guy is supposedly our best source and he says "I don't know" 18 times in a matter of 3 minutes. He's in the woods like everyone else. He goes off mortgage industry sources (take your guess on that) who were briefed but have no idea what is going to happen. Unbelievable. His best guess he is "doesnt think" the PSPA will be written down. His source blows. This was supposed to come after the bell according to his source.

 

https://video.foxbusiness.com/v/video-embed.html?video_id=6222969337001&ref=twitter.com

 

Just a bunch of word salad convoluting ownership, percentages, court cases, what conservatorship means, what it means to get out, money going here money going there. This guy is shot and he, Joe Light, and Ackerman are moving the market with their reporting.

 

FWIW when the Treasury plan was under embargo in 2019 he tweeted based on his read the plan was bad for common shareholder which actually meant nothing so this guy is useless too.

[WB_fan82]

The only journalists who have actual, real sources are Ackerman and Light (WSJ and Bberg). 

 

Nobody else matters.

 

I read a lot of comments dumping on them and it makes me wonder about the awareness level of how marquis journalism works...  Ackerman is going to be talking to people like Mnuchin and Calabria and Kudlow.  None of them would pick up the phone to talk to Charlie Gasparino.

[orthopa]

The only journalists who have actual, real sources are Ackerman and Light (WSJ and Bberg). 

 

Nobody else matters.

 

I read a lot of comments dumping on them and it makes me wonder about the awareness level of how marquis journalism works...  Ackerman is going to be talking to people like Mnuchin and Calabria and Kudlow.  None of them would pick up the phone to talk to Charlie Gasparino.

 

Sources maybe on thing but the reporting, headlines included have been very anti-GSE their entire career so some skepticism should be warranted. Ackerman has been quiet for a month so no one is talking to him either at the moment.

[DocSnowball]

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-and-Treasury-Allow-Fannie-Mae-and-Freddie-Mac-to-Continue-to-Retain-Earnings.aspx

[orthopa]

https://home.treasury.gov/news/press-releases/sm1236

[TwoCitiesCapital]

https://home.treasury.gov/news/press-releases/sm1236

 

So, Sr. preferred remain in place, but payments are suspended until GSEs retain capital upto previously stated levels.

 

Every dollar of retained earnings increases liquidation preference, and there is still no mechanism to reduce it, and NWS payments have been amended to the lesser of increase in book value or 10% of liquidation preference.

 

New capital can only be raised once lawsuits are ruled on or settled.

 

Let me see if I can read in between the lines:

 

Common shares are screwed. Retained earnings are financed @ 10%, non-compounded, because they add to liquidation preference which gets priority payment after recap. Only other way to recap more cheaply is to offer shares quickly. Shares can only be offered quickly if there is a settlement.

 

So,

 

1) Common gets screwed by dilution of Treasury's 80% AND new offerings coming in the near term with less emphasis on retained earnings

 

And

 

2) we can expect those new offerings soon as companies and govt now have incentive to settle this quickly (companies to avoid 10% financing of retained earnings for liquidation preference that can never be reduced and govt to unlock the value of its 80% stake to fund new stimulus packages).

 

Does that seem right to everyone else?

 

[Luke 532]

Does that seem right to everyone else?

 

Yes, good job summarizing it.  I agree.  Wonder where prefs trade tomorrow?  Being dependent on a Biden Administration (Yellen) is awful.

[COBFInfinity]

https://home.treasury.gov/news/press-releases/sm1236

 

So, Sr. preferred remain in place, but payments are suspended until GSEs retain capital upto previously stated levels.

 

Every dollar of retained earnings increases liquidation preference, and there is still no mechanism to reduce it, and NWS payments have been amended to the lesser of increase in book value or 10% of liquidation preference.

 

New capital can only be raised once lawsuits are ruled on, or settled.

 

Let me see if I can read in between the lines:

 

Common shares are screwed. Retained earnings are financed @ 10%, non-compounded, because they add to liquidation preference which gets priority payment after recap. Only other way to recap more cheaply is to offer shares quickly. Shares can only be offered quickly if there is a settlement.

 

So,

 

1) Common gets screwed by dilution of Treasury's 80% AND new offerings coming in the near term with less emphasis on retained earnings

 

And

 

2) we can expect those new offerings soon as companies and govt now have incentive to settle this quickly (companies to avoid 10% financing of retained earnings for liquidation preference that can never be reduced and govt to unlock the value of its 80% stake to fund new stimulus packages).

 

Does that seem right to everyone else?

 

Yes, as I guessed earlier today, preferred plaintiffs will be highly incentivized to drop the lawsuits (or settle for pennies). Keeping a 10% dividend and increasing liquidation preference is highly punitive.

 

My view: modestly bullish for preferred, very bearish for common. It's going to take at least a few years to build up the 3% capital target, but at 20% of par there's a big IRR built in. Assumes, of course, that Biden/Yellen will play ball. If they can settle the lawsuits for pennies, I think they might.

[COBFInfinity]

This is good.

 

 

If anyone was somehow underweight preferreds, you might want to buy a few at the open tomorrow.

[COBFInfinity]

A few thoughts before dinner.

 

A shout out to the chartist heroes who came out of the woodwork over the past two weeks with the viewpoint that if the share price was dropping, it meant Mnuchin was going to do nothing. Great help you all were!

 

I bought preferred at the end of 2014 based on the legal angle, but I couldn't help but be convinced by ACG Capital's supposed "D.C. insider" info the last couple years about admin reform. They had been confident that not only would Sr Pfd be written down, but the excess earned by NWS over 10% dividend would be added as a tax credit. I thought the latter part was pie-in-the-sky, but hey, they supposedly had the inside track. So much for that. Did Mnuchin ever have that view? Perhaps, but it obviously wasn't firmly held.

 

One reason Mnuchin waited til the last minute was to develop a plan that Yellen would give the stamp of approval. Good move.

 

Completely meaningless predictions for tomorrow: Common -25%, Preferred +30%.

[Luke 532]

This is good.

 

 

If anyone was somehow underweight preferreds, you might want to buy a few at the open tomorrow.

 

Not sure why that would be good.  Neutral I'd say.  Could have settled with Trump Admin, didn't get done.  Now we have to rely on Biden Admin.  Prefs are at their mercy, unfortunately.

[Luke 532]

Completely meaningless predictions for tomorrow: Common -25%

 

Probably should trade under $1 tomorrow, but I think drops and pops probably land it where you predicted, around $1.50 or so.

 

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

[james22]

Amended PSPA is as edgy as a second glass of Pinot Grigio on a school night. No end in sight for conservatorship. retain more capital – no release from conservatorship for a very long time (settle the lawsuits and meet capital requirements).

 

[james22]

We may eat crow but it very hard to accept  that Trump, who won’t attend Biden’s inauguration, will leave him the NWS in place in some fashion and the SPS to negotiate and monetize.

 

The NWS that Trump is not currently using. 

 

Set up Biden and stick it to donor Paulson.  It doesn’t make sense.

 

Must be very confident in the SCOTUS outcome?

[investorG]

This plan seems unworkable, $400bn needed to be raised or retained, unless we win Collins or Yellen slices the sr pref. 

 

edit: Calabria's tone seemed pissed.

[james22]

Maybe Mnuchin knows the documents Trump just declassified include damning F&F info for SCOTUS to consider?

 

But it doesn't need to make sense. Could simply have fumbled the ball.

[Guest cherzeca]

Does that seem right to everyone else?

 

Yes, good job summarizing it.  I agree.  Wonder where prefs trade tomorrow?  Being dependent on a Biden Administration (Yellen) is awful.

 

JP are dependent on not to be trusted Ds only if scotus doesn't come through. friends, this has always been a legal special situation