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

[investorG]

and....we're back -- hello everybody.

 

hopefully bigger and better than before.

 

starting position in terms of capital (political and economic) looks good.

 

 

[Sunrider]

Saw a Substack or twitter post by kaoboy pointing out that Treasury’s senior pref is going to about 400bn by the time we get to release and that treasury previously concluded that they can simply write if off … if that’s so then it’s hard to see how there’s much value left for JPS, given earnings power and reasonable multiple …?

 

views? Does anyone know any details on that treasury analysis which concluded it would be illegal for them to write off the SPS?

thanks

[gfp]

28 minutes ago, Sunrider said:

previously concluded that they can simply write if off

you meant to say "can't" ?

[TwoCitiesCapital]

30 minutes ago, Sunrider said:

Saw a Substack or twitter post by kaoboy pointing out that Treasury’s senior pref is going to about 400bn by the time we get to release and that treasury previously concluded that they can simply write if off … if that’s so then it’s hard to see how there’s much value left for JPS, given earnings power and reasonable multiple …?

 

views? Does anyone know any details on that treasury analysis which concluded it would be illegal for them to write off the SPS?

thanks

 

Does it really matter the legality of it?

 

The Treasury will do what it wants regardless of legality. Those wanting to challenge them on it can fight in court for the next 15 years. 

 

But I have a hard time believing that they're just going to give up $400 billion in value to make minority shareholders rich. Nobody cares what the common is worth to the government - it's not on their books for them to suffer a write down of any sort of the common goes to zero and there is zero incentive for them to forfeit 100% of profits into perpetuity in the SPS in exchange for 80% profits in perpetuity by owning the common. 

Edited Friday at 02:05 AM by TwoCitiesCapital

[Sweet]

8 hours ago, TwoCitiesCapital said:

 

Does it really matter the legality of it?

 

The Treasury will do what it wants regardless of legality. Those wanting to challenge them on it can fight in court for the next 15 years. 

 

But I have a hard time believing that they're just going to give up $400 billion in value to make minority shareholders rich. Nobody cares what the common is worth to the government - it's not on their books for them to suffer a write down of any sort of the common goes to zero and there is zero incentive for them to forfeit 100% of profits into perpetuity in the SPS in exchange for 80% profits in perpetuity by owning the common. 

 

This.  Short of the treasury secretary being Paulson or Ackman, I think the chances of these preferred or common making out large is low.  Plus we have a 15 year history on exactly this happening, Treasury doing what it wants, it going through the courts and the shareholders losing.  The Treasury could just wipe the slate, issue new shares and send it to market taking all the money for themselves.

[orthopa]

11 hours ago, Sweet said:

 

This.  Short of the treasury secretary being Paulson or Ackman, I think the chances of these preferred or common making out large is low.  Plus we have a 15 year history on exactly this happening, Treasury doing what it wants, it going through the courts and the shareholders losing.  The Treasury could just wipe the slate, issue new shares and send it to market taking all the money for themselves.

 

I disagree, that's receivership and if any admin was going to do it, it was Obamas, didnt happen then, wont happen now. Treasury hold all the cards now with a functioning mortgage market that no one has been able to come up with an alternative too. Receivership would tank the mortgage market and for what reason.  Inaction is a risk receivership is not.  Doing whatever you want goes both ways. If the laws allow treasury and FHFA to do whatever they want then release could certainly happen within the law. 

 

Why release? Treasury doesn't touch any of the money it gets now in liquidation preference. It can eventually according to the last agreement when the NWS turns back on but Treasury can also get money now or soon. Time value of money. 

 

Take it for what it worth from a bag holder but since opinions count here Trump owes Paulson and I bet( I have bet very highly and foolishly for some time) get paid this time. Trump doesn't have to get reelected. FnF will have 150B+ of capital, FHFA director works at pleasure of president. Bessent just announced front runner for Treasury. He believes in reprivatizing the American economy per reports. What does that mean who knows. 

 

I never believed Paulson would be Treasury Secretary. David Faber this morning on squawk box reported he has 4-5B par value of preferreds. Why would he sell that to take Treasury position andthen take FnF out of conservatorship? Makes no sense and looks like self dealing. I bet he keeps his distance and is an advisor in this admin like Craig Phillips. His holdings are private and not disclosed for a reason and will stay private. 

 

FWIW there is a Moelis paper circulating out there that is hard to get your hands on. Says preferred have 2 options. Turn divs back on (yes please!) or convert at 80-90% I believe based on series. Not gospel but interesting for sure. 

 

There is also an outstanding lawsuit in favor of plaintiffs on appeal with 612 million in damages that is accruing interest. Not a ton of extra cash but (I think but haven't done the math in a while) 40-50 cent award for some series if finalized.  If your cost basis on shares is $2-3 a share like mine thats a nice ROI. 

 

This investment is like religion. Either you believe or not. Is that smart? Depends on your reasoning and how you connect the dots. Will be a fun ride. 

Edited Friday at 10:46 PM by orthopa

[sleepydragon]

37 minutes ago, orthopa said:

 

I disagree, that's receivership and if any admin was going to do it, it was Obamas, didnt happen then, wont happen now. Treasury hold all the cards now with a functioning mortgage market that no one has been able to come up with an alternative too. Receivership would tank the mortgage market and for what reason.  Inaction is a risk receivership is not.  Doing whatever you want goes both ways. If the laws allow treasury and FHFA to do whatever they want then release could certainly happen within the law. 

 

Why release? Treasury doesn't touch any of the money it gets now in liquidation preference. It can eventually according to the last agreement when the NWS turns back on but Treasury can also get money now or soon. Time value of money. 

 

Take it for what it worth from a bag holder but since opinions count here Trump owes Paulson and I bet( I have bet very highly and foolishly for some time) get paid this time. Trump doesn't have to get reelected. FnF will have 150B+ of capital, FHFA director works at pleasure of president. Bessent just announced front runner for Treasury. He believes in reprivatizing the American economy per reports. What does that mean who knows. 

 

I never believed Paulson would be Treasury Secretary. David Faber this morning on squawk box reported he has 4-5B par value of preferreds. Why would he sell that to take Treasury position andthen take FnF out of conservatorship? Makes no sense and looks like self dealing. I bet he keeps his distance and is an advisor in this admin like Craig Phillips. His holdings are private and not disclosed for a reason and will stay private. 

 

FWIW there is a Moelis paper circulating out there that is hard to get your hands on. Says preferred have 2 options. Turn divs back on (yes please!) or convert at 80-90% I believe based on series. Not gospel but interesting for sure. 

 

There is also an outstanding lawsuit in favor of plaintiffs on appeal with 612 million in damages that is accruing interest. Not a ton of extra cash but (I think but haven't done the math in a while) 40-50 cent award for some series if finalized.  If your cost basis on shares is $2-3 a share like mine thats a nice ROI. 

 

This investment is like religion. Either you believe or not. Is that smart? Depends on your reasoning and how you connect the dots. Will be a fun ride. 

 

It seems all thesis is on the preferred. I am curious is the commons a good bet? I have both. Shall I sell my commons and put all eggs in the preferred?

[COBFInfinity]

3 hours ago, sleepydragon said:

 

It seems all thesis is on the preferred. I am curious is the commons a good bet? I have both. Shall I sell my commons and put all eggs in the preferred?

 

The SPS + warrants for 80% of common means the Treasury already controls 100% of the common value. So while preferred stocks have some contractual rights protecting them, you have to come up with some sort of compelling argument why Treasury would be willing to share any material value with existing common shareholders.

[TwoCitiesCapital]

15 hours ago, orthopa said:

Why release? Treasury doesn't touch any of the money it gets now in liquidation preference. It can eventually according to the last agreement when the NWS turns back on but Treasury can also get money now or soon. Time value of money. 

 

All that requires is a renegotiation of the sweep. Just like how it got renegotiated to be retained by Mnuchin last time around. 

 

15 hours ago, orthopa said:

I never believed Paulson would be Treasury Secretary. David Faber this morning on squawk box reported he has 4-5B par value of preferreds. Why would he sell that to take Treasury position and then take FnF out of conservatorship? Makes no sense and looks like self dealing. 

 

Why would Paulson be expected to dispose of his positions if Trump isn't required to? Trump was actively negotiating for a hotel in Moscow last time he was running for President. Do you really believe this administration cares about self-sealing or conflicts of interest? 

 

Self-sealing is the ONLY way they get released. 

 

I don't think it happens. But that's because I don't think Trump cares and it doesn't benefit him. Where I concede I could be wrong here is the possibility of some political favor trading going on where he does it to benefit someone in his administration in return for something from them, but I think the odds are low because he could've done that last time too. 

Edited Saturday at 01:53 PM by TwoCitiesCapital

[Sweet]

16 hours ago, orthopa said:

 

I disagree, that's receivership and if any admin was going to do it, it was Obamas, didnt happen then, wont happen now. Treasury hold all the cards now with a functioning mortgage market that no one has been able to come up with an alternative too. Receivership would tank the mortgage market and for what reason.  Inaction is a risk receivership is not.  Doing whatever you want goes both ways. If the laws allow treasury and FHFA to do whatever they want then release could certainly happen within the law. 

 

Why release? Treasury doesn't touch any of the money it gets now in liquidation preference. It can eventually according to the last agreement when the NWS turns back on but Treasury can also get money now or soon. Time value of money. 

 

Take it for what it worth from a bag holder but since opinions count here Trump owes Paulson and I bet( I have bet very highly and foolishly for some time) get paid this time. Trump doesn't have to get reelected. FnF will have 150B+ of capital, FHFA director works at pleasure of president. Bessent just announced front runner for Treasury. He believes in reprivatizing the American economy per reports. What does that mean who knows. 

 

I never believed Paulson would be Treasury Secretary. David Faber this morning on squawk box reported he has 4-5B par value of preferreds. Why would he sell that to take Treasury position andthen take FnF out of conservatorship? Makes no sense and looks like self dealing. I bet he keeps his distance and is an advisor in this admin like Craig Phillips. His holdings are private and not disclosed for a reason and will stay private. 

 

FWIW there is a Moelis paper circulating out there that is hard to get your hands on. Says preferred have 2 options. Turn divs back on (yes please!) or convert at 80-90% I believe based on series. Not gospel but interesting for sure. 

 

There is also an outstanding lawsuit in favor of plaintiffs on appeal with 612 million in damages that is accruing interest. Not a ton of extra cash but (I think but haven't done the math in a while) 40-50 cent award for some series if finalized.  If your cost basis on shares is $2-3 a share like mine thats a nice ROI. 

 

This investment is like religion. Either you believe or not. Is that smart? Depends on your reasoning and how you connect the dots. Will be a fun ride. 

You could be correct Orthopa, I just think the history of this suggest that getting it released is unlikely give the history.

 

I still think it is more likely the current share structure is wiped.  I think we could see a half way where current holders could get something as part of a new ownership structure.

[TwoCitiesCapital]

3 hours ago, TwoCitiesCapital said:

 Do you really believe this administration cares about self-sealing or conflicts of interest? 

 

Self-sealing is the ONLY way they get released. 

 

On this note: 

https://www.nytimes.com/2024/11/09/us/politics/donald-trump-ethics-transition.html

[Gregmal]

The Trump trade was what I posted last fall….you coulda bought FNMAS for $2 and just played house money into the election. At $9 now? Who cares? It ain’t a Trump trade anymore, you’re banking solely on a specific outcome now. The only way to have made money on those over the last decade is to buy em when nobody is talking about them and sell them when they are.

[Sunrider]

21 hours ago, orthopa said:

 

 

Take it for what it worth from a bag holder but since opinions count here Trump owes Paulson and I bet( I have bet very highly and foolishly for some time) get paid this time. Trump doesn't have to get reelected. FnF will have 150B+ of capital, FHFA director works at pleasure of president. Bessent just announced front runner for Treasury. He believes in reprivatizing the American economy per reports. What does that mean who knows. 

 

 

FWIW there is a Moelis paper circulating out there that is hard to get your hands on. Says preferred have 2 options. Turn divs back on (yes please!) or convert at 80-90% I believe based on series. Not gospel but interesting for sure. 

 

 

Can you ping me that paper please? I think it's from a few years ago? Anyway, if we assume for a moment that Treasury isn't simply going to write down its SPS to zero (why would they), then the capital stack is something like $400bn SPS, $40bn JPS (really don't remember what they are in aggregate), then common.

 

Let's forget about common for a second. The entities make what $40bn (?) in profit - back of the envelope, slap a 10x multiple on it and we've only just covered the SPS? Since Treasury holds the cards and no restructuring happens without the SPS, the question here is how much do they want for their securities (as in, their restructured securities, whatever they turn them into). If significantly less than the liquidation preference then there's a good chance JPS do very well, if right on the liquidation preference, then chances not quite so good.

 

So it seems to me "as simple as" (1) How much will the liquidation pref be by the time we get to release? and (2) How much less than that value will Treasury accept when it sells new instruments to replace the SPS and thereby release the entities?

 

Edit: I should add - Treasury may turn its SPS into new common and leave the JPS alone (probably good for JPS), but I would expect they only do that if they can sell it at roughly SPS value. Not many have that firepower (hello Uncle W!). If you bought common from Treasury in that scenario, why would you want JPS in front of you? 

Treasury may instead leave common and JPS untouched and, let's be generous, create new preferreds on par with current JPS (Farnam street HQ might accept that deal) ... so then we're back to what's the SPS worth, if $400bn and JPS is $40bn, then roughly 10% of all dividends to preferred will go to current JPS. Again, not sure about the numbers but if the entities make $40bn and aggregate preferreds after the restructure pay something like 6%, then common has some value.  Question in this scenario: Who buys newly issued preferreds pari passu with JPS if they could insist on preferential treatment to write the cheque ... 

Edited Saturday at 08:11 PM by Sunrider