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 November 8 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 November 8 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 November 9 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 November 9 by Sunrider

[orthopa]

On 11/9/2024 at 8:52 AM, TwoCitiesCapital said:

 

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

 

 

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. 

 

 

Is this self dealing for Paulson? I would say so no?

 

 

 

COMPLEX FINANCIAL HOLDINGS preventing him from holding office.  Wonder what those are? Come on John, come out and say it!

So Pauslon turned down being a treasury secretary so he can hope and pray on little to no chance that FnF get released. Not because he holds what is believed to be 4B+ in face value of preferreds bought a pennies on the dollar. Really????

 

Paulson must know enough about what may happen to FnF to turn down one of the most powerful financial jobs in the world. Im going to follow his lead for now. 

Edited November 13 by orthopa

[TwoCitiesCapital]

2 minutes ago, orthopa said:

 

 

Is this self dealing for Paulson? I would say so no?

 

 

 

COMPLEX FINANCIAL HOLDINGS preventing him from holding office.  Wonder what those are? Come on John, come out and say it!

 

 

So we're saying Paulson has a better moral compass than Trump? Because that's basically all this hints at. 

[orthopa]

On 11/9/2024 at 3:04 PM, Sunrider said:

 

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 ... 

 

 

I dont have the latest Moelis paper. There have been a couple released with a 2 I believe coming out around 2016ish I believe. From what I understand the latest one has been trading via PMs on twitter with others I follow who have been in the Fannie trade for years. Tim Pagliara has been sharing it with them I guess. I have been unsuccessful in obtaining a copy but from what others have shared with me in one scenario Preferred get converted at ~82% of par. The other scenario is the preferred have the dividend turned back on at some point. From what I have gathered from others way more connected then me is that just turning the div back on is seen as a more palatable option within the admin as it takes away the angle of "unjustly enriching preferred shareholders". The preferred shares have contract rights and restarting the divs honor those rights. 

 

Conversion is an option for preferred but then you open up the dynamic of sharing the pie and who takes from who in relation to Gov vs common etc. As you mention there are multiple different options. The WSJ article from late summer says recap options that limit lawsuits and essentially in fighting are being pursued. I think the Govs liquidation preference since the last amendment gets waived in exchange for a commitment fee of some sort. Then you have the govt position of the Sr preferred and the warrants. The gov has a million options of how to deal with that. The gov could convert the Sr preferred and sell the warrants like they did with BAC, C, JPM etc. That optically looks better then crushing the common on their own.  They could convert the Sr and Jr preferred on a 1 for 1 basis with an equal haircut for both into common then sell new preferred. They could get them out on consent decree and hold divs on the Jr Preferred until capital hits target levels a let the companies continue to build capital and forego an IPO. 

 

Im currently only in preferred and would never argue strongly against someone's common position who think the return maybe similar or better because I know no more then anyone else. I do know though that the preferred are higher in the capital stack, have 2/3 vote hurdles for conversion etc and thus some built in protections against getting crushed like common can. I sleep better at night knowing that Paulson only owns preferred too. 

[orthopa]

 

 

 

 

 

Trump Team Plans Fannie/Freddie Privatizing Push in First Months of Administration; Elizabeth Warren Becomes Ranking Dem on Senate Banking Committee; Biden Administration Shields Agency Rulemaking from Repeal Under Trump.  Officials within the Trump transition team are considering a plan to initiate privatization of Fannie Mae (FNMA) and Freddie Mac (FMCC), the mortgage finance giants, within the first months of the administration with a blockbuster public offering before the end of 2025, said sources familiar with the discussions. 

 

Members of Trump’s economic and housing policy team believe they need to move quickly to break years of inertia on how to reform the companies that were effectively seized by the government when the 2008 housing crisis hit. “This is the last unresolved issue of the Financial Crisis, and we have a chance to fix this the right way,” said one source familiar with the internal deliberations. In one scenario being considered, president elect Trump, or a new Treasury Secretary would state the administration’s intention to privatize Fannie and Freddie and End Conservatorship in 100 Days”—referring to the current regulatory structure that has Fannie and Freddie in government hands. The Trump transition team did not immediately respond to a request for comment on Thursday.

 

When the government took control of Fannie and Freddie, it offered enough capital to keep the companies afloat but virtually wiped-out common shareholders. The government has a right to about 80% of common stock if the companies are put back on the market. The government’s stake in the enterprises could be worth $150 billion, according to boosters of the plan. The first Trump administration and Biden administration both considered releasing Fannie and Freddie—known as government-sponsored enterprises (GSEs)—but the plans faltered. Policymakers were concerned that privatizing the companies could rattle mortgage bond investors who are accustomed to Washington bolstering the companies. If investors fear the government’s backing could vanish, they might shun mortgage bonds and ultimately push housing costs higher. 

 

Supporters of privatization envision Fannie and Freddie paying a surcharge for ongoing government protection  against a financial calamity and they believe that investors will accept that implicit government backing as ironclad. Some housing market experts are skeptical. Congress would have to initiate or at least ratify Fannie and Freddie privatization to send a full-throated message to the market that the government is giving its steadfast backing, they said. Only Congress can fix the inherent flaws in the GSE model and provide taxpayers, homebuyers, lenders, and global investors with certainty regarding the government’s role in a post-conservatorship secondary mortgage market,” said Edward DeMarco, President of the Housing Policy Council which represents a variety of stakeholders in the housing market.

 

Lawmakers in Congress have initiated and ultimately abandoned several plans to reform Fannie and Freddie since the Financial Crisis. Representative French Hill (R-AR), a leading contender to become Chairman of the House Financial Services Committee, said he expects lawmakers will want a voice in any reform of Fannie and Freddie. “Congress is ready to work with the incoming Trump Administration to make the best decision as to the resolution of the conservatorship of Fannie Mae and Freddie Mac,” he told The Capitol Forum. “I look forward to collaborating with President Trump and his team as a continuation of my decade of advocacy of reform, accountability and sound management of the Government Sponsored Enterprises (GSEs).”  Some housing industry leaders have said they believe a privatization of the GSEs is workable—particularly if the companies are heavily regulated and investors treat the companies’ stock as they would shares in a public utility. “The nature of utility stocks, which promise a steady dividend and no rapid stock price appreciation, reinforces the companies as safe and sound U.S. market stabilizers,” said Rob Zimmer of the Community Home Lenders of America which represents small mortgage lenders.

[sleepydragon]

13 minutes ago, orthopa said:

 

 

 

 

 

Trump Team Plans Fannie/Freddie Privatizing Push in First Months of Administration; Elizabeth Warren Becomes Ranking Dem on Senate Banking Committee; Biden Administration Shields Agency Rulemaking from Repeal Under Trump.  Officials within the Trump transition team are considering a plan to initiate privatization of Fannie Mae (FNMA) and Freddie Mac (FMCC), the mortgage finance giants, within the first months of the administration with a blockbuster public offering before the end of 2025, said sources familiar with the discussions. 

 

Members of Trump’s economic and housing policy team believe they need to move quickly to break years of inertia on how to reform the companies that were effectively seized by the government when the 2008 housing crisis hit. “This is the last unresolved issue of the Financial Crisis, and we have a chance to fix this the right way,” said one source familiar with the internal deliberations. In one scenario being considered, president elect Trump, or a new Treasury Secretary would state the administration’s intention to privatize Fannie and Freddie and End Conservatorship in 100 Days”—referring to the current regulatory structure that has Fannie and Freddie in government hands. The Trump transition team did not immediately respond to a request for comment on Thursday.

 

When the government took control of Fannie and Freddie, it offered enough capital to keep the companies afloat but virtually wiped-out common shareholders. The government has a right to about 80% of common stock if the companies are put back on the market. The government’s stake in the enterprises could be worth $150 billion, according to boosters of the plan. The first Trump administration and Biden administration both considered releasing Fannie and Freddie—known as government-sponsored enterprises (GSEs)—but the plans faltered. Policymakers were concerned that privatizing the companies could rattle mortgage bond investors who are accustomed to Washington bolstering the companies. If investors fear the government’s backing could vanish, they might shun mortgage bonds and ultimately push housing costs higher. 

 

Supporters of privatization envision Fannie and Freddie paying a surcharge for ongoing government protection  against a financial calamity and they believe that investors will accept that implicit government backing as ironclad. Some housing market experts are skeptical. Congress would have to initiate or at least ratify Fannie and Freddie privatization to send a full-throated message to the market that the government is giving its steadfast backing, they said. Only Congress can fix the inherent flaws in the GSE model and provide taxpayers, homebuyers, lenders, and global investors with certainty regarding the government’s role in a post-conservatorship secondary mortgage market,” said Edward DeMarco, President of the Housing Policy Council which represents a variety of stakeholders in the housing market.

 

Lawmakers in Congress have initiated and ultimately abandoned several plans to reform Fannie and Freddie since the Financial Crisis. Representative French Hill (R-AR), a leading contender to become Chairman of the House Financial Services Committee, said he expects lawmakers will want a voice in any reform of Fannie and Freddie. “Congress is ready to work with the incoming Trump Administration to make the best decision as to the resolution of the conservatorship of Fannie Mae and Freddie Mac,” he told The Capitol Forum. “I look forward to collaborating with President Trump and his team as a continuation of my decade of advocacy of reform, accountability and sound management of the Government Sponsored Enterprises (GSEs).”  Some housing industry leaders have said they believe a privatization of the GSEs is workable—particularly if the companies are heavily regulated and investors treat the companies’ stock as they would shares in a public utility. “The nature of utility stocks, which promise a steady dividend and no rapid stock price appreciation, reinforces the companies as safe and sound U.S. market stabilizers,” said Rob Zimmer of the Community Home Lenders of America which represents small mortgage lenders.

what do you think will happen if Lutnick is chosen to be the next US treasurer? It seems Scott Bessent is going to be more favorable to FNMA investors?

 

[DRValue]

Held Prefs and commons for years and over time switched mainly to Prefs due to dilution risk. Considering upping my commons with a Pref hedge. Minds are probably made up at this point as to what you think will happen, I'm not trying to convince anyone of anything perhaps just to state where I see the wind blowing. A review of key points as I recall  them (jump in if any of this is inaccurate):

1. Trump has written explicitly that he would have privatized the companies had it not been for his inability to replace the head of the FHFA
2. The 10% moment has been crossed, maybe even higher now. Prior to the net worth sweep terms, the government has been repaid
3. Shareholders have won the fair dealing court case
4. To raise capital all significant litigation must be over
5. Marc Calabria has stated that Treasury lawyers think the government must somehow be compensated for the liquidation preference and a cramdown would be necessary
6. The companies are accruing net worth following Mnuchin's amendments
7. Republicans have the House and Senate
8. Rumours are swirling to end the conservatorships in 100 days
9. Larry Kudlow may have bowed out of Tres.Sec position due to 'complex investments'

With Trump's second term and the letter, I would be comfortable saying I believe recap and release probability is greater than 50%. The 10% moment along with the winning court case can give legitimate cover to amending the SPSA, especially with the added sweetener of $150b from the warrants. Re-terming the SPSA to the 10% moment would end significant litigation. Marc Calabria's comment regarding Treasury lawyers potential need for a cram down is redundant if the SPSA is deemed paid off with an amendment. The permission to accrue net worth is a 'bright line' between the 10% moment and the net worth sweep. With the Republican sweep there is no better time to go through with recap and release and lock in any reforms they wish to make. The 100 day rumours are just rumours but the noise is promising. Larry Kudlow bowing out due to investments is a good sign he would have a conflict of interest in any recap and release proceeding so cannot be involved, assuming he is not willing or cannot transfer the assets to a blind trust.

 

Current opinion is that;

1. Recap and Release happens
2. SPSA is amended and deemed paid off, possibility of the excess going back to the companies
3. Capital Rule amended to be more realistic and also lower G-Fees
4. Warrants are exercised
5. Capital Raises (maybe)

This leaves the common valuation. As a starting point, the $150b number is thrown around a lot, maybe I've seen higher, but this is a reasonable starting point. If the only government dilution is the warrants as the SPSA is paid off, with 9b shares outstanding between the two this leaves a share price of $20.83 when the government sells and exits. interestingly, the combined companies net worth is currently c.$146b, not far from the $150b which would be exceeded next quarter and any sale at that amount could easily be achieved as is represents the book value of the businesses, no flowery valuations needed.

 

For capital requirements, if you consider 2.5% of held mortgage assets as the requirement that puts capital requirement at $197b. Taking off the $146b that leaves $51b to find. With another year's earnings of c.$11.5b for Freddie and $17.25b for Fannie, with a capital raise of $22.25b this is done in 12 months. I would argue $22.25b is very achievable. Raising $22.5b at $12 a share dilutes by 1.875b shares.

 

Going back to the $150b sale value and including the dilution you end up with a market cap of $226b or $20.78 per share for the combined companies.

 

What are everyone's thoughts, please?

 

I am an armchair investor. I am considering upping my common long with a pref hedge. This is not financial advice .

 

 

 

 

 

 

Edited November 17 by DRValue

[TwoCitiesCapital]

3 hours ago, DRValue said:

1. The companies are accruing net worth following Mnuchin's amendment

 

This isn't true - at least not in the traditional sense that would matter to common/preferred shareholders who would be expected to be entitled to that 'net worth'. 

 

They're accruing 'capital' - but every $1 of retained earnings is offset by a $1 increase in the Treasury's liquidation preference.

 

The retained earnings are NOT owned by the companies nor the shareholders - it is owned by the Treasury 

Edited November 17 by TwoCitiesCapital

[sholland]

http://www.timelessinvestor.com/wp-content/uploads/2019/10/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final-1.pdf
 

@Sunrider here is the latest copy of the Moelis blueprint 

[COBFInfinity]

7 hours ago, DRValue said:

The 10% moment along with the winning court case can give legitimate cover to amending the SPSA, especially with the added sweetener of $150b from the warrants.

 

 

 

 

 

 

As far as I know, no one at Treasury has ever given validity to the 10% moment, so I think it's meaningless. SCOTUS gave it's stamp of approval to the Net Worth Sweep, so Treasury gets all the earnings and there is no cap on rate of return. And since Treasury gets all the earnings ON TOP OF an outright 80% warrant, my cautious view is that Treasury should be assumed to get about 100% of the common stock, prior to an offer to convert JPS to common at around par value. Mr. Market clearly sees it differently, because the common shares are trading above $0.01. But for my taste, the common is untouchable.

[DRValue]

12 hours ago, TwoCitiesCapital said:

 

This isn't true - at least not in the traditional sense that would matter to common/preferred shareholders who would be expected to be entitled to that 'net worth'. 

 

They're accruing 'capital' - but every $1 of retained earnings is offset by a $1 increase in the Treasury's liquidation preference.

 

The retained earnings are NOT owned by the companies nor the shareholders - it is owned by the Treasury 

 

Yes, you're right but they're never going to pay it back so the only way to get rid of it to raise capital is to convert or re-term, so to me essentially it is capital due to the anticipated end state. Mnuchin agreed to allow each co. to raise $70b through SPO to pay off the liquidation pref I believe, I cannot see how anyone would ever provide any capital to give it straight to the government.

 

This whole thing comes down to what's more practical and to me, conversion of SPSA seems unnecessary and overly punitive but it doesn't mean others see it that way.

 

I also cannot shake Bill Ackman being in the commons. I certainly see prefs as the safer option that they are but I just wonder how he could be that wrong, compared to someone like me....

[DRValue]

8 hours ago, COBFInfinity said:

As far as I know, no one at Treasury has ever given validity to the 10% moment, so I think it's meaningless. SCOTUS gave it's stamp of approval to the Net Worth Sweep, so Treasury gets all the earnings and there is no cap on rate of return. And since Treasury gets all the earnings ON TOP OF an outright 80% warrant, my cautious view is that Treasury should be assumed to get about 100% of the common stock, prior to an offer to convert JPS to common at around par value. Mr. Market clearly sees it differently, because the common shares are trading above $0.01. But for my taste, the common is untouchable.

 

Craig Phillips was aware of it and agreed with it under Mnuchin in Treasury.

 

IIRC Ackman's thesis is that the commons increase when conservatorship ending is announced, which means less dilution, which means a higher share price, which means less dilution, which means a higher share price...

[orthopa]

I think the uncertainly and debate regarding commons outcome is enough for me to stay only in preferred. Even at todays prices it 2.5 times here to par. Is it worth being lowest in the capital stack and getting diluted to oblivion to get 3 or 4 times your money instead? Not worth the risk to me and 2.5 times todays common price is $8.57. Not worth the risk vs return IMO. 

 

If converted I believe preferred will participate in commons upside after conversion either via favorable conversion terms or eventual reinstatement of dividend. That being said I think some "fairness" will be bestowed upon common ie not 99% dilution but I think the likely hood of outside returns compared to others in the capital stack is low. The preferred have contract rights, years of missed dividends etc and I think will demand a return superior to the common. Why wouldn't they?

 

I still think the gov could get creative with their stake and sell the warrants like the did with the banks. I very highly doubt the SPS get erased and its because the courts have given them cover to not forgive them. That being said I think both the Sr preferred and warrants are on the table. The liquidation preference gets "exchanged" for a yearly fee for commitment or gov guarantee.  Implied vs explicit is where congress could get involved. 

 

Like I said before this investment at this point is like religion. Either you believe there is a reason that Paulson's "exotic investments" prevent him from being nominated, think there is no reason Kudlow wants an interest in treasury etc.  The FHFA head will be telling but in turn that person serves at the pleasure of the president after the supreme court case so its a de facto extension of Trump and his advisors. Trumps cabinet appointments have leaned heavily on loyalty and no one has been more loyal through the 2 presidential winning campaigns then Paulson. This time I'm almost certain we all get paid for his loyalty.