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

[Guest wellmont]

hey bethany this is yahoo finance. you follow the whole gse mess, right? they've been doing really well. they are in the news. And we need a Contrary take and we need it quick.

 

bethany: ummmm.....ahhhhh...well.....

 

bethany come on you can do it. just think of Something Okay?

 

bethany: ummmm....okay. let me think about this a bit more. let me get back to you.

I will try to come up with Something. I can't promise anything though.

[Steve_Berk]

this is such a crazy investment. I put in 100% of one of my main retirement accounts in this, solely for the purpose of investing in what I believed to be a high likelihood of a remand in Perry. I was planning on exiting post remand, depending on the strength of the opinion. This whole Trump thing has been a complete surprise to me, as I'm sure it's been to everyone. But I'll take it. I'm not taking anything off the board for now--this was always an investment that I promised myself I would only make if I were willing to lose it all, and I still am.

[onyx1]

Apologies if this is too basic, but what gives everyone so much confidence that the pref shareholders will have rights to dividends in the future?  Given that they already were essentially killed by the profit sweep, it seems there is a precedent set that their rights are no longer applicable post bail out.

 

My concern is that Mnunchin might give Fannie/Freddie back to the market, but that might not end up being a win for preferred shareholders.

 

The preferred shareholder's don't have a right to a dividend.  But, they do have leverage because the common shareholder's cannot receive any distributions unless the preferred shareholder's dividend payments are current.  Any attempt to recapitalize by selling common shares to new buyers with new money will fail unless the common sold is eligible to receive distributions.

[SnarkyPuppy]

Also own a sizable position and it's taking serious willpower not to trim here.

[BTShine]

Have there been public coments by any of the major players (Paulson, Berkowitz, Ackman -- people that will be negotiating for us) on what they believe the common is worth?

 

Sorry if this had been covered by the board over the thousand+ posts on here.

[tede02]

Also own a sizable position and it's taking serious willpower not to trim here.

 

I own a small position and am thinking the same thing!  ;D

 

Thanks for all of those who have kept this discussion going.  I largely keep quiet and just follow along because you guys are way smarter than me.  Just along for the ride.  Its been interesting to follow. 

[Jurgis]

With current price (.3 of par), getting positive return requires over 40% chance of success and less than 4 years to achieve. (Or higher chance of success if it takes over 4 years to achieve it).

 

Pre-runup, the numbers were ~20% of chance + over 4 years.

 

Assuming 40% chance of success, gain to par, loss to zero, full Kelly's is 10% of portfolio, half Kelly's is 5%.

 

FWIW.

[hardincap]

re: loss to zero, it would be impossible to restructure and reprivatize these companies without resolving the legal cases. mnuchin wants to resolve this relatively fast. for loss to zero, we need the following to happen: fairholme dismissal, perry affirm, and mnuchin turn his back to paulson. someone please correct me if i'm wrong, but zero seems to be off the table.

[PLynchJr]

Have there been public coments by any of the major players (Paulson, Berkowitz, Ackman -- people that will be negotiating for us) on what they believe the common is worth?

 

Sorry if this had been covered by the board over the thousand+ posts on here.

 

Take this for what it's worth but back in May of 2014 Ackman was saying the common is worth between $23 and $47.  The common at the time was trading right around $4.  See attached PDF.

Fannie__Freddie_-_Ackman.pdf

[Guest cherzeca]

re: loss to zero, it would be impossible to restructure and reprivatize these companies without resolving the legal cases. mnuchin wants to resolve this relatively fast. for loss to zero, we need the following to happen: fairholme dismissal, perry affirm, and mnuchin turn his back to paulson. someone please correct me if i'm wrong, but zero seems to be off the table.

 

Loss to zero has always shadowed over name. Risk now has been reduced exponentially but trump is unpredictable so who knows. I believe affirmance in perry is very low risk:  10-20%

[Mephistopheles]

I think by far the highest risk is a Trump impeachment. Democrats hate him, Republicans love Pence, and Trump is a maniac. If Pence gets in, it's probable that he'll do Hensarling's and Corker's bidding rather than Paulson's.

 

Perry affirmance is also a risk though a smaller one imo.

[merkhet]

h/t BTShine for texting me on this

 

http://www.washingtonpost.com/news/where-we-live/wp/2016/11/30/fannie-mae-freddie-mac-should-be-privatized-treasury-secretary-nominee-says/

 

Correction: An earlier version of this story incorrectly stated that Rep. Jeb Hensarling wanted to eliminate Fannie and Freddie. Hensarling wants to get rid of their government charters but not eliminate them as companies.

 

Oh, really, Jeb? Ahem...

 

https://www.bloomberg.com/news/articles/2013-07-24/house-committee-approves-hensarling-s-housing-finance-overhaul

 

The House Financial Services Committee approved a Republican housing bill that would liquidate U.S.-owned financiers Fannie Mae and Freddie Mac and limit government mortgage guarantees.

 

...

 

Hensarling’s legislation would eliminate Washington-based Fannie Mae and Freddie Mac of McLean, Virginia, within five years and replace them with a National Mortgage Market Utility to securitize mortgages. Unlike the Senate bill, the House measure wouldn’t include U.S. backing for securitized loans, though it would let the Federal Housing Administration play an expanded guarantee role in an economic crisis.

 

He's actually my district rep now that I have moved to Dallas (I think, the map is wonky). Guess I no longer have to write that letter that I'd been planning. Welcome to the club, Jeb.

 

Looks like both Corker and Hensarling have had a come to Jesus moment.

[goblue100]

For the experts on the preferreds, do you recommend a specific series b c of discount to par or certain advantages?  I own FNMAS (due to its trading liquidity) but would appreciate thoughts on the other issues.  Thanks for such an extensive dialog. 

[merkhet]

I'd chafe at being labeled an expert on anything, but I'd say that Fannie S is not just the most liquid stock but the second highest yielding stock if they happen to turn on dividends again. So some of the discount to Series S & T (T being the highest, IIRC) is likely due to liquidity but also likely due to lower potential yields.

 

My entire position is in Series S.

[maybe4less]

I'd chafe at being labeled an expert on anything, but I'd say that Fannie S is not just the most liquid stock but the second highest yielding stock if they happen to turn on dividends again. So some of the discount to Series S & T (T being the highest, IIRC) is likely due to liquidity but also likely due to lower potential yields.

 

My entire position is in Series S.

 

Agreed. All the preferreds are at least partly trading on dividend rate and potential yield.

[Luke 532]

I'd chafe at being labeled an expert on anything, but I'd say that Fannie S is not just the most liquid stock but the second highest yielding stock if they happen to turn on dividends again. So some of the discount to Series S & T (T being the highest, IIRC) is likely due to liquidity but also likely due to lower potential yields.

 

My entire position is in Series S.

 

I have FNMAS, FNMAH, and FMCCL, in that order of current dollar amounts.

 

Of those 3, liquidity is best on FNMAS and discount to par is best on FMCCL*.  FNMAH is in the middle on both metrics.

 

*roughly $22 have been paid in dividends over the life of FMCCL (if my math is correct) so if the scenario arises where par minus dividends paid is the resolution, then FMCCL would only settle for $28 ($50-$22).

[Mephistopheles]

That would be an awful scenario; I still don't get why that makes sense as a settlement.

[merkhet]

That would be an awful scenario; I still don't get why that makes sense as a settlement.

 

Which scenario?

[Mephistopheles]

That would be an awful scenario; I still don't get why that makes sense as a settlement.

 

Which scenario?

 

If they deduct the dividends already paid in a settlement, as Fairholme's lawyer suggested

[merkhet]

That would be an awful scenario; I still don't get why that makes sense as a settlement.

 

Which scenario?

 

If they deduct the dividends already paid in a settlement, as Fairholme's lawyer suggested

 

It would be an odd remedy. I personally think that's the lowest case recovery.

[Luke 532]

That would be an awful scenario; I still don't get why that makes sense as a settlement.

 

Which scenario?

 

I think he means FMCCL on par minus dividends as resolution.  I agree, it would be awful.  I mentioned it since it's a possibility.

[spartansaver]

Jurgis, I just want to double check that I'm calculating the Kelly formula right.

 

Odds of being right 40%

Actual odds 1/30%

(bp - q)/q

 

b = 1/.3-1 = 2.33

p = .4

q = (1-.4) = .6

 

(2.33 x .4 - .6) / 2.33 = 14.2%

 

 

[waynepolsonAtoZ]

"I think you will see fnma and fncc merged, attaining huge synergy savings, and a utility-like regulatory regime where rates and return on capital are subject to approval."

 

To the extent that there are any synergy savings, they could be fulfilled via the securitization platform they are building. There may be other synergies, but easier said than done. I wouldn't hold my breath waiting on a merger that FnF doesn't want.

 

Merger savings from "synergies" always comes up in public utility merger proceedings, and there are very many utility mergers that have failed to go through because the commission wanted the utility to commit to very large merger savings and pass them through to ratepayers.

 

I'd say that the GSEs have a utility-like set up already, although it's different obviously. I did a paper on this in 2010. I'll post the attachment when I'm on my "work" computer.

 

Long story short, FHFA sets the GFees. DeMarco raised them a lot (idea being to provide a price umbrella for private label securitizers). Voila, now they are profitable. Of course, costs returned to more or less normal levels, but the result is that they returned to profitability.

 

I don't think the standard rate base * rate of return plus op ex formula works all that readily for the GSEs. But, basically setting GFees high enough so that the GSEs make a "normal return," ie, one that is representative of their forward looking cost of equity capital does make sense.

 

Obviously, a lot of people starting with Bernanke and Hank Paulson have talk about the "public utility model." As a footnote, Bernanke was a GTA at MIT for a former colleague of mine. Bill Taylor was an econ professor at MIT at the time, he left to go to work at Bellcore, which he loved as it was like being a college professor but without the students. Then, ATT was broken up in 1984, lol, and he turned to consulting (legendary as an expert witness).

 

 

 

 

 

 

[hardincap]

A Fannie Mae and Freddie Mac Background Check

Reports of privatizing the government-sponsored mortgage-finance giants are greatly exaggerated.

 

http://www.wsj.com/articles/a-fannie-mae-and-freddie-mac-background-check-1480638591#renderComments

 

[Luke 532]

A Fannie Mae and Freddie Mac Background Check

Reports of privatizing the government-sponsored mortgage-finance giants are greatly exaggerated.

 

http://www.wsj.com/articles/a-fannie-mae-and-freddie-mac-background-check-1480638591#renderComments

 

Wallison...

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg266018/?topicseen#msg266018

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg265330/?topicseen#msg265330

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/msg229141/?topicseen#msg229141