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

[hardincap]

the larger concern is that there are still serious political obstacles to overcome. “Never underestimate the ability of Washington to kick the can down the road”

 

investors have dismally underestimated how long this saga goes on for

[Guest cherzeca]

the larger concern is that there are still serious political obstacles to overcome. “Never underestimate the ability of Washington to kick the can down the road”

 

investors have dismally underestimated how long this saga goes on for

 

while there are political obstacles to overcome if you take the political route, mnuchin's "pretty fast" comment and the terms of HERA and the SPSP agt (and corker's jumpstart omnibus language) certainly permit recap and release without congressional action.  if trump wanted to kick the can he could have selected hensarling for treasury secretary.

[Jurgis]

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%

 

You are right.

[Mephistopheles]

This hasn't been mentioned enough, but Trump has between $1-5 million invested in each of 3 Paulson funds, lol.

 

Pg 35/92:

http://2016election.procon.org/sourcefiles/trump-financial-disclosure-form.pdf

 

I think this may be an Ericopoly, put 100% of your net worth in, type of situation...

 

Edit:

I will bet anyone $100 that Paulson has been buying aggressively since the election, probably both prefs and common. I wouldn't be surprised if he's got like 10-20% of his funds in there.

[SnarkyPuppy]

This hasn't been mentioned enough, but Trump has between $1-5 million invested in each of 3 Paulson funds, lol.

 

Pg 35/92:

http://2016election.procon.org/sourcefiles/trump-financial-disclosure-form.pdf

 

I think this may be an Ericopoly, put 100% of your net worth in, type of situation...

 

Not very material for Trump.  Ericopoly also used non recourse leverage (warrants/LEAPS) while shorting downside exposure in related competition- neither of which are applicable here.

[Mephistopheles]

This hasn't been mentioned enough, but Trump has between $1-5 million invested in each of 3 Paulson funds, lol.

 

Pg 35/92:

http://2016election.procon.org/sourcefiles/trump-financial-disclosure-form.pdf

 

I think this may be an Ericopoly, put 100% of your net worth in, type of situation...

 

Not very material for Trump.  Ericopoly also used non recourse leverage (warrants/LEAPS) while shorting downside exposure in related competition- neither of which are applicable here.

 

I was being facetious about the 100%. But having said that, I think Trump likes every single penny coming his way, material or not, and he's a total sellout. That's why he does things like appear in wrestling matches and run a scam university.

[goblue100]

Thanks for the replies on preferred class preferences.  Not sure if group has seen this commentary from KBW, but comments like these have been bandied about the past few days.  I assume this would have no impact on value of preferreds but would appreciate thoughts on recapitalization and impact on value of common, etc.

 

BFW) CORRECT: FNMA, FMCC Shares Zero Value Most Likely Scenario

: KBW

 

+------------------------------------------------------------------------------+

 

CORRECT: FNMA, FMCC Shares Zero Value Most Likely Scenario: KBW

2016-12-02 14:04:16.476 GMT

 

 

By Felice Maranz

    (Bloomberg) -- (Corrects headline to reflect value of

shares rather than actual price of shares)

Even in "best case scenario" of Fannie, Freddie privatization

with 2.5% capital requirement, capital need would "meaningfully"

dilute common shares’ value, suggesting little upside from

current levels, KBW’s Bose George writes in note.

* Still believes most likely scenario is one in which common

shares have no value

* Notes FNMA, FMCC rallied on Steven Mnuchin comments about new

administration wanting to get GSEs out of government hands;

resolving GSE issue was top 10 priority for new administration;

but KBW believes share movement has been based on "unrealistic"

earnings expectations as there hasn’t been enough focus on lack

of capital

** Even if GSE litigation were successful and Trump White House

decides to let FNMA, FMCC go back to prior business model, with

2.5% capital, shares already trading at ~10x pro forma earnings

** Under best case, assuming 2.5% capital requirement, FNMA

would need >$75b, FMCC would need >$50b; if this were to be

raised at ~$5 a share, share count at both would grow by ~4x;

est. fair value would then be ~$4 (current level); if capital

level were set at 5%, fair value would fall into $2.50 range

** Also notes if third amendment to the GSEs’ senior preferred

stock purchase agreements were overturned, GSEs could replace

sweep with periodic commitment fee (meant to compensate Treasury

for ongoing commitment via $400b credit line)

[investorG]

in my opinion there could be 2 flaws with the kbw analysis:

 

a) he might assume all of the capital proceeds need to be raised immediately rather than over time

 

b) it's circular, if the stock price rises then far fewer shares need to be issued, creating a higher current fair value

 

in addition, there is some small chance the warrants are not exercised.

 

the analysis of this investment is time consuming and stressful ---- many people don't want the career risk to be associated with this call, and thus they come up reasons (that sound good) to stay away.   

 

 

[rros]

Thanks for the replies on preferred class preferences.  Not sure if group has seen this commentary from KBW, but comments like these have been bandied about the past few days.  I assume this would have no impact on value of preferreds but would appreciate thoughts on recapitalization and impact on value of common, etc.

 

Analysts are paid to understand today's frozen picture of a company. Not to see how much value can be extracted from an investment. Take a look at John Paulson's investment in LNG when the company was only set for imports and nobody yet had envisioned the US exporting liquified natgas. It took a while but Cheniere made the switch and it can now make money hands over fist. It's not his job, but most likely the analyst is underestimating the creativity and resourcefulness of the potential new owners. It's hard to value and assess the earnings of "leap of faith".

[deadspace]

What if they just did a rights offering to raise capital?  Why do you have to assume they can only raise capital by selling very undervalued shares.  This is a retarded analysis from a supposed expert.  Makes me suspect malfeasance

[merkhet]

What if they just did a rights offering to raise capital?  Why do you have to assume they can only raise capital by selling very undervalued shares.  This is a retarded analysis from a supposed expert.  Makes me suspect malfeasance

 

A rights offering is, by definition, selling undervalued shares... why would anyone subscribe to a rights offering that's above the price you can currently get on the market?

 

Also, I think there is very little chance that Mnuchin allows for a release if the companies don't have adequate capital immediately upon release. So my guess is that letting the companies just build capital over time is not likely. Definitely not 8-10 years like Ackman proposed. I could see 2/3 years but that still means there is an equity gap that has to be filled.

[investorG]

fwiw, I have tilted towards the preferred in 2016 due to the warrants / dilution.

 

however I have switched to slightly favor common because I now view a larger chance (than before) that the warrants don't get exercised, for three reasons:

 

a) Mnuchin directly said the govt needed to get out of ownership.  selling the govt's exercised warrants would take years, as they would likely be selling along side primary capital raises

 

b) Berkowitz, I believe, in a recent interview said they aren't asking for payouts (back dividends, punitive damages, etc), rather just that the companies go free from here on;  this seems to be a conciliatory change in tune vs. a few months ago when he wanted to honor contracts on dividends

 

c) the president-elect doesn't seem to be against citizens making money

[waynepolsonAtoZ]

To the extent people are interested, here is my 2010 paper where I say that FnF are already regulated like public utilities.

Like_Public_Utilities_Regulating_Fannie_Mae_and_Freddie_Mac_ELECTR5643.pdf

[Luke 532]

Epstein...

http://www.forbes.com/sites/richardepstein/2016/12/02/settling-the-fannie-freddie-fiasco-steven-mnuchin-reverse-the-obama-administration-scorched-earth-litigation-strategy-if-they-hope-to-privatize-fannie-and-freddie/#5e6cf6786cf6

Settling the Fannie Freddie Fiasco: Steven Mnuchin Reverse the Obama Administration Scorched Earth Litigation Strategy If They Hope to Privatize Fannie and Freddie

[BTShine]

Wouldn't Mnuchin just go into the treasury office, take a look at what happened by seeing the internal projections, emails, agreements, etc and say "Ok, I've looked back at the agreements that were made and discovered some mistakes.  The GSE's overpaid the government based upon the agreements of the Senior Pref, etc, so the govt will pay back the excess payments since it wasn't our (US Govt) money to begin with, and this will help capitalize the companies to where they should've been.  Now we can start with a clean conscience and create a plan to properly capitalize them."

 

Is this far too optimistic?  I mean, it's pretty clear to most unbiased individuals that the govt strong armed the GSEs into overpaying the govt, is it not?  Am I falling into the alt-universe of the CoBF Board? 

[TwoCitiesCapital]

Wouldn't Mnuchin just go into the treasury office, take a look at what happened by seeing the internal projections, emails, agreements, etc and say "Ok, I've looked back at the agreements that were made and discovered some mistakes.  The GSE's overpaid the government based upon the agreements of the Senior Pref, etc, so the govt will pay back the excess payments since it wasn't our (US Govt) money to begin with, and this will help capitalize the companies to where they should've been.  Now we can start with a clean conscience and create a plan to properly capitalize them."

 

Is this far too optimistic?  I mean, it's pretty clear to most unbiased individuals that the govt strong armed the GSEs into overpaying the govt, is it not?  Am I falling into the alt-universe of the CoBF Board?

 

I think that's the hope for the common shares. That the amount overpaid comes back to the company and doesn't have to be raised via share issuance or by retained earnings. There's probably going to be a share sale, but it'll be a lot more favorable if there are tens of billions flowing back into the companies.

 

Further, as mentioned above, this would be the virtuous cycle as the common would likely pop on the news which means even fewer shares getting issued since it would be done at a higher price.

 

[Guest cherzeca]

Epstein...

http://www.forbes.com/sites/richardepstein/2016/12/02/settling-the-fannie-freddie-fiasco-steven-mnuchin-reverse-the-obama-administration-scorched-earth-litigation-strategy-if-they-hope-to-privatize-fannie-and-freddie/#5e6cf6786cf6

Settling the Fannie Freddie Fiasco: Steven Mnuchin Reverse the Obama Administration Scorched Earth Litigation Strategy If They Hope to Privatize Fannie and Freddie

 

"No private party will ever invest money into any private firm if it knows that some artful maneuver like the NWS could be used to strip them of all their capital whenever the government wished to do so.  The only way for the Trump administration to win the long-term struggle over restructuring Fannie and Freddie is to put an end to the current impasse over the NWS."

 

this is the core point that mnuchin understands and noone in obama administration understands. if you want to privatize GSEs you have to make clear that NWS has not advantaged govt...except for pulling forward timing of receipt of monies otherwise due under original agreement

 

 

[Luke 532]

Epstein...

http://www.forbes.com/sites/richardepstein/2016/12/02/settling-the-fannie-freddie-fiasco-steven-mnuchin-reverse-the-obama-administration-scorched-earth-litigation-strategy-if-they-hope-to-privatize-fannie-and-freddie/#5e6cf6786cf6

Settling the Fannie Freddie Fiasco: Steven Mnuchin Reverse the Obama Administration Scorched Earth Litigation Strategy If They Hope to Privatize Fannie and Freddie

 

"No private party will ever invest money into any private firm if it knows that some artful maneuver like the NWS could be used to strip them of all their capital whenever the government wished to do so.  The only way for the Trump administration to win the long-term struggle over restructuring Fannie and Freddie is to put an end to the current impasse over the NWS."

 

this is the core point that mnuchin understands and noone in obama administration understands. if you want to privatize GSEs you have to make clear that NWS has not advantaged govt...except for pulling forward timing of receipt of monies otherwise due under original agreement

 

Bingo.

[Guest cherzeca]

What if they just did a rights offering to raise capital?  Why do you have to assume they can only raise capital by selling very undervalued shares.  This is a retarded analysis from a supposed expert.  Makes me suspect malfeasance

 

A rights offering is, by definition, selling undervalued shares... why would anyone subscribe to a rights offering that's above the price you can currently get on the market?

 

Also, I think there is very little chance that Mnuchin allows for a release if the companies don't have adequate capital immediately upon release. So my guess is that letting the companies just build capital over time is not likely. Definitely not 8-10 years like Ackman proposed. I could see 2/3 years but that still means there is an equity gap that has to be filled.

 

agreed, though i could see a release once reform has been agreed to (my thought would be a utility-like arrangement suggested by real tim howard), and if capital is light at that time, govt could provide equity line of credit for which GSEs would pay a market fee

[Guest cherzeca]

fwiw, I have tilted towards the preferred in 2016 due to the warrants / dilution.

 

however I have switched to slightly favor common because I now view a larger chance (than before) that the warrants don't get exercised, for three reasons:

 

a) Mnuchin directly said the govt needed to get out of ownership.  selling the govt's exercised warrants would take years, as they would likely be selling along side primary capital raises

 

b) Berkowitz, I believe, in a recent interview said they aren't asking for payouts (back dividends, punitive damages, etc), rather just that the companies go free from here on;  this seems to be a conciliatory change in tune vs. a few months ago when he wanted to honor contracts on dividends

 

c) the president-elect doesn't seem to be against citizens making money

 

if you run your analysis of value of fnma common if NWS is revoked retroactively, i think you will find the current price is very attractive even assuming full warrant dilution

[Luke 532]

Gretchen Morgenson

Trump Treasury May Mean Independence for Fannie and Freddie

http://www.nytimes.com/2016/12/02/business/trump-treasury-may-mean-independence-for-fannie-and-freddie.html?smid=tw-share

[waynepolsonAtoZ]

She says FnF will have zero capital as of the end of 2018.

 

Actually, they'll have zero capital as of January 1, 2018.

[doughishere]

I kinda feel like the typo is supposed to be "at the end of 2016", No? Which isnt a surprise.

[investorG]

re-listing the stock would be important since there's a limited pool of buyers currently, retail+hf's.

[rros]

Wouldn't Mnuchin just go into the treasury office, take a look at what happened by seeing the internal projections, emails, agreements, etc and say "Ok, I've looked back at the agreements that were made and discovered some mistakes.  The GSE's overpaid the government based upon the agreements of the Senior Pref, etc, so the govt will pay back the excess payments since it wasn't our (US Govt) money to begin with, and this will help capitalize the companies to where they should've been.  Now we can start with a clean conscience and create a plan to properly capitalize them."

 

Is this far too optimistic?  I mean, it's pretty clear to most unbiased individuals that the govt strong armed the GSEs into overpaying the govt, is it not?  Am I falling into the alt-universe of the CoBF Board?

 

Not too optimistic but realistic, in my view.

 

Unlike the Obama administration, the Trump administration doesn't look like the type that thinks "your business: the government made you do it". More like along Reagan lines, the government "is the problem". For Obama, government is like an overpowering Sun from which all life emanates. Therefore, government should suck up all benefits for itself.

 

Trumpism doesn't follow this line of thought. Neither Mnuchin. It is entirely realistic that once in there they may come out with statements that will greatly differ from what we have become sick of hearing.