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

[BTShine]

http://www.wsj.com/articles/dont-hold-your-breath-on-fannie-mae-and-freddie-mac-1480878666

 

whats the deal with wsj/carney continually writing negative pieces on the gses? do these authors legitimately believe what they're writing and are writing on their own accord or are there subterranean (top down) forces at play? serious question

 

A few dozen pages ago in this thread, someone speculated that Carney may have source(s) in the Treasury and so to keep them, he reflects their interests.  We'll never know but seems like the most likely explanation for his incentives.

 

It could just be me, but I've noticed the character of his articles has changed over the past several months too: his pieces are more brief now, and contain less analysis/interpretation, more facts.  He could see the writing on the wall as well.

 

fred fraenkel 6 hours ago

It might be a good idea for you and John Carney to wake up and smell the coffee.  The treasury department you were fronting for no longer exists.

 

Fred Fraenkel: http://en.wikipedia.org/wiki/Fred_Fraenkel

 

I think Mr. Fraenkel deleted his comment.  Probably a smart idea, even though I agree with him. 

[investorG]

 

The spreadsheet I attached includes a-e).  Capital ratio target seems reasonably placed at 2.5% if you triangulate different sources but of course you can adjust.  I believe Ackman uses 2.5%.

 

ok snarky i'll play along

 

it's impossible to raise $100bn+ immediately.  so there will be a window of grace period time to achieve the 2.5pct ratio.  during this window of time, hopefully, the companies, will generate 20bn of net profits annually which will count and thus could dramatically reduce the need for new shares.  i believe ackman assumes no new outside capital raises. also look back in prior years at the capital ratio targets for the banks, and the stress tests --- the govt gave them many years to achieve the end goals.

 

moreover, the $5 assumed sale price could be way off.  if they cancel the warrants, the stock could trade to $20-50 quickly.  or if they just list the shares on the NYSE which opens up trillions of dollars of buying potential that wont buy OTCBB stocks, the price could motor. a higher share sale price could vastly reduce the shares outstanding  -- it's circular.

 

they could also re-capitalize with preferred or convertible preferred rather than straight common.

 

perhaps there are others, but once again, having any confidence or certainty on a common target at this point is extremely difficult imo.  my view, as stated before is $0 - $75 with ackman's targets as a base case.

[Guest cherzeca]

 

The spreadsheet I attached includes a-e).  Capital ratio target seems reasonably placed at 2.5% if you triangulate different sources but of course you can adjust.  I believe Ackman uses 2.5%.

 

ok snarky i'll play along

 

it's impossible to raise $100bn+ immediately.  so there will be a window of grace period time to achieve the 2.5pct ratio.  during this window of time, hopefully, the companies, will generate 20bn of net profits annually which will count and thus could dramatically reduce the need for new shares.  i believe ackman assumes no new outside capital raises. also look back in prior years at the capital ratio targets for the banks, and the stress tests --- the govt gave them many years to achieve the end goals.

 

moreover, the $5 assumed sale price could be way off.  if they cancel the warrants, the stock could trade to $20-50 quickly.  or if they just list the shares on the NYSE which opens up trillions of dollars of buying potential that wont buy OTCBB stocks, the price could motor. a higher share sale price could vastly reduce the shares outstanding  -- it's circular.

 

perhaps there are others, but once again, having any confidence or certainty on a common target at this point is extremely difficult imo.

 

i agree with most of this G.

 

i think you will see a "profit retention" period where dividends on any and all classes of capital stock will be prohibited.  which is why i think you will see some mechanism for junior pref to exchange for common.

 

as a bridge to future primary raises, i think you will see a rights offering which, as merkhet said previously, must be at a discount to the new trading price...which will dilute holders who dont participate.  another way for hedgies to prosper would be for the rights offering to be "underwritten" meaning some hf investors would agree to take up any shares not taken up by other holders.

 

i think you will see a longish runway to build capital out of retained earnings, but you may see some kind of emergency line offered by govt until capital rebuilt, for which gses would pay a fee.

 

mnuchin said negotiation could be done "pretty fast".  can you imagine lew saying something like that?

[investorG]

 

i agree with most of this G.

 

i think you will see a "profit retention" period where dividends on any and all classes of capital stock will be prohibited.  which is why i think you will see some mechanism for junior pref to exchange for common.

 

as a bridge to future primary raises, i think you will see a rights offering which, as merkhet said previously, must be at a discount to the new trading price...which will dilute holders who dont participate.  another way for hedgies to prosper would be for the rights offering to be "underwritten" meaning some hf investors would agree to take up any shares not taken up by other holders.

 

i think you will see a longish runway to build capital out of retained earnings, but you may see some kind of emergency line offered by govt until capital rebuilt, for which gses would pay a fee.

 

mnuchin said negotiation could be done "pretty fast".  can you imagine lew saying something like that?

 

i agree on profit retention and emergency line and preferred-common exchange option. thanks. 

 

rights offerings are rarely done, if ever, in the US.  it's simpler to just cancel the warrants and issue opportunistically, a combo of common and (convertible) preferred.  or they could do the tim howard (i think) view and adjust the warrant exercise price which could provide meaningful bridge capital.    the court case outcomes, if delivered prior, likely will help dictate how shareholder friendly the new admin might be, given inevitable media blowback. 

 

but mnuchin was clear that he wanted govt out of ownership which is contrary to warrant exercise. 

 

also just because something (warrant values) is available to someone doesn't mean they grab for it if they dont think it's fair.  (admittedly i have no idea what their subjective view is on the matter)

[Guest cherzeca]

 

i agree with most of this G.

 

i think you will see a "profit retention" period where dividends on any and all classes of capital stock will be prohibited.  which is why i think you will see some mechanism for junior pref to exchange for common.

 

as a bridge to future primary raises, i think you will see a rights offering which, as merkhet said previously, must be at a discount to the new trading price...which will dilute holders who dont participate.  another way for hedgies to prosper would be for the rights offering to be "underwritten" meaning some hf investors would agree to take up any shares not taken up by other holders.

 

i think you will see a longish runway to build capital out of retained earnings, but you may see some kind of emergency line offered by govt until capital rebuilt, for which gses would pay a fee.

 

mnuchin said negotiation could be done "pretty fast".  can you imagine lew saying something like that?

 

i agree on profit retention and emergency line and preferred-common exchange option. thanks. 

 

rights offerings are rarely done, if ever, in the US.  it's simpler to just cancel the warrants and issue opportunistically, a combo of common and (convertible) preferred.  or they could do the tim howard (i think) view and adjust the warrant exercise price which could provide meaningful bridge capital.    the court case outcomes, if delivered prior, likely will help dictate how shareholder friendly the new admin might be, given inevitable media blowback. 

 

but mnuchin was clear that he wanted govt out of ownership which is contrary to warrant exercise. 

 

also just because something (warrant values) is available to someone doesn't mean they grab for it if they dont think it's fair.  (admittedly i have no idea what their subjective view is on the matter)

 

agreed.

 

mnuchin likely will hire a financial advisor (lol if it is goldman).  it will advise whether a primary can be done right out of the box (hhhmmm, underwriting fees), or whether a rights offering is a good first step (easier execution because you are going to existing group of shareholders and saying pony up or you get diluted).

[Seahug]

there is no recap w/o rolling back NWS. no one puts a buck in w/o that.

\

 

Absolutely right.

 

I've reread Ack's pres, AIG bailout and FNMA's financials. I understand these more & am estimating different restructuring scenarios (spref balance paid over time or converted to equity or used to pay for the 79.9%, jpref converted at par or x% of par, etc, capital requirement raised at once or over  time - all these are possible i believe).

 

In figuring out the value of this investment and how to tackle it, all hinges on NWS reversal and a settlement:

 

1) Overall probability that there will be a settlement or advanced settlement discussions in 2 years?

 

Seem very high given personalities in the new administration and their statements. 80-90% is my guess, but maybe over optimistic so would appreciate sober advice.

 

2) How does this change with

 

a) Loss in both perry or fairholme cases? Does a win over p's make it more difficult or easier for the government to adopt a pro-company stance? Does it reduce the probability of a reasonable settlement? A loss in both requires the government to be somewhat benevolent in initiating a settlement - which I believe is not impossible given they will make so much more money with the GSE's vs AIG etc. A loss will make the P's less likely to have impossible conditions. Does this make sense or am i being too optimistic again?

 

b) As a layman, a win in 1/2 I believe is sufficient to enhance our P's position, right?

 

c) Does a win or loss result in a likely delay a settlement as parties consider & file appeals as a first priority?

 

d) What would be the price action in the event of a loss? 60% for both previously. 35% here?

 

3) Is it not better/faster if no decisions in both cases by the time DT is sworn in, for govt & p's to pause and enter into settlement talks?

 

4) Is it valid for the govt to drive a harder bargain because the GSE's rely on some implicit guarantee? Personally I feel the financial system also benefits from a slightly less implicit guarantee. Too optimistic again?

 

5) Is it even worth trying to evaluate the above and just consider this as purely speculative?

 

From AIG, my impression is it's very unlikely for the govt not to exercise warrants. Although there was a taking ruling in AIG no damages were awarded because AIG would have gone bust.

 

In FNMA, there were actual credit losses that wiped out FNMA's pre crisis capital (whether its 1x or 3x wipeout depends on how u calculate according to ackman). This excludes any (perhaps unjustified) credit loss provisioning to justify the NWS. So there was a need for a bailout/conservatorship and seems no one has been challenging this. So 79.9% to the govt. In aig's case btw, originally it was 77.9% but ended at 92% after pref conversion.

 

Anyway, would appreciate some more legal perspective.

 

Thanks!

 

 

 

 

[Guest cherzeca]

 

"5) Is it even worth trying to evaluate the above and just consider this as purely speculative?'

 

there is nothing wrong with analyzing a speculative investment such as you have done.  one can analyze a big cap name up and down and come up with a modest conviction. one can analyze fnma and come up with a large conviction, admittedly highly speculative.

 

you can be wrong on either. there is nothing wrong with going with a speculative conviction if you have done your due diligence imho. just apportion risk accordingly

[Seahug]

 

"5) Is it even worth trying to evaluate the above and just consider this as purely speculative?'

 

...there is nothing wrong with going with a speculative conviction if you have done your due diligence imho. just apportion risk accordingly

 

Thanks Cherzeca.

 

I'm 7-8% of total. Am thinking of adding if the price corrects.

 

Would appreciate inputs on the legal probabilities if u have time.

 

Cheers!

[investorG]

 

From AIG, my impression is it's very unlikely for the govt not to exercise warrants. Although there was a taking ruling in AIG no damages were awarded because AIG would have gone bust.

 

In FNMA, there were actual credit losses that wiped out FNMA's pre crisis capital (whether its 1x or 3x wipeout depends on how u calculate according to ackman). This excludes any (perhaps unjustified) credit loss provisioning to justify the NWS. So there was a need for a bailout/conservatorship and seems no one has been challenging this. So 79.9% to the govt. In aig's case btw, originally it was 77.9% but ended at 92% after pref conversion.

 

 

Seahug, I recommend having an open mind to lots of outcomes.

 

Yes, I do believe the court decisions will help dictate how shareholder-friendly any potential settlement terms end up.  There would be media attention, as there already is, about hedge funds making profits and thus having the courts aligned would be helpful. Here, there's a wide range of outcomes from complete loss of the shareholders in both appeals courts, to invalidation of NWS, to a complete shakedown of HERA.

 

Regarding AIG, it appears that even with the warrants, the govt made 5bn net on their investment.  For the GSEs, its over 60bn excluding any warrants.  I agree if the GSEs were still in the hole, warrants would certainly be exercised. However that's not the case. Lawsuits would likely be filed on warrant exercise and maybe the new admin wants a fresh break from the past.  Or they could try to squeeze out every dollar, i understand there's a chance of that too.

[Seahug]

AIG Bailout Summary is here https://fas.org/sgp/crs/misc/R42953.pdf  as of 2013.

 

Net net 184bn disbursed. Loans repaid + interest ranging from 5% to 10% + some fees. Loans were repaid via asset sales. Also sale of common in tranches to market.

 

$47.5 bn tarp prefs additionally converted to common bringing up treasury share from 77.9% to 92%. Total of $70bn for the 92%. Warrants fully exercised. I believe the later conversion was around $40. AIG is now at 63.

 

Net net 23.1 bn gains to Fed/Treasury. Actually 12.5bn capital loss on the conversion to common offset by interest, dividends, fees.

 

Some security info:

 

AIG junior subordinated bond 8.175 issued 5/15/2009 maturing 5/15 2058 $4bn issue $437 mn outstanding. Price in Aug 2009 was 24, now at 125.

 

Aig senior unsec 5/18/17 issued 2007. 1.25 bn issued only 178mn outstanding. Low of 30 now at 101.

 

AIG retained earnings from 90bn in 2007 to -33bn in Q12009.

 

2008 book value 60bn

2009 book value 90 bn

 

Remained + inspite of loss possibly due to Govt prefs + minority interest (maybe part of bail out via separate asset holding companies)

 

[BeerBBQ]

$47.5 bn tarp prefs additionally converted to common bringing up treasury share from 77.9% to 92%. Total of $70bn for the 92%. Warrants fully exercised. I believe the later conversion was around $40. AIG is now at 63.

 

 

What was the original strike price for those warrants?

 

[Seahug]

77.9% was in the low/mid 20s per share if i recall. Additional shares were higher

[rros]

 

i agree with most of this G.

 

i think you will see a "profit retention" period where dividends on any and all classes of capital stock will be prohibited.  which is why i think you will see some mechanism for junior pref to exchange for common.

 

as a bridge to future primary raises, i think you will see a rights offering which, as merkhet said previously, must be at a discount to the new trading price...which will dilute holders who dont participate.  another way for hedgies to prosper would be for the rights offering to be "underwritten" meaning some hf investors would agree to take up any shares not taken up by other holders.

 

i think you will see a longish runway to build capital out of retained earnings, but you may see some kind of emergency line offered by govt until capital rebuilt, for which gses would pay a fee.

 

mnuchin said negotiation could be done "pretty fast".  can you imagine lew saying something like that?

 

i agree on profit retention and emergency line and preferred-common exchange option. thanks.

 

Commons are Ackman's bet. Ackman supported Bloomberg for a Presidential run during primaries. Instead, John Paulson -Jr. preferred shares- fully supported Trump. This could influence the final outcome. Not that commons will do bad but a slow, organic recapitalization over a 2 year period will hurt the Jrs. You must assign a probability to the Jrs. getting hurt if your bet is slow recapitalization.

[investorG]

 

Commons are Ackman's bet. Ackman supported Bloomberg for a Presidential run during primaries. Instead, John Paulson -Jr. preferred shares- fully supported Trump. This could influence the final outcome. Not that commons will do bad but a slow, organic recapitalization over a 2 year period will hurt the Jrs. You must assign a probability to the Jrs. getting hurt if your bet is slow recapitalization.

 

either you are aligned with trump (taxpayer) if warrants are kept or if warrants are ditched, even better.

[SnarkyPuppy]

 

Commons are Ackman's bet. Ackman supported Bloomberg for a Presidential run during primaries. Instead, John Paulson -Jr. preferred shares- fully supported Trump. This could influence the final outcome. Not that commons will do bad but a slow, organic recapitalization over a 2 year period will hurt the Jrs. You must assign a probability to the Jrs. getting hurt if your bet is slow recapitalization.

 

either you are aligned with trump (taxpayer) if warrants are kept or if warrants are ditched, even better.

 

Meh - I still don't see the commons as +expected value in most recap scenarios.  I have to spend time trying to do pro forma capital if you assume 10% dividends+excess pays down sr pref with a NWS invalidation to have more granular figures though.  I haven't seen any convincing detailed figures which show the upside that everyone is claiming.  Ackman contemplates certain share prices but assumes recap over ~10 years or additional dilution. 

 

Is anyone aware of an analysis that was done to arrive at pro forma assuming NWS never came to fruition (before I sit down and try to figure it out)?

[Luke 532]

Tim Rood, after meeting with Trump, had this to say today: "It's probably the least American thing I've ever seen.  Having this situation where you have privately owned companies and the government comes in and nationalizes 80% of them but takes 100% of the profits.  There's a huge opportunity there."

http://video.cnbc.com/gallery/?video=3000574296&play=1

 

Given the recent appointments, quotes from various people, etc. it is pretty easy to figure out where Trump's head is at on this issue.

 

I must admit I'm a bit surprised the position sizes mentioned on this board aren't higher.  With that said, I'm not publicly sharing how I've sized it.

[investorG]

tim rood interview on cnbc, google it if interested. 

 

4 minutes and 30 seconds.  as soon as they got to FNMA/FMCC in the last 20 seconds, he said it's a great opportunity and they cut him off.

 

only relevant (as it's just one opinion) because he met with the president elect this morning.

[SnarkyPuppy]

Tim Rood, after meeting with Trump, had this to say today: "It's probably the least American thing I've ever seen.  Having this situation where you have privately owned companies and the government comes in and nationalizes 80% of them but takes 100% of the profits.  There's a huge opportunity there."

http://video.cnbc.com/gallery/?video=3000574296&play=1

 

Given the recent appointments, quotes from various people, etc. it is pretty easy to figure out where Trump's head is at on this issue.

 

I must admit I'm a bit surprised the position sizes mentioned on this board aren't higher.  With that said, I'm not publicly sharing how I've sized it.

 

I'll be honest, my sizing in the preferreds is significantly higher than I've seen posted on here.  Very small amount in commons for optionality.

[BTShine]

tim rood interview on cnbc, google it if interested. 

 

4 minutes and 30 seconds.  as soon as they got to FNMA/FMCC in the last 20 seconds, he said it's a great opportunity and they cut him off.

 

only relevant (as it's just one opinion) because he met with the president elect this morning.

 

It's terrible how anti business and anti-shrewd investment CNBC peeps are.  Brian Sullivan rips Mnuchin for making a profit from his investment and then implies blame to him for foreclosing on people during the biggest foreclosure boom of our lifetimes.  Ridiculous. 

 

On the topic of this investment, that is more solid info from Trump's thinking on this. 

[Seahug]

I remember 2014...a time like this. Fnma nearing 3+. Jp refs around 10. Everyone excited. Traded up to 5+  A couple of court losses then down 2/3.

 

A few weeks ago glen Bradford on seeking alpha was on the beach posting his eviction notice and loan from an online lender.

 

This time is different?

 

Just trying to keep it real

[BTShine]

This time different?  For the market overall, probably the same thing.  For the GSEs?  Yeah, I think this time is different.  The incoming treasury secretary said these should be in the public hands.  I believe he can do this on his own.  No court ruling needed.

 

[Guest cherzeca]

I remember 2014...a time like this. Fnma nearing 3+. Jp refs around 10. Everyone excited. Traded up to 5+  A couple of court losses then down 2/3.

 

A few weeks ago glen Bradford on seeking alpha was on the beach posting his eviction notice and loan from an online lender.

 

This time is different?

 

Just trying to keep it real

 

keeping it real with glen bradford?

[Seahug]

 

Well not sure how all in to be with this thing

 

Edit: Hmm. Recalculated his holdings. Maybe not margin called or if at call not a big amount. I got mixed up with the 50 pars. Current market value is about $900k, which is about 2x previous value.

 

My bad, apologies to all.

Modify message

 

[Sunrider]

Is there actually a retail broker that allows you to margin common or pref?

 

 

Well not sure how all in to be with this thing

[Seahug]

I dunno which brokers would provide margin on FNMA/pref. No margin currently in my 3 accts (full service, ibkr, schw). My guess is not impossible. Not sure good idea to margin this even if available.