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

[waynepolsonAtoZ]

"among all of the buffett wisdoms and witticisms, the one i like best is to invest like you have a punchcard, 20 stocks that you buy over 40 years.  at this point, fnma would be on my buffett punchcard."

 

Mr. Graham has a classic article on special situation investing. He would want more certainty, he was almost talking about "risk arbitrage."

 

Regarding uncertainty, I bought my preferreds in July 2010. He's right, I didn't see 8/17/2012 coming. I did see FnF becoming very profitable, which should have been enough. Now, we are back on track again it seems.

 

Mr. Buffett is a critic of noncum dividends. However, given 8/17/2012 it wouldn't matter if the preferreds were cum not noncum. Going forward, it shouldn't be an issue. Theyve made a huge amount of money since 8/17/2012--noncum preferreds should do fine.

 

 

[deadspace]

"among all of the buffett wisdoms and witticisms, the one i like best is to invest like you have a punchcard, 20 stocks that you buy over 40 years.  at this point, fnma would be on my buffett punchcard."

 

Mr. Graham has a classic article on special situation investing. He would want more certainty, he was almost talking about "risk arbitrage."

 

Regarding uncertainty, I bought my preferreds in July 2010. He's right, I didn't see 8/17/2012 coming. I did see FnF becoming very profitable, which should have been enough. Now, we are back on track again it seems.

 

Mr. Buffett is a critic of noncum dividends. However, given 8/17/2012 it wouldn't matter if the preferreds were cum not noncum. Going forward, it shouldn't be an issue. Theyve made a huge amount of money since 8/17/2012--noncum preferreds should do fine.

 

I didnt like Buffett's comments at the general meeting that noncum pref shares are a weak form of currency as fannie mae investors are finding out - I wish someone would ask him if he actually thought the net worth sweep was legal on any level as his comments seemed to suggest this was just the way it goes if you buy a non cum pref share ...

[Mephistopheles]

"among all of the buffett wisdoms and witticisms, the one i like best is to invest like you have a punchcard, 20 stocks that you buy over 40 years.  at this point, fnma would be on my buffett punchcard."

 

Mr. Graham has a classic article on special situation investing. He would want more certainty, he was almost talking about "risk arbitrage."

 

Regarding uncertainty, I bought my preferreds in July 2010. He's right, I didn't see 8/17/2012 coming. I did see FnF becoming very profitable, which should have been enough. Now, we are back on track again it seems.

 

Mr. Buffett is a critic of noncum dividends. However, given 8/17/2012 it wouldn't matter if the preferreds were cum not noncum. Going forward, it shouldn't be an issue. Theyve made a huge amount of money since 8/17/2012--noncum preferreds should do fine.

 

I didnt like Buffett's comments at the general meeting that noncum pref shares are a weak form of currency as fannie mae investors are finding out - I wish someone would ask him if he actually thought the net worth sweep was legal on any level as his comments seemed to suggest this was just the way it goes if you buy a non cum pref share ...

 

Wait, he commented on the FNMA/FMCC preferreds? I don't recall any question about the NWS or the GSE's...

 

Incidentally I emailed both Becky Quick and Sorkin questions about the NWS, as I'm sure others did as well. IMHO, Buffett is a fan of the NWS as I remember him commenting a while ago that Berkshire would go into the mortgage guaranty business if FNMA/FMCC pull back or disappear. (I think it was before the NWS).

[merkhet]

I think deadpsace is thinking about Munger's comments from the Daily Journal meeting earlier this year.

[investorG]

While I do not have confidence the markets will recognize this right away, I believe the Mulvaney news is important and favorable: 

 

First, by selecting perhaps the only R congressperson to publicly push / sponsor release, it sends a positive signal on intentions. 

 

Second, and more important, this concept only works if the NWS is canceled retroactively and the sr preferred disappears after all the capital + interest has been fully returned.  Sorry to the lawyers, but  the courts have not stepped up (yet) to their duty to deliver justice.  Thus, working with Congress is important (certainly for 2017 and likely for 2018+) and picking someone as popular as Mulvaney to negotiate along side Mnuchin (with no congressional relationships / experience) is absolutely crucial.

 

One other note, I do think this raises the odds that the warrants are kept as part of the deal.  I have read Mulvaney is a fiscal hawk and thus the $100-$250bn value here is likely too good to pass up.  It still can be a win-win for all sides.

[investorG]

single family housing starts still way down vs pre-crisis pre-bubble levels.  this is a major opportunity for economic growth and i think the new team realizes this. 

[racemize]

http://www.wsj.com/articles/winding-down-fannie-and-freddie-is-easier-than-it-seems-1481846232

 

Well this solution doesn't seem too favorable to preferreds.

[Guest cherzeca]

@merkhet

 

"My focus is currently on whether the EC ends up voting for Trump on Monday."

 

as i understand it, even if the electors dont follow their state's popular vote, congress can object to any non-complying electoral vote and, given R control over both house, fix the non-complying electoral votes that were cast.

 

so unless i am misreading, and assuming the Rs in congress dont bolt for HRC, there is a zero % chance trump is not elected

 

see eg http://www.nytimes.com/2016/12/18/us/politics/the-electoral-college-meets-monday-heres-what-to-expect.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

[no_free_lunch]

It seems that there is a pretty broad range of outcomes here even with privatization.  Wouldn't you need to pay off the governments $100B+ senior preferred's and raise equity before you could even consider paying the standard preferred's?  It just seems like a daunting task and it seems that the existing share-holders would be wiped (which is fine) and the public preferred's would take some sort of haircut.  Is the thesis based on the more recent profit sweep being reversed and the excess counting as senior preferred repayment?  If that doesn't happen I think you could make some money here but hard to see what exactly the preferred's are worth.  I just can't see there being enough funds to repay at par the government and the public on the preferreds.

 

There are hundreds of pages to this topic so just ignore me if I am rehashing old stuff.  :)

[merkhet]

@merkhet

 

"My focus is currently on whether the EC ends up voting for Trump on Monday."

 

as i understand it, even if the electors dont follow their state's popular vote, congress can object to any non-complying electoral vote and, given R control over both house, fix the non-complying electoral votes that were cast.

 

so unless i am misreading, and assuming the Rs in congress dont bolt for HRC, there is a zero % chance trump is not elected

 

see eg http://www.nytimes.com/2016/12/18/us/politics/the-electoral-college-meets-monday-heres-what-to-expect.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

 

This has been a year of many improbable surprises, so I'm making a few slight Bayesian adjustments.

[rros]

It seems that there is a pretty broad range of outcomes here even with privatization.  Wouldn't you need to pay off the governments $100B+ senior preferred's and raise equity before you could even consider paying the standard preferred's?  It just seems like a daunting task and it seems that the existing share-holders would be wiped (which is fine) and the public preferred's would take some sort of haircut.  Is the thesis based on the more recent profit sweep being reversed and the excess counting as senior preferred repayment?  If that doesn't happen I think you could make some money here but hard to see what exactly the preferred's are worth.  I just can't see there being enough funds to repay at par the government and the public on the preferreds.

 

There are hundreds of pages to this topic so just ignore me if I am rehashing old stuff.  :)

Mulvaney had a bill doing away with the Sr. preferred shares. So if a congressman already proposed it, why not next Treasury Sec.? You must consider a scenario in which the Sr. shares are considered fully repaid. Next problem would be building a minimum of 2.5% capital.

[Fat Pitch]

It seems that there is a pretty broad range of outcomes here even with privatization.  Wouldn't you need to pay off the governments $100B+ senior preferred's and raise equity before you could even consider paying the standard preferred's?  It just seems like a daunting task and it seems that the existing share-holders would be wiped (which is fine) and the public preferred's would take some sort of haircut.  Is the thesis based on the more recent profit sweep being reversed and the excess counting as senior preferred repayment?  If that doesn't happen I think you could make some money here but hard to see what exactly the preferred's are worth.  I just can't see there being enough funds to repay at par the government and the public on the preferreds.

 

There are hundreds of pages to this topic so just ignore me if I am rehashing old stuff.  :)

Mulvaney had a bill doing away with the Sr. preferred shares. So if a congressman already proposed it, why not next Treasury Sec.? You must consider a scenario in which the Sr. shares are considered fully repaid. Next problem would be building a minimum of 2.5% capital.

 

How many here think they are going to recap the entire structure of the GSE? Makes more sense to recap a smaller portion of the giants and release them back to the public. Let what's left go into runoff and pay the gov't off and residual common stock. This allows them to recap to 5% and get it done quickly. Basically the Bruce,Millstein plans.

[Peregrine]

also, this could be why sell off today

http://www.americanbanker.com/bankthink/gse-recap-experiment-is-just-a-sideshow-1092871-1.html

 

where accordingly line of credit is capital.

 

This is an excellent explanation of the dilemma facing housing finance policy-makers today.

 

Either the GSEs are truly government backed or they are privately-owned. Any arrangement that mixes the two will lead to the same issues pre-crisis.

[Flynnstone5]

Has anyone run a common pps scenario with the assumptions that 1.) senior prf'd are adjusted from the NWS over payment on original deal to show approximately $10 billion outstanding balance, 2.) jr. prf'd balance of $30 billion outstanding and 3.) a new capital requirement of $70 billion. Assume that warrants are kept and that the exercise price is raised. Use a goal of a 2 year recap window and some combined new issuance of prfd and common or a conversion incentive where dividends remain suspended for a period of time.

 

I'm ok with rough calculations, but I don't have the expertise to know realistically what the level of prfd issuance would look like, in addition, to what the "right" price is for a new exercise price. I do think the assumptions of 1,2,3 and the warrants being kept with a higher exercise price is the most probable outcome. Please post if anyone has formulated a rough pps based on this methodology. I welcome any feedback positive or negative, but am focused on this methodology.

[investorG]

Has anyone run a common pps scenario with the assumptions that 1.) senior prf'd are adjusted from the NWS over payment on original deal to show approximately $10 billion outstanding balance, 2.) jr. prf'd balance of $30 billion outstanding and 3.) a new capital requirement of $70 billion. Assume that warrants are kept and that the exercise price is raised. Use a goal of a 2 year recap window and some combined new issuance of prfd and common or a conversion incentive where dividends remain suspended for a period of time.

 

I'm ok with rough calculations, but I don't have the expertise to know realistically what the level of prfd issuance would look like, in addition, to what the "right" price is for a new exercise price. I do think the assumptions of 1,2,3 and the warrants being kept with a higher exercise price is the most probable outcome. Please post if anyone has formulated a rough pps based on this methodology. I welcome any feedback positive or negative, but am focused on this methodology.

 

flynn, there are so many assumptions involved, making any forecasts on your question educated guesses at best.

 

a simple solution is to raise the warrants exercise price to a value where the capital injected is equal to the 70bn of (combined from F+F) interest payments the govt has received.  and then convert the jr preferred to common at some ratio.  that would create about 7bn shares outstanding.  if income was 12bn per year, that's 1.71 of eps x 12 = $21 expected value.  perhaps a little higher target price if the preferred doesnt convert but instead just gets divvy's turned back on.

 

the drawback to this idea is the govt would need to front the 70bn, even though they would likely get much more on the back side from share sell downs.  if they dont want to send 70bn back over to the GSEs right away then you're just going to have to make some big assumptions on common / preferred mix and the price at which the new capital is raised.  i believe if things get rolling the shares will rally in advance of any share sales, making dilution more manageable.

 

at current prices, i would not overthink things.  most importantly need trump + mnuchin + mulvaney confirmed and in their seats to execute their plan. court rulings could be a major bump or tailwind.  it appears, with recent price action, that investors would rather be late and risk missing material upside rather than be early and get exposed with bad news coming out in the mean time (which unfortunately is still a possibility).

 

[Flynnstone5]

Has anyone run a common pps scenario with the assumptions that 1.) senior prf'd are adjusted from the NWS over payment on original deal to show approximately $10 billion outstanding balance, 2.) jr. prf'd balance of $30 billion outstanding and 3.) a new capital requirement of $70 billion. Assume that warrants are kept and that the exercise price is raised. Use a goal of a 2 year recap window and some combined new issuance of prfd and common or a conversion incentive where dividends remain suspended for a period of time.

 

I'm ok with rough calculations, but I don't have the expertise to know realistically what the level of prfd issuance would look like, in addition, to what the "right" price is for a new exercise price. I do think the assumptions of 1,2,3 and the warrants being kept with a higher exercise price is the most probable outcome. Please post if anyone has formulated a rough pps based on this methodology. I welcome any feedback positive or negative, but am focused on this methodology.

 

flynn, there are so many assumptions involved, making any forecasts on your question educated guesses at best.

 

a simple solution is to raise the warrants exercise price to a value where the capital injected is equal to the 70bn of (combined from F+F) interest payments the govt has received.  and then convert the jr preferred to common at some ratio.  that would create about 7bn shares outstanding.  if income was 12bn per year, that's 1.71 of eps x 12 = $21 expected value.  perhaps a little higher target price if the preferred doesnt convert but instead just gets divvy's turned back on.

 

the drawback to this idea is the govt would need to front the 70bn, even though they would likely get much more on the back side from share sell downs.  if they dont want to send 70bn back over to the GSEs right away then you're just going to have to make some big assumptions on common / preferred mix and the price at which the new capital is raised.  i believe if things get rolling the shares will rally in advance of any share sales, making dilution more manageable.

 

at current prices, i would not overthink things.  most importantly need trump + mnuchin + mulvaney confirmed and in their seats to execute their plan. court rulings could be a major bump or tailwind.  it appears, with recent price action, that investors would rather be late and risk missing material upside rather than be early and get exposed with bad news coming out in the mean time (which unfortunately is still a possibility).

 

I know this is difficult with so many unknowns. Just trying to establish some kind of base on what I expect as a probable outcome. Why couldn't the gov reinstate divs and then issue new prf'd as the primary way to raise capital? There's enough cash to pay dividends and there's no dilution to common, which benefits their own position.

[investorG]

 

I know this is difficult with so many unknowns. Just trying to establish some kind of base on what I expect as a probable outcome. Why couldn't the gov reinstate divs and then issue new prf'd as the primary way to raise capital? There's enough cash to pay dividends and there's no dilution to common, which benefits their own position.

 

certainly possible.  i would note however a general trend among regulators to prioritize common over preferred for capital adequacy purposes.

 

on a separate topic, there is a large block of nearly 700k shares on the ask in freddie mac, which is a lot in a low volume day like today. 

[Flynnstone5]

 

I know this is difficult with so many unknowns. Just trying to establish some kind of base on what I expect as a probable outcome. Why couldn't the gov reinstate divs and then issue new prf'd as the primary way to raise capital? There's enough cash to pay dividends and there's no dilution to common, which benefits their own position.

 

certainly possible.  i would note however a general trend among regulators to prioritize common over preferred for capital adequacy purposes.

 

on a separate topic, there is a large block of nearly 700k shares on the ask in freddie mac, which is a lot in a low volume day like today.

 

Wouldn't treasury be the primary regulator in this case....lol

 

Saw that block. Just disappeared.

 

[waynepolsonAtoZ]

"Assume that warrants are kept and that the exercise price is raised."

 

I'm sorry but the exercise of the warrants for 79.9% of the GSE common stock won't help to recapitalize the GSEs.

 

+++++++++

 

How is it legal for this preferred stock purchase agreement to be valid beyond the December 31, 2009 expiration of Treasury's authority?

Treasury received the preferred stock and received warrants for common stock as of Sunday September 7, 2008 and will not need to purchase any additional shares relative to this agreement.

Can the government exercise its warrants whenever it wants, even if it is disadvantageous to the companies?

Yes. Treasury can exercise its warrant for up to 79.9% of the common stock of each GSE on a fully diluted basis at any time during the 20-year life of the warrant.

 

[SnarkyPuppy]

My current position is allocated about 80% preferreds / 20% commons for optionality purposes.  I've been torn about selling the commons.  I just don't see many likely+favorable scenarios where the commons are not heavily diluted.  The one pragmatic scenario, where the Treasury increases its strike price to effectively recap the companies, does not seem likely given Mnuchin's comments around exiting government ownership.   

[waynepolsonAtoZ]

Buffett F& F

 

http://www.warrenbuffett.com/buffetts-lesson-of-fannie-mae-freddie-mac/

 

I think his point isn't on point. NWS would have been bad for cum preferreds too. It doesn't matter at this point that FnF preferreds are non cum.

[Fat Pitch]

Buffett F& F

 

http://www.warrenbuffett.com/buffetts-lesson-of-fannie-mae-freddie-mac/

 

I think his point isn't on point. NWS would have been bad for cum preferreds too. It doesn't matter at this point that FnF preferreds are non cum.

 

It would have mattered greatly. If dividends accrued then the gov't would have been forced to deal with the issue at hand... ie zeroing out the shareholders or buying back the jr prefs. Being non cum. it was easy not to pay and kick the can down the road which is where we are at.

[Flynnstone5]

"Assume that warrants are kept and that the exercise price is raised."

 

I'm sorry but the exercise of the warrants for 79.9% of the GSE common stock won't help to recapitalize the GSEs.

 

+++++++++

 

How is it legal for this preferred stock purchase agreement to be valid beyond the December 31, 2009 expiration of Treasury's authority?

Treasury received the preferred stock and received warrants for common stock as of Sunday September 7, 2008 and will not need to purchase any additional shares relative to this agreement.

Can the government exercise its warrants whenever it wants, even if it is disadvantageous to the companies?

Yes. Treasury can exercise its warrant for up to 79.9% of the common stock of each GSE on a fully diluted basis at any time during the 20-year life of the warrant.

 

I wasn't talking about using warrants as way to recap. I think that by raising the strike, they can foster greater confidence in the pps allowing for easier recap going forward. I think they look to reinstating divs and new issuance of prf'd as a way to recapitalize. They use a 1-2 year window and sell their position over time (exit ownership) into market moving forward. I guess the main issue is that, why are people talking about diluting common so much, when there seems to be alternative scenarios that are favorable to shareholders and the gov while achieving the desired end point? What's the benefit to effectively screw shareholders if there's an alternative win - win solution? And, how would that end the litigation so that "we can get this done relatively quickly"?

[hardincap]

interesting post on trump: https://www.linkedin.com/pulse/reflections-trump-presidency-one-month-after-election-ray-dalio?trk=prof-post

[no_free_lunch]

Does the price difference between say the O & T preferred's make sense to people?  They both can be recalled at any time, the T does have a bit higher interest rate (8.25% fixed vs 7% min with floating component) but I don't know if it is enough to justify paying almost 30% more.  I can see how the T would get paid off first but I don't think O would be far behind.