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

[Mephistopheles]

On the other hand lower taxes may spur home buying.

 

First let's figure out whether we can even get our money back :P

[SnarkyPuppy]

On the topic of hedging political risk, the website "PredictIt" is apparently legitimate (i.e. legal) betting on political outcomes.  You effectively buy one side of the bet for a given price, and if you win the price is made whole at $1.00. 

 

Mnuchin is priced at $0.95 cents, but what is interesting is you can buy Szubin at $0.04 cents.  $100 bet on Szubin would pay out $2,500. 

 

I have no idea if Szubin would be the #2...?  But surely if something happened with Mnuchin the market would spike strongly for Szubin and you'd get some payout. 

 

The fees are high but might still be worth it:

- 10% fee on any gains

- 5% withdraw fee on total withdrawal amount

 

Any thoughts on Szubin?  Obviously Mnuchin will be the Tsy, but with large $ at stake I wouldn't mind hedging a bit. 

[SnarkyPuppy]

Ah, I didn't maximize the screen I was looking at.  You can choose from Szubin, Kravis, Icahn, Lew (Szubin favorite amongst these)

 

https://www.predictit.org/Market/2468/Who-will-be-Secretary-of-the-Treasury-on-Feb-28%2c-2017

[no_free_lunch]

  It's personal and payback time. Makes me think the money is moot. just to stick it in his eye, which thanks to one Correspondent's dinner circa 2011, he wants to at every step of the turn. And who wouldn't want to follow obama, easier than following bush anyways.

 

I agree with this 100%.  I was thinking of exactly the same dinner.  I have read more, much more.  People are calling for Trumps assassination, this is beyond personal.  I have many theories on how this plays out but regardless it *should* be beneficial to fnma pref & common.

 

One bit of tea leave was Trump was signing executive orders to repeal obama care within hours of being inaugurated.  Before even a replacement is evident, wise or not.  He wants to completely eliminate Obama's legacy.  I can see fannie playing into that.

 

None of this means of course that fannie mae preferred's work out okay, but he would have to really subvert the law to wipe them out.  Possible but not likely, IMO.

[BTShine]

Predictitt does seem to work.  I know a guy that bet on Trump winning and he made multiples of his wager.  Hasn't taken the money out of his account, tho.  Might parlay the bet into Trump staying in office through 2017. 

 

As for the mortgage interest deduction, I believe someone in Team Trump said they wouldn't fully eliminate it.  Looks like today's limit is at $1 million for the mortgage (~$40k interest deductible).  Going forward, this might be up to a $300k mortgage, so only the well off are hurt.  So, that would hurt home prices in the upper price range, but not in the 'normal' home market.

[Guest cherzeca]

Predictitt does seem to work.  I know a guy that bet on Trump winning and he made multiples of his wager.  Hasn't taken the money out of his account, tho.  Might parlay the bet into Trump staying in office through 2017. 

 

As for the mortgage interest deduction, I believe someone in Team Trump said they wouldn't fully eliminate it.  Looks like today's limit is at $1 million for the mortgage (~$40k interest deductible).  Going forward, this might be up to a $300k mortgage, so only the well off are hurt.  So, that would hurt home prices in the upper price range, but not in the 'normal' home market.

 

i've heard various formulations re personal income taxes too.  one version (miller/kudlow) would limit all deductions to $100K (state taxes, charity, interest etc) per person.  hopefully we will see soon

[Ismael]

As for the mortgage interest deduction, I believe someone in Team Trump said they wouldn't fully eliminate it.  Looks like today's limit is at $1 million for the mortgage (~$40k interest deductible).  Going forward, this might be up to a $300k mortgage, so only the well off are hurt.  So, that would hurt home prices in the upper price range, but not in the 'normal' home market.

 

I'm not sure if the tax reform will get passed in its current form, but if it does, the standard deduction will increase by almost 300%.  Increasing the standard deduction will change the calculus for a large swath of homeowners, mostly at lower tax brackets, concerning whether to itemize their deductions...so they (essentially) "lose" the interest tax deduction.  This will remove a meaningful incentive for new home buyers.  Its hard to predict the decrease in home ownership this will cause, but it will result in a smaller number of home loans for F&F to insure. (I doubt the increase in standard deductions compensate for the loss of the home ownership incentive that is lost)  Will there be a 10% reduction in home ownership?  5%?  Will the profitability of F&F stay the same under these scenarios? If the profitability is unchanged, then you would get (roughly) a percentage reduction in market cap that corresponds to the percentage reduction in mortgages insured.  As long as the mortgage market doesn't decrease too much, and the profitability of the firms remains the same, then the investment thesis appears to be largely intact.  Say Ackman's valuation of the two firms of ~$200B is correct.  If home ownership decreases 10% then the firms should now be worth ~$180B.  Preferred stays money good, common takes a hit, but will still do fine.  Does anyone have a view about how a significant contraction in market size would affect the cost structure of the firms? 

[waynepolsonAtoZ]

I'm not sure how useful this is, but here is my little spreadsheet for the preferreds.

 

What I do is screen out the ones that have very low variable preferred dividends (if they were paying dividends), then sort based on adjt dividend to price. I adjust all the market prices as if they all had an RV of $50. As a practical matter, the ones with high dividends tend to trade higher than the ones that have low dividends.

 

 

 

Preferred_spreadsheet_5March2017.xls

[no_free_lunch]

Someone had mentioned the citigroup recap a while back.  It is tough to find information and I wasn't involved in that personally.  FWIW I dug up the term sheet and ALL preferred's, including government owned were converted to common at a standard price o $3.25 per citigroup share using full preferred price.  At the time citi group was trading at about half that but then this was on Feb 27, 2009 so it was very volatile times.  What I get out of that is that no consideration was given to the dividend yield of preferreds since they all converted in the same fashion.  All in all, if there were low yielding citi preferred's they must have done very well.

 

http://www.citigroup.com/citi/news/2009/090227a.pdf

 

However, with fannie mae I would be concerned with the really low yielders.  Since they will be issuing debt anyways, I don't see why they wouldn't just keep those preferred's on the book and pay the divvy.

[Guest cherzeca]

@no free lunch

 

there is a saying in restructuring land, "everybody in the pool", which is to say that all the various claims levels of the capital structure of the company get converted into common, in relative amounts based upon the seniority of claim, to create a clean financing slate.  if this happens with GSEs, since all the preferreds are parri passu, they would all get equal treatment vis a vis each other.  we shall see.

[no_free_lunch]

So one easy question, what is the outstanding share count of fannie mae common?  In one section of their Q3 it indicates 1.1b shares.  Elsewhere it says over 5b.  Is the 5b shares with the warrants exercised and the 1.1b is without the warrants?

[SnarkyPuppy]

So one easy question, what is the outstanding share count of fannie mae common?  In one section of their Q3 it indicates 1.1b shares.  Elsewhere it says over 5b.  Is the 5b shares with the warrants exercised and the 1.1b is without the warrants?

 

Correct

[Flynnstone5]

Curious how many here have examined Ackman's proposal and what thoughts are regarding it as a viable solution. It seems to be very well crafted, but the amount of time for recap is so long that I can't see how it fits with Mnuchins comments. It does, however, allow for solid value in terms of warrants. Not that Trump would care at all, but if they ever adopted this plan I think they would be relentlessly attacked on the grounds that all the hf benefit, but the companies remain unsafe, taxpayers at risk, etc. (suddenly the capital matters from the crowd who completely ignored last 5 years). I also wonder what/if any relationship between Ackman and Mnuchin, as well as, Ackman and Berkowitz.

[no_free_lunch]

So mnuchin is getting sued now?  Has to be politically driven given the timing.  Politics in the US is so interesting.

 

On a separate note, given the price action in the preferred's it looks like the market is buying into the swim theory.  I have to admit it makes sense.  Price difference is collapsing and starting to ignore divvy yields.  It is tempting to trade up in yield.

[Luke 532]

Richard Epstein's latest...

Fairholme's Big Win on Discovery

http://www.forbes.com/sites/richardepstein/2017/02/06/fairholmes-big-win-on-discovery/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix#775c4d7271bf

 

 

[Flynnstone5]

Some additional very interesting points from Tim Howard regarding warrants:

 

"I wrote that response too quickly (and it’s also a very complicated issue).

 

In September 2008, Treasury granted itself 79.9 percent of the outstanding shares of the common stock of both Fannie and Freddie as a component of its purported “rescue” of them. Treasury’s action, however, was not a rescue; it was a takeover of two companies it historically had opposed, done for ideological and policy reasons. When Treasury granted itself these warrants, it had no intention of ever exercising them; its purpose was to reduce the stock prices of both Fannie and Freddie by a factor of five (since Treasury instantly gave itself the right to four-fifths of the companies’ earnings in perpetuity), in order to contribute to the sense that they were in financial free-fall (which they were not). Treasury’s intention at the time it took the companies over was ultimately to liquidate them, and to allow the warrants to expire worthless.

 

But Treasury, and its allies, never could come up with an alternative to Fannie and Freddie that worked as well as they did, and that Congress was willing to take a gamble on and legislate. So here we are, nine years later: the warrants still are outstanding, and Treasury Secretary-designate Mnuchin is talking about reforming Fannie and Freddie and bringing them out of conservatorship. And the warrants have become a complication.

 

The term sheet for the warrants says they may be exercised “in whole or in part, at any time during the exercise period [which runs through September 7, 2028]”…and that the warrants entitle Treasury to 79.9 percent of the outstanding shares of Fannie and Freddie not as of the date the warrants were granted (September 7, 2008), but “on the date of EXERCISE,” which could be any time up to September 2028.

 

When Treasury granted itself the warrants back in 2008, it never contemplated that the companies might issue new shares of equity to recapitalize (because it intended to kill them). But now that they might, that 2008 warrant language definitely is a problem. Unless Treasury exercises all of its warrants immediately–which would cause massive dilution and create a nearly insurmountable hurdle to reforming them and bringing them out of conservatorship–whatever percentage of its warrants for Fannie and Freddie’s “outstanding common shares” remains unexercised when they do their equity issues to recapitalize will, by the language of the 2008 Senior Preferred Stock Agreement, have to be turned into NEW shares for Treasury, for which it will pay an exercise price of one one-thousandth of one cent (meaning Fannie and Freddie will get negligible proceeds from this equity).

 

THAT is what I called the “deal-killer.” As long as the 2008 language governing the exercise of the warrants remains in force, the companies will not be able to recapitalize. That language never was intended to apply to companies that were going to recapitalize and come out of conservatorship. Now that this prospect is on the table, the language relating to the warrant exercises–along with other aspects of them–clearly has to be in play for alteration, amendment or cancellation.

 

I hope that makes this more understandable (as I said, it IS a complicated issue). "

[SnarkyPuppy]

Mnuchin confirm vote "should" be today right?

[Spekulatius]

So what prevents the government from just selling the warrants and getting cash for their stake rather than forfeiting them without compensation?

That wouldn't prevent a recap of Fannie/Freddie, but just dilute the shareholders of common and preferred.

[no_free_lunch]

Unless Treasury exercises all of its warrants immediately–which would cause massive dilution and create a nearly insurmountable hurdle to reforming them and bringing them out of conservatorship

 

I don't know.  I have read this a few times and I think this is an incomplete argument.  Exactly WHY would it be an insurmountable hurdle?  At current prices we are talking $15B in stock vs a company that will probably trade north of $100B once recapped.  As far as recap goes, it creates like a 2 foot hurdle to raising enough equity.  So maybe they need to retain profits for 1 more year, after 9 years in conservatorship, big deal. If anything it will be easier to bring them out of conservatorship if warrants are exercised because the government is getting their share and it is an easier argument to the taxpayer.  Or like spekulatius said, convert and sell.

 

I know, talking against myself here but since I don't have any influence I might as well at least be rational.

[Flynnstone5]

Unless Treasury exercises all of its warrants immediately–which would cause massive dilution and create a nearly insurmountable hurdle to reforming them and bringing them out of conservatorship

 

I don't know.  I have read this a few times and I think this is an incomplete argument.  Exactly WHY would it be an insurmountable hurdle?  At current prices we are talking $15B in stock vs a company that will probably trade north of $100B once recapped.  As far as recap goes, it creates like a 2 foot hurdle to raising enough equity.  So maybe they need to retain profits for 1 more year, after 9 years in conservatorship, big deal. If anything it will be easier to bring them out of conservatorship if warrants are exercised because the government is getting their share and it is an easier argument to the taxpayer.  Or like spekulatius said, convert and sell.

 

I know, talking against myself here but since I don't have any influence I might as well at least be rational.

 

It's a hurdle because as written, who would invest knowing they can instantly be diluted 5x? To convert and sell screws shareholders and only hinders the ability of the companies to raise capital. Their goal is going to be to raise capital quickly with the overall purpose of strengthening the housing market. Not to say this means they void them, but it certainly appears that they have to be adjusted in addition to whatever P's are able to achieve through settlement.

[Mephistopheles]

But people are investing now based on potential dilutuon. They would just adjust for the 79.9 when investing

[Flynnstone5]

But people are investing now based on potential dilutuon. They would just adjust for the 79.9 when investing

 

Right, but as written, how does FnF raise capital from new issuance when Treasury automatically takes 80% and only 20% goes towards a capital buffer?

[Sunrider]

Can we please, largely, stay on the topic at hand in this thread?  :o

We've done rather well in most of the 570 pages in this regard so far!

 

;D

 

  You hear that folks, POTUS said New NAFTA Deal could pay for the Wall. Doesn't sound like any other imminent source of funds are being earmarked for public coffers anyways. Then again, I'm no Psychiatrist, (it's true) but isn't that how stalkers read their tea leaves too? I swear I saw a sign in my toast this morning that looked like Warrants were being cancelled. Or maybe, that was just my subconscious aligning what it thinks of this investment theory(read:gamble), with my breakfast of choice, toast.

 

  Ah yes, nice to see MSM highlight the Ayatollah's rant out about the "real" US and declaring that now you will see our ire. As if it's POTUS's fault that today, Feb 07, 2017, due to POTUS IranBan, radical wackjobs all over the world are going to start blowing themselves up in suicide attacks while yelling allahu akbar. Like one of Jeffrey Dahmer's victims fighting back to Jeff's reply "Oh ya, well now I'm going to eat you!" Wait for it, next death, POTUS fault, 100%. Won't matter who, what, where, when, why. Unfortunately how radicals view things as well, facts don't matter anymore, anywhere.

 

  I appreciate the wide latitude here, but I find this all relates to the constant drip-drip Chinese Water Boarding Slo-Mo Stlye, Antagonizing of POTUS. What's in it for him? imho....He will never, ever receive widespread intangibles such as respect, recognition, admiration etc (deserved or otherwise) unless he personally punches a suicide bomber's plane out of the sky. Grotesquely, sadly, but assuredly so, unlike what they did with obama (read:FastFurious/Benghazi/VA etc) MSM will keep a body count in POTUS watch.

 

  Uh, that was morbid, so I give you this. I noticed a disclaimer on a bottle of sleeping pills the other day that read "May cause drowsiness." May.....cause drowsiness!? WTF is that, wasn't that the point!? What's next, a disclaimer on a box of condom's that reads "May contain nuts" lawyers huh....sheesh... ;D 8) ::)

 

PM,

[Luke 532]

Can we please, largely, stay on the topic at hand in this thread?  :o

We've done rather well in most of the 570 pages in this regard so far!

 

;D

 

 

+1

[Picasso]

  You hear that folks, POTUS said New NAFTA Deal could pay for the Wall. Doesn't sound like any other imminent source of funds are being earmarked for public coffers anyways. Then again, I'm no Psychiatrist, (it's true) but isn't that how stalkers read their tea leaves too? I swear I saw a sign in my toast this morning that looked like Warrants were being cancelled. Or maybe, that was just my subconscious aligning what it thinks of this investment theory(read:gamble), with my breakfast of choice, toast.

 

  Ah yes, nice to see MSM highlight the Ayatollah's rant out about the "real" US and declaring that now you will see our ire. As if it's POTUS's fault that today, Feb 07, 2017, due to POTUS IranBan, radical wackjobs all over the world are going to start blowing themselves up in suicide attacks while yelling allahu akbar. Like one of Jeffrey Dahmer's victims fighting back to Jeff's reply "Oh ya, well now I'm going to eat you!" Wait for it, next death, POTUS fault, 100%. Won't matter who, what, where, when, why. Unfortunately how radicals view things as well, facts don't matter anymore, anywhere.

 

  I appreciate the wide latitude here, but I find this all relates to the constant drip-drip Chinese Water Boarding Slo-Mo Stlye, Antagonizing of POTUS. What's in it for him? imho....He will never, ever receive widespread intangibles such as respect, recognition, admiration etc (deserved or otherwise) unless he personally punches a suicide bomber's plane out of the sky. Grotesquely, sadly, but assuredly so, unlike what they did with obama (read:FastFurious/Benghazi/VA etc) MSM will keep a body count in POTUS watch.

 

  Uh, that was morbid, so I give you this. I noticed a disclaimer on a bottle of sleeping pills the other day that read "May cause drowsiness." May.....cause drowsiness!? WTF is that, wasn't that the point!? What's next, a disclaimer on a box of condom's that reads "May contain nuts" lawyers huh....sheesh... ;D 8) ::)

 

PM,

 

+1