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

[onyx1]

FNMA/FMCC were put into conservatorship when they failed to raise short-term funding necessary to continue operations from the private markets in 2008. They were temporarily illquid, which is the same as insolvent. Simple as that.

 

Oh really?

 

http://www.fidererongses.com/15-facts-about-fannie-mae-and-freddie-mac/gse-liquidity/

[asterisk]

In regards to the lunch tomorrow- the topic of F&F has to come up in budget negotiations. Do you all think we are underestimating the influence of the individuals who in a sense purchased an out of the money call by supporting Trump? (Icahn, Paulson, etc)

[TonyG]

if perry appeals en banc, and the entire bench agrees, does this void the opinion put out yesterday?

[HalfMeasure]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

[Luke 532]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

 

+1.  That distinction alone likely created many millionaires back in the day with GGP.

[Spekulatius]

Are there really no scenarios where Mnuchin can be consistent with his wording (get out of government control, Fannie/Freddie important, well capitalized) but also wipe out existing shareholders?  I have to think that this is a non zero event that I'm not smart enough to figure out.

 

I think this is a possibility and I would argue that this is in the best interest of the government to do so. The question is not, what is right or wrong, the question is what can you get away with. I would even argue that starting with a clean slate is going to make it simpler to issue new equity after changing the statues of FNM and FRE.

 

Doing so would certainly maximize the governments profit.

 

The capital markets don't care, as long as FRE and FNM debt is safe. Wall Street will happily sell the new and improved FRE and FNM to institutional investors and the general public. it has been 9 years since FRE and FNM was put under the government wings, which might as well be forever. Companies reorganize and wipe out equity all the time. in fact Trump can be considered an expert in these things, so what is the big deal?

 

I don't think I have a clue what is and when something is going happen, but I do agree that after the government change, a change in FRE and FNM status is much more likely - I am just not sure which of the many possibilities is going to actually occur going forward and if there is a profit or a wipeout or something in between.

[SnarkyPuppy]

Are there really no scenarios where Mnuchin can be consistent with his wording (get out of government control, Fannie/Freddie important, well capitalized) but also wipe out existing shareholders?  I have to think that this is a non zero event that I'm not smart enough to figure out.

 

I think this is a possibility and I would argue that this is in the best interest of the government to do so. The question is not, what is right or wrong, the question is what can you get away with. I would even argue that starting with a clean slate is going to make it simpler to issue new equity after changing the statues of FNM and FRE.

 

Doing so would certainly maximize the governments profit.

 

The capital markets don't care, as long as FRE and FNM debt is safe. Wall Street will happily sell the new and improved FRE and FNM to institutional investors and the general public. it has been 9 years since FRE and FNM was put under the government wings, which might as well be forever. Companies reorganize and wipe out equity all the time. in fact Trump can be considered an expert in these things, so what is the big deal?

 

Right. 

-Mnuchin has used the term “restructure”. 

-He acknowledged he’s aware of the legal cases but hadn’t studied them. 

-He said he wants to get them out of government control because it displaces lending

 

What if he truly hadn’t studied the cases up until the recent ruling?  And then realized that this ruling gives him full autonomy to takeover Fannie/Freddie while restoring lending efficiency, maximizing his incentivizes of government profit + enhancing mortgage liquidity?  That would be a “restructuring” ala any post bankruptcy where shareholders are wiped and senior claims take over.  He could end the remaining lawsuits (which aren’t looking too great) with some cash settlement likely immaterial in the grand scheme of now owning 2 companies which make ~$15bn a year.  All of us retail guys get annihilated. 

 

 

[Spekulatius]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

 

 

 

+1.  That distinction alone likely created many millionaires back in the day with GGP.

 

Sometimes illiquid is the same than insolvent, as far as the outcome is concerned, sometimes it is not. In most cases, if you become illiquid, the debtors decide and if they want to own the assets, They can. this is particularly true for a financial institution where the regulators are protecting the depositors and to some extend the debt, rather than worrying about the equity sliver.

[Luke 532]

ValueWalk: Maria Bartiromo will interview Steve Mnuchin live tomorrow morning on FOX Business Network’s Mornings with Maria at 8AM/ET $FNMA $FMCC

 

7am on CNBC, 8am on Fox.  Mnuchin sure seems to want to get something off his chest.

[Mephistopheles]

Interesting that the common is up 10% today yet the prefs continue to go down. Short covering?

[Eye4Valu]

I think there is a decent chance SCOTUS would grant certiorari on Perry. So i guess I disagree with the consensus on that. I also think the takings case is strong in Ct. of Fed. Claims. Sweeney has taken a long time, but has also been instrumental in moving the Plaintiff's case along. I seriously doubt Fairholme is going to take its foot off the gas. With regard to the preferred, a liquidation preference is a liquidation preference. I don't think Mnuchin can tread all over the preferred by offering something far lower than the liquidation preference they are contractually entitled to. I'm not sure he would anyway. There have been many setbacks and positive surprises in this enduring saga. I expect that to continue. Staying long my 20,000 shares of FNMAS.

[Guest Schwab711]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

 

What a cop out. Illquidity differs from insolvency because it is temporary. I just finished arguing that they were unable to finance their operations in the private markets, which is why I was able to make that statement (I make additional arguments that further supported this posit, with the caveat that my assumptions are correct. Either way, I was clearly making generalizations and not writing a rigorous thesis - Again, context matters). You took this quote out of context, which was vital to being able to make the statement in the first place! If you don't want to or don't think it is worth discussing this (maybe because you don't think I'm qualified to do so), fine, but that's a different statement than what you made. If, like onyx1, you disagree about their access to funding (or any other assumption I made, which are necessary to arrive at my conclusion) then great, we can have that discussion. Maybe I have my history wrong. However, this is a bully move by grabbing a single statement out of context in an attempt to discredit me. Good luck investing with that attitude towards knowledge acquisition.

[Guest Schwab711]

FNMA/FMCC were put into conservatorship when they failed to raise short-term funding necessary to continue operations from the private markets in 2008. They were temporarily illquid, which is the same as insolvent. Simple as that.

 

Oh really?

 

http://www.fidererongses.com/15-facts-about-fannie-mae-and-freddie-mac/gse-liquidity/

 

I've seen this before and I'm aware that they had access until almost immediately before conservatorship. I'll try to find time tonight to update this argument because it's obviously a crucial detail, but I recall reading that their auction on or around September 5th or so (a Friday and the day before they were placed in conservatorship) failed to raise even half of what they needed and various US officials feared collapse of the market. The next day they placed them in conservatorship. You raise a very worthwhile point that, even if I am correct in memory, it was a hell of a judgement call to make when they were able to fund operations in the weeks leading up to conservatorship. Also from memory but I believe Lehman experienced a similar phenomena where access to funding dried up almost literally overnight.

 

Edit: If I continue this I'll start another thread. I probably shouldn't clog up this thread any more than it already is.

[Flynnstone5]

Can any of the lawyers explain this?

 

"Ginsburg & Millett neglected 12 USC 4623(b), which allows them 2 set aside NWS. But says 12 USC 4617 (no A&C wording) is anti-injunctive"

 

 

[TwoCitiesCapital]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

 

What a cop out. Illquidity differs from insolvency because it is temporary. I just finished arguing that they were unable to finance their operations in the private markets, which is why I was able to make that statement (I make additional arguments that further supported this posit, with the caveat that my assumptions are correct. Either way, I was clearly making generalizations and not writing a rigorous thesis - Again, context matters). You took this quote out of context, which was vital to being able to make the statement in the first place! If you don't want to or don't think it is worth discussing this (maybe because you don't think I'm qualified to do so), fine, but that's a different statement than what you made. If, like onyx1, you disagree about their access to funding (or any other assumption I made, which are necessary to arrive at my conclusion) then great, we can have that discussion. Maybe I have my history wrong. However, this is a bully move by grabbing a single statement out of context in an attempt to discredit me. Good luck investing with that attitude towards knowledge acquisition.

 

Many of us don't debate the 2008 bailout. It's the unilateral re-negotiation of those terms to sweep 100% of profits and capital when it became clear the companies never needed the bailout and were going to be incredibly profitable that leaves a big stink over the gov't.

 

As it stands, Fannie and Freddie were never insolvent. They had a liquidity need that the gov't provided in a moment of crisis for a STEEP price. Then, years later, it was realized that Fannie and Freddie were nowhere near as impaired as feared and were going to make a boatload even after paying the steep price. That's when the gov't said, "we can't allow that. We're going to steal it all," and then they did. It's this latter part that we take issue with.

[HalfMeasure]

They were temporarily illquid, which is the same as insolvent.

 

If you do not understand the distinction between those terms this is likely not the discussion for you. Good luck understanding financials in general without that distinction.

 

What a cop out. Illquidity differs from insolvency because it is temporary. I just finished arguing that they were unable to finance their operations in the private markets, which is why I was able to make that statement (I make additional arguments that further supported this posit, with the caveat that my assumptions are correct. Either way, I was clearly making generalizations and not writing a rigorous thesis - Again, context matters). You took this quote out of context, which was vital to being able to make the statement in the first place! If you don't want to or don't think it is worth discussing this (maybe because you don't think I'm qualified to do so), fine, but that's a different statement than what you made. If, like onyx1, you disagree about their access to funding (or any other assumption I made, which are necessary to arrive at my conclusion) then great, we can have that discussion. Maybe I have my history wrong. However, this is a bully move by grabbing a single statement out of context in an attempt to discredit me. Good luck investing with that attitude towards knowledge acquisition.

 

I snipped just the sentence to avoid the wall of text from quoting the whole post, not to cherry-pick and argue out of context as the context is easy to see a couple posts earlier (we just don't need to keep reposting it). You don't actually argue that they were unable to raise funds to finance their operations, you just state it without any backing. Even in context, the statement of equality between insolvency and illiquidity is wholly inaccurate. Taking your incorrect assertion as fact for the sake of argument and assuming they could not raise other funds, it was still a liquidity problem and not a solvency problem - the ability to raise funds or finance obligations in the short term does not change that.

[beaufort]

Back of the envelope approximate calculations for Fannie and steps to independence.

 

Comments on whether this would work are welcome.

 

Facts:

 

3T assets.

1.1B shares outstanding.

5 B shares outstanding including dilution from government warrants.

21B junior preferred stock.

 

 

Assumptions:

15 P/E fair for FNMA.

2.5% regulatory capital required.

10-11B net income sustainable moving forward.

 

Government has been paid back fully on its injections of capital into Fannie by way of NWS.  Still retains warrants.

 

Mnuchin ends NWS.

 

Mnuchin raises strike price of warrants to $20 to exit ownership, then sells them.

 

Now 5B total diluted shares outstanding.

 

After dilution, sale of 3B in new stock to public for 60B total.

2 years of retained capital post NWS before any dividends are paid.

I am going to ignore preferred dividends for the moment.

 

Conclusion:

 

8B common outstanding

 

11B Net income

 

15 P/E

 

Share price for common = approximately $20/share (needs adjustment for preferred dividends)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Guest cherzeca]

if perry appeals en banc, and the entire bench agrees, does this void the opinion put out yesterday?

 

if reheard en banc, the merits panel decision is voided

[Midas79]

if perry appeals en banc, and the entire bench agrees, does this void the opinion put out yesterday?

 

if reheard en banc, the merits panel decision is voided

 

Who all would have to agree to an en banc hearing? It seems unlikely to me but it's worth getting a read on the players involved.

[investorG]

Back of the envelope approximate calculations for Fannie and steps to independence.

 

Comments on whether this would work are welcome.

 

Facts:

 

3T assets.

1.1B shares outstanding.

5 B shares outstanding including dilution from government warrants.

21B junior preferred stock.

 

 

Assumptions:

15 P/E fair for FNMA.

2.5% regulatory capital required.

10-11B net income sustainable moving forward.

 

Government has been paid back fully on its injections of capital into Fannie by way of NWS.  Still retains warrants.

 

Mnuchin ends NWS.

 

Mnuchin raises strike price of warrants to $20 to exit ownership, then sells them.

 

Now 5B total diluted shares outstanding.

 

After dilution, sale of 3B in new stock to public for 60B total.

2 years of retained capital post NWS before any dividends are paid.

I am going to ignore preferred dividends for the moment.

 

Conclusion:

 

8B common outstanding

 

11B Net income

 

15 P/E

 

Share price for common = approximately $20/share (needs adjustment for preferred dividends)

 

that seems like a good plan with balance. let's put you in charge.

[TonyG]

https://www.bloomberg.com/news/videos/2017-02-22/what-will-happen-to-gses-under-the-trump-administration

 

smart guy

[waynepolsonAtoZ]

"if reheard en banc, the merits panel decision is voided"

 

en banc is active judges, 7D, 4R, good luck.

[Cardboard]

I decided to buy some preferreds for the first time today. I wanted to get ahead of Mnuchin talking tomorrow. Will probably buy more after that and more research.

 

I like the odds. This is a business friendly administration, Fannie Mae has been in business since 1938 and the U.S. mortgage market needs these entities.

 

I can't see nationalization nor liquidation. The way forward IMO is being public entities with strict control or similar to Bassel, Fed stress tests and Dodd-Frank with the banks. They are already being dictated by FHFA to decrease the size of their portfolio and to focus more on guaranty. So they will be less profitable than pre-2008 but, will still be awesome businesses.

 

It is possible that the old preferred's get wiped-out in the process described above or all legacy capital. I see that as a distant probability. In any case, the government will make money and that will look good.

 

I find interesting that their share was set at 79.9% of ownership for both in 2008. Is there any rule that was preventing to go above 80%?

 

Cardboard

[rros]

Back of the envelope approximate calculations for Fannie and steps to independence.

 

Comments on whether this would work are welcome.

 

Facts:

 

3T assets.

1.1B shares outstanding.

5 B shares outstanding including dilution from government warrants.

21B junior preferred stock.

 

 

Assumptions:

15 P/E fair for FNMA.

2.5% regulatory capital required.

10-11B net income sustainable moving forward.

 

Government has been paid back fully on its injections of capital into Fannie by way of NWS.  Still retains warrants.

 

Mnuchin ends NWS.

 

Mnuchin raises strike price of warrants to $20 to exit ownership, then sells them.

 

Now 5B total diluted shares outstanding.

 

After dilution, sale of 3B in new stock to public for 60B total.

2 years of retained capital post NWS before any dividends are paid.

I am going to ignore preferred dividends for the moment.

 

Conclusion:

 

8B common outstanding

 

11B Net income

 

15 P/E

 

Share price for common = approximately $20/share (needs adjustment for preferred dividends)

So raising the warrants price would be Stegman's recap "at the cost of the taxpayer". And then, there is a double dip on this scenario. Not sure this has a chance. Mnuchin is on record saying "I never said recap and release". Before anything happens, or simultaneously, the companies will see more stringent regulation.

 

Re: illiquidity/insolvency. You can cure illiquidity with a simple credit line. You can't cure insolvency the same way. They are radically different concepts.

[SnarkyPuppy]

I decided to buy some preferreds for the first time today. I wanted to get ahead of Mnuchin talking tomorrow. Will probably buy more after that and more research.

 

I like the odds. This is a business friendly administration, Fannie Mae has been in business since 1938 and the U.S. mortgage market needs these entities.

 

I can't see nationalization nor liquidation. The way forward IMO is being public entities with strict control or similar to Bassel, Fed stress tests and Dodd-Frank with the banks. They are already being dictated by FHFA to decrease the size of their portfolio and to focus more on guaranty. So they will be less profitable than pre-2008 but, will still be awesome businesses.

 

It is possible that the old preferred's get wiped-out in the process described above or all legacy capital. I see that as a distant probability. In any case, the government will make money and that will look good.

 

I find interesting that their share was set at 79.9% of ownership for both in 2008. Is there any rule that was preventing to go above 80%?

 

Cardboard

 

Welcome to the party.  79.9% was chosen so that the debt held on the GSE balance sheets would not be consolidated with the governments balance sheet