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

investorG · February 23, 2017

Mnuchin is becoming quite the politician already. He said basically nothing of substance. Both sides can interpret his words to favor their side of the solution.

if you are anti-GSE what did you hear that excites you besides nothing is imminent? not trying to be difficult, just curious. thank you

I am not anti-GSE. I own the common. Basically the usual can't go on like this....need housing reform...bipartisan...etc. You can read that a lot of ways. He gave no specifics. He said nothing directly to give the current shareholders support. No mention of ending the NWS. Everyone is trying to squeeze meaning out of the very vague comments he made. Just trying to be realistic. A bit disappointed with what he said today. I don't feel any better or worse about the position after the interview.

ok, thanks. he's got the strategic long term view in mind imo. very GS-like. if he came out hot and aggressive, it puts more at risk. although I wish he would have mentioned how great the companies are.

and I apologize, I should have said 'one' instead of 'you' regarding the anti-gse, ie if someone was anti-gse what did they hear.....sorry

investorG · February 23, 2017

the preferreds lost relative advantage this week imo (outside of future positive court rulings). their negotiating leverage declined and the odds of the warrants being exercised are higher meaning preferreds are fighting more against trump / taxpayer in dividing the equity. but clearly the 2:1 ratio I used would be further down the line and any potential progress would be reflected in the common price, hopefully, relative to where it is today.

and fwiw 1/3 of my position (currently, it changes often) is in preferred, so i'm not against preferreds.

Could you please expand on why you think the preferred lost relative advantage and why you think the preferreds negotiating leverage diminished?

sure. i'll try. the court cases weakened a lot with the ruling. these cases are sponsored by the preferreds. their confidence in a positive court outcome (and timing) goes down so they are willing to accept less in any future negotiation. moreover bc the senior preferred will likely need to be extinguished via congress or a 4th amendment in 2018 (rather than more purely in the courts), it increases the likelihood of exercising the warrants in some form to generate tax $ for political purposes. this suggests in dividing up the equity pie between common, jr preferred, and new equity, the common gets an advantage bc trump and the taxpayer is on that team. but all that said, I think if mnuchin can pull off his plan, a 2:1 exchange into common would be quite nice for preferred. I just believe all high end price targets needed to be reduced after the news, for both securities. good luck!

edit: I also guess preferred dividends won't be turned on (except if court cases turn around), suggesting convergence between the higher and lower dividend preferreds.

Desert_Rat · February 23, 2017

Mnuchin is becoming quite the politician already. He said basically nothing of substance. Both sides can interpret his words to favor their side of the solution.

if you are anti-GSE what did you hear that excites you besides nothing is imminent? not trying to be difficult, just curious. thank you

I am not anti-GSE. I own the common. Basically the usual can't go on like this....need housing reform...bipartisan...etc. You can read that a lot of ways. He gave no specifics. He said nothing directly to give the current shareholders support. No mention of ending the NWS. Everyone is trying to squeeze meaning out of the very vague comments he made. Just trying to be realistic. A bit disappointed with what he said today. I don't feel any better or worse about the position after the interview.

ok, thanks. he's got the strategic long term view in mind imo. very GS-like. if he came out hot and aggressive, it puts more at risk. although I wish he would have mentioned how great the companies are.

and I apologize, I should have said 'one' instead of 'you' regarding the anti-gse, ie if someone was anti-gse what did they hear.....sorry

that's all well and good but not the impression shared before the ruling. I'm disappointed today because I can't help adding housing reform to ACA, tax reform, the wall, pretty much everything that's been promised as a super high priority. It's almost as if those goals exist but support for them doesn't so this administration is just filling a new swamp with different gators.

I'll repeat, for anything to get done by this administration it will take damn near 100% GOP support. Dem's won't approve anything.

investorG · February 23, 2017

Mnuchin is becoming quite the politician already. He said basically nothing of substance. Both sides can interpret his words to favor their side of the solution.

if you are anti-GSE what did you hear that excites you besides nothing is imminent? not trying to be difficult, just curious. thank you

I am not anti-GSE. I own the common. Basically the usual can't go on like this....need housing reform...bipartisan...etc. You can read that a lot of ways. He gave no specifics. He said nothing directly to give the current shareholders support. No mention of ending the NWS. Everyone is trying to squeeze meaning out of the very vague comments he made. Just trying to be realistic. A bit disappointed with what he said today. I don't feel any better or worse about the position after the interview.

ok, thanks. he's got the strategic long term view in mind imo. very GS-like. if he came out hot and aggressive, it puts more at risk. although I wish he would have mentioned how great the companies are.

and I apologize, I should have said 'one' instead of 'you' regarding the anti-gse, ie if someone was anti-gse what did they hear.....sorry

that's all well and good but not the impression shared before the ruling. I'm disappointed today because I can't help adding housing reform to ACA, tax reform, the wall, pretty much everything that's been promised as a super high priority. It's almost as if those goals exist but support for them doesn't so this administration is just filling a new swamp with different gators.

I'll repeat, for anything to get done by this administration it will take damn near 100% GOP support. Dem's won't approve anything.

nov 30 was a mistake, I'm sure he regrets not holding back. he learned his lesson. yet I think what he said is indeed his core view.

I believe his housing plan announcement can come out this spring. he didn't say tax reform needed to be completed before housing plan announced, if I heard correctly. plus we have the 0 capital issue at year end to deal with which suggests don't wait too long. imo he was just telling all the GSE supporters to back off a little, he's not going to be a quick hero post-Tuesday. and from the shareholder side, he's our main avenue for justice.

Desert_Rat · February 23, 2017

the preferreds lost relative advantage this week imo (outside of future positive court rulings). their negotiating leverage declined and the odds of the warrants being exercised are higher meaning preferreds are fighting more against trump / taxpayer in dividing the equity. but clearly the 2:1 ratio I used would be further down the line and any potential progress would be reflected in the common price, hopefully, relative to where it is today.

and fwiw 1/3 of my position (currently, it changes often) is in preferred, so i'm not against preferreds.

Could you please expand on why you think the preferred lost relative advantage and why you think the preferreds negotiating leverage diminished?

sure. i'll try. the court cases weakened a lot with the ruling. these cases are sponsored by the preferreds. their confidence in a positive court outcome (and timing) goes down so they are willing to accept less in any future negotiation. moreover bc the senior preferred will likely need to be extinguished via congress or a 4th amendment in 2018 (rather than more purely in the courts), it increases the likelihood of exercising the warrants in some form to generate tax $ for political purposes. this suggests in dividing up the equity pie between common, jr preferred, and new equity, the common gets an advantage bc trump and the taxpayer is on that team. but all that said, I think if mnuchin can pull off his plan, a 2:1 exchange into common would be quite nice for preferred. I just believe all high end price targets needed to be reduced after the news, for both securities. good luck!

edit: I also guess preferred dividends won't be turned on (except if court cases turn around), suggesting convergence between the higher and lower dividend preferreds.

Actually it would be a loss at today's prices. You nuts ;D, only way a 2:1 is accepted on the $25's is if common is at $12.50.

I agree with your convergence thoughts. I've always bought on that principle.

investorG · February 23, 2017

Actually it would be a loss at today's prices. You nuts ;D, only way a 2:1 is accepted on the $25's is if common is at $12.50.

I agree with your convergence thoughts. I've always bought on that principle.

well if the offer is to convert at 2:1 or keep preferred with no dividends for years, you might just accept after all. if the court cases turn around from looking weak now, then I might agree more with you.

Mephistopheles · February 23, 2017

Trying to summarize everything with a 10,000 ft view:

1) Mnuchin once again expressed that conservatorship is not the answer. Together with previous comments that a) he doesn't want taxpayers at risk and b) he wants to preserve the 30 year mortgage, it's obvious that he wants privately owned solution.

2) So the question is, will he do this by a) bringing in new capital and screwing over current shareholders, or b) by returning the companies to their current shareholders?

-IMO (a) is much harder, because he'd have to deal with the existing shareholders simultaneously. And how exactly would this work? Would he have to wind them down first, and then sponsor new companies, bring in new private capital? Is there any reasonable way for them to transfer the assets and obligations of FNMA/FMCC to a new private sector company with new shareholder capital? I'm not an expert here but I feel it would a total mess while also having to deal with the legal battles. And let's not forget that the clock is winding down and these companies will need a new Treasury draw at any moment.

-(b) is the more practical solution. Yes it rewards hedge funds, but it's the quickest solution. Put an end to the legal battles, NWS, recap, privatize, not have to worry about future capital shortfalls. He has expressed several times that he wants the quickest possible solution. Not only does he want it, but it's better politically given the almost zero equity left, as well as the lawsuits. And this also brings in huge warrant profits for Trump to spend - wind down doesn't do that.

He could of course recap them and make them public utilities and have the Govt reap the profits year after year, but that wouldn't be consistent with 1) not putting taxpayers at risk, 2) taking the huge political and financial windfall from the warrants. I think Trump would rather have 79.9% of the equity minus jr. preferred up front rather than have 100% of the net income for 4 (ok maybe 8 ) years.

merkhet · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

I think a lot of the parsing is based on the narrative post-Mnuchin comments in November of last year. That's just what people choose to focus on. And, surprisingly, people (including on this board) seem to be ignoring the fact that the breach of implied covenant (dividends) and the breach of contract & implied covenant (liquidation preference) case gets to move on in district court -- something all three judges agreed on -- though that may be a function of ownership considerations (common vs. preferred).

Desert_Rat · February 23, 2017

nov 30 was a mistake, I'm sure he regrets not holding back. he learned his lesson. yet I think what he said is indeed his core view.

I believe his housing plan announcement can come out this spring. he didn't say tax reform needed to be completed before housing plan announced, if I heard correctly. plus we have the 0 capital issue at year end to deal with which suggests don't wait too long. imo he was just telling all the GSE supporters to back off a little, he's not going to be a quick hero post-Tuesday. and from the shareholder side, he's our main avenue for justice.

Why does this board think that 0 capital or capital draw is less than a positive? I mean, it's not as if anyone would claim a draw occurred because FnF were doing poorly. It would certainly be attributed to the govt putting the country at risk by raping the companies of all capital and refusing to consider serious housing reform.

If anything it should get the ball rolling

Edit: NM. More draw adds to senior preferred outstanding. Yeah, this would be bad.

Mephistopheles · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

I think a lot of the parsing is based on the narrative post-Mnuchin comments in November of last year. That's just what people choose to focus on. And, surprisingly, people (including on this board) seem to be ignoring the fact that the breach of implied covenant (dividends) and the breach of contract & implied covenant (liquidation preference) case gets to move on in district court -- something all three judges agreed on -- though that may be a function of ownership considerations (common vs. preferred).

At least for me, I have very little faith in Lamberth given our previous experience. It's also largely because I'm not a lawyer, but based on my elementary reading, it just didn't seem like he gave a shit. So I take the DC case as a free call option, but I have higher hopes for Sweeney (again based on my amateur reading of the cases).

ScottHall · February 23, 2017

This seems too risky for my blood but GL to all.

Flynnstone5 · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

I think a lot of the parsing is based on the narrative post-Mnuchin comments in November of last year. That's just what people choose to focus on. And, surprisingly, people (including on this board) seem to be ignoring the fact that the breach of implied covenant (dividends) and the breach of contract & implied covenant (liquidation preference) case gets to move on in district court -- though that may be a function of ownership considerations (common vs. preferred).

I really find it bizarre that the common has been moving incrementally up while the prfd is doing the opposite. The market seems to be perceiving that both breach cases are not very strong. What's your take?

Desert_Rat · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

I think a lot of the parsing is based on the narrative post-Mnuchin comments in November of last year. That's just what people choose to focus on. And, surprisingly, people (including on this board) seem to be ignoring the fact that the breach of implied covenant (dividends) and the breach of contract & implied covenant (liquidation preference) case gets to move on in district court -- something all three judges agreed on -- though that may be a function of ownership considerations (common vs. preferred).

At least for me, I have very little faith in Lamberth given our previous experience. It's also largely because I'm not a lawyer, but based on my elementary reading, it just didn't seem like he gave a shit. So I take the DC case as a free call option, but I have higher hopes for Sweeney (again based on my amateur reading of the cases).

Lamberth has stepped down. I assume his successor now leads?

https://en.wikipedia.org/wiki/Richard_W._Roberts

SnarkyPuppy · February 23, 2017

Trying to summarize everything with a 10,000 ft view:

1) Mnuchin once again expressed that conservatorship is not the answer. Together with previous comments that a) he doesn't want taxpayers at risk and b) he wants to preserve the 30 year mortgage, it's obvious that he wants privately owned solution.

2) So the question is, will he do this by a) bringing in new capital and screwing over current shareholders, or b) by returning the companies to their current shareholders?

-IMO (a) is much harder, because he'd have to deal with the existing shareholders simultaneously. And how exactly would this work? Would he have to wind them down first, and then sponsor new companies, bring in new private capital? Is there any reasonable way for them to transfer the assets and obligations of FNMA/FMCC to a new private sector company with new shareholder capital? I'm not an expert here but I feel it would a total mess while also having to deal with the legal battles. And let's not forget that the clock is winding down and these companies will need a new Treasury draw at any moment.

-(b) is the more practical solution. Yes it rewards hedge funds, but it's the quickest solution. Put an end to the legal battles, NWS, recap, privatize, not have to worry about future capital shortfalls. He has expressed several times that he wants the quickest possible solution. Not only does he want it, but it's better politically given the almost zero equity left, as well as the lawsuits. And this also brings in huge warrant profits for Trump to spend - wind down doesn't do that.

He could of course recap them and make them public utilities and have the Govt reap the profits year after year, but that wouldn't be consistent with 1) not putting taxpayers at risk, 2) taking the huge political and financial windfall from the warrants. I think Trump would rather have 79.9% of the equity minus jr. preferred up front rather than have 100% of the net income for 4 (ok maybe 8 ) years.

"1) Mnuchin once again expressed that conservatorship is not the answer. Together with previous comments that a) he doesn't want taxpayers at risk and b) he wants to preserve the 30 year mortgage, it's obvious that he wants privately owned solution.

2) So the question is, will he do this by a) bringing in new capital and screwing over current shareholders, or b) by returning the companies to their current shareholders?"

This. Everything I know about this story leads me to believe that 2b will happen, but I'm

Very concerned about the unknown potential with 2a.

orthopa · February 23, 2017

Trying to summarize everything with a 10,000 ft view:

1) Mnuchin once again expressed that conservatorship is not the answer. Together with previous comments that a) he doesn't want taxpayers at risk and b) he wants to preserve the 30 year mortgage, it's obvious that he wants privately owned solution.

2) So the question is, will he do this by a) bringing in new capital and screwing over current shareholders, or b) by returning the companies to their current shareholders?

-IMO (a) is much harder, because he'd have to deal with the existing shareholders simultaneously. And how exactly would this work? Would he have to wind them down first, and then sponsor new companies, bring in new private capital? Is there any reasonable way for them to transfer the assets and obligations of FNMA/FMCC to a new private sector company with new shareholder capital? I'm not an expert here but I feel it would a total mess while also having to deal with the legal battles. And let's not forget that the clock is winding down and these companies will need a new Treasury draw at any moment.

-(b) is the more practical solution. Yes it rewards hedge funds, but it's the quickest solution. Put an end to the legal battles, NWS, recap, privatize, not have to worry about future capital shortfalls. He has expressed several times that he wants the quickest possible solution. Not only does he want it, but it's better politically given the almost zero equity left, as well as the lawsuits. And this also brings in huge warrant profits for Trump to spend - wind down doesn't do that.

He could of course recap them and make them public utilities and have the Govt reap the profits year after year, but that wouldn't be consistent with 1) not putting taxpayers at risk, 2) taking the huge political and financial windfall from the warrants. I think Trump would rather have 79.9% of the equity minus jr. preferred up front rather than have 100% of the net income for 4 (ok maybe 8 ) years.

Nice summary. I think we can all agree Mnuchin will get them out of conservatorship no? He has said multiple times he wants them out of govt control.

The questions I have are the day he announces conservatorship is over. He is returning the companies back to their state prior to conservatorship right? FnF will no longer need the back up of the govt. Is this action essentially returning the company back to shareholders or not that simple?

If (when)the companies are out of conservatorship can the net worth sweep still be in place? If the companies are no longer are in govt control can they still have all of earnings swept? No right?

Even looking at this page it seems there was a desire to get private capital into fannie and freddie and investors are mentioned as stakeholders FWIW

https://www.fhfa.gov/Conservatorship/pages/history-of-fannie-mae--freddie-conservatorships.aspx

Anothe question is for the legal guys. What happens if the govt/Mnucnhin winds down FnF and liquidates shareholers and then sometime after they get a positive Sweeney or otherwise final court ruling. Where do those funds come from?

gr33ngi4nt · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

I think a lot of the parsing is based on the narrative post-Mnuchin comments in November of last year. That's just what people choose to focus on. And, surprisingly, people (including on this board) seem to be ignoring the fact that the breach of implied covenant (dividends) and the breach of contract & implied covenant (liquidation preference) case gets to move on in district court -- something all three judges agreed on -- though that may be a function of ownership considerations (common vs. preferred).

At least for me, I have very little faith in Lamberth given our previous experience. It's also largely because I'm not a lawyer, but based on my elementary reading, it just didn't seem like he gave a shit. So I take the DC case as a free call option, but I have higher hopes for Sweeney (again based on my amateur reading of the cases).

Lamberth has stepped down. I assume his successor now leads?

https://en.wikipedia.org/wiki/Richard_W._Roberts

This doesn't look correct. Lamberth is a Senior judge according to this website. He stepped down from Chief Judge (in 2013) when he was appointed as a Senior judge. Timeline also doesn't make sense as he "stepped down" BEFORE the 2014 decision.

https://en.wikipedia.org/wiki/United_States_District_Court_for_the_District_of_Columbia

http://www.dcd.uscourts.gov/content/senior-judge-royce-c-lamberth

orthopa · February 23, 2017

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind.

This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more.

Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

No position but in agreement with this. It starts getting speculative when you have to read between the lines and analyze tones. If Trump had not won (a seemingly improbable event), I can't imagine these securities would be trading anywhere near current market prices.

Agree, Mnuchin is the gse investment thesis. as was the obama administration. That's why all the reading between the lines. What other options do we have, to look at the current earnings and future earnings?

investorG · February 23, 2017

at the margin, the shareholder base needs to turn over after this week's news, imo. these can get messy at times.

before you had people in for a) courts and b) nov30 commentary -- both of which pointed towards 1h 2017 catalyst profits. most of these people are hedge funds and are likely concentrated on the high dividend liquid preferreds.

currently those catalysts appear diminished or pushed out. at the same time we have lower prices and a step forward to a long term solution, which should attract long only value investors (those that don't mind owning a pink sheet stock below 5). imo these new investors will take a more balanced view of the menu of security options.

the good news is at some point --- if progress continues --- the selling finishes and the long term value investors are still there as better partners with reduced volatility. and then the momentum investors can be there in the wings as potential demand to give some price action if things ever go positive.

orthopa · February 23, 2017

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

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