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

[Mephistopheles]

Is there a scenario where the 3rd amendment is invalidated but the companies can't redeem the senior preferreds, and have to continue paying dividends on the full amount? Under the 2nd amendment, what power do the companies have to redeem the prefs? It appears from the language that they can't redeem as long as Treasury's funding commitment is ongoing. So Fannie, for instance, would continue paying $11.7 billion in dividends here, almost equal to their net income, leaving scraps for the junior and common. Fannie obviously has $117 billion liquidation preference, well below the $200 billion threshold for ending commitment, referenced below.

 

This assumes that the companies stay in perpetual conservatorship without the NWS, because if they exit, obviously Treasury wouldn't have a funding commitment. But it gets me thinking that it is possible for the NWS to be overturned and we STILL getting screwed. Thoughts?

 

Fannie's 2nd amendment to the SPSA:

https://www.sec.gov/Archives/edgar/data/310522/000095012309074293/w76743exv4w1.htm

Commitment. Purchaser hereby commits to provide to Seller, on the terms and conditions set forth herein, immediately available funds in an amount up to but not in excess of the Available Amount, as determined from time to time (the “Commitment”); provided, that in no event shall the aggregate amount funded under the Commitment exceed the greater of (a) $200,000,000,000 (two hundred billion dollars), or (b) $200,000,000,000 plus the cumulative total of Deficiency Amounts determined for calendar quarters in calendar years 2010, 2011, and 2012, less any Surplus Amount determined as of December 31, 2012. The liquidation preference of Senior Preferred Stock shall increase in connection with draws on the Commitment, as set forth in Section 3.3 below.

 

Fannie's 2011 10-k:

https://www.sec.gov/Archives/edgar/data/310522/000119312512087297/d282546d10k.htm

 

We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the outstanding shares of senior preferred stock except to the extent of (1) accrued and unpaid dividends previously added to the liquidation preference and not previously paid down; and (2) quarterly commitment fees previously added to the liquidation preference and not previously paid down. In addition, if we issue any shares of capital stock for cash while the senior preferred stock is outstanding, the net proceeds of the issuance must be used to pay down the liquidation preference of the senior preferred stock; however, the liquidation preference of each share of senior preferred stock may not be paid down below $1,000 per share prior to the termination of Treasury’s funding commitment. Following the termination of Treasury’s funding commitment, we may pay down the liquidation preference of all outstanding shares of senior preferred stock at any time, in whole or in part.

 

....

 

The senior preferred stock purchase agreement provides that the Treasury’s funding commitment will terminate under any of the following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not contingent, including mortgage guaranty obligations), or (3) the funding by Treasury of the maximum amount that may be funded under the agreement. In addition, Treasury may terminate its funding commitment and declare the senior preferred stock purchase agreement null and void if a court vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of the conservator or otherwise curtails the conservator’s powers. Treasury may not terminate its funding commitment under the agreement solely by reason of our being in conservatorship, receivership or other insolvency proceeding, or due to our financial condition or any adverse change in our financial condition.

[Spekulatius]

@picasso

 

while mnuchin is a cypher, he has been consistent that the status quo, govt ownership and conservatorship, is unacceptable.  he wants these GSEs to be privately owned.

 

now come back from being privately owned to today, knowing that these are magic warrants.  you cant make that trip unless you change the terms of the warrants.  now, how mnuchin resolves this is anyone's guess, he could wipe out the entire capital structure and start fresh with a primary share offering, and pay junior pref their takings remedy in 5 years.

The warrant were a way for the government to own the business, while staying technically below the 80% hurdle, which would have put both entities on the governments balance sheet. The latter would have been politically unpopular and I think there also was an issue with crossing the debt limit at that time.

if you think that you take a pass on this.

[Guest cherzeca]

hopefully someone will point out that i'm wrong but the filing in the sweeney court today suggests both that a) sessions led DOJ is still resisting releasing the 11k documents and b) the timing outline in sum suggests 1-2 years at least before a final ruling?

 

I don't think you're wrong. The constant delays with this case are nothing short of incredible and does put the timeline way out there. Love to hear what the legal guys here make of Sessions - he would certainly be aware of this case and variables by now simply through his relationship with Cooper, no?

 

this is an interesting angle that i have been thinking of.  in addition to cooper's relationship with sessions, cooper knows (meaning had in his firm) two other new or prospective senior doj officials according to below article from above the law.  can't see doj turning on a dime, but it makes you wonder.

 

"The alums who’ve graduated from Cooper & Kirk (formerly Cooper, Carvin & Rosenthal) include leading lights among conservative lawyers, including two whom you’ve recently covered: Rachel Brand (reportedly slated to be Associate AG) and Noel Francisco (reportedly slated to be Principal Deputy SG). "

[Guest cherzeca]

I think this just means that the court either has received a request for a rehearing or en-banc hearing or it expects such to come.

 

Chris/Merkhet?

 

C.

 

http://www.glenbradford.com/wp-content/uploads/2017/02/14-5243-1662092.pdf

 

Does anyone know what this one means? Is the court considering an en banc review?

 

Not sure why en banc is a good strategy. The whole appeals panel has 17 D and 4 R. Do you expect them to rule in plantiffs favor?

 

it will be a good strategy if the new DOJ takes a different position...

[muscleman]

I think this just means that the court either has received a request for a rehearing or en-banc hearing or it expects such to come.

 

Chris/Merkhet?

 

C.

 

http://www.glenbradford.com/wp-content/uploads/2017/02/14-5243-1662092.pdf

 

Does anyone know what this one means? Is the court considering an en banc review?

 

Not sure why en banc is a good strategy. The whole appeals panel has 17 D and 4 R. Do you expect them to rule in plantiffs favor?

 

it will be a good strategy if the new DOJ takes a different position...

 

 

We haven't seen that change of attitude yet from their responses to the Fairholme case.

 

I hope things will start to change soon.

[deadspace]

hopefully someone will point out that i'm wrong but the filing in the sweeney court today suggests both that a) sessions led DOJ is still resisting releasing the 11k documents and b) the timing outline in sum suggests 1-2 years at least before a final ruling?

 

I don't think you're wrong. The constant delays with this case are nothing short of incredible and does put the timeline way out there. Love to hear what the legal guys here make of Sessions - he would certainly be aware of this case and variables by now simply through his relationship with Cooper, no?

 

I doubt that these relationships will cause the case to turn and I think its more or less on auto pilot now.

I almost think that it just doesn't matter.  DOJ can mail their responses in and not even show up in court  - these judges are bending over backward to twist laws to make them fit to hand government a victory -- The Appeal remand seems so twisted - the networth sweep is illegal because it breaches contracts - Yet they call the NWS legal and mention there may be a breach of contract ---  now you have these judges separating these two items presumably to eventually hand some hollow victory here for breach of contract based on some low expectation for any return.

 

  The outcome here is that any financial institution that is deemed in trouble will fail overnight as shareholders rush for the exits

 

Its a mess and that is what happens when justice is not blind

 

 

 

[waynepolsonAtoZ]

I wasn't wrong.

[hardincap]

I wasn't wrong.

 

Did you expect this ruling?

[SnarkyPuppy]

Mnuchin is apparently on Fox at 10am EST.  My guess is this was pre-recorded on Thursday after then live interview but not positive

[Luke 532]

Mnuchin is apparently on Fox at 10am EST.  My guess is this was pre-recorded on Thursday after then live interview but not positive

 

I think this was recorded yesterday while Maria was at the Treasury building.  Seems that way according to her Twitter feed.

[Desert_Rat]

I have been reading this but never posted before. Is there still some hope? All of us were wrong on Perry Appeal.

 

I wasn't wrong either. I gave it very little chance because, as illegitimate as the fed's case is, a court won't likely rule against how they managed the financial crisis. So, that said, I'm very surprised of the 40% hit. I thought the preferred's would dip briefly, then continue climbing while we wait for the govt to stop this nonsense and do what's right.

 

[racemize]

What do you expect next? I own both commons and preferreds with a cost basis little over $4.00. If I sell both now, I will be close to what I spent. I need this money for my kids college in 2-5 years. What would you do? To my first question, is any hope left? All hopes were on Perry Appeal till now.

 

There are lots of court cases and the liquidation preference bit is being remanded, so the legal battle goes on.  However, the actual thesis at this point is Mnuchin is going to take care of it this year in some form or fashion, hopefully in a manner that is good for shareholders (I personally wouldn't touch the common). 

 

As to "needing" this money in 2-5 years--this is clearly a uncertain investment with a wide range of outcomes and at least one of them is that this is worth nothing.  I wouldn't invest any in this if it is actually needed. 

[Guest cherzeca]

[glow=red,2,300][/glow]

I have been reading this but never posted before. Is there still some hope? All of us were wrong on Perry Appeal.

 

yes there is hope, though one may very well dismiss hope as a sound basis for an investment.

 

i think you have to ask yourself whether the NWS will be viewed by the trump administration as a device that the obama administration used to prepare the GSEs for wind down, setting the stage for congress to act in a manner that would replace the GSEs.  as we have seen, congress had 4 years after the NWS to act, and failed to do so.  the question is whether the trump administration will pick up where the obama administration left off, or propose something different.

 

the next question i think you have to ask yourself is whether you think the trump administration will respect shareholder rights in connection with their plans.  mnuchin has stated that he wants the GSEs to continue without govt ownership and control, with sufficient capital to insulate the taxpayer from future bailouts. so it appears that a wind down is off the table and any trump admin plan will necessarily need to raise from the capital markets alot of new capital.

 

there is no assurance that existing shareholders will be treated well in connection with this plan. 

 

but if mnuchin looks at the NWS not as a nationalization device, as per obama admin, but rather as a device to accelerate repayment to treasury, then there is some hope that the trump administration plan going forward will be build upon the existing capital structure with the junior pref, common and importantly the govt's warrants as a foundation for raising more capital.

 

there are some legal avenues that remain, certainly more for pref than common, though the legal thesis is mostly shot at this point.  i dont think current trading values reflect only a legal thesis at this point.

 

so, perhaps we are down to hope, and perhaps hope is not enough.  each of us has to decide.

[Desert_Rat]

What do you expect next? I own both commons and preferreds with a cost basis little over $4.00. If I sell both now, I will be close to what I spent. I need this money for my kids college in 2-5 years. What would you do? To my first question, is any hope left? All hopes were on Perry Appeal till now.

 

I don't expect anything next, I only expect that eventually we'll be made whole - unless we concede to time - because otherwise judge Brown is right about being a banana republic.

[SnarkyPuppy]

What do you expect next? I own both commons and preferreds with a cost basis little over $4.00. If I sell both now, I will be close to what I spent. I need this money for my kids college in 2-5 years. What would you do? To my first question, is any hope left? All hopes were on Perry Appeal till now.

 

I think it's necessary to comment on this - while some are confident of the inevitable outcome, there is absolutely a very real chance of 100% loss subject to the whims of a few men in our government.  I only have "play" money in this - I personally would not put any money I needed into this. 

[Desert_Rat]

"In search of the elusive 10 bagger". It is what it is.

[deadspace]

 

 

but if mnuchin looks at the NWS not as a nationalization device, as per obama admin, but rather as a device to accelerate repayment to treasury, then there is some hope that the trump administration plan going forward will be build upon the existing capital structure with the junior pref, common and importantly the govt's warrants as a foundation for raising more capital.

 

 

Hard not to consider this as being very optimistic.  It would be ideal for shareholders for sure but legally at this point the Sr preferred is not paid off - its just a magic  security that had a huge dividend boost in 2012. The dividend boost could come back down to 10% but  why would they make the security  go away?  If I were Mnuchin with all my known wallstreet contacts I would worry about being subject to a lot of criticism for doing this.  SO I think any analysis of residual value has to be done from the point of view of the Sr preferred still existing - and where does that leave even Jr preferred holders ?

[investorG]

 

 

but if mnuchin looks at the NWS not as a nationalization device, as per obama admin, but rather as a device to accelerate repayment to treasury, then there is some hope that the trump administration plan going forward will be build upon the existing capital structure with the junior pref, common and importantly the govt's warrants as a foundation for raising more capital.

 

 

Hard not to consider this as being very optimistic.  It would be ideal for shareholders for sure but legally at this point the Sr preferred is not paid off - its just a magic  security that had a huge dividend boost in 2012. The dividend boost could come back down to 10% but  why would they make the security  go away?  If I were Mnuchin with all my known wallstreet contacts I would worry about being subject to a lot of criticism for doing this.  SO I think any analysis of residual value has to be done from the point of view of the Sr preferred still existing - and where does that leave even Jr preferred holders ?

 

if you believe the administration is out for the last $, then it's likely not a good investment considering the court

disappointments. 

 

if, like me, you look at the roster --- ken Blackwell (2014 commentary), ichan (former shareholder), Wilbur ross (originally brought up the GSEs in nov30 fox interview), ben carson (neutral GSE commentary despite libertarian streak), mulvaney (sponsored a congressional bill to release), Paulson + berkowitz (positions), mnuchin (nov30 commentary was over-sharing but likely represents his core views), and either trump or his admin (2016 Republican convention language softening on GSEs) --- and take a leap of faith that they are not hostile to the GSEs or their shareholders.

 

there are plenty risks out there but last week 2 major ones got on with it --- mnuchin timing disappointment and perry loss.  starting last tuesday the shareholder base is turning over from the fast money to longer term guys, this can take time and hold things back, but for me, the risk reward has improved vs two weeks ago and my main focus is their ability to execute a balanced plan, timing, and if/when they are willing to use the admin tools if/when bipartisan efforts stall.  I do believe mnuchin favors both keeping the GSEs and introducing competition in some form.

[SnarkyPuppy]

I do need more money for education needs. Investing in index funds won't do it. Is there a forum here where I can get some ideas to make higher return?

 

Let me know if you find the alpha forum

[deadspace]

Where is Alpha Forum?

Emily he is just being snarky.  There is no such forum. No one can give you the answer to those questions

Investing is an imperfect game of probabilities

Make sure you hold preferred shares over common.  The breech of contract claims are alive and as Hamish Hume has said this was always all about breeech of contract. The probability of a zero on the preferred shares is likely low    There is just a very wide range of outcomes right now

[SnarkyPuppy]

Where is Alpha Forum?

Emily he is just being snarky.  There is no such forum. No one can give you the answer to those questions

Investing is an imperfect game of probabilities

Make sure you hold preferred shares over common.  The breech of contract claims are alive and as Hamish Hume has said this was always all about breeech of contract. The probability of a zero on the preferred shares is likely low    There is just a very wide range of outcomes right now

 

I strongly disagree that the probability of a zero on the preferred shares being "likely low".  I still think that risk-adjusted, at 3-4x upside to par the preferreds may be a decent GAMBLE, but unfortunately you only get one coin flip here. 

[Desert_Rat]

I was picking up 50's last week for right around $10. 5 to 1

[SnarkyPuppy]

I was picking up 50's last week for right around $10. 5 to 1

 

Not bad.  Simple expected value dictates that it's +EV at ~17% chance they go to par.  But once again, you only get one coin flip. 

[deadspace]

Where is Alpha Forum?

Emily he is just being snarky.  There is no such forum. No one can give you the answer to those questions

Investing is an imperfect game of probabilities

Make sure you hold preferred shares over common.  The breech of contract claims are alive and as Hamish Hume has said this was always all about breeech of contract. The probability of a zero on the preferred shares is likely low    There is just a very wide range of outcomes right now

 

I strongly disagree that the probability of a zero on the preferred shares being "likely low".  I still think that risk-adjusted, at 3-4x upside to par the preferreds may be a decent GAMBLE, but unfortunately you only get one coin flip here.

 

Don't forget there was a remand for breech of contract

Sometimes I think as investors our reality gets clouded by the stock movement

This can be viewed by different angles after all

[Mephistopheles]

Yes there is remand for breach of contract, but people have very little faith in the Judge that it's remanded to.