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

[Desert_Rat]

Hey, wait one damn second. I distinctly recall my parents saying I was a winner many times. You calling them liars?

[Guest cherzeca]

cherzeca, regarding the 13.5 multiple, if f&f were converted to utilities ( even though it doesn't say that in the Blueprint) don't utilities generally trade at high teens multiples? Or maybe 13.5 or lower is more acceptable given the politics with this thing.

 

You can't really compare conventional utilities with a utility-like model for Fannie & Freddie - at the end of the day they would still be leveraged financial institutes, essentially insurance companies, not a traditional electrical utility.

 

blueprint makes point that unlike depositary banks, with reliance on short term funding, GSEs match funding results in less liquidity risk.  also, relying on the persistence of the treasury line until reduced at end of capital raising program or entirely ceded to reinsurers relieves GSEs from credit risk.  if berkshire doesnt buy equity in the capital raise, i imagine it might be interested to reinsure line after capital raise. 

[asterisk]

according to cnbc, ben carson recently said in an interview he wouldnt be opposed to investors getting paid

 

timing of moelis is a clue that things are heating up

 

Do you have a link?

 

it's not much..  http://video.cnbc.com/gallery/?video=3000623709

 

Thanks! It looks like all the parties needed are slowly entering the room.

[rros]

according to cnbc, ben carson recently said in an interview he wouldnt be opposed to investors getting paid

 

timing of moelis is a clue that things are heating up

 

Do you have a link?

 

it's not much..  http://video.cnbc.com/gallery/?video=3000623709

 

Thanks! It looks like all the parties needed are slowly entering the room.

"I am very, very familiar with Blackstone and its leadership"

 

lol It's a small world!

 

Like a handkerchief.. almost.

 

Do these guys meet in a locker room after playing bridge?

[waynepolsonAtoZ]

It's gratifying-- and fun-- to read a plan like the "Blueprint," which complies with nearly everything that I laid out in my five most recent Seeking Alpha articles on FnF. Skeptics might say "just a coincidence." Fair enough. Maybe it's just that great minds think alike. 

[Guest cherzeca]

It's gratifying-- and fun-- to read a plan like the "Blueprint," which complies with nearly everything that I laid out in my five most recent Seeking Alpha articles on FnF. Skeptics might say "just a coincidence." Fair enough. Maybe it's just that great minds think alike.

 

i confess to have missed those SA articles, wayne, but it would appear that moelis was attentively reading them.

 

i had a similar feeling insofar as i have worked out in my own mind what i thought would be necessary if mnuchin said to congress, "look, you can dick around on pie in the sky reform proposals for another 4 years, but i live in the real world and in the meantime i want to get the GSEs fixed in those 4 years", in so many words.  and the blueprint contains pretty much everything i thought would be necessary to get the GSEs fixed based upon what i think is doable in the financial markets.

 

perhaps moelis was reading my mind in addition to reading your SA articles.

[orthopa]

Even though commons would get between $9-$13 (after all of the dilutions), the plan is a good start but a no go plan.

 

Why should the government get principal +10% dividends + 100 billion through warrants + 150 billion in fines received? This is like them getting $400 billion but for doing what?

 

Also, the G fee is too low. I don't care what MBA thinks, it is known that they represent banks and banks are the one caused the crisis and lobbying hard to get GSE business for free through CSP. I also don't care that Stevens thinks shareholders are getting rich.

 

If you calculate the return for shareholders over last 9 years, it is not much higher than many of the ETF's could have made. I wonder if anyone has made a calculation of shareholders who bought the shares at $2.00 in 2008, what would the % return be for them by 2020 if it reaches $13.00. It will be less than what Corker made and less than the government wants to make on GSE's. Why the hoopla over shareholders getting rich than just making a political statement in desperation? We should put out a journalistic piece showing shareholders would make less % return  over last 9 years and also lost ton of money during the crisis. Only winners are banks.

 

Never thought I would see the day a fannie investor would complain about actually being able to make a return on the investment! :P :P

[onyx1]

By far the most practical and comprehensive plan I've seen to date.  No other plan gives the Administration the money and delivers it inside the important 4-year window.  Nice to see a workable paper from capital markets experts rather than lobbyists with a political angle.  Private investors get their due as well.  Incentive appear aligned.

 

The only thing I see missing is comfort for IPO shareholders that a NWS can't happen again.  They will need to have their property rights confirmed.

 

Jr preferred will shoot shoot to 60 cents on the dollar if only Mnuchin would say three words:  "I like it."

[Guest cherzeca]

"The only thing I see missing is comfort for IPO shareholders that a NWS can't happen again.  They will need to have their property rights confirmed.

 

any plan that winds down GSEs and eliminates the NWS, and hands the cash flow off somewhere else will find prospective investors wondering whether what goes around comes around.  my own view is that by keeping the cash flow at GSEs for existing shareholders, subject to dilution, the NWS issue recedes. as per the blueprint, saying something like the NWS was a good idea only insofar as to accelerate repayment and not on a permanent basis should calm the capital markets waters.

 

[Desert_Rat]

It's gratifying-- and fun-- to read a plan like the "Blueprint," which complies with nearly everything that I laid out in my five most recent Seeking Alpha articles on FnF. Skeptics might say "just a coincidence." Fair enough. Maybe it's just that great minds think alike.

 

Searching 'Wayne Polson' didn't bring anything up. Care to share, I'd be interested in reading.

[waynepolsonAtoZ]

Wayne Paul Olson. I do get junk mail for someone named Polson though.

[Desert_Rat]

I read a couple: Letter to Mnuchin and Pay us back. Well done and I have you saved.

[waynepolsonAtoZ]

Couple things Blueprint didn't do.

 

1. Relisting. I'd do it ASAP. Hedge fund ownership is an excuse to complain about "windfalls," but delisting drove conventional institutional investors.

 

2. Dividends. I have trouble seeing how they can attract new equity capital if they don't restore dividends right away on both common and preferreds. I realize they delay this for "optics" and to treat common, preferreds, and Senior Preferred Stock symmetrically. At the very least they could have announced a target dividend payout ratio for the common equity.

[Guest cherzeca]

Couple things Blueprint didn't do.

 

1. Relisting. I'd do it ASAP. Hedge fund ownership is an excuse to complain about "windfalls," but delisting drove conventional institutional investors.

 

2. Dividends. I have trouble seeing how they can attract new equity capital if they don't restore dividends right away on both common and preferreds. I realize they delay this for "optics" and to treat common, preferreds, and Senior Preferred Stock symmetrically. At the very least they could have announced a target dividend payout ratio for the common equity.

 

both fair points.

 

blueprint relists in connection with IPO.  i see no reason why relisting couldnt come sooner.  but delisting has permitted institutions from having to report positions on 13Fs, and before IPO there actually may be some benefit in permitting that to continue.  i would think institutions that cannot invest in unlisted securities would have no interest in GSEs until after IPO anyhow.

 

having dividends resume after core capital is reestablished makes regulatory sense.  if it means that prices will be depressed as well during this period, then patience will be rewarded

[Flynnstone5]

Thoughts on these filing's?

 

http://www.glenbradford.com/wp-content/uploads/2017/06/Document.pdf

 

http://www.glenbradford.com/wp-content/uploads/2017/06/Document-1.pdf

 

Particularly:

 

"In sum, because a purchase of stock, whether in an original issuance or on the secondary market, forms a new contract with the corporation rather than assignment of a past contract, the objections advanced in Class Plaintiffs’ Petition are without merit and do not warrant rehearing."

 

"In such a case, the owner presumably paid a discounted price for the property. Compensating him for a ‘taking’ would confer a windfall.”

[waynepolsonAtoZ]

"Regulatory sense" needs to make market sense. I just think this isn't the way to maximize the value of the warrants, the value of which, when sold, go to Treasury and--ultimately--to taxpayers. Fool me once shame on you, fool me twice shame on me.

 

I realize that Blueprint is trying to accommodate "politics," which is fine, I don't blame them. It just makes their assumptions about the value of the warrants in the market way optimistic.

[Desert_Rat]

Thoughts on these filing's?

 

http://www.glenbradford.com/wp-content/uploads/2017/06/Document.pdf

 

http://www.glenbradford.com/wp-content/uploads/2017/06/Document-1.pdf

 

Particularly:

 

"In sum, because a purchase of stock, whether in an original issuance or on the secondary market, forms a new contract with the corporation rather than assignment of a past contract, the objections advanced in Class Plaintiffs’ Petition are without merit and do not warrant rehearing."

 

"In such a case, the owner presumably paid a discounted price for the property. Compensating him for a ‘taking’ would confer a windfall.”

 

They're pretty funny. They should have known they'd be ripped off is quite a defense!

[waynepolsonAtoZ]

"beyond this, i dont know what utility regulation does for anybody."

 

One possible relevant way to characterize the "regulatory bargain" for utilities is that it is a balancing act between the "public interest" and "treating investors fairly."

 

Thus, in a simplistic way the "public interest" might be to keep utility rates as low as possible. However, a utility will not be able to raise capital at the lowest possible costs in good times and bad if investors aren't treated fairly. Another way to say this is that utility must include the recovery of capital costs in the rates paid by customers. So, the embedded cost of debt and the forward-looking cost of common equity is an important part of utility rate cases.

 

This is relevant to the GSE recapitalization. The public interest will be to maximize the value of the warrants and common stock to the extent that is consistent with the public interest. To induce new investors to provide new book equity capital, existing GSE investors will need to be treated fairly.

 

 

 

[waynepolsonAtoZ]

Mike Allen, John Paulson

https://www.axios.com/first-look-john-paulsons-blueprint-for-reforming-fannie-freddie-2428957928.html

First look: John Paulson, a hedge-fund billionaire famous for his lucrative short of the U.S. subprime mortgage market ("The Greatest Trade Ever"), recently talked exclusively to me from New York as he promoted a blueprint published Thursday, providing a reform prescription for Fannie Mae and Freddie Mac.

 

Paulson is a big investor in the two mortgage finance giants — also called government-sponsored enterprises, or GSEs.

 

The paper, "Restoring Safety and Soundness to the GSEs," is available here. It was written by Moelis & Company, as financial adviser to some Fannie and Freddie stockholders, including Paulson & Co. and Blackstone GSO Capital Partners.

 

An announcement teleconference and webinar was scheduled for Thursday. A quick scan:

 

Among the key elements: "Protects Taxpayers from Future Bailouts ... Promotes Home Ownership and Preserves the 30-Year Mortgage ... Repays the Government in Full ... Produces ... Profits for Taxpayers."

Paulson, on the proposal: It "returns Fannie and Freddie to the private sector. ... t's very important now for the government to exit its stake in Fannie and Freddie."

Paulson, on his role: "We've been involved in almost every major financial restructuring in the U.S. ... [W]hat was important is that once the financial institution was stabilized, there was an opportunity for the government to exit and to [be replaced] by private capital."

What critics say: The plan doesn't adequately grapple with a key issue in GSE reform: public risk but private gain. Backers responded that it "protects the taxpayer."

Paulson, who supported President Trump's campaign: "[H]e's doing well on a path to achieve [pro-growth and pro-business] objectives. But, obviously, the political environment is, you know, very — let's call it 'emotional.'"

His book recommendations: "Washington: A Life" and "Alexander Hamilton," both by Ron Chernow.

 

[waynepolsonAtoZ]

Does anyone understand the numbers in Figure 16?

 

I guess Tsy exercises warrants and sell them for $75 b with the proceeds going to Tsy. Tsy ends of selling all of its warrants for $75 b.  So new has 80%, existing has 20%.

Some junior preferreds convert preferred stock to common.

This dilutes existing commoners further. Say, commoners to maybe 15%, just a guess.

 

Then new issues of common stock occur. This raises about $80 billion.

I haven't done the calculations but I would think that this brings down existing commoners to 2% or 4% of the combined firm. Just a rough guess.

This what I always thought would happen and why I've avoided the commons.

There would be horrendous earnings dilutions for existing commoners.

 

I guess it all depends on what the new commons are sold at. If sold for little, the dilution of existing common would be much worse.

 

 

[racemize]

Under the proposed solution, preferreds and common have a similar upside. 

For example, first exemplary outcome is (and only paying attention to the first conversion, since afterwards the upside is the same):

common goes from 2.63->7.95, which is 3x

preferred gets par, so using current prices, you get $25 for $6.73, which is 3.7x

 

In the second exemplary outcome, using the same methodology:

common is 10.87/2.63->4.1x

preferred is the same outcome as above (common price doesn't actually matter, you just get par).

 

So, if raises go well, common does better, and if not, preferreds do better.  Makes some sense given the situation.

 

I'm sure the designers knew that they were representing both preferreds and common shareholders, so they proposed a fairly equal solution.  I personally think the preferreds outcome should be higher than the common (which is why I bought the preferreds), given the whole scenario.  IMO, it makes no sense for common to get more upside than preferreds.

[racemize]

With regard to dilution, original shareholders have:

8,997-7,200=1,797

 

Final share count is 21,489 in the first outcome

1,797/21,489 = 8.4%

 

Second outcome is 10%

 

So a lot of dilution, but not down to 2-3%

[racemize]

Under the proposed solution, preferreds and common have a similar upside. 

For example, first exemplary outcome is (and only paying attention to the first conversion, since afterwards the upside is the same):

common goes from 2.63->7.95, which is 3x

preferred gets par, so using current prices, you get $25 for $6.73, which is 3.7x

 

In the second exemplary outcome, using the same methodology:

common is 10.87/2.63->4.1x

preferred is the same outcome as above (common price doesn't actually matter, you just get par).

 

So, if raises go well, common does better, and if not, preferreds do better.  Makes some sense given the situation.

 

I'm sure the designers knew that they were representing both preferreds and common shareholders, so they proposed a fairly equal solution.  I personally think the preferreds outcome should be higher than the common (which is why I bought the preferreds), given the whole scenario.  IMO, it makes no sense for common to get more upside than preferreds.

 

Thank you. Your analysis is only for first phase of conversion. What would be the ratio for common and preferreds once all is done by 2020 i.e. after second conversion and everything else?

 

Preferreds get converted to commons, so they enjoy the same upside. I also read tha G fee would go up higher with time and benefit accrues to common (and thus to converted preferreds). My goal is to decide if I should hold for the continued upside.

 

They both get exactly the same upside afterwards.  Only difference is initial conversion.

[Guest cherzeca]

@race

 

"IMO, it makes no sense for common to get more upside than preferreds."

 

depends on the time horizon.  it is not controversial for common to outperform preferred on a longer time horizon, as blueprint indicates.  juniors can exchange if they are convinced this will happen.

[Guest cherzeca]

i expect congress to ignore blueprint, since as an administrative solution it does not involve them.

 

i do not expect mnuchin and watt to ignore it.  this will be a fallback in event congress doesnt settle on a solution at some point before watt pulls trigger on his div retention warning...and frankly, how can congress (ie both houses) settle on something before watt decides he must act to withhold divs for capital reasons.  not bloody likely.  corker may think he has done something if he reports something out of senate finance committee, but that's a long way from congress addressing GSE reform.

 

i appreciate that withholding divs is not indicative of any disposition to adopt blueprint, but it is a forceful administrative step (certainly corker thinks so).  and long trips begin with a first step

 

edit:  actually "ignore" may be overstating.  at least some members in congress will see blueprint as something that a respected banking firm has stated is doable, and will want to check the GSE reform box with something that works.  only true believers/fellow travelers like corker will resist.  seems to me that there are more in congress that want to fix GSEs than want to fix GSEs in a particular way. 

 

last thought: there is not much in MBA proposal that presents difficulty to implementing blueprint.  yes there is a call for treasury direct gtee of MBS, and permitting additional monoline govt charters.  both require legislation.  former is very controversial, whereas the blueprint call for the existing treasury line to remain is less controversial.  at some point, GSE reform fatigue will set in.  blueprint would make sense for those in congress who think it is good enough and it is time to move on.