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

[TwoCitiesCapital]

The GSEs have a lot of intertia going against them. Further, there is no tried/true system for handicapping the actions of independent individuals.

 

We need a judge who has a similar interpretation of justice as board members OR we need a figure with the authority to change things in our favor with that authority.

 

It's a simple as that. The discussions here are members discussing the likelihood or a multitude of outcomes, but none of that conversation/reading is actually going to change the outcome. It's simply us as investors getting comfortable with the risks/rewards to size the position accordingly. We simply have to be patient and wait for that decision to be made. This is what it means to be a passive participant via stock.

 

If you want to be the one calling the shots and shaping the outcome - you'd need an activist size stake in the co's, a job at the Treasury, or a job in Congress. Pick your poison. Otherwise, patience and constant re-evaluation are the names of the game.

[DocSnowball]

Moelis plan must be bad as both commons and preferreds have not done well since it was released. Do you think Corker is working on a devious plan that will not go anywhere but help him cover his short quickly?

 

The Moelis proposal did add to my investment thesis by making the restructuring scenario realistic and a higher probability outcome. It helped me move this from a legal thesis to a restructuring one with activist investors involved. It is now the path of least resistance and the benchmark to beat in terms of profit for Treasury and viability

 

Or I could be fooling myself with confirmation bias. But it seems like an asymmetric bet in our favor to me. What prices the securities are sold at has no bearing on the final outcome

[merkhet]

I read this message board.  I have running e-mail conversations with a handful of people.  I read the proposals that are put out, but realize they are just that... proposals.  And I sit and wait.  It's important to realize as a young investor that much of investing is sitting and waiting and doing nothing.  You do not need to constantly scrutinize an investment and read-up on it daily.  Write down your thesis and read the stuff that impacts your thesis (whether positively or negatively), not stuff that doesn't.

 

Sure, money being returned would be ideal and probably the right/moral thing to do.  With that said, I do my best to separate ideal situations from probable situations.

 

It's a simple as that. The discussions here are members discussing the likelihood or a multitude of outcomes, but none of that conversation/reading is actually going to change the outcome. It's simply us as investors getting comfortable with the risks/rewards to size the position accordingly. We simply have to be patient and wait for that decision to be made. This is what it means to be a passive participant via stock.

 

If you want to be the one calling the shots and shaping the outcome - you'd need an activist size stake in the co's, a job at the Treasury, or a job in Congress. Pick your poison. Otherwise, patience and constant re-evaluation are the names of the game.

 

+1 to both

[Guest cherzeca]

Moelis plan must be bad as both commons and preferreds have not done well since it was released. Do you think Corker is working on a devious plan that will not go anywhere but help him cover his short quickly?

 

The Moelis proposal did add to my investment thesis by making the restructuring scenario realistic and a higher probability outcome. It helped me move this from a legal thesis to a restructuring one with activist investors involved. It is now the path of least resistance and the benchmark to beat in terms of profit for Treasury and viability

 

Or I could be fooling myself with confirmation bias. But it seems like an asymmetric bet in our favor to me. What prices the securities are sold at has no bearing on the final outcome

 

the moelis blueprint is basically how i have seen things playing out, assuming there was a settlement with plaintiffs, which assumes that the plaintiffs actually won something! still holding out for hindes/jacobs though.

 

but what moelis did for me is to confirm that a massive capital raise was doable.  i thought their analysis was spot on, which makes me believe that i was not as crazy in my view as i feared.  let's face it, moelis is an excellent firm, and they are in the middle of the mother of all capital raises, as financial advisor to aramco

[Desert_Rat]

I'm sure there could be dozens of plans showing a massive capital raise as doable, each as good as the other, but I'm even surer that none of them mean squat without determination by Congress to act. As the FnF market will attest, it's doubtful they are anywhere near ready to.

 

That said, I still believe the prices these things are selling for lately is bizarre. I mean, I think it's obvious how this story ends, with Moelis plan being an example, but it's like the market is blowing it all off until it believes Congress is ready. How in its right mind could they blow it off though? Even at 10 years (possible) the annualized return is still in the 20% range, and I laugh at anyone who believes that type return is possible with market ETF's.

 

The market's wrong, I'm holding tight.

 

 

[merkhet]

Treasury's report on changes to financial regulation is out. (https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf)

 

Unfortunately, there's not much talk about how it wants to deal w/ the FHFA provision that was in the Financial CHOICE Act, but there are some interesting differences between what the White House wants and what the Financial CHOICE Act proposes.

 

https://www.wsj.com/graphics/Dueling-Blueprints/

 

The biggest departures seem to be expanding the Financial Stability Oversight Council rather than curtailing it, and amending parts of the Volcker Rule rather than repealing it.

 

We'll see what the Senate comes up with. Hopefully, they too agree on the idea that the FHFA director should be removable at will, and the White House's lack of opinion on that was to make things politically easier.

 

This report covers the depository system. Subsequent reports will cover the other topics listed above.  This report does not cover comprehensive housing reform and the future state of the government-sponsored enterprises, Fannie Mae and Freddie Mac.

 

It's not immediately clear whether there will be a future report from Treasury on the GSEs.

[Luke 532]

The stage is yours, Mr. Mnuchin...

 

https://www.insidemortgagefinance.com/imfnews/1_1126/daily/No-Mortgage-and-GSE-Reform-This-Year-1000041676-1.html?ET=imfpubs:e9415:73599a:&st=email&s=imfnews

 

June 13, 2017

No Mortgage/GSE Reform This Year, Maybe No Bill Either

By Paul Muolo, pmuolo@imfpubs.com

 

The mortgage industry has come to the conclusion that meaningful housing-finance reform is so elusive that any legislation being introduced is a long shot, even in the Senate Banking, Housing and Urban Affairs Committee, which seems to be more involved in the topic than any other panel on Capitol Hill.

 

Over the past month, rumors have circulated that some senators on the committee, including Bob Corker, R-TN, have been discussing with fellow members what an outline for housing-finance reform might look like, but with nothing committed to paper.

 

A spokeswoman for the committee told Inside Mortgage Finance that Chairman Mike Crapo, R-ID, “intends to hold more [government-sponsored enterprise] hearings before the fall,” but added there are “no other developments from us bill-wise.”

 

At a recent housing-finance conference hosted by Bank of America Merrill Lynch, market participants discussed the conflicting views on the reasons behind slow movement of GSE reform. “Nonetheless, there was a consensus view that reform will not happen anytime soon,” BAML said in a summary of the meeting. For more details, see Inside Mortgage Finance, now available online.

 

[orthopa]

I highly doubt Mnuchin has guts to do it alone. If he did, he should stop the sweep instantly and that would be a start.

 

The stage is yours, Mr. Mnuchin...

 

I would argue against that. If you have followed this story from the beginning with mnuchin he has expressed strong opinions about FnF and has reserved acting alone multiple times in front of congress although not his "preference".

 

What does the Treasury Secretary do with FnF when he says the status quo is unacceptable, has not gotten a legislative solution from congress and has the ability to execute the Moelis act in its entirety without any input from congress? My guess is not "nothing".

 

Mnuchin can easily point the finger at congress for no solution.  I think every day we are finding out there really isn't a better system.

[orthopa]

I read it as someone had posted here before. I still don't get it what is in Chapter 8 that makes this investment go down every day and a losing proposition since last 8 years when the companies are making $10 billion dollar with close to 1 billion shares i.e $10/pps and if you take p/e of 7, that is $70.00/share. Each penny is taken away and we are to keep reading chapter 8?

 

 

Moelis plan must be bad as both commons and preferreds have not done well since it was released.

 

I recommend reading chapter 8 again of The Intelligent Investor.

 

FWIW your getting diluted significantly as a common shareholder. Not quite sure you understand that yet. The NWS and the 80% common dilution as well as senior preferred are two different things. Once the sweep stops, your still at risk of getting diluted by a minimum of 80% and likely even more if jr preferred are converted to common. AIG common was diluted by ~92% so its not without precedent.

 

Your stance and anger is appreciated but obviously going to do very little in regards to personal return. It sounds like are strongly in favor of common but if preferred may long run give a better return why not consider it? Unfortunately no has cared or will care if someone stole from you. Placing yourself in the position to get the best returns for your $$ should be your main focus now. Suffering from anchor bias traditionally hasn't been the best way to proceed with investing.

 

My 2 pennies.

 

 

[TwoCitiesCapital]

Yes, but he will take forever saying "I am still waiting for congress to do something" and will not act. Leadership to 'act now' is missing. He already knows congress will not do anything. Why wait? Is waiting 8 years not enough? He needs to stop the dance in congress where bank lobbyists prevail.

 

 

 

Mnuchin can easily point the finger at congress for no solution.  I think every day we are finding out there really isn't a better system.

 

Because, the gov't hasn't technically been repaid yet if you believe the senior preferred issuance was lawful. The gov't was owed 10% coupons with an assumption of principal return.

 

We need one or two more sweeps for total repayment to occur. At which point Mnuchin can say "Gov't has been totally repaid by the original terms, Congress has done nothing, and these companies are badly in need of capital - I'm going to fix this."

 

The status quo is easy - leaving it place accelerates gov't prepayment (a good thing given the 10% coupon it carries). Repaying the gov't is the grease for the next step - recap and release. That's going to be hard enough without the cloud of gov't liability still be owed.

 

If we hit two more payments and he's still not doing anything, then I'm wrong. Until then, that's the assumption I'm operating under.

[Sunrider]

It all depends on relative price at which you can buy them.

 

Ermm ... no. It depends on the difference between the price you can buy and sell them. There are two variables and whilst you can look at the purchase price every day the market is open, you'll have to make assumptions about the price you'll sell at.

 

As various people here have been trying to tell you, they consider it likely that preferred gets par or equivalent in terms of common. If it is par as cash, then the return calc is easy. If it is par in terms of common shares issues then it's a bit more complex, but inevitably it means that common gets diluted so those $7/share (don't recall exactly) earnings you're using in your valuation may be closer to or less than $1. (e.g. 9 new shares for each current common share).

 

Ok, you can argue that you can still apply a multiple to that and get $10 per common, and with FNMA at 2.5 that's a 4x return. Well FNMFN is at about 10.5, so that's 4.7x.

 

Even if they were the same prospective pay-offs, you may wish to ask yourself what you would rather hold - an asset whose intrinsic value depends heavily on a dilution event or an asset that has a fixed liquidation value for which any sort of conversion would need to be pegged to that value (even if done at an explicit or implicit discount). That is, of course, without trying to get into any sort of argument as to whether the property right attached to that liquidation preference still means anything in the US legal system.

 

 

 

[racemize]

Guys, we've tried to talk some sense into Emily, but nothing is going through.  Personally, I think this is a troll.  I've already mentioned it to Sanjeev, but these interjections just don't help anyone, and replying doesn't appear to be helping "her" either.

[Sunrider]

Guys, we've tried to talk some sense into Emily, but nothing is going through.  Personally, I think this is a troll.  I've already mentioned it to Sanjeev, but these interjections just don't help anyone, and replying doesn't appear to be helping "her" either.

 

Hmm. Been wondering this myself. I think you're right.

[rros]

The stage is yours, Mr. Mnuchin...

 

https://www.insidemortgagefinance.com/imfnews/1_1126/daily/No-Mortgage-and-GSE-Reform-This-Year-1000041676-1.html?ET=imfpubs:e9415:73599a:&st=email&s=imfnews

 

June 13, 2017

No Mortgage/GSE Reform This Year, Maybe No Bill Either

By Paul Muolo, pmuolo@imfpubs.com

 

The mortgage industry has come to the conclusion that meaningful housing-finance reform is so elusive that any legislation being introduced is a long shot, even in the Senate Banking, Housing and Urban Affairs Committee, which seems to be more involved in the topic than any other panel on Capitol Hill.

 

Over the past month, rumors have circulated that some senators on the committee, including Bob Corker, R-TN, have been discussing with fellow members what an outline for housing-finance reform might look like, but with nothing committed to paper.

 

A spokeswoman for the committee told Inside Mortgage Finance that Chairman Mike Crapo, R-ID, “intends to hold more [government-sponsored enterprise] hearings before the fall,” but added there are “no other developments from us bill-wise.”

 

At a recent housing-finance conference hosted by Bank of America Merrill Lynch, market participants discussed the conflicting views on the reasons behind slow movement of GSE reform. “Nonetheless, there was a consensus view that reform will not happen anytime soon,” BAML said in a summary of the meeting. For more details, see Inside Mortgage Finance, now available online.

To believe that Corker will sit comfortably and not make his strongest push for a bill in any way, shape, form or color is misguided. Corker may be confronting his biggest, darkest danger which is a Moelis recap and release. That is what Moelis means. For Mnuchin it is a restructuring. For Corker it's *the* nightmare scenario. Before jumping under a train Corker will try to outmaneuver everybody. So we should take those "rumors" as true and that any bill might show up at any moment with the intent to tie Treasury's hands even further, straitjacket Mel Watt or simply kill shareholders.

[Flynnstone5]

Volume on prfds and price action absolutely sucks lately. Some positive comments/developments would be nice just to stop the slow bleed.

[rros]

I was thinking "Emily" is Rob Schain. Maybe not, but "she" sure sounds familiar...

who is rob schain?

[Desert_Rat]

Volume on prfds and price action absolutely sucks lately. Some positive comments/developments would be nice just to stop the slow bleed.

 

So a Buffett protege sold 200 FMCCJ today at a 12.5% discount. Like, that $1700 just had to be immediately reallocated. dumbasses

[Eye4Valu]

Definitely a troll. Probably not the only one.

[Seahug]

Didn't see this posted yet - Berkowitz sold some prefs in Q1

 

https://seekingalpha.com/article/4081459-interview-fairholmes-bruce-berkowitz?app=1&auth_param=1ttmd:1ck2vff:b34e3931f4acd8cecd636c3dd976f042#alt1

 

 

Fannie Mae and Freddie Mac

 

FNMAS and FMCKJ are preferred stocks and the largest Fannie and Freddie holdings in The Fairholme Fund. It had 38% of assets in these securities in its latest fund facts sheet as of 2/28/17. Most of my conversation with Mr. Berkowitz was spent discussing the path forward for Fannie and Freddie. The Fairholme Fund has pursued two lawsuits against the Federal Housing Finance Agency and the United States Treasury that date back to 2013. His aim has been to protect our rights as owners of preferred shares in Fannie and Freddie. Although I believe Fannie and Freddie investors will be rewarded for their patience in the end, my concern was the size of the Fannie and Freddie position. There are still significant political and legal hurdles to overcome. Bruce spoke about his large investments in financials such as Wells Fargo (NYSE:WFC) in the 1990s, and AIG (NYSE:AIG) during the financial crisis which reached as high as 60% of the fund's assets. Many thought he was crazy for taking such concentrated bets, but they worked out well in the end. He believes this will happen with Fannie and Freddie.

 

I questioned Bruce on the status of the government releasing the 11,000 buried documents in the Fairholme case against the federal government. He acknowledged that 3,500 documents were recently released and his lawyers are reviewing them. He said he is prepared to take the case to the U.S. Supreme Court to prevail if necessary, but remains open to a negotiated settlement first. He believes that senior officials and key advisors in the Trump Administration all understand the Fannie/Freddie situation. He believes more and more people are beginning to understand, but 99% of the world won't care until they face the prospect of paying higher fees on their mortgages than is the case with Fannie and Freddie providing liquidity to the secondary mortgage market. Bruce is looking for some positive news during the second half of 2017 and believes that FHFA Director Mel Watt may direct Fannie and Freddie to retain some of their earnings in the near future. He said Mel Watt recently testified about the need for capital at Fannie and Freddie just last month. Bruce said: "The law needs to be respected and taxpayer math tells the story about public gain backed by private capital. The math shows lots of public good backed by private capital ever since Fannie and Freddie were converted to shareholder-owned companies decades ago." He suggested that I look at the Moelis Blueprint to restore safety and soundness to Fannie and Freddie. The Blueprint calls for building $180 billion in capital at the companies and would ultimately result in additional taxpayer profit of up to $100 billion (on top of the current ~$80 billion profit). This sounds like a "win win" for all stakeholders which makes a lot of sense to me. He also suggested that I look at the newly filed lawsuit in the United States District Court for the Western District of Michigan challenging the constitutionality of the "Net Worth Sweep."

 

Bruce said:

 

"The plaintiffs in the new suit argue that FHFA was operating in violation of the constitutional separation of powers when it agreed to the Net Worth Sweep because it was not subject to meaningful oversight by any of the three branches of the federal government. In addition to being headed by a single Director who is independent from the President and other federal agencies, FHFA is not subject to supervision by Congress through the normal appropriations process. Instead, FHFA raises funds by directly imposing assessments on Fannie and Freddie. Other courts that have heard statutory challenges to the Net Worth Sweep have concluded that judicial review of FHFA's actions is severely constrained except when FHFA violates the U.S. Constitution. FHFA is thus insulated from meaningful supervision by the Executive, Legislative, and Judicial Branches."

He added:

 

"The Michigan suit also contends that FHFA's acting Director, Edward DeMarco, occupied his office in violation of the Constitution's Appointments Clause when he approved the Net Worth Sweep. The Appointments Clause requires that agency heads and other "principal" officers of the federal government take their positions only after being nominated by the President and confirmed by the Senate. President Obama never nominated Mr. DeMarco to lead FHFA, yet Mr. DeMarco had been the agency's acting Director for three years when he imposed the Net Worth Sweep. No court has ever approved such a lengthy tenure for the acting head of a federal agency."

Bruce stated:

 

"The new suit also asserts claims under the nondelegation doctrine, which requires that Congress articulate an intelligible principle to guide federal agencies when it gives them discretion. As interpreted by courts that have upheld the Net Worth Sweep under the Housing and Economic Recovery Act, that statute places no limits on what policies FHFA may pursue when acting as the conservator for Fannie and Freddie. The Michigan plaintiffs contend that the courts must vacate the Net Worth Sweep if any of their claims succeed."

Bruce expects the administration to focus on healthcare and tax reform first, and then they will turn to other economic growth initiatives, including Fannie and Freddie (and housing more generally). He believes we will have a better sense of the path forward for Fannie and Freddie in the second half of 2017, and that a positive outcome for investors should become apparent in 2018.

[Desert_Rat]

I am not 'him' Rob Schain. What is wrong with you all? You all are into bullying too? You just named someone who is not me. It is not fair to this person whoever he is. I thought you all were smart and educated. Have I asked you to sell or buy anything? Have I said anything that has offended you personally? You have been pressuring me to sell my commons and buy preferreds without understanding of my situation even though I have told you multiple times that I understood but the Moelis plan doesn't make me comfortable in switching. None of you have told me why I would lose if I don't switch and all of you seem to support Moelis plan. I came here to find some support but you are stressing me out.

 

I was thinking "Emily" is Rob Schain. Maybe not, but "she" sure sounds familiar...

who is rob schain?

 

But are you Emily Schain?

 

Seriously though, just ignore them. If you prefer the commons, that's your call. I may not agree with it, but with an outcome that's still up in the air, who knows.

 

[merkhet]

Didn't see this posted yet - Berkowitz sold some prefs in Q1

 

Where did you see that?

[Luke 532]

Didn't see this posted yet - Berkowitz sold some prefs in Q1

 

Where did you see that?

 

I think it's the comment below that is confusing at first glance and make it sound like Berkowitz sold some.  But it is a comment from the author, not a quote from Berkowitz.  The author is concerned with the position size, not Berkowitz.

Although I believe Fannie and Freddie investors will be rewarded for their patience in the end, my concern was the size of the Fannie and Freddie position.

[Guest cherzeca]

RBS soon to settle with fhfa on putbacks, resulting in over $4B additional dividends.  full payoff under original terms is just one Q away

 

http://www.nasdaq.com/g00/article/royal-bank-rbs-nears-mortgage-bond-settlement-with-fhfa-cm803361?i10c.referrer=http%3A%2F%2Fgselinks.com%2F

[beaufort]

My memory is that Freddie has already over paid in relation to the original terms.

 

@cherzeca, others, can you post a good source for how much is outstanding to Tsy by Fannie?  I did a (quick) search in the latest Q and didn't see it.

 

After FnF have paid back all money under the original terms, there will be further impetus for the the widely accepted narrative that FnF are wards of the State to change.  Of course, nothing will dissuade Corker and his allies:  whose bread I eat, his song I sing.  Nothing will stop the singing until the bread stops being passed around.

 

Importantly, the story is incrementally changing, from my biased point of view (I hold prefs).  There are more FnF positive stories all of the time and this has been the case since the election:  ICBA, Moelis, Mnuchin testimony and interviews, Watt testimony, Maria Baritimoro etc.   

 

The more often that a positive narrative begins to get into the media, the better, as the political facts are being marshalled in real time in the form of stories.  There is a powerful sense of reconciliation when a troubled person/institution, or perceived to be troubled, finds his way and makes amends for past actions.  We can disagree with the assertion that FnF are responsible for the 2008 financial panic.  We are stuck with that story.  But we are making good headway with reform.  And completed reform leads to release such as that proposed by Moelis. 

 

 

 

 

 

 

 

[Luke 532]

Today's piece by Richard Epstein on Perry vs. Mnuchin: https://www.forbes.com/sites/richardepstein/2017/06/15/mnuchin-v-perrys-disastrous-damage-rules/#10b09b642d2e