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

[rros]

Any thoughts on Icahn's departure?  IMO irrelevant for F/F and probably zero chance it had any relevance to why he left.  We still don't know if he even holds shares anymore iirc

The only significance would be in anticipating other departures for similar reasons: John Paulson and his ties to FF investments. Icahn's was specifically tied to CVRR and the RINs controversy.

[rros]

Funny how in the middle of all the nazi/hatred comments the fanniegate crowd manages to throw their hand grenades.

[Mephistopheles]

Any thoughts on Icahn's departure?  IMO irrelevant for F/F and probably zero chance it had any relevance to why he left.  We still don't know if he even holds shares anymore iirc

 

http://www.newyorker.com/magazine/2017/08/28/carl-icahns-failed-raid-on-washington

 

This stood out to me:

 

“Icahn is very sophisticated,” Brooke Coleman said. “But maybe not about Washington.” Senator Chuck Grassley not only represents corn growers; he also chairs the Judiciary Committee, which helps confirm Trump’s appointments of judges. This is the reason that traditional policy negotiations are so overcrowded. Washington is a city of vying constituencies, many of which happen to be very powerful. Coleman believes that “someone probably walked into Trump’s office and said, ‘Here’s why you need Chuck Grassley more than you need Carl Icahn.’ ”

 

Very relevant to those of us who feel that Paulson and Berkowitz influence is a slam dunk.

[rros]

Any thoughts on Icahn's departure?  IMO irrelevant for F/F and probably zero chance it had any relevance to why he left.  We still don't know if he even holds shares anymore iirc

 

http://www.newyorker.com/magazine/2017/08/28/carl-icahns-failed-raid-on-washington

 

This stood out to me:

 

“Icahn is very sophisticated,” Brooke Coleman said. “But maybe not about Washington.” Senator Chuck Grassley not only represents corn growers; he also chairs the Judiciary Committee, which helps confirm Trump’s appointments of judges. This is the reason that traditional policy negotiations are so overcrowded. Washington is a city of vying constituencies, many of which happen to be very powerful. Coleman believes that “someone probably walked into Trump’s office and said, ‘Here’s why you need Chuck Grassley more than you need Carl Icahn.’ ”

 

Very relevant to those of us who feel that Paulson and Berkowitz influence is a slam dunk.

The *minor* difference is that Icahn's RINs fight was for his own benefit. Revaluing preferred shares could make many, many rich. Including lots of representatives and senators. Not to mention funding many political campaigns. Just speculation, of course.

[Luke 532]

Very relevant to those of us who feel that Paulson and Berkowitz influence is a slam dunk.

 

How do you mean?

[Mephistopheles]

Any thoughts on Icahn's departure?  IMO irrelevant for F/F and probably zero chance it had any relevance to why he left.  We still don't know if he even holds shares anymore iirc

 

http://www.newyorker.com/magazine/2017/08/28/carl-icahns-failed-raid-on-washington

 

This stood out to me:

 

“Icahn is very sophisticated,” Brooke Coleman said. “But maybe not about Washington.” Senator Chuck Grassley not only represents corn growers; he also chairs the Judiciary Committee, which helps confirm Trump’s appointments of judges. This is the reason that traditional policy negotiations are so overcrowded. Washington is a city of vying constituencies, many of which happen to be very powerful. Coleman believes that “someone probably walked into Trump’s office and said, ‘Here’s why you need Chuck Grassley more than you need Carl Icahn.’ ”

 

Very relevant to those of us who feel that Paulson and Berkowitz influence is a slam dunk.

The *minor* difference is that Icahn's RINs fight was for his own benefit. Revaluing preferred shares could make many, many rich. Including lots of representatives and senators. Not to mention funding many political campaigns. Just speculation, of course.

 

Well if the reps and senators could own FNMA FMCC prefs, I don't see why they wouldn't want to own shares in that Ichan company. And of course Icahn can also fund campaigns.

 

The bigger takeaway for me was that money and loyalty talk, especially with Donald Trump. But still even his very rich and very loyal friend couldn't win Trump in this matter against the influence of Republican legislatures whose support he desperately needs. Oh and let's not forget the quarterly earnings sweep going to govt purse strings (more spending money) and you can see how maybe Paulson may fail too.

 

The major difference and why we still have hope imo is that very soon we will have a capital issue which will need to be solved. Even then, we can lose, for example in a scenario in which they decide to recap with a minimum amount, and continue to sweep everything above into perpetuity.

[rros]

Any thoughts on Icahn's departure?  IMO irrelevant for F/F and probably zero chance it had any relevance to why he left.  We still don't know if he even holds shares anymore iirc

 

http://www.newyorker.com/magazine/2017/08/28/carl-icahns-failed-raid-on-washington

 

This stood out to me:

 

“Icahn is very sophisticated,” Brooke Coleman said. “But maybe not about Washington.” Senator Chuck Grassley not only represents corn growers; he also chairs the Judiciary Committee, which helps confirm Trump’s appointments of judges. This is the reason that traditional policy negotiations are so overcrowded. Washington is a city of vying constituencies, many of which happen to be very powerful. Coleman believes that “someone probably walked into Trump’s office and said, ‘Here’s why you need Chuck Grassley more than you need Carl Icahn.’ ”

 

Very relevant to those of us who feel that Paulson and Berkowitz influence is a slam dunk.

The *minor* difference is that Icahn's RINs fight was for his own benefit. Revaluing preferred shares could make many, many rich. Including lots of representatives and senators. Not to mention funding many political campaigns. Just speculation, of course.

 

Well if the reps and senators could own FNMA FMCC prefs, I don't see why they wouldn't want to own shares in that Ichan company. And of course Icahn can also fund campaigns.

 

The bigger takeaway for me was that money and loyalty talk, especially with Donald Trump. But still even his very rich and very loyal friend couldn't win Trump in this matter against the influence of Republican legislatures whose support he desperately needs. Oh and let's not forget the quarterly earnings sweep going to govt purse strings (more spending money) and you can see how maybe Paulson may fail too.

 

The major difference and why we still have hope imo is that very soon we will have a capital issue which will need to be solved. Even then, we can lose, for example in a scenario in which they decide to recap with a minimum amount, and continue to sweep everything above into perpetuity.

I agree with you that we can still lose.

[waynepolsonAtoZ]

Odd article?

 

https://economics21.org/html/treasury-should-not-bail-out-fannie%E2%80%99s-and-freddie%E2%80%99s-subordinated-debt-2521.html

 

I wonder though exactly who were the subordinated debt holders? Exactly who did the underwriting?

 

Somebody with clout methinks.

[waynepolsonAtoZ]

Me too.

 

There have been encouraging developments, but Mnuchin and Gary Cohn can't be trusted. I've said that before. They can basically do what they want at this point.

[Luke 532]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/gse-dividend-debate-over-what-to-do-continues-1000042564-1.html

 

The issue of whether the Federal Housing Finance Agency will alter the dividend payments Fannie Mae and Freddie Mac pay the Treasury Department became a bit more complicated this month when agency Director Mel Watt hinted in correspondence he’s unlikely to make a change.

...

Haynie added: “I think he will act this year – and he will change that dividend payment to annual from quarterly. Watt is adamant that they should not have zero capital.” In May, the regulator told the Senate Banking, Housing and Urban Affairs Committee he does not want to see the two with zero capital, suggesting a delay in the dividend payments, not an elimination of them.

[rros]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/gse-dividend-debate-over-what-to-do-continues-1000042564-1.html

 

The issue of whether the Federal Housing Finance Agency will alter the dividend payments Fannie Mae and Freddie Mac pay the Treasury Department became a bit more complicated this month when agency Director Mel Watt hinted in correspondence he’s unlikely to make a change.

...

Haynie added: “I think he will act this year – and he will change that dividend payment to annual from quarterly. Watt is adamant that they should not have zero capital.” In May, the regulator told the Senate Banking, Housing and Urban Affairs Committee he does not want to see the two with zero capital, suggesting a delay in the dividend payments, not an elimination of them.

Doesn't sound like a radical change. As in doing away with the Sr. preferred shares. Also, what happened to Ackman's near-term-CW-bill?

 

Delaying or paying in kind are both the same for us. In both cases, we will need Trump to sign away the Sr. shares as in taxpayers-are-fully-paid. Then, companies can permanent keep what they will keep.

[SnarkyPuppy]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/gse-dividend-debate-over-what-to-do-continues-1000042564-1.html

 

The issue of whether the Federal Housing Finance Agency will alter the dividend payments Fannie Mae and Freddie Mac pay the Treasury Department became a bit more complicated this month when agency Director Mel Watt hinted in correspondence he’s unlikely to make a change.

...

Haynie added: “I think he will act this year – and he will change that dividend payment to annual from quarterly. Watt is adamant that they should not have zero capital.” In May, the regulator told the Senate Banking, Housing and Urban Affairs Committee he does not want to see the two with zero capital, suggesting a delay in the dividend payments, not an elimination of them.

 

This hints at what I believe to be a substiantial risk- settlement with only certain shareholders (plaintiffs) while concurrently stopping the shares from trading.  Would wipe out retail shareholders and wouldn't allow other funds to buy up the shares and sue. 

[Luke 532]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

This hints at what I believe to be a substiantial risk- settlement with only certain shareholders (plaintiffs) while concurrently stopping the shares from trading.  Would wipe out retail shareholders and wouldn't allow other funds to buy up the shares and sue.

 

I'd be interested in all of us discussing Snarky's concern of a private settlement with plaintiffs only and leaving out retail investors.

 

Here are some comments in the past about this topic:

 

Would someone give an example of certain equity of the same shareholder class being treated differently post-bankruptcy? But not the foreign entity referred to with Citi, that could be a myriad of things.

 

You boys obviously play these distressed situations more than I do as I think it's all crazy talk. What judge would sign off on that?

 

Edit (24 hours later): Ok, than, don't concoct something that is so highly unlikely it hasn't occurred before. Thank you and have a wonderful day :)

 

No, I was genuinely curious. I can't imagine such a thing and was pleased it didn't exist.

 

Thinking similarly. Its not 100 pct but quite high all the same.  Don't bet more than u can lose for sure.  Always a chance of wind down is biggest risk imo.

 

Liquidation preference at par value + legal provide the "margin of safety" here.  Someone hinted at the fact that it's possible the plaintiffs in the major cases negotiate a settlement privately that could screw public shareholders - some on this board mentioned it's not possible but still not sure I can think of every potential scenario within this space.  The citi bailout paid par to private preferred shareholders (I know this is different, Fairholme holds the same shares we do), but it just generally scares me a bit. 

 

Other than that, only a recap fully financed by only retained earnings seems to hurt the preferred holders (I own ~20% common as a backstop against this)

[orthopa]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/gse-dividend-debate-over-what-to-do-continues-1000042564-1.html

 

The issue of whether the Federal Housing Finance Agency will alter the dividend payments Fannie Mae and Freddie Mac pay the Treasury Department became a bit more complicated this month when agency Director Mel Watt hinted in correspondence he’s unlikely to make a change.

...

Haynie added: “I think he will act this year – and he will change that dividend payment to annual from quarterly. Watt is adamant that they should not have zero capital.” In May, the regulator told the Senate Banking, Housing and Urban Affairs Committee he does not want to see the two with zero capital, suggesting a delay in the dividend payments, not an elimination of them.

 

This hints at what I believe to be a substiantial risk- settlement with only certain shareholders (plaintiffs) while concurrently stopping the shares from trading.  Would wipe out retail shareholders and wouldn't allow other funds to buy up the shares and sue.

 

Berkowitz has said before that the preferred shares are a contract. How does the contract hold for one person and not the other?...When the entire premise of the takings is just that?  I can see "some" being preferred vs common.

[DocSnowball]

No competence to answer your question but did allocate a third of my preferred via Fairholme to reduce the risk of greenmail or this kind of outcome

[SnarkyPuppy]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/gse-dividend-debate-over-what-to-do-continues-1000042564-1.html

 

The issue of whether the Federal Housing Finance Agency will alter the dividend payments Fannie Mae and Freddie Mac pay the Treasury Department became a bit more complicated this month when agency Director Mel Watt hinted in correspondence he’s unlikely to make a change.

...

Haynie added: “I think he will act this year – and he will change that dividend payment to annual from quarterly. Watt is adamant that they should not have zero capital.” In May, the regulator told the Senate Banking, Housing and Urban Affairs Committee he does not want to see the two with zero capital, suggesting a delay in the dividend payments, not an elimination of them.

 

This hints at what I believe to be a substiantial risk- settlement with only certain shareholders (plaintiffs) while concurrently stopping the shares from trading.  Would wipe out retail shareholders and wouldn't allow other funds to buy up the shares and sue.

 

Berkowitz have said before that the preferred shares are a contract. How does the contract hold for one person and not the other? When the entire premise of the takings is just that?  I can see "some" being preferred vs common.

 

Wouldn't matter in a settlement.  The argument regarding contract rights goes away when the plaintiffs funding the litigation get paid

[waynepolsonAtoZ]

I imagine the hedge funds would want to be bought out for cash. So long as they restore the dividend for the small guys, that's fine.

 

The optics of hammering the small guys relative to the hedge funds would be pretty bad. Not that Trump, Mnuchin, or Cohn would care.

 

 

[SnarkyPuppy]

I imagine the hedge funds would want to be bought out for cash. So long as they restore the dividend for the small guys, that's fine.

 

The optics of hammering the small guys relative to the hedge funds would be pretty bad. Not that Trump, Mnuchin, or Cohn would care.

 

Right - no margin of safety in optics w the current players involved.  A settlement w the large shareholders gets rid of the lawsuits, which preferred bulls have been pointing out as an impediment to any negative reform

[waynepolsonAtoZ]

Well, each preferred has its own 2/3 vote requirement. That's a lot of separate preferreds to deal with. About the worst they could do is completely delist us and only trade in the grey market, where you would have to call your broker every time you wanted to know what it is trading at.

[SnarkyPuppy]

Well, each preferred has its own 2/3 vote requirement. That's a lot of separate preferreds to deal with. About the worst they could do is completely delist us and only trade in the grey market, where you would have to call your broker every time you wanted to know what it is trading at.

 

What if they announced settlement and immediate wind down of current companies after trading hours?

[rros]

I imagine the hedge funds would want to be bought out for cash. So long as they restore the dividend for the small guys, that's fine.

 

The optics of hammering the small guys relative to the hedge funds would be pretty bad. Not that Trump, Mnuchin, or Cohn would care.

 

Right - no margin of safety in optics w the current players involved.  A settlement w the large shareholders gets rid of the lawsuits, which preferred bulls have been pointing out as an impediment to any negative reform

Too soon to tell. But a cash settlement is not the only option. Government needs lawsuits to die to complete a meaningful reform, whether by Congress or administratively. The latter looking more and more likely. As I pointed out before, just an assurance to plaintiff their rights will be upheld and shares will carry value unto the next stage may be enough to kill most lawsuits. At least, the most significant ones. Without such burden, Mnuchin will have room to maneuver.

 

The issue would be that in a private settlement we will never know if this is what is happening when it is happening. For us it will be like driving in the dark.

 

I am not sure about this negative bias regarding a settlement. There may be other reasons for a settlement other than hurting the little guy.

[investorG]

https://www.insidemortgagefinance.com/imfnews/1_1174/daily/nationstar-changes-name-to-mr-cooper-1000042572-1.html

It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…

 

This hints at what I believe to be a substiantial risk- settlement with only certain shareholders (plaintiffs) while concurrently stopping the shares from trading.  Would wipe out retail shareholders and wouldn't allow other funds to buy up the shares and sue.

 

I'd be interested in all of us discussing Snarky's concern of a private settlement with plaintiffs only and leaving out retail investors.

 

 

possible, but I believe it's low odds.  lots of small bank investors invested in the jr preferred.  also, screwing the public shareholders while rewarding a billionaire would generate lots of news stories that would irritate trump's base.  for those invested in the cheaper jr preferreds (some of my allocation is there), there is some risk that different series are treated differently, based largely on issuance date;  in addition to liquidity and dividend rates (which are unlikely to matter), that's one reason for the large price discrepancy among various preferreds, I believe.

 

[Guest cherzeca]

there are class actions in perry, hindes/jacobs, bhatti and rop that are going forward.  if you own shares you are a member of the classes.  so this is not a case where fairholme can do what it wants

[rros]

there are class actions in perry, hindes/jacobs, bhatti and rop that are going forward.  if you own shares you are a member of the classes.  so this is not a case where fairholme can do what it wants

Also,... is this rationale of shares going to zero with a settlement based on some kind of logic or is born out of irrational fear?

 

Lately, Zandi affirmed companies are almost completely reformed. Pollock being in a somewhat similar camp, admitting w/o a doubt Treasury has been paid or about to be. How about Watt, who more than once stated the companies today do not resemble the ones from the past. Freddie ceo singing the same tune. Most antagonistic forces belonged to the Obama administration (Stegman et.al) and are now gone. Others feel legacy shareholders must not be hurt for private capital to come in and fund a restructuring. Within this context, how much money would the government offer Fairlhome to drop the takings case, a case the government has been winning and a case where the plaintiff decided to sue after the fact?

 

It makes no sense that the government will pay Fairholme to go away just so that they can then shut down all the remaining shares. More likely, administrative reform is advanced and Treasury feels the lawsuits are future time bombs that need to be defused today.

[SnarkyPuppy]

there are class actions in perry, hindes/jacobs, bhatti and rop that are going forward.  if you own shares you are a member of the classes.  so this is not a case where fairholme can do what it wants

Also,... is this rationale of shares going to zero with a settlement based on some kind of logic or is born out of irrational fear?

 

Lately, Zandi affirmed companies are almost completely reformed. Pollock being in a somewhat similar camp, admitting w/o a doubt Treasury has been paid or about to be. How about Watt, who more than once stated the companies today do not resemble the ones from the past. Freddie ceo singing the same tune. Most antagonistic forces belonged to the Obama administration (Stegman et.al) and are now gone. Others feel legacy shareholders must not be hurt for private capital to come in and fund a restructuring. Within this context, how much money would the government offer Fairlhome to drop the takings case, a case the government has been winning and a case where the plaintiff decided to sue after the fact?

 

It makes no sense that the government will pay Fairholme to go away just so that they can then shut down all the remaining shares. More likely, administrative reform is advanced and Treasury feels the lawsuits are future time bombs that need to be defused today.

 

I'm just constantly reassessing the downside from different angles here as I do with any investment.  I actually think overall we are in a good spot, I just threw the risk out there as I was reminded that it has always been one of the potential downside options that I've thought about and this quote reminded me:

 

"It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…"

 

Re-reading it, it's probably moreso contemplating settling with preferred plaintiffs vs common plaintiffs rather than what I've highlighted.  Understand there are still class actions but is there a risk the government sees that as much lower chance of loss than the Fairholme case?

 

Fairholme and Paulson drop this in a second if they are offered something that screws everyone else. 

 

Seems to me (I've been wrong before...) that there is a non-zero chance that the government settles w/ the major players funding the lawsuits, leaves the low risk of a class action loss, simultaneously announces reform which explicitly states government role in mortgage finance and re-charters new GSEs etc.  IMO, the argument that the government will have trouble raising private capital only holds true if the current structure is maintained (i.e. governments role is implicit, shareholders role ambiguous).   

 

It wouldn't necessarily be a rational decision in terms of maximizing housing finance efficiency, but there could be other incentives at play and I'm not sure any of us can say with a straight face that this administration has been consistently rational.   

 

Think we're fine, just talking through some of this since you guys provide great feedback.