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

[onyx1]

Trump will not only use the 100 billion he is after, he will make this move the hallmark of his administration ...

 

I have a different take, one that I haven't seen expressed yet.

 

Trump is unpredictable and he may indeed make the GSE's a talking point to beat up the previous administration, but his essential #1 priority is tax reform.  His administration needs to make good on a campaign promise to produce the first major tax reform in over 30 years.  Given the GOP failure on Obamacare, tax reform is now also the top priority, and possibly the only remaining source of survival, for the GOP congress as well. 

 

The hallmark of this administration and congress will be tax reform, and the metric for judging success will be the new corporate tax rate.  The lower, the better, and Trump wants 15%.

 

To complete tax reform and meaningfully lower corporate rates, CBO scoring is required.  In this process, every dollar counts.  This is where politicians scrape for every dollar of savings that can be assumed (without causing a media backlash), and find every possible source of future revenue.  Both work to further the case for the lowest possible corporate tax rate.

 

Would $100bln in extra revenue from selling the GSE warrants help achieve the top domestic priority of lower corporate taxes?  Hell yes.   

 

Does the administration & GOP have a huge incentive sell the warrants?  For sure. 

 

Will GOP leaders allow ideological hatred for the GSE’s to get in the way of a tax achievement essential to their survival?  No, especially after their complete failure on Obamacare.

 

For these reasons, I believe the $100bln revenue from a warrant sale is likely included in the projections of the tax reform plan currently being assembled by GOP leaders and the administration. 

 

They can’t disclose it yet.  It is incredibily market sensitive, and the GSEs warrant sale is only one part of a much larger tax reform plan that isn’t completed.  But the leaders know about it and the plan to sell the warrants. 

 

Of course, this may be wishful thinking from someone with a very meaningful position in Jr Preferred. 

 

But if true, it goes a long way in explaining the apparent overnight change in how members of the GOP view the GSE’s.  Their sudden embrace of Moelis and shareholder rights gets them out in front of a future warrant sale.

 

Now the interesting question:  If the $100bln proceeds from an assumed warrant sale is part of tax reform plan to be scored by the CBO, how long can this super-sensitive information be kept under wraps in the Leak Capital of the World, Washington DC?

 

Probably not long.  Leaks may force an all-at-once public disclosure of a warrant sale.  Ryan said the tax plan outline will be released on September 25.

[SnarkyPuppy]

Trump will not only use the 100 billion he is after, he will make this move the hallmark of his administration ...

 

I have a different take, one that I haven't seen expressed yet.

 

Trump is unpredictable and he may indeed make the GSE's a talking point to beat up the previous administration, but his essential #1 priority is tax reform.  His administration needs to make good on a campaign promise to produce the first major tax reform in over 30 years.  Given the GOP failure on Obamacare, tax reform is now also the top priority, and possibly the only remaining source of survival, for the GOP congress as well. 

 

The hallmark of this administration and congress will be tax reform, and the metric for judging success will be the new corporate tax rate.  The lower, the better, and Trump wants 15%.

 

To complete tax reform and meaningfully lower corporate rates, CBO scoring is required.  In this process, every dollar counts.  This is where politicians scrape for every dollar of savings that can be assumed (without causing a media backlash), and find every possible source of future revenue.  Both work to further the case for the lowest possible corporate tax rate.

 

Would $100bln in extra revenue from selling the GSE warrants help achieve the top domestic priority of lower corporate taxes?  Hell yes.   

 

Does the administration & GOP have a huge incentive sell the warrants?  For sure. 

 

Will GOP leaders allow ideological hatred for the GSE’s to get in the way of a tax achievement essential to their survival?  No, especially after their complete failure on Obamacare.

 

For these reasons, I believe the $100bln revenue from a warrant sale is likely included in the projections of the tax reform plan currently being assembled by GOP leaders and the administration. 

 

They can’t disclose it yet.  It is incredibility market sensitive, and the GSEs warrant sale is only one part of a much larger tax reform plan that isn’t completed.  But the leaders know about it and the plan to sell the warrants. 

 

Of course, this may be wishful thinking from someone with a very meaningful position in Jr Preferred. 

 

But if true, it goes a long way in explaining the apparent overnight change in how members of the GOP view the GSE’s.  Their sudden embrace of Moelis and shareholder rights gets them out in front of a future warrant sale.

 

Now the interesting question:  If the $100bln proceeds from an assumed warrant sale is part of tax reform plan to be scored by the CBO, how long can this super-sensitive information be kept under wraps in the Leak Capital of the World, Washington DC?

 

Probably not long.  Leaks may force an all-at-once public disclosure of a warrant sale.  Ryan said the tax plan outline will be released on September 25.

 

It's possible - but a one-time $100bn hit isn't very material in the grand scheme of annualized net-revenue loss figures I've seen thrown around as part of preliminary tax reform analysis (not accounting for the loss of quarterly sweep payments).  I think it's an interesting angle, consistent with the update to the budget language we saw earlier this year, and aligns to the recent shift in GOP view.  It would provide some political cover to recap/release. 

 

Couldn't agree more that tax reform is optically a game-changer for this administration.  I see that as a risk as well- I could see Trump/Mnuchin giving up on their plans for the GSE's in exchange for having successful tax reform. 

[rros]

I agree with everything said. Hallmark may have been a stretch. I really meant Trump may use the imperialist-communist-nationalization paradigm as a talking point for the next 3 years if he aligns himself with those statements from the RNC summer resolution. And perhaps the reason those paragraphs were /strangely/ included in the resolution was to set exactly that *campaign* tone and make property rights/rule of law an essential part of any future presidential speech. A persistent, continuous bashing of left democrats (Warren, Bernie Sanders, Obama if he ever plans a comeback) to rob them of any political capital left. Anyone supporting the nws may be seen as a Trotsky/Lenin aficionado.

[onyx1]

I agree with everything said. Hallmark may have been a stretch. I really meant Trump may use the imperialist-communist-nationalization paradigm as a talking point for the next 3 years if he aligns himself with those statements from the RNC summer resolution. And perhaps the reason those paragraphs were /strangely/ included in the resolution was to set exactly that *campaign* tone and make property rights/rule of law an essential part of any future presidential speech. A persistent, continuous bashing of left democrats (Warren, Bernie Sanders, Obama if he ever plans a comeback) to rob them of any political capital left. Anyone supporting the nws may be seen as a Trotsky/Lenin aficionado.

 

 

Trump will surely come up with an argument to combat the "GOP's GSE windfall to rich hedge-fund managers" narrative.  Your example may be it.

[SnarkyPuppy]

If government gets 100 billion for 4 billion shares (as 1 billion is outstanding), does that not make common shares $20.00 for a total of 5 billion shares? Ackman values them at $20 at the low end too (and $34 at high end).

 

 

Ackman "Since government and taxpayers own 79.9% of the common stocks of both companies, interests of shareholders and government are largely aligned"

 

I doubt that Ackman is so dumb that he would own 110 million shares if he didn't believe in his investment and as I understood he went over and beyond on number of shares that he was allowed to purchase.

 

So if rights of shareholders are respected, then commons are not worthless? Can commons still go to zero if rights are respected?

 

IMO it makes little to no sense to own the commons at this point.    Things are trending in the direction of the Moelis plan which estimates the commons will price at $9-13 in 2020.    Similar absolute upside as the prefs, potentially more timing risk than the prefs, and more downside risk than the prefs.    Only benefit of the commons IMO is upside optionality but seems unlikely with a dilutive restructuring looking like the most probable outcome.  Prefs might even get a taste of the common upside depending on conversions. 

 

Ackman's position is reflective of where things were a few years ago.  Not sure why anyone would own commons at this point, aside from mixing a small amount into a pref position for upside optionality and consideration of govt incentives. 

 

I'm sure you will continue to only look at the unrealistic upside for the commons and ignore everything else I just wrote, and it is a shame that unsophisticated speculators are riding along and will probably end up doing well.    Fanniegate in general has done nothing but hurt our positioning.

[investorG]

If government gets 100 billion for 4 billion shares (as 1 billion is outstanding), does that not make common shares $20.00 for a total of 5 billion shares? Ackman values them at $20 at the low end too (and $34 at high end).

 

 

Ackman "Since government and taxpayers own 79.9% of the common stocks of both companies, interests of shareholders and government are largely aligned"

 

I doubt that Ackman is so dumb that he would own 110 million shares if he didn't believe in his investment and as I understood he went over and beyond on number of shares that he was allowed to purchase.

 

So if rights of shareholders are respected, then commons are not worthless? Can commons still go to zero if rights are respected?

 

wrong math. FMCC is included too in the $100bn projection (guesstimates).

[investorG]

If government gets 100 billion for 4 billion shares (as 1 billion is outstanding), does that not make common shares $20.00 for a total of 5 billion shares? Ackman values them at $20 at the low end too (and $34 at high end).

 

 

Ackman "Since government and taxpayers own 79.9% of the common stocks of both companies, interests of shareholders and government are largely aligned"

 

I doubt that Ackman is so dumb that he would own 110 million shares if he didn't believe in his investment and as I understood he went over and beyond on number of shares that he was allowed to purchase.

 

So if rights of shareholders are respected, then commons are not worthless? Can commons still go to zero if rights are respected?

 

IMO it makes little to no sense to own the commons at this point.    Things are trending in the direction of the Moelis plan which estimates the commons will price at $9-13 in 2020.    Similar absolute upside as the prefs, potentially more timing risk than the prefs, and more downside risk than the prefs.    Only benefit of the commons IMO is upside optionality but seems unlikely with a dilutive restructuring looking like the most probable outcome.  Prefs might even get a taste of the common upside depending on conversions. 

 

Ackman's position is reflective of where things were a few years ago.  Not sure why anyone would own commons at this point, aside from mixing a small amount into a pref position for upside optionality and consideration of govt incentives. 

 

I'm sure you will continue to only look at the unrealistic upside for the commons and ignore everything else I just wrote, and it is a shame that unsophisticated speculators are riding along and will probably end up doing well.    Fanniegate in general has done nothing but hurt our positioning.

 

not sure where to start on this one except to say that I believe there's no certainty on anything in this situation.  in light of expected intense media scrutiny on any potential deal, it's not irrelevant imo that -- if the warrants are engaged -- then the taxpayers are on one side of negotiations and trump / mnuchin billionaire buddies Paulson and berkowtiz are on another (among other sides as well). 

 

[investorG]

Trump will not only use the 100 billion he is after, he will make this move the hallmark of his administration ...

 

I have a different take, one that I haven't seen expressed yet.

 

Trump is unpredictable and he may indeed make the GSE's a talking point to beat up the previous administration, but his essential #1 priority is tax reform.  His administration needs to make good on a campaign promise to produce the first major tax reform in over 30 years.  Given the GOP failure on Obamacare, tax reform is now also the top priority, and possibly the only remaining source of survival, for the GOP congress as well. 

 

The hallmark of this administration and congress will be tax reform, and the metric for judging success will be the new corporate tax rate.  The lower, the better, and Trump wants 15%.

 

To complete tax reform and meaningfully lower corporate rates, CBO scoring is required.  In this process, every dollar counts.  This is where politicians scrape for every dollar of savings that can be assumed (without causing a media backlash), and find every possible source of future revenue.  Both work to further the case for the lowest possible corporate tax rate.

 

Would $100bln in extra revenue from selling the GSE warrants help achieve the top domestic priority of lower corporate taxes?  Hell yes.   

 

Does the administration & GOP have a huge incentive sell the warrants?  For sure. 

 

Will GOP leaders allow ideological hatred for the GSE’s to get in the way of a tax achievement essential to their survival?  No, especially after their complete failure on Obamacare.

 

For these reasons, I believe the $100bln revenue from a warrant sale is likely included in the projections of the tax reform plan currently being assembled by GOP leaders and the administration. 

 

They can’t disclose it yet.  It is incredibily market sensitive, and the GSEs warrant sale is only one part of a much larger tax reform plan that isn’t completed.  But the leaders know about it and the plan to sell the warrants. 

 

Of course, this may be wishful thinking from someone with a very meaningful position in Jr Preferred. 

 

But if true, it goes a long way in explaining the apparent overnight change in how members of the GOP view the GSE’s.  Their sudden embrace of Moelis and shareholder rights gets them out in front of a future warrant sale.

 

Now the interesting question:  If the $100bln proceeds from an assumed warrant sale is part of tax reform plan to be scored by the CBO, how long can this super-sensitive information be kept under wraps in the Leak Capital of the World, Washington DC?

 

Probably not long.  Leaks may force an all-at-once public disclosure of a warrant sale.  Ryan said the tax plan outline will be released on September 25.

 

certainly possible but imo if it's going to be linked with something it's more likely infrastructure where ~100bn really moves the needle.

[waynepolsonAtoZ]

While I'm not especially over-confident about Mnuchin's reliability, one way to interpret his recent moderation is that he's trying to position himself as The Decider, i.e., trying to [avoid] pre-judging the issues. Then, at the right time he would look at all the available evidence and say, based on the "record" before me, I think it's time to end the NWS and recapitalize the GSEs. I guess it's possible. [i had to edit this.]

[SnarkyPuppy]

While I'm not especially over-confident about Mnuchin's reliability, one way to interpret his recent moderation is that he's trying to position himself as The Decider, i.e., trying to pre-judge the issues. Then, at the right time he would look at all the available evidence and say, based on the "record" before me, I think it's time to end the NWS and recapitalize the GSEs. I guess it's possible.

 

Agree.  I think it's as simple as him learning his lesson from the first fox interview. 

[beaufort]

I have had a few days to think about this week's events regarding both the RNC statement and the letter to Mnuchin and Watt from the 6 democratic senators and Mnuchin's comments at the politico event. 

 

Mnuchin is an administrator who has had a consistent approach from the beginning.  It is appropriate that he requires the dividend to be paid until such time as a plan is decided on that resolves the current situation.  As other posters have commented on, it is also not Mnuchin's decision on whether the dividend is declared.

 

There is nothing I don't like about this week.  The narrative concerning FnF is changing (failed business model, cause of 08 crisis).  A bipartisan effort looks like a possibility.  The timeline set out in the Moelis blueprint can remain on track. 

 

 

 

[rros]

I have had a few days to think about this week's events regarding both the RNC statement and the letter to Mnuchin and Watt from the 6 democratic senators and Mnuchin's comments at the politico event. 

 

Mnuchin is an administrator who has had a consistent approach from the beginning.  It is appropriate that he requires the dividend to be paid until such time as a plan is decided on that resolves the current situation.  As other posters have commented on, it is also not Mnuchin's decision on whether the dividend is declared.

 

There is nothing I don't like about this week.  The narrative concerning FnF is changing (failed business model, cause of 08 crisis).  A bipartisan effort looks like a possibility.  The timeline set out in the Moelis blueprint can remain on track.

Great comment.

[waynepolsonAtoZ]

"Great comment."

 

Yes, it's a reasonable way to interpret recent events. I think it's great that Craig Phillips now has "permission" to talk to people and he is reportedly doing so.

 

I will also say I'm glad I'm preferred. Even though it can readily be said that Treasury is now actually or virtually fully repaid (including interest at 10%), it's human nature to want to get even more for Treasury to go forward. So, no big surprise that the warrants are likely to be exercised.

 

Freddie has already made it, Fannie is almost there. Note also that Alex Pollock isn't at AEI anymore. I was wondering why he wrote something that was reasonable.

http://www.rstreet.org/op-ed/fannie-and-freddie-face-the-moment-of-truth-on-their-taxpayer-bailouts/

 

[SnarkyPuppy]

I have had a few days to think about this week's events regarding both the RNC statement and the letter to Mnuchin and Watt from the 6 democratic senators and Mnuchin's comments at the politico event. 

 

Mnuchin is an administrator who has had a consistent approach from the beginning.  It is appropriate that he requires the dividend to be paid until such time as a plan is decided on that resolves the current situation.  As other posters have commented on, it is also not Mnuchin's decision on whether the dividend is declared.

 

There is nothing I don't like about this week.  The narrative concerning FnF is changing (failed business model, cause of 08 crisis).  A bipartisan effort looks like a possibility.  The timeline set out in the Moelis blueprint can remain on track.

Great comment.

 

+1

[ValueMaven]

https://www.wsj.com/articles/fix-for-mortgage-giants-fannie-mae-freddie-mac-remains-on-back-burner-1505508211

 

 

[Guest cherzeca]

https://www.wsj.com/articles/fix-for-mortgage-giants-fannie-mae-freddie-mac-remains-on-back-burner-1505508211

 

thanks for link VM, hadnt seen that.  passage of time not the friend for FnF foes. mnuchin will eventual get around to seeking what he refers to as a fix for FnF, and if corker/crapo/warner have come up with bubkis, then i guess mnuchin will have to step into breach.  kudo to sen brown.  thought i would never say that...and there is that interesting hindes/jacobs case...

[Luke 532]

I find it mildly amusing that Corker's name is on the letterhead of the attached document.

[undervalued]

In that WSJ article, it says

Richard Perry's Perry Capital was an early hedge-fund holder of Fannie and Freddie shares. It told its clients in September 2016 it was closing down , citing "industry and market headwinds." The firm has returned 80% of clients' money since then as it has wound down its hedge fund, according to people familiar with the matter, but it continues to hold shares of Fannie and Freddie.

 

I wonder how big their holding of FnF if they haven't reduce but have returned shareholder money. Doesn't that make their FnF holding a much bigger stake in the portfolio?

[Midas79]

In that WSJ article, it says

Richard Perry's Perry Capital was an early hedge-fund holder of Fannie and Freddie shares. It told its clients in September 2016 it was closing down , citing "industry and market headwinds." The firm has returned 80% of clients' money since then as it has wound down its hedge fund, according to people familiar with the matter, but it continues to hold shares of Fannie and Freddie.

 

I wonder how big their holding of FnF if they haven't reduce but have returned shareholder money. Doesn't that make their FnF holding a much bigger stake in the portfolio?

 

I take that to mean that if FnF were 20% of their portfolio before closing down, they are 100% now. Basically a 5x concentration from before assuming that they didn't sell any FnF shares at any point.

 

They might be holding shares because of the ongoing lawsuit, or perhaps they also want to realize full value on them without having to worry about investor redemptions forcing them to sell at a potentially bad time.

[rros]

In that WSJ article, it says

Richard Perry's Perry Capital was an early hedge-fund holder of Fannie and Freddie shares. It told its clients in September 2016 it was closing down , citing "industry and market headwinds." The firm has returned 80% of clients' money since then as it has wound down its hedge fund, according to people familiar with the matter, but it continues to hold shares of Fannie and Freddie.

 

I wonder how big their holding of FnF if they haven't reduce but have returned shareholder money. Doesn't that make their FnF holding a much bigger stake in the portfolio?

 

I take that to mean that if FnF were 20% of their portfolio before closing down, they are 100% now. Basically a 5x concentration from before assuming that they didn't sell any FnF shares at any point.

 

They might be holding shares because of the ongoing lawsuit, or perhaps they also want to realize full value on them without having to worry about investor redemptions forcing them to sell at a potentially bad time.

I may be mistaken but I remember some article or statement by him saying his own money is in those shares. I know that is the case with Berkowitz but I believe Perry is sticking to the shares for the same reason. Or maybe I dreamed this.

[SnarkyPuppy]

https://www.forbes.com/sites/jameshcarr/2017/09/18/playing-russian-roulette-with-the-u-s-housing-finance-system/?s=trend#55a3e3096240

 

"The greatest weakness of these agencies prior to conservatorship was their private, shareholder-owned structure that made quarterly earnings growth more important than either good public policy or financial common sense. These institutions also suffered from an implicit federal guarantee that enabled and encouraged them to take unnecessary risks at taxpayer expense."

 

"There are many ways to release Fannie Mae and Freddie Mac from conservatorship in a manner that overcomes inherent weaknesses of a stock ownership structure with implicit federal backing while also enabling them to better meet the homeownership desires of our nation’s families while simultaneously operating in a safer and sounder manner."

 

"This 21st Century housing finance system would best be achieved by transforming Fannie Mae and Freddie Mac in a new Federal Housing and Community Investment Corporation. As a government corporation, it would have the ability to operate as a private company, including having the ability to offer competitive salaries and bonus plans, as well as to make timely business decisions without the need to wait for Congressional approval.

 

By eliminating shareholders, the trigger for employee bonuses would be based on how successful the new corporation achieves its mandate in a safe and sound manner to increase low-cost and sustainable homeownership, improved affordable rental production, and successful community investments including improved job opportunities.

 

Earnings of the new Corporation would be used to cover operations including a strong capital buffer against future losses. All earnings not required for operations would be reinvested into the housing sector to make homebuyer education a permanent aspect of mortgage lending, as well as to develop and pilot new generations of affordable home mortgage products, substantially increase support for the construction of low-cost rental housing, and invest in comprehensive and inclusive rebuilding strategies."

 

Correct me if I'm wrong, but nothing Mnuchin has publicly said has directly been inconsistent wit the above, correct?  Maybe the out of government control sttement but that is pretty vague. 

[TwoCitiesCapital]

https://www.forbes.com/sites/jameshcarr/2017/09/18/playing-russian-roulette-with-the-u-s-housing-finance-system/?s=trend#55a3e3096240

 

"The greatest weakness of these agencies prior to conservatorship was their private, shareholder-owned structure that made quarterly earnings growth more important than either good public policy or financial common sense. These institutions also suffered from an implicit federal guarantee that enabled and encouraged them to take unnecessary risks at taxpayer expense."

 

"There are many ways to release Fannie Mae and Freddie Mac from conservatorship in a manner that overcomes inherent weaknesses of a stock ownership structure with implicit federal backing while also enabling them to better meet the homeownership desires of our nation’s families while simultaneously operating in a safer and sounder manner."

 

"This 21st Century housing finance system would best be achieved by transforming Fannie Mae and Freddie Mac in a new Federal Housing and Community Investment Corporation. As a government corporation, it would have the ability to operate as a private company, including having the ability to offer competitive salaries and bonus plans, as well as to make timely business decisions without the need to wait for Congressional approval.

 

By eliminating shareholders, the trigger for employee bonuses would be based on how successful the new corporation achieves its mandate in a safe and sound manner to increase low-cost and sustainable homeownership, improved affordable rental production, and successful community investments including improved job opportunities.

 

Earnings of the new Corporation would be used to cover operations including a strong capital buffer against future losses. All earnings not required for operations would be reinvested into the housing sector to make homebuyer education a permanent aspect of mortgage lending, as well as to develop and pilot new generations of affordable home mortgage products, substantially increase support for the construction of low-cost rental housing, and invest in comprehensive and inclusive rebuilding strategies."

 

Correct me if I'm wrong, but nothing Mnuchin has publicly said has directly been inconsistent wit the above, correct?  Maybe the out of government control sttement but that is pretty vague.

 

Not that I'm aware of - but the whole purpose of the original structure as well as the more recent tendering of 79.9% max ownership via warrants was to keep liabilities from consolidated on the government's balance sheet. If the government is sole owner - those liabilities get consolidated. I don't think anyone really wants that.

[beaufort]

Nothing Mnuchin has said is inconsistent with the Forbes article.  The Forbes article is also consistent with a theory leading to a society in which all property is publicly owned and each person works and is paid according to his/her ability and need.

 

 

[racemize]

Nothing Mnuchin has said is inconsistent with the Forbes article.  The Forbes article is also consistent with a theory leading to a society in which all property is publicly owned and each person works and is paid according to his/her ability and need.

 

I'd say turning it into a government entity is not in the spirit of "getting it out of government control".  It also does not allow for monetization of the warrants.

[rros]

Nothing Mnuchin has said is inconsistent with the Forbes article.  The Forbes article is also consistent with a theory leading to a society in which all property is publicly owned and each person works and is paid according to his/her ability and need.

 

I'd say turning it into a government entity is not in the spirit of "getting it out of government control".  It also does not allow for monetization of the warrants.

Anybody here thinks either Trump or Mnuchin love the amtrak business model? Having Fannie and Freddie operating as government-owned entities is Warren's dream. Anyone seeing Warren, Mnuchin and Trump having drinks together at the bar celebrating the birth of the latest government corporation? Chatting about how insanely out of her mind Ayn Rand was?