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

[investorG]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

[investorG]

Coming Soon: The Trump Administration’s ‘Principles’ on GSE Reform

https://www.insidemortgagefinance.com/imfnews/1_1220/daily/trump-treasury-gse-reform-plan-coming-soon-1000043388-1.html#Login

 

I'm not saying they're connected events, but I do find it interesting that Stevens announced his retirement at the same event that he announced Trump's GSE plan is coming within weeks.

 

The Treasury Department will likely release principles on housing finance reform – centering on what to do about Fannie Mae and Freddie Mac – within weeks, according to David Stevens, president and CEO of the Mortgage Bankers Association. Speaking at the MBA’s annual convention in Denver, he said the principles will avoid specificity so as not to box-in legislation being drafted in Congress.

 

As you mention, I doubt they are connected.

 

one sentence would be nice:  in line with the traditions of American capitalism, the rights of junior shareholders should be taken into consideration. 

 

after all, it's those junior shareholders that allowed the govt to get paid back while avoiding the consolidation of $5trn of liabilities on the nation's balance sheet.

 

 

 

[Guest cherzeca]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

 

true only if buying back debt

[investorG]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

 

true only if buying back debt

 

help me out here.

 

assume 100bn assets,  80bn debt, 5bn preferred, 15bn common on the balance sheet.

 

the 5bn is repurchased for 3bn cash.    so assets goes to 97bn.  debt stays same at 80bn.  doesn't common value go to 17bn?

[Guest cherzeca]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

 

true only if buying back debt

 

help me out here.

 

assume 100bn assets,  80bn debt, 5bn preferred, 15bn common on the balance sheet.

 

the 5bn is repurchased for 3bn cash.    so assets goes to 97bn.  debt stays same at 80bn.  doesn't common value go to 17bn?

 

equity capital doesnt go up if no equity is issued and equity is retired

[dyow]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

 

true only if buying back debt

 

help me out here.

 

assume 100bn assets,  80bn debt, 5bn preferred, 15bn common on the balance sheet.

 

the 5bn is repurchased for 3bn cash.    so assets goes to 97bn.  debt stays same at 80bn.  doesn't common value go to 17bn?

 

equity capital doesnt go up if no equity is issued and equity is retired

 

In a corp that would be a gain of 2B that would hit retained earnings - so common 15 + 2 retained earnings.  Retained earnings/common stock is in shareholder's equity so that would be 17B.

 

If you buyback something at discount to the balance sheet amount the gain goes to shareholders. 

 

 

[investorG]

if the Sweeney case is settled, do the 1500 documents go away permanently or can one of the other peripheral cases access those?

 

after listening to the congressional hearings, and under the assumption that mnuchin - phillips at least attempt to work on a legislative solution, i'm guessing the time line for any potential resolution is longer than berkowitz, perry, and Paulson are aiming for.  And thus they might shave their expected return for a quicker solution.

 

a voluntary tender offer for the jr preferred around [2/3] of par could build a nice $10bn+ buffer for the two GSEs. and possibly it could resolve some lawsuits.

 

repurchasing equity capital doesnt create equity or regulatory capital

 

jr preferreds are carried at par on the balance sheet.  if you retire some or all at 2/3 of par, then the remaining 1/3 value drops to common equity.  ie a buffer.

 

true only if buying back debt

 

help me out here.

 

assume 100bn assets,  80bn debt, 5bn preferred, 15bn common on the balance sheet.

 

the 5bn is repurchased for 3bn cash.    so assets goes to 97bn.  debt stays same at 80bn.  doesn't common value go to 17bn?

 

equity capital doesnt go up if no equity is issued and equity is retired

 

last comment on this.  while total equity doesn't go up, common equity would.  and it's likely the common equity ratio which would be used as a targeted capital ratio in a potential recapitalization -- similar to the banks (but hopefully lower).  so it would in theory start to build a capital buffer if the jr preferreds are voluntarily tendered at a discount to par.  to me, that's the only thing that's reasonably possible over the medium term which also likely settles some of the lawsuits.  but if the 1500 documents are benign, or they can simply be accessed by an adjacent case, then the govt might not be inclined to settle (among other reasons).

[Guest cherzeca]

Credit (reduce) cash debit (reduce) preferred stock. No gain because you haven’t reduced an obligation at a discount. Capital is unaffected

 

EDIT:  actually as i think about it, capital should be reduced, because you have reduced equity (preferred).  doesnt matter whether at less than par, preferred not a liability. 

[Sunrider]

Admittedly accounting was my worst subject (ever, I think).... however, if memory serves, if you buy back debt at a discount, you realise a gain on extinguishing the debt, this flows through the P&L (probably somewhere below the line), and thus into retained earnings (which in turn is part of capital).

 

Am I wrong?

 

Thanks.

C.

[rros]

Admittedly accounting was my worst subject (ever, I think).... however, if memory serves, if you buy back debt at a discount, you realise a gain on extinguishing the debt, this flows through the P&L (probably somewhere below the line), and thus into retained earnings (which in turn is part of capital).

 

Am I wrong?

 

Thanks.

C.

I do not think preferred shares are debt. They are paid-in-capital and are part of stockholder's equity. Buying them back reduces capital. You return the money to the investor and terminate the dividend obligation. Not sure what happens with the difference when you return less than par pocketing a difference. You basically keep some of the money invested by the original investor but the possible addition of the excess to retained earnings may not compensate the loss of paid-in-capital in stockholder's equity.

[Luke 532]

Jerome Powell, possible Fed Chair, on the GSE's: Mr. Powell has called on Congress to overhaul the housing finance system, saying he'd like to see the country's two large mortgage-finance firms, Fannie Mae and Freddie Mac, move out from under government conservatorship. More private capital in those firms would reduce the risk of a taxpayer-funded bailout in the event of a downturn, he said in a speech in July.

http://www.foxbusiness.com/features/2017/09/29/what-need-to-know-about-jerome-powells-views.amp.html

[rros]

Jerome Powell, possible Fed Chair, on the GSE's: Mr. Powell has called on Congress to overhaul the housing finance system, saying he'd like to see the country's two large mortgage-finance firms, Fannie Mae and Freddie Mac, move out from under government conservatorship. More private capital in those firms would reduce the risk of a taxpayer-funded bailout in the event of a downturn, he said in a speech in July.

http://www.foxbusiness.com/features/2017/09/29/what-need-to-know-about-jerome-powells-views.amp.html

Thank you, Luke. Adding to this... here is his speech on Fannie/Freddie/Housing from July 2017

 

https://www.federalreserve.gov/newsevents/speech/powell20170706a.htm

 

Note his principles for reform are:

 

1. Mounds of private capital (although he refers to this as risk-transfers and multiple guarantors, not built-in capital).

2. Paid-for explicit guarantee to MBS, not institutions.

3. Break up the duopoly implicitly stating Congress should open up the charters to other institutions.

4. Restructure and repurpose parts of the existing architecture.

5. End the status quo by finding areas of bipartisan agreement.

 

Overall, he is against "a government-dominated mortgage market with insufficient private capital to protect taxpayers, and insufficient competition to drive innovation." Basically, open up the system for competition, have a narrow, explicit government guarantee and restructure Fannie and Freddie into smaller guarantors. This would be in opposition to recapping and releasing, in opposition to fully re-capitalizing Fannie and Freddie and turning them into "ICBA" utilities but much closer to the original Jim Millstein plan.

 

 

[Luke 532]

Nothing seems to matter when it comes to GSE's. Budget is on track. Corker and Warner is out. Stevens is out. I guess we wait for Watt to be kicked out, he is the master of politicians.

 

I assume when you say "nothing seems to matter..." you're referring to the stock price reaction, or lack thereof.  I humbly suggest to ignore stock price and focus on whether or not events impact your thesis negatively, positively, or not at all.  If it impacts your thesis in some way then the news certainly does matter.  If it doesn't impact your thesis in some way then the news does not matter.

[investorG]

Nothing seems to matter when it comes to GSE's. Budget is on track. Corker and Warner is out. Stevens is out. I guess we wait for Watt to be kicked out, he is the master of politicians.

 

$6mm FNMFN (jr pref) traded @ 21pct of par today. 

 

common is likely capped when these types of levels exist bc relative value investors will sell some common to buy the pref.

 

[Luke 532]

Jerome Powell, possible Fed Chair, on the GSE's: Mr. Powell has called on Congress to overhaul the housing finance system, saying he'd like to see the country's two large mortgage-finance firms, Fannie Mae and Freddie Mac, move out from under government conservatorship. More private capital in those firms would reduce the risk of a taxpayer-funded bailout in the event of a downturn, he said in a speech in July.

http://www.foxbusiness.com/features/2017/09/29/what-need-to-know-about-jerome-powells-views.amp.html

Thank you, Luke. Adding to this... here is his speech on Fannie/Freddie/Housing from July 2017

 

https://www.federalreserve.gov/newsevents/speech/powell20170706a.htm

 

Note his principles for reform are:

 

1. Mounds of private capital (although he refers to this as risk-transfers and multiple guarantors, not built-in capital).

2. Paid-for explicit guarantee to MBS, not institutions.

3. Break up the duopoly implicitly stating Congress should open up the charters to other institutions.

4. Restructure and repurpose parts of the existing architecture.

5. End the status quo by finding areas of bipartisan agreement.

 

Overall, he is against "a government-dominated mortgage market with insufficient private capital to protect taxpayers, and insufficient competition to drive innovation." Basically, open up the system for competition, have a narrow, explicit government guarantee and restructure Fannie and Freddie into smaller guarantors. This would be in opposition to recapping and releasing, in opposition to fully re-capitalizing Fannie and Freddie and turning them into "ICBA" utilities but much closer to the original Jim Millstein plan.

 

Jennifer Jacobs‏Verified account @JenniferJJacobs 1m1 minute ago

NEW: Trump is leaning toward appointing Jerome Powell to be the next chairman of the Federal Reserve, sources tell me and @SalehaMohsin.

[Luke 532]

No retained portfolios...

[Guest cherzeca]

the "whatsoever" seems unlikely.  if FnF maintain their cash window, which is a big small bank desire, then FnF will alwyas have a portfolio of loans to be securitized....which is why i never give that rag much credit

[investorG]

No retained portfolios...

 

if the debate ever does shift to how large of a retained portfolio, that likely means we've cleared some earlier more dangerous hurdles -- like the ones that will be mentioned this Thursday aftn when the large bank guys get their turn in front of the House financial services sub committee. 

 

good luck everyone!  i'm betting that a whole new attitude comes out after jan1 and tax reform is resolved (win or lose).  time will tell.

[Luke 532]

Jeb Hensarling to retire... http://thehill.com/policy/finance/358040-gop-rep-jeb-hensarling-to-retire-after-end-of-current-term-report

[SnarkyPuppy]

Jeb Hensarling to retire... http://thehill.com/policy/finance/358040-gop-rep-jeb-hensarling-to-retire-after-end-of-current-term-report

 

Interesting.  This continues to be a mindf*.  Powell seems to be negative news.  Stevens, Corker, and Henslaring leaving their positions positive.

[DocSnowball]

From FMCC earnings call, quoting CEO Don Layton, interesting to note how he is positioning FMCC going forward

 

“First, I will address overall corporate financial and operating results, they were excellent on several levels. Second, I will get into the individual lines of business. Behind the specifics of each, you will hear the recurring theme of business transformation, a big part of which is going from the not-very-competitive past to the very-competitive present, where we compete as if there were 3 or 5 or 8 GSEs not just 2.”

 

I’m wondering how this happens. Perhaps some iteration of the Moelis blueprint, or Moelis part 2 after the companies are capitalized. Versus simply letting other competitors enter the market if they would like to. In any scenario, Fannie and Freddie don’t seem to be going away.

[rros]

I’m wondering how this happens.

It is happening in his *multi-GSEs* head. Maybe if he repeats it a thousand time he will have the next Fed chair Powell believe it too and save Freddie from real competition. In the meantime, we are stuck in the mud with no clarity going forward.

[Luke 532]

Alanna McCargo‏ @MyHomeMatters 24m24 minutes ago

 

‘If it were easy to get GSEs out of conservatorship, it would have been done already’ -Mark Calabria #innovateHousing

 

#InnovateHousing @MarkCalabria We are committed to not handing over the GSEs in conservatorship to the next administration.

 

Sounds like they're leaning towards "announce future, not immediate, exit from conservatorship"... point 5 in the attached Moelis slide.

[Luke 532]

https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire

[rros]

https://www.housingwire.com/articles/41714-mark-calabria-trump-administration-committed-to-ending-conservatorship?utm_source=dlvr.it&utm_medium=twitter&utm_campaign=housingwire

What is difficult is getting them out of conservatorship without rewarding evil speculators. Treasury does not want that no matter who the ocassional pencil pusher, Geithner, Lew, Mnuchin is.