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

[DocSnowball]

VALUATION ATTEMPT:

Back in Feb 2017, Judges Millet and Ginsburg wrote that our company is not undergoing "liquidation" in their opinion, and like a good corporate finance student I first calculated the net present value of my equity FNMAT as promised in the prospectus (8.25% dividends unless called back at par, valuing it as a perpetuity). If dividends are turned on in future it will be a delayed perpetuity and discounted further based on when dividends are turned on. I'm revisiting this today to compare this option (the odds of this best case scenario) to alternative investment decisions.

 

NPV = Dividend/(r-g) where r is the discount rate and g is the growth rate (assuming zero growth rate, and beta =1 for a low risk utility)

Using Professor Aswath Damodaran's discount rate teachings, Discount rate = Risk free rate + Implied Equity risk premium at current level of index*Beta = 2.37%+ (4.68%*1) = 7.05%

 

NPV whenever dividends turned on (example today)

      = 2.06/0.0705%

      = 29.22 FOR FNMAT

 

NPV if dividends turned on after capital raise completed 12/31/2020 as per Moelis blueprint (3 years from now)

29.22 discounted back at 7.05%

      = 24.00 for FNMAT

 

EDIT: based on this valuation and revaluing it as an option at current price of 6.87, markets are giving 28.6% chance of this working out. That is still a mispricing with the ever-changing narrative

[orthopa]

 

EDIT: based on this valuation and revaluing it as an option at current price of 6.87, markets are giving 28.6% chance of this working out. That is still a mispricing with the ever-changing narrative

 

 

Agree, we aren't all the way there yet but becoming increasingly likely that this works out favorably with a target of par for the preferred. Like I had mentioned back probably 300 pages ago my capital at stake is aligned with Berkowitz, Paulson etc. Ill take that any day in a situation that has the relationships we hashed out before.  I know a fear for some has been preferential treatment for those bringing suit against the gov but that is not the clean solution I believe the gov is working towards.

 

I was thinking too it really makes more sense now that Paulson and Ackman mentioned Corker working on a bill and targeted an early 2018 for the investment working out favorably. They knew Corkers actions, the time table laid out does not seem all that unrealistic now.

 

I think one has to look hard at passing up a possible ~400% return to par in some of the preferred issues +/- a div for the common which seems to be a bit of a black box.  Is the risk for more then a 400% return worth what you could lose in common? First thing I would say if I read this typed by someone else is fat chance the div gets restarted, and I agree. But why is the market pricing it in then? Its odd. The market is pricing this at a ~25% of success but respecting the dividend payouts the securities had.

 

..and to fuel my overwhelming confirmation biased I added more FNMAH today

[SnarkyPuppy]

 

EDIT: based on this valuation and revaluing it as an option at current price of 6.87, markets are giving 28.6% chance of this working out. That is still a mispricing with the ever-changing narrative

 

 

Agree, we aren't all the way there yet but becoming increasingly likely that this works out favorably with a target of par for the preferred. Like I had mentioned back probably 300 pages ago my capital at stake is aligned with Berkowitz, Paulson etc. Ill take that any day in a situation that has the relationships we hashed out before.  I know a fear for some has been preferential treatment for those bringing suit against the gov but that is not the clean solution I believe the gov is working towards.

 

I was thinking too it really makes more sense now that Paulson and Ackman mentioned Corker working on a bill and targeted an early 2018 for the investment working out favorably. They knew Corkers actions, the time table laid out does not seem all that unrealistic now.

 

I think one has to look hard at passing up a possible ~400% return to par in some of the preferred issues +/- a div for the common which seems to be a bit of a black box.  Is the risk for more then a 400% return worth what you could lose in common? First thing I would say if I read this typed by someone else is fat chance the div gets restarted, and I agree. But why is the market pricing it in then? Its odd. The market is pricing this at a ~25% of success but respecting the dividend payouts the securities had.

 

..and to fuel my overwhelming confirmation biased I added more FNMAH today

 

Those involved have generally already doubled and tripled down over the past couple of years when things looked arguably just as optimistic as they do now.

 

I'm still completely lost as to reconciling Ackmans praise and the fact that it seems directionally commons might not perform well. 

 

Also completely weirded out by henslaring "doubling down" on getting rid of F/F but comprimising  on other aspects of reform.  The presumption is ackman isn't an idiot, but I'm skeptical that corker doesn't have some mischievous plan in mind.  F/F shareholders have been personally attacking his name for years now, and it strikes me as odd that anyone in his position wouldn't try to harm shareholders for that reason alone. 

[Luke 532]

Also completely weirded out by henslaring "doubling down" on getting rid of F/F but comprimising  on other aspects of reform.  The presumption is ackman isn't an idiot, but I'm skeptical that corker doesn't have some mischievous plan in mind.

 

+1

[rros]

https://www.congress.gov/bill/115th-congress/house-bill/4560

 

I can understand someone seeing a link between this bill, Hensarling's FF hatred and Joe Light's article. But then, this was introduced by Rep Fench Hill, has no co-sponsors and will be voted on on Tuesday. Does it matter that Hensarling's name isn't there as in taking no part? The bill's new section clearly states "preservation of capital during periods of low net worth". I continue to believe this bill anticipates a move by Treasury/FHFA to retain dividends. Housing Trust funds are not part of the PSPAs or its amendments. They are part of HERA 08 and one way to handle these payments is by congressional action. Another one is by Watt undoing his prior pay-out move but here he may be of 2 minds unable to resolve the conflict. Would Hensarling ever support a bill that has as one of its titles "preservation of capital... " which is actually presented as a remedy?

 

Maybe I am being naive but it really makes no sense to pay out the funds (although the amount is peanuts) while attempting to build capital. I understand where IU and investorG are coming from but if there is talk of starting to retain earnings/building capital and a 40-page bill is making the rounds in the Senate pointing at (shareholder friendly) legislation in 2018, this bill makes sense. I know many will disagree. In general, a shareholder friendly bill that resolves all issues wins over administrative action that can be undone later on. 

 

I sense that the idea of a dysfunctional Congress has become so widespread and it is so in-grained in our minds that it's hard to believe there may be some kind of minimal accord. But maybe there is. Lastly, a conspiracy theory about a bill rumored to be friendly to appease investors so that the new Jumpstart sails through Congress seems far-fetched.

[rros]

You may be correct but it seems far-fetched to expect anything positive from Corker bill who has publicly asked to short GSE  stock and asked Watt to draw money from treasury ‘s line of credit for fun and he is well plugged into bank lobby.  He is the author of  Jumpstart bill and asked his staffer Bright to write a stupid bankcentric bill. Hard to believe anything positive from Corker. I do believe he tried to snuck in the tax bill that was not good for GSE’s and they didn’t buy into it. Nothing is secret in DC for long, if there was anything positive in his bill, the bill would have been released by now. This is all done in a haste to influence the tax bill and sneak in last minute, something devious. It is big money for large banks that is involved here. I think Trump is stepping into it, slowly (Hint: Wells Fargo)

Well, I speak out of my butt. But you seem to hear things and have sources... so we'll see.

[doc75]

I don’t  have sources and I don’t  I hear. I read on GSElinks.com  and the feeling is universal.  Joe light should have sources but he cites as ‘anonymous sources’  and there is no sign of a bill either. Right after they throw a carrot at us of a par, they disclose the reauthorization of jumpstart bill that would stop the clock for another 12 months at a standstill.

 

 

You may be correct but it seems far-fetched to expect anything positive from Corker bill who has publicly asked to short GSE  stock and asked Watt to draw money from treasury ‘s line of credit for fun and he is well plugged into bank lobby.  He is the author of  Jumpstart bill and asked his staffer Bright to write a stupid bankcentric bill. Hard to believe anything positive from Corker. I do believe he tried to snuck in the tax bill that was not good for GSE’s and they didn’t buy into it. Nothing is secret in DC for long, if there was anything positive in his bill, the bill would have been released by now. This is all done in a haste to influence the tax bill and sneak in last minute, something devious. It is big money for large banks that is involved here. I think Trump is stepping into it, slowly (Hint: Wells Fargo)

Well, I speak out of my butt. But you seem to hear things and have sources... so we'll see.

 

Pardon me for being daft, but what exactly is the benefit of throwing a carrot at shareholders in this way?  How does it grease the wheels of anything in particular (e.g. the jumpstart reauth)?

 

 

[doc75]

Think about it. If we were only told about reauthorization of jumpstart (that is real and happening this Tuesday) ? Instead we were told  of a rumor that we will be made whole, to sort of calm things down.  Joe Light did not even bring up once of jumpstart. I am relatively new to this but I read that there have been many rumors to date that were no less than fake news. Check out how many have been tweeting to their congressman to defeat jumpstart.  Calming things down is in Corker’s interest who started jumpstart in the first place.

 

Pardon me for being daft, but what exactly is the benefit of throwing a carrot at shareholders in this way?  How does it grease the wheels of anything in particular (e.g. the jumpstart reauth)?

 

Well yes, I had thought about it and wondered if that's what you meant.  I still don't get it.

 

The fake news only placates GSE shareholders.    Nobody's been worried about our outrage for a decade so I don't see why they're too concerned with calming us down right now.  Especially with all the court decisions going the gov'ts way.    Would the congressmen be receiving materially more angry tweets about jumpstart without the subterfuge?   

 

I agree that it seems something screwy is going on.  I just don't see the point of this little PR exercise, if that's what it is.  My initial thought was that it provided a nice exit for some folks. 

 

 

 

[rros]

My initial thought was that it provided a nice exit for some folks.

You mean like the 2015 exit made possible by an orchestrated leak from... was it Alpha Capital Partners in DC, before everything tanked a few months after that? It's possible.

[doc75]

My initial thought was that it provided a nice exit for some folks.

You mean like the 2015 exit made possible by an orchestrated leak from... was it Alpha Capital Partners in DC, before everything tanked a few months after that? It's possible.

 

I wasn't thinking of any specific analogy -- didn't even know about the 2015 orchestrated leak.  To me it's simply a more rational motive for spreading the rumour.

 

 

[rros]

Height Securities updates on GSEs

 

Height Securities says the outlook for Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) improved significantly over the last week as housing finance reform was taken up by Congress.

"While a copy of the draft is not available at present, there are some additional details emerging. The GSEs will either lose their charters or the charters will be very limited. The entities will be considered guarantors and regulated by the Federal Housing Finance Authority," updates the firm.

"We expect the GSEs will continue to operate in conservatorship until they are recapitalized," adds Height.

 

[Luke 532]

Dick Bove discusses GSE's this morning with Maria Bartiromo starting at the 3 minute, 45 second mark: http://video.foxbusiness.com/v/5677611451001/?playlist_id=1866680862001#sp=show-clips

 

[Luke 532]

Mayopoulos today: http://fortune.com/2017/12/12/on-leading-fannie-mae-outlook/

 

(paraphrased) "We've paid them back plus about $50 billion."

 

When is the last time Mayopoulos publicly discussed the payments to Treasury?

[investorG]

Think about it. If we were only told about reauthorization of jumpstart (that is real and happening this Tuesday) ? Instead we were told  of a rumor that we will be made whole, to sort of calm things down.  Joe Light did not even bring up once of jumpstart. I am relatively new to this but I read that there have been many rumors to date that were no less than fake news. Check out how many have been tweeting to their congressman to defeat jumpstart.  Calming things down is in Corker’s interest who started jumpstart in the first place.

 

 

time will tell whether joe's reporting was accurate or fake but it appears the market is isn't buying its accuracy with the illiquid preferreds still close to 20pct of par.

[investorG]

Height Securities updates on GSEs

 

Height Securities says the outlook for Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) improved significantly over the last week as housing finance reform was taken up by Congress.

"While a copy of the draft is not available at present, there are some additional details emerging. The GSEs will either lose their charters or the charters will be very limited. The entities will be considered guarantors and regulated by the Federal Housing Finance Authority," updates the firm.

"We expect the GSEs will continue to operate in conservatorship until they are recapitalized," adds Height.

 

interesting. the market is in 'show-me' mode.  FnF investors used up their 9 lives of hope a long time ago.

 

[orthopa]

Height Securities updates on GSEs

 

Height Securities says the outlook for Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) improved significantly over the last week as housing finance reform was taken up by Congress.

"While a copy of the draft is not available at present, there are some additional details emerging. The GSEs will either lose their charters or the charters will be very limited. The entities will be considered guarantors and regulated by the Federal Housing Finance Authority," updates the firm.

"We expect the GSEs will continue to operate in conservatorship until they are recapitalized," adds Height.

 

interesting. the market is in 'show-me' mode.  FnF investors used up their 9 lives of hope a long time ago.

 

This is in reference to the Hensarling bill correct? Not the Corker/Warner bill that was reported to be friendly to preferred.

 

Hensarling said in his release he wanted the charters repealed.

[SnarkyPuppy]

http://www.valuewalk.com/2017/12/fannie-mae-foes-gse-reform/

 

Seems one potential outcome to me is bank-centric reform is passed by congress (facilitated through jumpstart extension) as referenced in the link above.  Bulls will argue that this doesn't:

 

1. Maximize the value of governments warrants

2. Solve for outstanding litigation

 

• Regarding point 1:  Maybe we're missing the true incentive structure here?  Is it possible that maximum economic benefit for the US government is truly the #1 incentive driving trump/mnuchin decision making?  Is it possible that alternative incentives are involved?   
  
  • Mnuchin worked 17 years for a "TBTF" bank and likely has large incentive to increase business for the banks.  Maybe his relationships w/ Paulson and Berkowitz are only a small segment of his broader network which could benefit from housing finance reform?   
    
  • If re-election is the #1 incentive at play, it's possible that providing economic benefits to large banks provides reciprocity in the form of fundraising for the 2020 election?
    
  • If tax reform is the #1 incentive at play (has more legacy value), it's possible that conceding value to shareholders in favor of increasing likelihood of passing tax reform is a rational move.
    

     

  [*]Regarding point 2:  lol.

 

Just trying to provide an alternative perspective here.    I think it's increasingly obvious where Congress is directionally headed. 

[investorG]

http://www.valuewalk.com/2017/12/fannie-mae-foes-gse-reform/

 

Seems one potential outcome to me is bank-centric reform is passed by congress (facilitated through jumpstart extension) as referenced in the link above.  Bulls will argue that this doesn't:

 

1. Maximize the value of governments warrants

2. Solve for outstanding litigation

 

• Regarding point 1:  Maybe we're missing the true incentive structure here?  Is it possible that maximum economic benefit for the US government is truly the #1 incentive driving trump/mnuchin decision making?  Is it possible that alternative incentives are involved?   
  
  • Mnuchin worked 17 years for a "TBTF" bank and likely has large incentive to increase business for the banks.  Maybe his relationships w/ Paulson and Berkowitz are only a small segment of his broader network which could benefit from housing finance reform?   
    
  • If re-election is the #1 incentive at play, it's possible that providing economic benefits to large banks provides reciprocity in the form of fundraising for the 2020 election?
    
  • If tax reform is the #1 incentive at play (has more legacy value), it's possible that conceding value to shareholders in favor of increasing likelihood of passing tax reform is a rational move.
    

     

  [*]Regarding point 2:  lol.

 

Just trying to provide an alternative perspective here.    I think it's increasingly obvious where Congress is directionally headed.

 

it's unfortunate that re-jumpstart is happening but it is what it is.

 

mnuchin however likely still has some power unless they get 2/3 majority to over-ride any veto on housing reform.

 

and with the congress having a good chance to flip in 2019, if trump/mnuchin are still around, they can tell Pelosi and Maxine waters to hold off on any legislation until early 2019 when they'd get more of what they want.

 

so hopefully, this is why everyone would come together in 2018 and get a bill done that is balanced and gives each side a little of what they want.  the bank lobby and republicans probably want it to get done this time. 

 

[investorG]

Height Securities updates on GSEs

 

Height Securities says the outlook for Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) improved significantly over the last week as housing finance reform was taken up by Congress.

"While a copy of the draft is not available at present, there are some additional details emerging. The GSEs will either lose their charters or the charters will be very limited. The entities will be considered guarantors and regulated by the Federal Housing Finance Authority," updates the firm.

"We expect the GSEs will continue to operate in conservatorship until they are recapitalized," adds Height.

 

interesting. the market is in 'show-me' mode.  FnF investors used up their 9 lives of hope a long time ago.

 

This is in reference to the Hensarling bill correct? Not the Corker/Warner bill that was reported to be friendly to preferred.

 

Hensarling said in his release he wanted the charters repealed.

 

the current charters probably will be repealed -- ie the implicit guarantee model is almost certainly dead.  hopefully the companies continue and thrive in a new form!

[Luke 532]

Finance Bill Big for Fannie Mae, Freddie Mac

https://money.usnews.com/investing/stock-market-news/articles/2017-12-13/fannie-mae-freddie-mac?src=usn_tw

[Midas79]

Do we know yet whether HR 4560 is stand-alone or will be attached to another bill? I don't know enough about the process here. I didn't think something that would be attached to other legislation would need to pass committee or be voted on separately.

[Guest cherzeca]

Do we know yet whether HR 4560 is stand-alone or will be attached to another bill? I don't know enough about the process here. I didn't think something that would be attached to other legislation would need to pass committee or be voted on separately.

 

it looks like it is stand alone.  it has just been reported out of committee. still needs to be passed by house (likely) and senate (if 60 votes needed, as i think it needs, then who knows)

[TonyG]

at what point does treasury/mnuchin need to speak up on this(provided he's pro fannie freddie as i believe he is)? or are they just waiting for the tax votes to go through first.

[DocSnowball]

Scratching my head how this bill is coherent with the RNC resolution! Inverting, we all knew about Hensarling and the historical republican position re: Anti recap and release of the GSEs, so I wonder what sequence of events and people led to the GSE shareholder friendly resolution being passed back in July - just doesn’t add up. I came close to hanging up on this investment after looking at the rider extension in this bill, then reminded myself my thesis was never based on trusting the republican legislators to get this done.

 

This is, as it has been since February, a thesis based on the motives of the administration with an easy 100B plus and a political win on a platter while giving Obama a black eye, and the GSEs being irreplaceable. Good luck everyone! 

[Midas79]

Do we know yet whether HR 4560 is stand-alone or will be attached to another bill? I don't know enough about the process here. I didn't think something that would be attached to other legislation would need to pass committee or be voted on separately.

 

it looks like it is stand alone.  it has just been reported out of committee. still needs to be passed by house (likely) and senate (if 60 votes needed, as i think it needs, then who knows)

 

If this is true I see it as great news. Any administrative reform/4th amendment would come at Trump's request, and he would hardly sign this bill into law in that case. I can't see it passing, getting vetoed, and passing again with 2/3 happening before January 1.

 

If this bill passes and Trump does sign it....well, at that point it's likely "abandon ship" for me.