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

[investorG]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

 

maximizing warrants does not seem to be a priority for any congressperson or senator, even if it is for some people on the message boards and moelis / ackman / rnc.  I used to believe it made sense to believe in the warrants' appeal but no one in power has spoken up, despite many opportunities to do so.

 

[Guest cherzeca]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

 

maximizing warrants does not seem to be a priority for any congressperson or senator, even if it is for some people on the message boards and moelis / ackman / rnc.  I used to believe it made sense to believe in the warrants' appeal but no one in power has spoken up, despite many opportunities to do so.

 

mnuchin very much wants to be trump's shining boy imo. eg didnt lambast trump over charlottesville notwithstanding his jewish heritage (emphasis on ish as i think his true heritage is $GS). i think mnuchin very much wants to take credit for taxes and soon infrastructure by giving trump a $100B check courtesy of the warrants.  just wouldnt be mnuchin like (given his $GS heritage) to piss away this opportunity.  you can take the man out of $GS but you cant...

[orthopa]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

 

maximizing warrants does not seem to be a priority for any congressperson or senator, even if it is for some people on the message boards and moelis / ackman / rnc.  I used to believe it made sense to believe in the warrants' appeal but no one in power has spoken up, despite many opportunities to do so.

 

I think you probably have'nt heard anyone come forward to discuss monetizing the warrants yet because that discussion includes treatment of both preferred and common shareholders. Maybe once the language of the new bill is out "we" and others in power can start to extrapolate about second order benefits for gov.

[SnarkyPuppy]

@orthopa

 

riddle me this:  mnuchin has been quiet on GSEs, but very effective on tax reform. tell me when was last you heard of cohn.  so mnuchin seems to have positioned himself to be a power player generally, and on on GSEs specifically, now that he is bringing home trump's bacon on taxes, and one would think all for GSE shareholder betterment inasmuch as treasury is an 80% shareholder.  but is there a trap in this scenario?

 

as price goes up, you have to figure out whether risk is going down even more so

 

maximizing warrants does not seem to be a priority for any congressperson or senator, even if it is for some people on the message boards and moelis / ackman / rnc.  I used to believe it made sense to believe in the warrants' appeal but no one in power has spoken up, despite many opportunities to do so.

 

mnuchin very much wants to be trump's shining boy imo. eg didnt lambast trump over charlottesville notwithstanding his jewish heritage (emphasis on ish as i think his true heritage is $GS). i think mnuchin very much wants to take credit for taxes and soon infrastructure by giving trump a $100B check courtesy of the warrants.  just wouldnt be mnuchin like (given his $GS heritage) to piss away this opportunity.  you can take the man out of $GS but you cant...

 

Possible we are conflating incentives here?  I think you're right, but can also very easily see a reality whereby re-election incentives are #1 and maximizing benefit to taxpayers (by monetizing warrants) is not actually important to trump and team. 

 

What if Trump and Mnuchin view odds of re-election to be greater by restructuring and turning GSEs over to bank-owned institutions (increase fundraising and support by large banks in 2020), as opposed to reinstating the old model (which by the way, the average genius voter considers synonymous with the cause of the financial crisis)? 

 

Maximizing value of warrants implies this heavy assumption that trump and mnuchin have fully aligned incentives with the taxpayer.  Big assumption. 

 

Removing any contingent liabilities (outstanding litigation) by restructuring back to old model could be seen as a risk acceptance of a low probability outcome (NWS reversal), for which they can blame the Obama administration for when the time comes. 

 

I'm the contrarian here in a thread of contrarians, but maybe it's not so crazy that the prefs are still trading at such a wide discount.

 

I'm very long - just like to pose these questions to the group to get a sense from much smarter people than myself. 

 

[Guest cherzeca]

@snarky

 

contrarians welcome.  i just think infrastructure is a big item for trump (big part of MAGA) and it should be bipartisan except how to fund.  there are going to be some Rs who wont want to appropriate big money for it, and some Ds are nevertrump.  i dont see how deal makers like trump/mnuchin throw away $100B (which is what the MBA agenda would seem to imply).  we shall see.

[Eye4Valu]

$100B not being important to Trump? That will be a cold day in hell!

[SnarkyPuppy]

$100B not being important to Trump? That will be a cold day in hell!

 

Agree if it goes into his pocket.  Not the case here.

[tiddman]

What got my attention recently was for the first time in a long time we saw what looks like a clear catalyst to resolve what everyone agrees is an untenable situation. The tax plan forces their hand and there finally seems to be appetite to do something.  At the same time we can't expect the politicians to make rational comments of any kind.  Just listen to comments from Hensarling:  "I continue to believe that a government guarantee in the secondary mortgage market remains a bad idea, a risky idea, and an unneeded idea," .... "I also believe the idea is not going away anytime soon and I fully expect it to be part of any successful reform effort in this Congress."

 

"This is a terrible idea but is probably necessary" pretty much sums up the view of so many politicians, who don't grasp the financial consequences but are more worried about the political, and are more likely to obstruct than facilitate.

 

Also, this is a situation that can resolve in many different ways and isn't going to end up tied up with a pretty bow on it which is also what makes it hard to quantify.  Could be a recapitalization, could be a reinstatement of the preferred dividends, could be a combining or splitting of the companies, who knows what will happen to the "implied government backing" etc. However the current situation of a quasi-public company funneling billions in profits to the gummint based on a crisis-era fiat, perhaps the last such fog-of-war regulations that are still in place, can't continue.

[DocSnowball]

More Uncertainty now (range of outcomes) versus Risk of loss (higher probability of negative outcomes) as in the past

 

For me, the Cato institute discussion back in July was an aha moment, after the Moelis blueprint showed a viable plan forward -  in that discussion, those advocating for GSEs to be wound down basically came to admitting that the 30 year mortgage would also need to end with them!

[investorG]

What got my attention recently was for the first time in a long time we saw what looks like a clear catalyst to resolve what everyone agrees is an untenable situation. The tax plan forces their hand and there finally seems to be appetite to do something.  At the same time we can't expect the politicians to make rational comments of any kind.  Just listen to comments from Hensarling:  "I continue to believe that a government guarantee in the secondary mortgage market remains a bad idea, a risky idea, and an unneeded idea," .... "I also believe the idea is not going away anytime soon and I fully expect it to be part of any successful reform effort in this Congress."

 

"This is a terrible idea but is probably necessary" pretty much sums up the view of so many politicians, who don't grasp the financial consequences but are more worried about the political, and are more likely to obstruct than facilitate.

 

Also, this is a situation that can resolve in many different ways and isn't going to end up tied up with a pretty bow on it which is also what makes it hard to quantify.  Could be a recapitalization, could be a reinstatement of the preferred dividends, could be a combining or splitting of the companies, who knows what will happen to the "implied government backing" etc. However the current situation of a quasi-public company funneling billions in profits to the gummint based on a crisis-era fiat, perhaps the last such fog-of-war regulations that are still in place, can't continue.

 

nice post.

 

imo the implied guarantee is almost certainly a thing of the past.

 

and reinstating dividends is possible but seems counter-productive relative to goals of making them well capitalized.  it's hard to tell whether the market is pricing FNMAS and FNMAT higher than others due to liquidity or dividend potential, perhaps both.

 

[Midas79]

and reinstating dividends is possible but seems counter-productive relative to goals of making them well capitalized.  it's hard to tell whether the market is pricing FNMAS and FNMAT higher than others due to liquidity or dividend potential, perhaps both.

 

I agree that turning on junior pref dividends hurts recapitalization, at least in the short term. The only circumstance in which it would help is if the companies want to issue new common shares to rebuild capital and want to offer a common dividend (for more attractive pricing), thus forcing a reinstatement of junior pref dividends.

 

I still think it is probable we get a voluntary conversion to common offer in the near future. I have now rebalanced 100% to prefs and all in Fannie, whose circulars do not allow any amendments without approval from 2/3 of shareholders.

 

FNMAT is a good bit more liquid than most other pref series, but FNMAS is far more liquid (using 30-day volume averages as a measure of liquidity). The liquidity gap between FNMAS and FNMAT greatly exceeds that between FNMAT and the other series. That's why I include FNMAT but not FNMAS when looking at correlation between price as a % of par and dividend yield.

 

The R^2 value is well down in the last few days, sitting at 0.72 (0.75 on the bid and 0.69 on the ask). To me this signals an increased probability assumed by the market that we see a conversion offer or redemption as opposed to a reinstatement of dividends, though it is an increase off a low base.

[rros]

and reinstating dividends is possible but seems counter-productive relative to goals of making them well capitalized.  it's hard to tell whether the market is pricing FNMAS and FNMAT higher than others due to liquidity or dividend potential, perhaps both.

 

I agree that turning on junior pref dividends hurts recapitalization, at least in the short term. The only circumstance in which it would help is if the companies want to issue new common shares to rebuild capital and want to offer a common dividend (for more attractive pricing), thus forcing a reinstatement of junior pref dividends.

 

I still think it is probable we get a voluntary conversion to common offer in the near future. I have now rebalanced 100% to prefs and all in Fannie, whose circulars do not allow any amendments without approval from 2/3 of shareholders.

 

FNMAT is a good bit more liquid than most other pref series, but FNMAS is far more liquid (using 30-day volume averages as a measure of liquidity). The liquidity gap between FNMAS and FNMAT greatly exceeds that between FNMAT and the other series. That's why I include FNMAT but not FNMAS when looking at correlation between price as a % of par and dividend yield.

 

The R^2 value is well down in the last few days, sitting at 0.72 (0.75 on the bid and 0.69 on the ask). To me this signals an increased probability assumed by the market that we see a conversion offer or redemption as opposed to a reinstatement of dividends, though it is an increase off a low base.

fnmat has a lot of weak hands. Or maybe tired hands. Or... someone planning on big exit upon some kind of announcement. Therefore, moving their stash to the much more liquid fnmas/fmckj.

[Midas79]

At 31:58 mins, Jan 3rd meeting. Gary Cohn says they have 200 billion dollar for infrastructure and did not say where it is. Could it be GSE’s?

 

https://www.c-span.org/video/?438744-1/gary-cohn-discusses-2018-legislative-agenda

 

Good find. But Cohn says that the administration has $200B that they can "lever into well over $1T", and I don't see how the warrant can be "levered." The Moelis plan involves $100B from sale of shares obtained with the warrant and that is over the course of several years.

[merkhet]

At 31:58 mins, Jan 3rd meeting. Gary Cohn says they have 200 billion dollar for infrastructure and did not say where it is. Could it be GSE’s?

 

https://www.c-span.org/video/?438744-1/gary-cohn-discusses-2018-legislative-agenda

 

Good find. But Cohn says that the administration has $200B that they can "lever into well over $1T", and I don't see how the warrant can be "levered." The Moelis plan involves $100B from sale of shares obtained with the warrant and that is over the course of several years.

 

What he's describing is a sort of public & private partnership where the government puts in $1 for every $4 that the private sector puts in. The details on it have been very vague, but we'll probably get more clarity in the next few weeks.

 

Also, my back of the envelope math says that the $100 billion would be around $125 billion post-tax reform.

[Guest cherzeca]

i would think the readjustment in value to the deferred tax assets would occur as of the end of quarter in which tax act become law, so i do think that trump has bought the GSEs a quarter.  there was also some commentary that this avoids a possible required reduction in mandatory spending under the pay as you go act until 2019.

[Midas79]

I believe that Trump waiting until after January 1 means that the DTAs will be written down in Q1 2018, the losses and negative net worth would be reported in the Q1 filing in April, and the draw from Treasury would happen on June 30, 2018.

 

If he were to sign the tax bill before January 1 the loss would be recognized in Q4 2017 and the draw would be March 31, 2018.

 

I have mixed feelings about the timing of Trump signing the bill. I think overall the delayed signing is positive for shareholders: assuming that the draw happening in June means that Congress is less likely to pass a knee-jerk bill (probably bad for shareholders imo) before the administration can work out their own reform.

 

Is it possible for HR 4560-type language (extension of Jumpstart) to be put into the upcoming spending bill? Isn't that how we ended up with the first Jumpstart? That possibility really has me worried.

[rros]

Is it possible for HR 4560-type language (extension of Jumpstart) to be put into the upcoming spending bill? Isn't that how we ended up with the first Jumpstart? That possibility really has me worried.

Yes, that is exactly how it happened in the past. The question is, will Trump go easy on it like Obama did?

[Guest cherzeca]

fwiw:  https://www.politico.com/story/2017/12/20/congress-government-shutdown-2017-trump-306655

 

"Speaker Paul Ryan’s plan to keep the government funded past Friday now involves a simple funding extension through Jan. 19 — a last-minute course reversal that is roiling the conference's most conservative flank as well as defense hawks.

 

Leaders could get some help from the calendar: With Christmas near, members are eyeing their travel schedules as they talk about punting the prickliest issues until next month.

 

The GOP’s current funding strategy would appear to shelve nearly every tricky political issue until Jan. 19. That includes the must-pass items, like funding for the Children’s Health Insurance Program and national surveillance powers that run out Dec. 31 — though those items could see short-term extensions."

 

 

[DocSnowball]

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx

[rros]

Thanks Doc. Very good. Sea change.

 

Statement from FHFA Director Melvin L. Watt on Capital Reserve for Fannie Mae and Freddie Mac

FOR IMMEDIATE RELEASE

12/21/2017

“The Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, and the Department of the Treasury have agreed to reinstate a $3 billion capital reserve amount under the Senior Preferred Stock Purchase Agreements for each Enterprise beginning in the fourth quarter of 2017.  While it is apparent that a draw will be necessary for each Enterprise if tax legislation results in a reduction to the corporate tax rate, FHFA considers the $3 billion capital reserve sufficient to cover other fluctuations in income in the normal course of each Enterprise’s business.  We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.”

[rros]

I am thinking Berkowitz is about to double his money today.

[DocSnowball]

I’d been wondering why contents of the Senate bill would be leaked to Bloomberg, by those not friendly to GSEs. Now it makes sense, to prepare the ground for this capital retention perhaps?

[investorG]

good news but no celebrating yet, imo --- they could still pass re-jumpstart without the housing trust fund withholding addition (now that watt has front-run that).

[Midas79]

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx

 

Thank you for posting this. Here are what I think are the most important points:

 

• The Fourth Quarter Dividend section says that the entire NWS dividend minus $2.4B will be paid on December 31.
  

• Notwithstanding the foregoing, for each Dividend Period from January 1, 2018, and thereafter, following any Dividend Payment Date with respect to which the Board of Directors does not declare and pay a dividend or declares and pays a dividend in an amount less than the Dividend Amount, the Applicable Capital Reserve Amount shall thereafter be zero. For the avoidance of doubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no Dividend Amount shall accrue or be payable for such Dividend Period.

  If Watt tries to hold back any money the capital reserve immediately falls to zero.
  
• The Increase in Liquidation Preference section says that Treasury's liquidation preference has increased by $3B for each company.
  

 

My initial thoughts:

• Overall I don't think this is slam-dunk great news, or even very good news at that. Watt basically cannot choose to hold back capital from this point forward; if he does then the reserve amount drops to zero, making it extremely costly (an extra $3B per company added to Treasury's liquidation preference) to do so.
  
• The liquidation preference went up by $3B (per company) anyway. This is essentially a draw of $3B for each company, though that section may have only been included so that Treasury "gets something out of the deal."
  
• The NWS continues. The only possible positive spin here is that the only purpose of this agreement was to get it in ahead of any HR 4560/Jumpstart language that could be included in an end-of-year spending bill. HR 4560 states that any agreements made between FHFA and Treasury after January 1, 2018 could not change NWS-type language established before that date, so Treasury and FHFA had to act quickly.
  
• The language in FHFA's statement is interesting.
  

  We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.

  The words "contemplate" and "exigent circumstances" leave a lot of wiggle room, even though the letters themselves don't seem to.
  

[investorG]

https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-from-FHFA-Director-Melvin-L-Watt-on-Capital-Reserve-for-Fannie-Mae-and-Freddie-Mac.aspx

 

Thank you for posting this. Here are what I think are the most important points:

 

• The Fourth Quarter Dividend section says that the entire NWS dividend minus $2.4B will be paid on December 31.
  

• Notwithstanding the foregoing, for each Dividend Period from January 1, 2018, and thereafter, following any Dividend Payment Date with respect to which the Board of Directors does not declare and pay a dividend or declares and pays a dividend in an amount less than the Dividend Amount, the Applicable Capital Reserve Amount shall thereafter be zero. For the avoidance of doubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no Dividend Amount shall accrue or be payable for such Dividend Period.

  If Watt tries to hold back any money the capital reserve immediately falls to zero.
  
• The Increase in Liquidation Preference section says that Treasury's liquidation preference has increased by $3B for each company.
  

 

My initial thoughts:

• Overall I don't think this is slam-dunk great news, or even very good news at that. Watt basically cannot choose to hold back capital from this point forward; if he does then the reserve amount drops to zero, making it extremely costly (an extra $3B per company added to Treasury's liquidation preference) to do so.
  
• The liquidation preference went up by $3B (per company) anyway. This is essentially a draw of $3B for each company, though that section may have only been included so that Treasury "gets something out of the deal."
  
• The NWS continues. The only possible positive spin here is that the only purpose of this agreement was to get it in ahead of any HR 4560/Jumpstart language that could be included in an end-of-year spending bill. HR 4560 states that any agreements made between FHFA and Treasury after January 1, 2018 could not change NWS-type language established before that date, so Treasury and FHFA had to act quickly.
  
• The language in FHFA's statement is interesting.
  

  We, therefore, contemplate that going forward Enterprise dividends will be declared and paid beyond the $3 billion capital reserve in the absence of exigent circumstances.

  The words "contemplate" and "exigent circumstances" leave a lot of wiggle room, even though the letters themselves don't seem to.
  

 

I think 'contemplate' is a good word for us.  and the fact that it's a joint agreement with Tsy on board.

 

I also guess that your concerns on watt withholding future dividends isn't too big of a deal because watt's made it clear he's not going to recapitalize the companies on his own.

 

all the signs point to a real effort to get something done in 1h 2018, and this does not get in that way.

 

i'm most concerned with re-jumpstart sneaking in these last few days and mnuchin losing negotiating leverage (assuming he's a balanced actor, which we don't completely know yet).