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

[Guest cherzeca]

"the banks likely believe 2018 is their best chance to pass something friendly to them. 

 

they need the small banks (who own preferred) on board, as well as the lawsuits (preferred) gone."

 

agreed.  and apparently they dont think that they need treasury on board too, or that treasury doesnt care about >$100B of taxpayer foregone profit...which would all go into a potus slush fund (likely not going to pay healthcare subsidies)...methinks that might get treasury's attention

[Eye4Valu]

So it appears administrative reform is still most probable? I would think Mnuchin would craft something more favorable than Corker/Warner. Scotus is still a big wild card out there.

[Midas79]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

[Guest cherzeca]

So it appears administrative reform is still most probable? I would think Mnuchin would craft something more favorable than Corker/Warner. Scotus is still a big wild card out there.

 

i suppose c/w may have had staff look at the litigation and conclude that preferreds have stronger legal case than common, hence lets treat former better than latter.  of course, the legal landscape could change

[orthopa]

More..."The Federal Housing Finance Agency, which controls Fannie and Freddie, would direct the companies to sell or transfer their assets and then put them in receivership, the people said.

 

In a receivership, funds are available to common shareholders only after covering more senior claims, such as the FHFA’s expenses as a receiver, the government’s securities and preferred shareholders."

 

I looked last Q and in a liquidation scenario there was just enough to cover Jr Preferred and common got nothing. Will have to look at most recent Q.

 

I assume that your analysis assumed that the seniors were declared repaid? Because otherwise it seems to me that juniors and common get nothing at all.

 

This would be another reason to own the lower-yielding prefs then. I had thought the "flattening of the curve" of price with respect to dividend yield was due to an anticipated conversion to common only based on par/stated value, but receivership that actually leaves enough money for juniors would be another reason.

 

Correct seniors declared prepaid

 

Thanks.

 

How do you account for the seniors disappearing from the balance sheet? Just wipe them away and increase accumulated deficit by the same amount, leaving total equity unchanged? In that case Fannie's last 10-Q showed around $3.8B of total equity, only enough to pay off 20% of the $19B in junior prefs. If you don't mind, how did you come to your conclusion?

 

I was looking at it in receivership and 1B liquidation value. Ill have to find/dig up my notes but I thought I got to just under ~20B left  after and 19B of preferred. 

[orthopa]

@investorG

 

if compass is right (big if) that there is a 10% chance of any bill, whether or not this bill with a section entitled pending further discussion, passing this year, then fnma is overly-discounted.

 

Big if is right. If you look back at compass comments over the last couple of years they are in the dark just as much as anyone else and have been mostly wrong on their predictions all along. They did and still may have a $1 target value on common.

[Guest cherzeca]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

 

totally agree. except last spending bill had no jumpstart, and only jumpstart attempt was in house fin serv ctee bill that nevr got anywhere and never would because it cut off trust fund contributions too.  so we'll see about the next short term spending bill, likely one of many more

[investorG]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

 

would take huge guts to pre-emptively cancel the sr preferred before a deal is attempted between all the parties.  I doubt it happens.

[Midas79]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

 

would take huge guts to pre-emptively cancel the sr preferred before a deal is attempted between all the parties.  I doubt it happens.

 

Well, cancelling the seniors would have to be done in exchange for other considerations and not just a giveaway of $193B in liquidation preference. I always saw cancelling the seniors as a way of settling the lawsuits because it would end the NWS and would avoid Treasury being subject to an unpredictable court-mandated remedy down the road. I just don't know if the plaintiffs would be willing to accept only that in exchange for dropping the suits.

 

Given that the lawsuits are proceedingly very slowly and there is little hope of a near-term catalyst then I concede your point: Mnuchin likely won't take large-scale action like this without negative developments (for Treasury) in the courts.

[Guest cherzeca]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

 

would take huge guts to pre-emptively cancel the sr preferred before a deal is attempted between all the parties.  I doubt it happens.

 

Well, cancelling the seniors would have to be done in exchange for other considerations and not just a giveaway of $193B in liquidation preference. I always saw cancelling the seniors as a way of settling the lawsuits because it would end the NWS and would avoid Treasury being subject to an unpredictable court-mandated remedy down the road. I just don't know if the plaintiffs would be willing to accept only that in exchange for dropping the suits.

 

Given that the lawsuits are proceedingly very slowly and there is little hope of a near-term catalyst then I concede your point: Mnuchin likely won't take large-scale action like this without negative developments (for Treasury) in the courts.

 

agree with all of this.

 

i have been thinking about the whole issue of housing finance as the mashup of politics/policy and finance.  while i get that mnuchin (and potus) are now politicians, they have been deal guys all their life, financiers in the RE space.  i just assume that they are looking at GSE reform differently than corker/warner and congress.

 

now if you get this, where that gets you i dont know.  but it might get you to a place where the deal guy mentality at some point, after continued policy/political inaction, simply says, hey this fix is doable and it is simply a matter of common sense deal making/finance.  let's claim another victory and move on.

[Midas79]

Just brainstorming here. What considerations would Treasury be willing to take in return for the seniors being declared repaid and either cancelling or exercising the warrants, allowing a recap to happen using retained earnings and equity issues? Treasury would also have to keep some sort of diminishing backstop in place while the recap happens so that's another thing that would need extra considerations in exchange for.

 

• Some portion, let's say 1/5, of all future profits (up to a certain amount to offset Treasury's loss of the seniors and warrants)
  
• Another g-fee increase, the proceeds of which go to Treasury (same)
  
• No future lobbying
  
• Increased support for affordable housing funds (a sop to Democrats for political capital purposes)
  
• Mortgage assistance for downtrodden areas (same)
  

 

Again these are just throwing-stuff-at-the-wall ideas without regard to plausibility or even good sense in some cases. The first two violate all sense of fairness in that the seniors would be re-repaid, but I don't get the vibe from Mnuchin or Trump that that matters at all.

 

Even if these don't seem like enough reason to give up around $300B of claims ($193B of senior liquidation preference and around $100B for warrants), Trump could declare victory already because the GSEs have paid back so much more than they were given, and he can still try to claim releasing them as an anti-Obama act. But the things on this list allow him to declare an even bigger victory, something I can definitely see as attractive to him.

 

 

Aside: I guess that RNC resolution was basically meaningless? I don't recall hearing it addressed or mentioned by any major player at any point, and prominent Republicans in the Senate, as well as Hensarling, are saying and doing things that run directly counter to the resolution.

[rros]

Just brainstorming here. What considerations would Treasury be willing to take in return for the seniors being declared repaid and either cancelling or exercising the warrants, allowing a recap to happen using retained earnings and equity issues? Treasury would also have to keep some sort of diminishing backstop in place while the recap happens so that's another thing that would need extra considerations in exchange for.

 

• Some portion, let's say 1/5, of all future profits (up to a certain amount to offset Treasury's loss of the seniors and warrants)
  
• Another g-fee increase, the proceeds of which go to Treasury (same)
  
• No future lobbying
  
• Increased support for affordable housing funds (a sop to Democrats for political capital purposes)
  
• Mortgage assistance for downtrodden areas (same)
  

 

Again these are just throwing-stuff-at-the-wall ideas without regard to plausibility or even good sense in some cases. The first two violate all sense of fairness in that the seniors would be re-repaid, but I don't get the vibe from Mnuchin or Trump that that matters at all.

 

Even if these don't seem like enough reason to give up around $300B of claims ($193B of senior liquidation preference and around $100B for warrants), Trump could declare victory already because the GSEs have paid back so much more than they were given, and he can still try to claim releasing them as an anti-Obama act. But the things on this list allow him to declare an even bigger victory, something I can definitely see as attractive to him.

 

 

Aside: I guess that RNC resolution was basically meaningless? I don't recall hearing it addressed or mentioned by any major player at any point, and prominent Republicans in the Senate, as well as Hensarling, are saying and doing things that run directly counter to the resolution.

I am not sure it is Treasury's role to set policy. The majority of the above items appear to belong to either Congress or FHFA who regulates the entities. That is not to say the WH/Treasury can offer guidelines as they did in the past. So far, the set up has been of Treasury as an investor getting money rewards in exchange for support. It will be strange to see Treasury switching from investor to blackmailer.

 

More than a bargaining card, the Srs. might fall in the right/wrong - moral/immoral dilemma that was born during Obama's tenure.

[investorG]

Just brainstorming here. What considerations would Treasury be willing to take in return for the seniors being declared repaid and either cancelling or exercising the warrants, allowing a recap to happen using retained earnings and equity issues? Treasury would also have to keep some sort of diminishing backstop in place while the recap happens so that's another thing that would need extra considerations in exchange for.

 

• Some portion, let's say 1/5, of all future profits (up to a certain amount to offset Treasury's loss of the seniors and warrants)
  
• Another g-fee increase, the proceeds of which go to Treasury (same)
  
• No future lobbying
  
• Increased support for affordable housing funds (a sop to Democrats for political capital purposes)
  
• Mortgage assistance for downtrodden areas (same)
  

 

Again these are just throwing-stuff-at-the-wall ideas without regard to plausibility or even good sense in some cases. The first two violate all sense of fairness in that the seniors would be re-repaid, but I don't get the vibe from Mnuchin or Trump that that matters at all.

 

Even if these don't seem like enough reason to give up around $300B of claims ($193B of senior liquidation preference and around $100B for warrants), Trump could declare victory already because the GSEs have paid back so much more than they were given, and he can still try to claim releasing them as an anti-Obama act. But the things on this list allow him to declare an even bigger victory, something I can definitely see as attractive to him.

 

 

Aside: I guess that RNC resolution was basically meaningless? I don't recall hearing it addressed or mentioned by any major player at any point, and prominent Republicans in the Senate, as well as Hensarling, are saying and doing things that run directly counter to the resolution.

 

midas, are you mnuchin? if so, here's how to do it, become a hero:

 

- cite your expertise in the area again

- mention how important FnF are to America

- talk about the $100bn made so far on the bailout + future warrant value - govt isn't a pig at some point

- cancel the sr pref and sweep in return for all lawsuits settled + an ongoing backstop fee until conservatorship ends

- set out the path out of conservatorship in terms of capital ratio requirements

- invite congress to write legislation which opens the market to competitors, share securitization platform, set an explicit paid for guarantee etc

[orthopa]

I dont think anyone can be heavily criticized for owning common and since are all on the outside looking in we only know what has been disseminated to us.  The latest twice is what Joe Light has given us.  That could surely change over time but if you give any credence to that article and speculation owning common is very risky.  We have moved all the way on the spectrum from shareholders getting nothing to now preferred getting consideration. I guess we could get reports eventually that common are treated well too but is that too much speculation at this point to hold a large amount of common?

 

The other issue I guess is the time needed to recoup your investment in common if there is heavy dilution, multiple offerings of common by treasury to the general public and the potential of lower earnings cause by dilution of the duopoly. I was invested in AIG warrants after that ~90 dilution in that common and the overhang was there for a long time.

 

For arguments sake in the most optimal of situations if preferred are given par there is ~4x upside of most preferred. How much has to go right for common to outperform that and in what time frame? ALOT still has to go right for preferred to return that much. How much more has to go right above and beyond that for common to out perform? That's my definition of increased risk.  At this point, until available information changes common is to risky to bet a chunk of the portfolio on.

 

Lets face it. What can FHFA, Mnuchin, Congress etc do? What ever the fuck they want. If they cut shareholders in its because they are nice enough too. Not necessarily because they have to.  We can scream and yell and bitch and moan all we want. Its gotten us no where for 10 years. That being the case I think they(Congress) can be pushed to hand out some but not too much. If your last in line and lucky your getting something I think its smart to not expect a lot.

 

The preferred has been represented by the big money. Say again preferred gets made whole and common gets little or little enough that returns over time are undesirable. Who steps up then? We have already seen where the courts have gotten us. Who is going to spend millions of dollars in the name of common shareholders when many courts may consider they were lucky enough to get cut in, in the first place?

 

 

[orthopa]

how likely is it that mnuchin is in full bipartisan/work with congress mode only until such time as it either comes up with nothing, or what it comes up with doesnt satisfy his two first principles of housing finance reform? 

 

What gives me pause is that Congress can still potentially add Jumpstart-like language to a must-pass bill before Mnuchin acts. Right now Mnuchin has the most freedom to act administratively that he ever has, and is ever likely to have. Retiring the seniors and starting a capital build does not affect Congress's attempts at housing finance reform in any way. Watt has basically stated that he will keep the status quo until Congress tells him otherwise. Why would Mnuchin do the same?

 

would take huge guts to pre-emptively cancel the sr preferred before a deal is attempted between all the parties.  I doubt it happens.

 

Well, cancelling the seniors would have to be done in exchange for other considerations and not just a giveaway of $193B in liquidation preference. I always saw cancelling the seniors as a way of settling the lawsuits because it would end the NWS and would avoid Treasury being subject to an unpredictable court-mandated remedy down the road. I just don't know if the plaintiffs would be willing to accept only that in exchange for dropping the suits.

 

Given that the lawsuits are proceedingly very slowly and there is little hope of a near-term catalyst then I concede your point: Mnuchin likely won't take large-scale action like this without negative developments (for Treasury) in the courts.

 

agree with all of this.

 

i have been thinking about the whole issue of housing finance as the mashup of politics/policy and finance.  while i get that mnuchin (and potus) are now politicians, they have been deal guys all their life, financiers in the RE space.  i just assume that they are looking at GSE reform differently than corker/warner and congress.

 

now if you get this, where that gets you i dont know.  but it might get you to a place where the deal guy mentality at some point, after continued policy/political inaction, simply says, hey this fix is doable and it is simply a matter of common sense deal making/finance.  let's claim another victory and move on.

 

We may also find that congress works on structuring/laws/charters/competition etc and Trump/Mnuchin do the work even silently of working out all of the shareholder/finance aspects

[investorG]

I dont think anyone can be heavily criticized for owning common and since are all on the outside looking in we only know what has been disseminated to us.  The latest twice is what Joe Light has given us.  That could surely change over time but if you give any credence to that article and speculation owning common is very risky.  We have moved all the way on the spectrum from shareholders getting nothing to now preferred getting consideration. I guess we could get reports eventually that common are treated well too but is that too much speculation at this point to hold a large amount of common?

 

The other issue I guess is the time needed to recoup your investment in common if there is heavy dilution, multiple offerings of common by treasury to the general public and the potential of lower earnings cause by dilution of the duopoly. I was invested in AIG warrants after that ~90 dilution in that common and the overhang was there for a long time.

 

For arguments sake in the most optimal of situations if preferred are given par there is ~4x upside of most preferred. How much has to go right for common to outperform that and in what time frame? ALOT still has to go right for preferred to return that much. How much more has to go right above and beyond that for common to out perform? That's my definition of increased risk.  At this point, until available information changes common is to risky to bet a chunk of the portfolio on.

 

Lets face it. What can FHFA, Mnuchin, Congress etc do? What ever the fuck they want. If they cut shareholders in its because they are nice enough too. Not necessarily because they have to.  We can scream and yell and bitch and moan all we want. Its gotten us no where for 10 years. That being the case I think they(Congress) can be pushed to hand out some but not too much. If your last in line and lucky your getting something I think its smart to not expect a lot.

 

The preferred has been represented by the big money. Say again preferred gets made whole and common gets little or little enough that returns over time are undesirable. Who steps up then? We have already seen where the courts have gotten us. Who is going to spend millions of dollars in the name of common shareholders when many courts may consider they were lucky enough to get cut in, in the first place?

 

some good points here. 

 

another thing though is the downside if this gets punted again because the bridge between henserling and Sherrod brown is too deep.  one security has rallied of late on hopes of a deal and another has not.

[Guest cherzeca]

if mnuchin is thinking proposed legislation through like a deal man, he may think treasury had a deal at 10% interest and 80% of the upside.  if we unwind NWS because 10% and all advanced funds have been paid, why shouldnt treasury also get its 80% upside?  clearly no politician is thinking like this, and maybe even mnuchin the politician is not as well...but shouldnt there be good reason offered by politicians to justify pissing away >$100B?

[SnarkyPuppy]

I don't see the $100bn for government spending as an incentive Mnuchin/Trump care about at all unless it's $100bn going into their personal pockets.  The notion that their incentives are aligned to the taxpayer/country are debatable.   

[investorG]

I don't see the $100bn for government spending as an incentive Mnuchin/Trump care about at all unless it's $100bn going into their personal pockets.  The notion that their incentives are aligned to the taxpayer/country are debatable. 

 

certainly possible.

 

alternatively, it could align with his preferred outcome (if he likes FnF) and the warrants are used to get others on board.

 

[Guest cherzeca]

I don't see the $100bn for government spending as an incentive Mnuchin/Trump care about at all unless it's $100bn going into their personal pockets.  The notion that their incentives are aligned to the taxpayer/country are debatable. 

 

certainly possible.

 

alternatively, it could align with his preferred outcome (if he likes FnF) and the warrants are used to get others on board.

 

can you imagine democrats reaction if mnuchin said he wanted to monetize warrants in full and potus would devote X% of this >$100B bucket towards low income housing?

[DocSnowball]

I don't see the $100bn for government spending as an incentive Mnuchin/Trump care about at all unless it's $100bn going into their personal pockets.  The notion that their incentives are aligned to the taxpayer/country are debatable. 

 

Not to forget getting even with Obama by doing so. At some point they will want to spin a story about what Obama did. That is very well aligned with their interests. Also, any politician who lets go of this 100B plus money on the table will be criticized by their opposition. Loss aversion, Disliking bias, Incentive caused bias (new shareholders of FnF will be Trump friendly), Reciprocity bias (towards Paulson Berkowitz etc), Availability bias of Moelis blueprint are all at play here to cause a lollapalooza effect

[Midas79]

 

can you imagine democrats reaction if mnuchin said he wanted to monetize warrants in full and potus would devote X% of this >$100B bucket towards low income housing?

 

Replace "low income housing" with "infrastructure" and he gets even more political capital from both parties. Not to mention going a long way towards a stated policy goal of the Trump administration.

[investorG]

does anyone know how to see the minutes / transcripts from the Bhatti hearing in Minnesota from last month?

 

from looking around a little, the hearing took 4 hours? and the judge once clerked for scalia, appointed by G W bush.  I think this case took a different angle, constitutional.

[investorG]

Based on Joe Light’s piece, preferred holders may be punished as they are the ones with lawsuits and hiring of private investigators to dig dirt on Corker and Warner. Both of them must be fuming on preferred holders. We shall see. Their bill is dead anyways as they have no credibility left.

 

Now, does this apply to Watt?

 

 

to be a current or former government official, or a person acting for or on behalf of such an official, who is responsible for or complicit in, or has directly or indirectly engaged in:

 

(1) corruption, including the misappropriation of state assets, the expropriation of private assets, corruption related to government contracts or the extraction of natural resources, or bribery; or

 

(2) the transfer or the facilitation of the transfer of the proceeds of corruption;

 

https://www.whitehouse.gov/presidential-actions/executive-order-blocking-property-persons-involved-serious-human-rights-abuse-corruption/

 

watt may be the man.  created a buffer, and didn't need to drive alone.  step 1.  we'll see from here...

[rros]

does anyone know how to see the minutes / transcripts from the Bhatti hearing in Minnesota from last month?

 

from looking around a little, the hearing took 4 hours? and the judge once clerked for scalia, appointed by G W bush.  I think this case took a different angle, constitutional.

What's the case number? I can search pacer.