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

[Guest cherzeca]

re bhatti, gselinks usually links to transcript when it becomes publicly available.  likely not on pacer

[rros]

re bhatti, gselinks usually links to transcript when it becomes publicly available.  likely not on pacer

ok, thanks.

[rros]

Found this, anyway. Under case number 17-cv-02185 there are 2 transcript requests from 12/22 and 12/29. Looks like 14 days timeline on each?

2210117056724.pdf

2910117062652.pdf

[Midas79]

I don't usually pay much attention to daily price action but today has me confused. I didn't see any big news that would justify a 10% drop on the commons. Other than a few big block sells on FNMAT I didn't notice any unusual volume in the prefs. FNMAS volume was low as well.

 

I just saw someone mention on iHub that FNMAS to FNMA ratio is now nearly 4, and is approaching 7:1 for some of the $50s. I had assumed that the conversion factor in the Moelis plan (3:1 for $25s, 6:1 for $50s) was at a premium to then-current market prices to give junior pref holders an incentive to switch. But the lower commons go relative to prefs the higher of a ratio has to be offered, hurting commons even more. In that case even though it looks attractive to swap some of my position into commons, my thesis of a possible conversion actually warns against it.

[investorG]

I don't usually pay much attention to daily price action but today has me confused. I didn't see any big news that would justify a 10% drop on the commons. Other than a few big block sells on FNMAT I didn't notice any unusual volume in the prefs. FNMAS volume was low as well.

 

I just saw someone mention on iHub that FNMAS to FNMA ratio is now nearly 4, and is approaching 7:1 for some of the $50s. I had assumed that the conversion factor in the Moelis plan (3:1 for $25s, 6:1 for $50s) was at a premium to then-current market prices to give junior pref holders an incentive to switch. But the lower commons go relative to prefs the higher of a ratio has to be offered, hurting commons even more. In that case even though it looks attractive to swap some of my position into commons, my thesis of a possible conversion actually warns against it.

 

clearly, if there's a receivership / liquidation, as joe light reported yesterday, then a common holder goes behind a preferreds, which are still trading at big discounts to par - which spooks many big commoners.

 

reasons to switch to common are if you think a solution comes that doesnt involve formal receivership, or if you think no deal gets done this year (as one security has rallied on joe light deal hopes and another has tanked).  I am guessing but think there's a decent chance of one the above 2 happening this year.

 

[TwoCitiesCapital]

I just have a hard time understanding how their bill gets passed.

 

The simplest route is the most likely - liquidating the companies and rebuilding news ones, to do the same thing, from the scraps that remain and private capital is nowhere close to being the easiest route. Nor does it maximize value for govt. Nor does it jige with the idea of a maintaining a smoothly operating mortgage market.

 

Recapitalization achievs all of those and is way easier. This alone is what gives me confidence

[Guest cherzeca]

I just have a hard time understanding how their bill gets passed.

 

The simplest route is the most likely - liquidating the companies and rebuilding news ones, to do the same thing, from the scraps that remain and private capital is nowhere close to being the easiest route. Nor does it maximize value for govt. Nor does it jige with the idea of a maintaining a smoothly operating mortgage market.

 

Recapitalization achievs all of those and is way easier. This alone is what gives me confidence

 

@midas  motley fool covered light's article.  lots of common holders are fools

[Guest cherzeca]

I just have a hard time understanding how their bill gets passed.

 

The simplest route is the most likely - liquidating the companies and rebuilding news ones, to do the same thing, from the scraps that remain and private capital is nowhere close to being the easiest route. Nor does it maximize value for govt. Nor does it jige with the idea of a maintaining a smoothly operating mortgage market.

 

Recapitalization achievs all of those and is way easier. This alone is what gives me confidence

 

you have encapsulated the difference between a banker (mnuchin) and a pol (C/W). 

[doughishere]

I just wanted to say congratulations on passing the sears thread.

[SnarkyPuppy]

I just wanted to say congratulations in passing the sears thread.

 

A high honor.

 

I just have a hard time understanding how their bill gets passed.

 

The simplest route is the most likely - liquidating the companies and rebuilding news ones, to do the same thing, from the scraps that remain and private capital is nowhere close to being the easiest route. Nor does it maximize value for govt. Nor does it jige with the idea of a maintaining a smoothly operating mortgage market.

 

Recapitalization achievs all of those and is way easier. This alone is what gives me confidence

 

you have encapsulated the difference between a banker (mnuchin) and a pol (C/W). 

 

Despite some of my overall skepticism, this premise is why I'm still invested.  Inverting from "how are preferreds wiped out" provides a set of answers which are very difficult to implement.  Whereas answering the question of "how are preferreds made whole or close to it" provides a much broader and easier range of answers which align much closer to reality.

[Guest cherzeca]

I just wanted to say congratulations in passing the sears thread.

 

A high honor.

 

I just have a hard time understanding how their bill gets passed.

 

The simplest route is the most likely - liquidating the companies and rebuilding news ones, to do the same thing, from the scraps that remain and private capital is nowhere close to being the easiest route. Nor does it maximize value for govt. Nor does it jige with the idea of a maintaining a smoothly operating mortgage market.

 

Recapitalization achievs all of those and is way easier. This alone is what gives me confidence

 

you have encapsulated the difference between a banker (mnuchin) and a pol (C/W). 

 

Despite some of my overall skepticism, this premise is why I'm still invested.  Inverting from "how are preferreds wiped out" provides a set of answers which are very difficult to implement.  Whereas answering the question of "how are preferreds made whole or close to it" provides a much broader and easier range of answers which align much closer to reality.

 

agreed.  you should change your handle to mungerpuppy. 

[rros]

The attractiveness of common stock was based on a possible organic recapitalization by the elimination of the sweep and full earnings retention. This, with the 4th A, is now gone.

 

It is likely that the 4th will be in place until a) there is a comprehensive bill signed into law that includes a resolution to both commons and Jrs., b) there is only administrative action to be had -Congress fails or *exigent* circumstances come into play-.

 

b) may include severe dilution (exercise of warrants, Jr. conversion offer, possible IPOs) to infuse large amounts of capital to replace the funding commitment in its entirety or, if exigent circumstances, another 4th A bandaid -a 5th A- may move us closer to breaking up the PSPAs. In general, it is really hard to think of any common stock elimination given the warrants.

 

A reminder...

Treasury's funding commitment in the agreement would terminate under three events:

 

1. The funding commitment terminates if the commitment is fully funded by Treasury.

2. If a GSE liquidates its assets, its net worth deficiency is computed at that time and the GSE can call upon the Treasury to fund under its preferred stock purchase agreement. After that final funding, the funding commitment in the agreement would terminate.

3. When a GSE satisfies all of its liabilities, whether at maturity or by making some other provision for payment in full of its obligations, the funding commitment will also terminate.

 

The 4th A is testimony to how difficult is to handle any PSPAs change. There seems to be an impossibility to easily terminate Treasury's commitment, by design. Little room to maneuver whether you are Trump or Mnuchin.

 

Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?

This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions that would adversely affect debt or mortgage-backed securities holders.

[rros]

So Jrs. have this...

 

Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?

This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions that would adversely affect debt or mortgage-backed securities holders.

 

Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law would be inconsistent with the U.S. government's longstanding history of honoring its obligations. Such action would also give rise to government liability to parties suing to enforce their rights under the agreement.

 

The U.S. Government stands behind the preferred stock purchase agreements and will honor its commitments. Contracts are respected in this country as a fundamental part of rule of law.

 

From Treasury's website.

[SnarkyPuppy]

So Jrs. have this...

 

Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?

This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions that would adversely affect debt or mortgage-backed securities holders.

 

Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law would be inconsistent with the U.S. government's longstanding history of honoring its obligations. Such action would also give rise to government liability to parties suing to enforce their rights under the agreement.

 

The U.S. Government stands behind the preferred stock purchase agreements and will honor its commitments. Contracts are respected in this country as a fundamental part of rule of law.

 

From Treasury's website.

 

How ironic.  Looks like this has been posted since 2008 unfortunately.

[rros]

So Jrs. have this...

 

Can the U.S. Congress or the Executive Branch change the terms of the preferred stock purchase agreement?

This preferred stock purchase agreement is a binding legal obligation between two parties. The agreement is designed to prohibit any amendment that would decrease the amount of Treasury's funding commitment or add funding conditions that would adversely affect debt or mortgage-backed securities holders.

 

Some may speculate that a future Congress could pass a law that would abrogate the agreement. But any such law would be inconsistent with the U.S. government's longstanding history of honoring its obligations. Such action would also give rise to government liability to parties suing to enforce their rights under the agreement.

 

The U.S. Government stands behind the preferred stock purchase agreements and will honor its commitments. Contracts are respected in this country as a fundamental part of rule of law.

 

From Treasury's website.

 

How ironic.  Looks like this has been posted since 2008 unfortunately.

The irony is that Jrs. have a contract. Commons don't. And the 3 parties that matter, FHFA, Treasury and Congress, have been walking along the same line: rules, regulations, binding contracts. So Jrs. are more difficult to disregard. Commons, on the other hand, are in a different Universe. If the same line of thinking from 2008 still applies today I am a happy camper.

[Midas79]

@midas  motley fool covered light's article.  lots of common holders are fools

 

Pun intended? ;-)

[investorG]

who here thinks trump wants the following headline in an election year?  (while acknowledging it's possible, I, personally, do not believe it is the most likely scenario, and despite last week's actions, view the share prices of common and preferred as most likely positively correlated going forward).

 

'trump signs a bill that pays his buddy Paulson and mnuchin's berkowitz multiples of their investment, billions of dollars, while zeroing out many retail investors and the taxpayers' 80pct warrants, and in the process handing out secondary business to the too big to fail banks'.  ackman, assuming he still owns common, has a loud megaphone to the media and investor universe.

 

imo the one flaw to my argument above is if they can wiggle the 80pct warrants into some value in a new-co;  but still, with the common mkt cap of FNMA at $2bn in that scenario (rather than ~12bn with warrants), it wouldn't take a lot of absolute $ to throw commoners way in some form to have ackman / media call it a 'fair deal' for all sides.

 

 

[rros]

who here thinks trump wants the following headline in an election year?  (while acknowledging it's possible, I, personally, do not believe it is the most likely scenario, and despite last week's actions, view the share prices of common and preferred as most likely positively correlated going forward).

 

'trump signs a bill that pays his buddy Paulson and mnuchin's berkowitz multiples of their investment, billions of dollars, while zeroing out many retail investors and the taxpayers' 80pct warrants, and in the process handing out secondary business to the too big to fail banks'.  ackman, assuming he still owns common, has a loud megaphone to the media and investor universe.

 

imo the one flaw to my argument above is if they can wiggle the 80pct warrants into some value in a new-co;  but still, with the common mkt cap of FNMA at $2bn in that scenario (rather than ~12bn with warrants), it wouldn't take a lot of absolute $ to throw commoners way in some form to have ackman / media call it a 'fair deal' for all sides.

Two things, if I may. Warrants and commons are one. Can't be disassociated. W/o the commons warrants cannot exist. I guess that is the positive. As for loud megaphones, when WM went bankrupt there was a standing ovation when commons were virtually zero'd. I do not think it is that simple here. Thus, the alleged blank space in the proposed bill. Some senators may wish to zero us (or the commons) only to realize all the negative implications.

 

One thing is for sure. Corker/Warner will make a push to revive them as "different". Maybe in names or structures. And in that transition there is risk for both commons and Jrs. Mnuchin may see any kind of transition as re-inventing the wheel though.

[deadspace]

who here thinks trump wants the following headline in an election year?  (while acknowledging it's possible, I, personally, do not believe it is the most likely scenario, and despite last week's actions, view the share prices of common and preferred as most likely positively correlated going forward).

 

'trump signs a bill that pays his buddy Paulson and mnuchin's berkowitz multiples of their investment, billions of dollars, while zeroing out many retail investors and the taxpayers' 80pct warrants, and in the process handing out secondary business to the too big to fail banks'.  ackman, assuming he still owns common, has a loud megaphone to the media and investor universe.

 

 

I think it’s time to admit that this isn’t an investment any more.  There is no logical line of reason that you can follow here especially when both the courts and the government have shown that they will create their own reality.  To me it’s no longer a given that the warrants cannot exist and the common wipes out.  Or that the companies cannot be bankrupt while at the same time being highly profitable.  In fact when I invested I also had the crazy idea that it didn’t matter when you purchased the shares and that all rights were transferred with the share purchases as has been law for a century or more.  The district court suggested maybe that’s not true either.  I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.  I’m still holding some shares and wish good luck to all longs.  But this has been a highly unusual trip through Wonderland

 

imo the one flaw to my argument above is if they can wiggle the 80pct warrants into some value in a new-co;  but still, with the common mkt cap of FNMA at $2bn in that scenario (rather than ~12bn with warrants), it wouldn't take a lot of absolute $ to throw commoners way in some form to have ackman / media call it a 'fair deal' for all sides.

Two things, if I may. Warrants and commons are one. Can't be disassociated. W/o the commons warrants cannot exist. I guess that is the positive. As for loud megaphones, when WM went bankrupt there was a standing ovation when commons were virtually zero'd. I do not think it is that simple here. Thus, the alleged blank space in the proposed bill. Some senators may wish to zero us (or the commons) only to realize all the negative implications.

 

One thing is for sure. Corker/Warner will make a push to revive them as "different". Maybe in names or structures. And in that transition there is risk for both commons and Jrs. Mnuchin may see any kind of transition as re-inventing the wheel though.

[deadspace]

who here thinks trump wants the following headline in an election year?  (while acknowledging it's possible, I, personally, do not believe it is the most likely scenario, and despite last week's actions, view the share prices of common and preferred as most likely positively correlated going forward).

 

'trump signs a bill that pays his buddy Paulson and mnuchin's berkowitz multiples of their investment, billions of dollars, while zeroing out many retail investors and the taxpayers' 80pct warrants, and in the process handing out secondary business to the too big to fail banks'.  ackman, assuming he still owns common, has a loud megaphone to the media and investor universe.

 

 

I think it’s time to admit that this isn’t an investment any more.  There is no logical line of reason that you can follow here especially when both the courts and the government have shown that they will create their own reality.  To me it’s no longer a given that the warrants cannot exist and the common wipes out.  Or that the companies cannot be bankrupt while at the same time being highly profitable.  In fact when I invested I also had the crazy idea that it didn’t matter when you purchased the shares and that all rights were transferred with the share purchases as has been law for a century or more.  The district court suggested maybe that’s not true either.  I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.  I’m still holding some shares and wish good luck to all longs.  But this has been a highly unusual trip through Wonderland

 

imo the one flaw to my argument above is if they can wiggle the 80pct warrants into some value in a new-co;  but still, with the common mkt cap of FNMA at $2bn in that scenario (rather than ~12bn with warrants), it wouldn't take a lot of absolute $ to throw commoners way in some form to have ackman / media call it a 'fair deal' for all sides.

Two things, if I may. Warrants and commons are one. Can't be disassociated. W/o the commons warrants cannot exist. I guess that is the positive. As for loud megaphones, when WM went bankrupt there was a standing ovation when commons were virtually zero'd. I do not think it is that simple here. Thus, the alleged blank space in the proposed bill. Some senators may wish to zero us (or the commons) only to realize all the negative implications.

 

One thing is for sure. Corker/Warner will make a push to revive them as "different". Maybe in names or structures. And in that transition there is risk for both commons and Jrs. Mnuchin may see any kind of transition as re-inventing the wheel though.

I think it’s time to admit that this isn’t an investment any more.  There is no logical line of reason that you can follow here especially when both the courts and the government have shown that they will create their own reality.  To me it’s no longer a given that the warrants cannot exist and the common wipes out.  Or that the companies cannot be bankrupt while at the same time being highly profitable.  In fact when I invested I also had the crazy idea that it didn’t matter when you purchased the shares and that all rights were transferred with the share purchases as has been law for a century or more.  The district court suggested maybe that’s not true either.  I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.  I’m still holding some shares and wish good luck to all longs.  But this has been a highly unusual trip through Wonderland

 

imo the

[rros]

I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.

Entirely correct, deadspace. It has been an unfortunate learning process.

[Guest cherzeca]

I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.

Entirely correct, deadspace. It has been an unfortunate learning process.

 

long strange trip

[HalfMeasure]

I don’t think anyone here would have invested if they knew the rabbit hole they were walking into.

Entirely correct, deadspace. It has been an unfortunate learning process.

 

long strange trip

 

The situation is and always has been most analogous to a distressed situation, and those often end up in long investment periods with a lot of noise. It does explain why most investors don't have the stomach for it, but I think there are also investors willing to bear the rabbit hole.

[orthopa]

https://www.wsj.com/articles/the-high-stakes-in-the-looming-fannie-and-freddie-overhaul-1515407401

 

Full text

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[TonyG]

common down big again. anyone with balls of steel thinking of adding? hasn't been this low in a long time