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

[SnarkyPuppy]

The receivership bill is nonsense - and the people drafting it are aware.  Likely a negotiation starting point with the objective of meeting in the middle at a bank mutualization model. 

 

Investors should focus on the likelihood that congress ultimately passes reform which swaps shareholders with a private mutualization structure, which is consistent with Parrots proposal which also calls for a MIF and explicit guarantee (iirc).  Then the probabilities of Mnuchin and/or watt supporting this should be assessed (SMEs in watts plan could be mutually owned instead of public shareholder owned).  The government can swap their senior preferred for equity in the mutual structure (as compared to executing $120bn of warrants in a public shareholder structure) and collect on perpetual earnings.  Inconsistent with some Mnuchin and Phillips statements- but I wouldn't take what the Trump administration says without legal writing as fact. 

 

Separate question-  what is the role of congress in any administrative reform?  Can congress block administrator action (such as PSPA amendment or cancellation)?  Or are they without any recourse if the admin/FHFA coordinate to implement some form of Watt's plan or Moelis?

[rros]

just gonna post that Luke. This process has to fail and then Mnuchin will hopefully step in.

 

https://www.insidemortgagefinance.com/imfnews/1_1276/daily/-1000044481-1.html#Login

 

If you thought that GSE reform had a good chance of passing this year, think again. Friday morning, industry lobbyists were perplexed about new reports that Senate Republicans were leaning toward a reform plan that entailed placing Fannie Mae and Freddie Mac into receivership as a transition to a new housing-finance system, one with multiple guarantors. The belief is that the GSEs would be killed outright. As one trade group official noted: “There is no vote count for receivership. There is not a single Democrat who will vote for this…”

"perplexed" is the correct word. How could Corker go from admitting at many hearings that the current structure stays and no need to re-invent the wheel to a receivership with a minimum of 10 new companies supporting the housing system?

 

In the end, Ackman maybe right in that Corker and Warner are sophisticated players. Coming up with a bill that looks impossible to pass will only leave one choice: admin/FHFA cooking up the way out of c-ship. But that would be just too smart for either C or W. 

[rros]

The receivership bill is nonsense - and the people drafting it are aware.  Likely a negotiation starting point with the objective of meeting in the middle at a bank mutualization model. 

 

Investors should focus on the likelihood that congress ultimately passes reform which swaps shareholders with a private mutualization structure, which is consistent with Parrots proposal which also calls for a MIF and explicit guarantee (iirc).  Then the probabilities of Mnuchin and/or watt supporting this should be assessed (SMEs in watts plan could be mutually owned instead of public shareholder owned).  The government can swap their senior preferred for equity in the mutual structure (as compared to executing $120bn of warrants in a public shareholder structure) and collect on perpetual earnings.  Inconsistent with some Mnuchin and Phillips statements- but I wouldn't take what the Trump administration says without legal writing as fact. 

 

Separate question-  what is the role of congress in any administrative reform?  Can congress block administrator action (such as PSPA amendment or cancellation)?  Or are they without any recourse if the admin/FHFA coordinate to implement some form of Watt's plan or Moelis?

Sides are so far apart (congress/watt) that any negotiation seems difficult, at best. Given Watt's historical cautiousness and Mnuchin's delicate balancing act, I would think Congress can act/react quickly and in a negative way. Proof is Corker's Jump start Act. Who know what else they could do?

[Guest cherzeca]

just gonna post that Luke. This process has to fail and then Mnuchin will hopefully step in.

 

https://www.insidemortgagefinance.com/imfnews/1_1276/daily/-1000044481-1.html#Login

 

If you thought that GSE reform had a good chance of passing this year, think again. Friday morning, industry lobbyists were perplexed about new reports that Senate Republicans were leaning toward a reform plan that entailed placing Fannie Mae and Freddie Mac into receivership as a transition to a new housing-finance system, one with multiple guarantors. The belief is that the GSEs would be killed outright. As one trade group official noted: “There is no vote count for receivership. There is not a single Democrat who will vote for this…”

 

isnt this CW 1.0?  i guess writing the new bill was too hard so they pulled out their last failure

[Guest cherzeca]

"Can congress block administrator action (such as PSPA amendment or cancellation)?  "

 

not without jumpstart type language.  this is a contract like thousands of others that the treasury is party to, and it can amend it unless congress by legislation says no

[Luke 532]

"Can congress block administrator action (such as PSPA amendment or cancellation)?  "

 

not without jumpstart type language.  this is a contract like thousands of others that the treasury is party to, and it can amend it unless congress by legislation says no

 

If a Jumpstart (or Jumpstart-like) bill was gaining steam (either as a stand-alone bill or attached to something bigger), couldn't Mnuchin/Watt simply make a deal before any Jumpstart gets signed into law?  I'm sure they are watching any and all legislative bills to see if something like that is trying to be sneaked in.  I wouldn't be surprised if Mnuchin/Watt already have an agreement written that merely needs to be signed in case this scenario arises.

[Midas79]

"Can congress block administrator action (such as PSPA amendment or cancellation)?  "

 

not without jumpstart type language.  this is a contract like thousands of others that the treasury is party to, and it can amend it unless congress by legislation says no

 

If a Jumpstart (or Jumpstart-like) bill was gaining steam (either as a stand-alone bill or attached to something bigger), couldn't Mnuchin/Watt simply make a deal before any Jumpstart gets signed into law?  I'm sure they are watching any and all legislative bills to see if something like that is trying to be sneaked in.  I wouldn't be surprised if Mnuchin/Watt already have an agreement written that merely needs to be signed in case this scenario arises.

 

Yes, Mnuchin and Watt should be able to front-run any Jumpstart-like legislation. I don't see Congress being able to pass something like that without any sort of leaks.

[rros]

"Can congress block administrator action (such as PSPA amendment or cancellation)?  "

 

not without jumpstart type language.  this is a contract like thousands of others that the treasury is party to, and it can amend it unless congress by legislation says no

 

If a Jumpstart (or Jumpstart-like) bill was gaining steam (either as a stand-alone bill or attached to something bigger), couldn't Mnuchin/Watt simply make a deal before any Jumpstart gets signed into law?  I'm sure they are watching any and all legislative bills to see if something like that is trying to be sneaked in.  I wouldn't be surprised if Mnuchin/Watt already have an agreement written that merely needs to be signed in case this scenario arises.

That is exactly what happened -in the dead of night- with the 4th. While a new jumpstart was in the works failing miserably.

[investorG]

there's obviously a lot to think about from this week.

 

I was disappointed with phillips' comments about lack of shareholders.  yes, it might be explained away by governance issues, but he said it so casually (and laughed at one point) which suggests to me some caution, particularly lower in the capital structure.

 

It also sounds like they want to do something comprehensive which argues against administrative actions and warrant maximization, as this would be a more narrow change. 

 

so i'm guessing either they will sneak through the senate bill (with bribes) or just close up shop and retry in with congress in 2019, perhaps under different leadership.

 

the court cases may be more important than expected in 2018. my hopes have been down on the courts but maybe someone out there sees how wrong the NWS was.

 

 

[hardincap]

^ agree with this. can will be kicked yet again. this is like waiting for godot

[Luke 532]

Audio of Craig Phillips' talk yesterday...

https://app.voicebase.com/autonotes/private_detail/58549613/hash=bpyaZG1rZ2uWaZmWxmGWnZ2PnG2XlGZsaWqYkZqWlJRmyMmSl25na5psmJSU

 

 

Wadden Golf Academy @bwadden

Hey everyone, Joe Light is right here. I was there yesterday. The audio clip cuts off the last few questions. The final one was mine! I asked CP if we get to the August recess and no legislation is forthcoming, will you undertake administrative action. He said No! We will wait.

[nodnub]

Why can't MBA, Corker, Warner let shareholders survive? Current shareholders are the rightful owners who have suffered for last 10 years, took a loss in the 2008 crisis (common shares fell from $60 to $0.19, preferreds haven't seen any dividends in last 10 years). I don't know what MBA/Corker/Warner has to gain by not appeasing current shareholders who are real people, working people, moms, dads, students, patients, voters, veterans and hardworking taxpayers. If they are fair to them while taking care of other things, they may even get an applause. Something is seriously wrong with Corker-Stevens-Warner-Watt.

 

Life is not fair and the "rightful owners" often get screwed.  The sooner we learn that, the less of our life we waste waiting for court judgments or politicians to provide our own subjective version of "justice".

 

Good luck :)

[orthopa]

My 2 pennies

 

1. Corker hasn't squawked about the capital buffer since it happened even though he was very against it last summer.  Wonder why that is? It hasnt changed much I guess but when he engaged Watt at that one senate hearing he said that a capital buffer went against what was going on/or talked about/or what he was thinking if I remember correctly.

 

2. As much as Joe Light may have an angle against shareholders in his reporting he did report preferred shareholders would get treated favorably in the CW bill. The talk of receivership obviously is making and should make common holders nervous but for whatever reason in that drastic scenario preferred shareholders were still recognized. If that is the worse case scenario and he is the enemy working for the banks why would anyone hold common with a ~350-400% upside on some pfd issues? Secondly and blindly what is there to worry about. If the worst enemy is willing to recognize preferred shareholders what me worry? Just wait it out right?

 

3. FHFA does carry a lot of clout and their idea does seem to be much more favorable to shareholders in language but how favorable still remains to be seen. The utility structure though seems as if it would effect eps thus commons valuation vs a par for preferred.

 

4. Paulsons latest letter still mentions that he sees a favorable outcome, and there is still the political connection between Trump, Paulson, Mnuchin, Berkowitz which I think ultimately is what makes the outcome favorable or not. Without influence from these guys I think there is little to no empathy from congress and if so just enough to get a deal through.

 

5. Whats most bothersome is time. This has taken long enough and the latest information points to this taking longer.

 

6. Contemplating all of that I cant say other then waiting longer Im all that annoyed or worried about the final outcome yet as a preferred shareholder then I was last month. I would say just the opposite if I was a common holder. All of those heavily in common called CW 2.0 DOA and thats fine but now Watt is suggesting a utility model which after at least 80% dilution would lead to suggestively substantially lower rates of return and equity dilution and warrant selling by the gov that would overhang for presumably another couple of years.

 

7.  As optimistic as I am it still could be a year or two until any resolution but if par is a possible outcome its worth the wait. Other then a token amount of speculative common I cant wrap my head around a large common position. There are many on other websites who stubbornly still fail to believe that they could end up with a zero or a heavily diluted share with a fraction of earnings power.  Obviously a lot anchoring bias to an idea that money was stolen and someone is going to swoop in and give it all back.

 

For those that do hold more then just a speculative amount of common how do you still justify it now with what we know and what level of return are you looking for to justify the position? An investment in this has always been binary, but, the preferred seems to have an added put politically, valuation wise (par), and more so legally then common.  Outside of taking a paper loss on avg cost or an unrealistic dream of endless valuation and riches I dont see why a switch to preferred wouldn't make you sleep better at night for the reasons above.

 

 

[Guest cherzeca]

@orthopa

 

thanks for writing down the thought process.

 

i would only add that the fhfa perspectives letter is bigger than mr market seems to give it credit for.  all politicians need spine stiffening, and watt has just provided that for all democrats (watt is a former democrat house member).  i dont see how any democratic senator (other than warner?) votes for a GSE receivership/runoff when fhfa has just planted a flag for GSE recap/utility regulation.

 

time is not our IRR friend, but it is our ultimate result friend.  my IRR expectation has already been busted.  as per usual.

 

listened to phillips speech at luncheon.  insipid generalizations.  this guy has been on the case for almost a year. what has he been doing?  if you think watt first cleared sending letter to congress with mnuchin, then keeping an eye on phillips is just a waste of time.

 

[investorG]

My 2 pennies

 

1. Corker hasn't squawked about the capital buffer since it happened even though he was very against it last summer.  Wonder why that is? It hasnt changed much I guess but when he engaged Watt at that one senate hearing he said that a capital buffer went against what was going on/or talked about/or what he was thinking if I remember correctly.

 

2. As much as Joe Light may have an angle against shareholders in his reporting he did report preferred shareholders would get treated favorably in the CW bill. The talk of receivership obviously is making and should make common holders nervous but for whatever reason in that drastic scenario preferred shareholders were still recognized. If that is the worse case scenario and he is the enemy working for the banks why would anyone hold common with a ~350-400% upside on some pfd issues? Secondly and blindly what is there to worry about. If the worst enemy is willing to recognize preferred shareholders what me worry? Just wait it out right?

 

3. FHFA does carry a lot of clout and their idea does seem to be much more favorable to shareholders in language but how favorable still remains to be seen. The utility structure though seems as if it would effect eps thus commons valuation vs a par for preferred.

 

4. Paulsons latest letter still mentions that he sees a favorable outcome, and there is still the political connection between Trump, Paulson, Mnuchin, Berkowitz which I think ultimately is what makes the outcome favorable or not. Without influence from these guys I think there is little to no empathy from congress and if so just enough to get a deal through.

 

5. Whats most bothersome is time. This has taken long enough and the latest information points to this taking longer.

 

6. Contemplating all of that I cant say other then waiting longer Im all that annoyed or worried about the final outcome yet as a preferred shareholder then I was last month. I would say just the opposite if I was a common holder. All of those heavily in common called CW 2.0 DOA and thats fine but now Watt is suggesting a utility model which after at least 80% dilution would lead to suggestively substantially lower rates of return and equity dilution and warrant selling by the gov that would overhang for presumably another couple of years.

 

7.  As optimistic as I am it still could be a year or two until any resolution but if par is a possible outcome its worth the wait. Other then a token amount of speculative common I cant wrap my head around a large common position. There are many on other websites who stubbornly still fail to believe that they could end up with a zero or a heavily diluted share with a fraction of earnings power.  Obviously a lot anchoring bias to an idea that money was stolen and someone is going to swoop in and give it all back.

 

For those that do hold more then just a speculative amount of common how do you still justify it now with what we know and what level of return are you looking for to justify the position? An investment in this has always been binary, but, the preferred seems to have an added put politically, valuation wise (par), and more so legally then common.  Outside of taking a paper loss on avg cost or an unrealistic dream of endless valuation and riches I dont see why a switch to preferred wouldn't make you sleep better at night for the reasons above.

 

phillips' speech did not sound favorable for common, imo.

 

but since you asked,

 

1) if the warrants are ever in play, common might be a better risk reward.  the pref most own are more like 2:1 or 2.5:1 than 3.5x or 4x.

 

2) if it's delayed til 2019+, then common might have less downside in the mean time than preferred since the pref has risen a lot the last 2 months.

 

3) if they go through receivership, there's some chance common in the end gets a windfall relative to it's 2bn current market cap.

[investorG]

@orthopa

 

thanks for writing down the thought process.

 

i would only add that the fhfa perspectives letter is bigger than mr market seems to give it credit for.  all politicians need spine stiffening, and watt has just provided that for all democrats (watt is a former democrat house member).  i dont see how any democratic senator (other than warner?) votes for a GSE receivership/runoff when fhfa has just planted a flag for GSE recap/utility regulation.

 

time is not our IRR friend, but it is our ultimate result friend.  my IRR expectation has already been busted.  as per usual.

 

listened to phillips speech at luncheon.  insipid generalizations.  this guy has been on the case for almost a year. what has he been doing?  if you think watt first cleared sending letter to congress with mnuchin, then keeping an eye on phillips is just a waste of time.

 

 

here's the issue, though -- we only know bits of what's been released. we don't know all the details. of course corker knows he needs 9 democrats, or 8 if warner's on board.  can he bribe 8 senators in some fashion?  perhaps crapo attaches this to the bipartisan dodd frank overhaul which is about to go through?  if mnuchin is on the side of FnF, as I have hoped, then could he just tell the D senators to wait for 2019.  but maybe mnuchin wants to leave in 2019 and wants this to be his legacy along with the tax cut.  on the other side, joe light could have been given misinformation for some to scoop up cheap common.

 

more questions than answers, i'm trying to remain flexible to multiple outcomes.  I believe FnF are good for this country, but understand that's up for debate based on one's political leanings.  At a minimum, however, shareholders have been absolutely violated with the NWS and should participate in some fashion in FnF's recent resurgence, even if the politicians go a different route for the future of housing finance.

 

[orthopa]

Why did Capital Group spend more than half a billion dollars and bought ton of commons and preferreds? Do you think they invested in speculation? As far as I can see most companies they hold are rock solid in their portfolio.  They aren't so called vulture hedge funds either. This fund is Virginia fund where both Fannie and Fredddie are located? Coincidence? Do they know something? I am not sure but it says College America 529? Taking childrens education for a ride if it is related to 529 plan administered in Virginia?

 

Virginia College America Growth Fund of America 529F

67 million shares of commons (5.79%)

NEW

 

https://beta.morningstar.com/stocks/pinx/fnma/quote.html

 

Virginia College America 529-F-1

http://www.savingforcollege.com/529_plan_details/index.php?page=plan_details&plan_id=89

 

Who knows and unfortunately activity and research like this couldn't be more useless.  I think its time to put a conspiracy theory or that maybe the manager of a 529 fund "knows something"

[orthopa]

Im going to have to go back and do some reading but if memory serves GM common was wiped in that "reorganization" or bankruptcy correct?  Anyone quickly know what happen to the preferred there?

 

I know this case is arguably different but it still involves the gov, UST, and shareholders.  Im going to start reading at a minimum here https://seekingalpha.com/article/135638-general-motors-officially-wiping-out-common-shareholders

 

FWIW Idk if anyone has a good recollection of what happened in each of the Financial Crisis bailouts but i think at a minimum may give some idea of what treasury might want to do to be additionally compensated.

[orthopa]

At the risk of going a little off topic this list is way longer then I thought!

 

https://projects.propublica.org/bailout/list

[rros]

Mnuchin/Watt signed off on the letter of agreement (acceptable version of a 4th A) with NO drama. That is after Mnuchin said he expected the full dividends to be paid to Treasury and Corker vociferously took a shot at Watt. Truth is, anything can happen any time.

 

CP is not going to ring a bell the day before administrative action takes place. They did not do it before the letter of agreement. And if they take admin action, Congress will be unable/unwilling to stop it. Even if a few more senators become vociferous.

https://www.fhfa.gov/Conservatorship/Documents/GSEAgreementLetters_12-21-2017.pdf

 

Most of us were blindsided by that agreement. In spite of being the most obvious move that had to be taken and in spite many of us having anticipated it.

 

Shares will fluctuate. But the most obvious thing right in front of us is Mnuchin wanting to cash in the warrants. Specially, to further consolidate the economy via fiscal policy (infrastructure). We are at the end of the line and 2019 may see a recession.

[Luke 532]

Mnuchin/Watt signed off on the letter of agreement (acceptable version of a 4th A) with NO drama. That is after Mnuchin said he expected the full dividends to be paid to Treasury and Corker vociferously took a shot at Watt. Truth is, anything can happen any time.

 

Great point.

[investorG]

Mnuchin/Watt signed off on the letter of agreement (acceptable version of a 4th A) with NO drama. That is after Mnuchin said he expected the full dividends to be paid to Treasury and Corker vociferously took a shot at Watt. Truth is, anything can happen any time.

 

CP is not going to ring a bell the day before administrative action takes place. They did not do it before the letter of agreement. And if they take admin action, Congress will be unable/unwilling to stop it. Even if a few more senators become vociferous.

https://www.fhfa.gov/Conservatorship/Documents/GSEAgreementLetters_12-21-2017.pdf

 

Most of us were blindsided by that agreement. In spite of being the most obvious move that had to be taken and in spite many of us having anticipated it.

 

Shares will fluctuate. But the most obvious thing right in front of us is Mnuchin wanting to cash in the warrants. Specially, to further consolidate the economy via fiscal policy (infrastructure). We are at the end of the line and 2019 may see a recession.

 

at this point I am not expecting any administrative action until mid to late 2019, if then.  phillips just said so (based on confirmed accounts of the end of his speech).  the expected gain from warrants of ~100bn seems inflated (would require ~$15 stock prices and likely monetized only over multiple years).  also they likely want to do comprehensive reform with charter changes (away from implied company guarantee model), which requires congress.  finally, mnuchin has given himself until 2020 to fix this.

 

the bull case for common for 2018, as I now think about it, rests in a) a court victory b) ironically, corker's bill passing that gives the common a decent shot of recovery in receivership (sr pref would need to be cancelled) and/or c) a democratic sweep in November.

 

[Guest cherzeca]

the turn of events going forward will contain surprises no doubt.  but as i sit here, i see a sen bk ctee that has a staff that seems to be taking direction from MBA-inspired fellow travelers (as per previous failed legislation attempts) and a fhfa director who has put out much more sensible and palatable view of things.  i'll take this hand as dealt

[TonyG]

also, do you think its most likely Watt ran this white paper by Mnuchin?

[hardincap]

@investorG, no reason to think we won't see the c+w bill soon-ish (before midterms). if the sources who leaked that prefs may get "par or close to it" are to be believed, this should be a very positive catalyst