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

[Midas79]

I just asked about this on Tim Howard's blog but I will cross-post here as well.

 

Today (March 2) marks the 61st calendar day since December 31 when FnF's net worth went negative due to the DTA writedown. HERA section 1367(a)(4)(A)(i) states

 

‘(A) IN GENERAL- The Director shall appoint the Agency as receiver for a regulated entity if the Director determines, in writing, that--

 

    ‘(i) the assets of the regulated entity are, and during the preceding 60 calendar days have been, less than the obligations of the regulated entity to its creditors and others

 

If FnF's balance sheet is only updated quarterly then Watt has to have already asked for the draw (actually, FnF have to already HAVE the money) or else he is forced to put FnF into receivership. If the balance sheets are updated more often then Freddie should not have to take a draw at all; it should have only taken them a couple of weeks to make back the $312M deficit they face. Fannie should also, in this case, not need a draw of the full $3.7B.

 

If Watt asked for the money then Treasury had to send it per the SPSPA. Watt deliberately delaying so as to trigger mandatory receivership goes against everything he has said: if a draw is a "dereliction of duty" then choosing receivership would be akin to treason!

 

Whenever Watt does ask for the money will we know about it in any sort of timely fashion?

[investorG]

Speaking of big blocks, over 16M shares of FNMAT have traded today at $5.90 or $5.95, other trades around that time were around $6.40. Total issuance is 89M so that's almost 20% of the float that has been dumped at prices well below market. That's some serious sell volume. This isn't Fairholme, they didn't own any FNMAT as of the 2017 annual report. Around 1/6 of my total pref position is in FNMAT due to relative weakness in January.

 

 

some chance that's perry selling after his court case ended.  the rest of their hedge fund had been rolled up a while back.  perry, ackman, berk, etc - they have businesses to run and investors to report to and communicate with. 

 

mnuchin's lack of leadership / taking the easy road on the matter since the jan-1 ending of jumpstart has likely rightfully discouraged many long term holders and reduced conviction. 

 

perhaps many of us misjudged his intentions.  on the other hand, if he's interested in a fair outcome for all parties, it would have been fairly easy for him to telegraph that in the past 2 months but he's chosen a different path - likely with a long term view but penalizing to investors without endless time frames.

 

 

[Guest cherzeca]

@investorG

 

i can see someone going to mnuchin and saying slow play your hand until we lose a case or congress shows everyone it has no hand

[rros]

Speaking of big blocks, over 16M shares of FNMAT have traded today at $5.90 or $5.95, other trades around that time were around $6.40. Total issuance is 89M so that's almost 20% of the float that has been dumped at prices well below market. That's some serious sell volume. This isn't Fairholme, they didn't own any FNMAT as of the 2017 annual report. Around 1/6 of my total pref position is in FNMAT due to relative weakness in January.

 

 

some chance that's perry selling after his court case ended.  the rest of their hedge fund had been rolled up a while back.  perry, ackman, berk, etc - they have businesses to run and investors to report to and communicate with. 

 

mnuchin's lack of leadership / taking the easy road on the matter since the jan-1 ending of jumpstart has likely rightfully discouraged many long term holders and reduced conviction. 

 

perhaps many of us misjudged his intentions.  on the other hand, if he's interested in a fair outcome for all parties, it would have been fairly easy for him to telegraph that in the past 2 months but he's chosen a different path - likely with a long term view but penalizing to investors without endless time frames.

Call me a cynic but in the realm of speculation I have always believed Perry sold most, if not a very large chunk, after the colossal run towards 50 cents on the dollar by March 10th, 2014. THAT SAME DAY after the close Bloomberg published an article about the genius of Todd T. Westhus, the Perry guy who oversaw the trade early on when Jrs. were trading at cents on the dollar and on 3/11 all Jrs. gapped down at open, sold off and never saw the peak again, ever. The article compared Westhus to Soros and John Paulson regarding the success of the bet and the magnitude of the windfall. Perry Capital may have kept some shares tied to the ongoing lawsuits -had they sold prior to the publication of the article- and the rest, to this day, is just theater.

 

A cynic view, of course.

[investorG]

Take it slow? It can erode all the capital. Morningstar reports outflow of capital from Fairlhome.  Invesors aren't begging but want to stop what is wrong for last 10 years. The situation is getting out of hand and is a total political issue than financial.

 

http://www.morningstar.com/articles/853729/another-downgrade-for-fairholme.html

 

 

 

@investorG

 

i can see someone going to mnuchin and saying slow play your hand until we lose a case or congress shows everyone it has no hand

 

Emily, I agree.  It's not like we expect final solutions implemented any time soon.  It's just that he could have taken the narrative since jan-1 and actually 'lead' on the subject - wasn't there talk of treasury principles last year? - but he's chosen another path of waiting or working behind the scenes only.  I'd like to think I'm a long term holder but when I see 10m+ shares of FNMAT trade, I see obviously some people who either have given up on justice or are forced sellers for business reasons.  All that said, in the end, we may have misjudged his intentions, and entered into a dead end investment.  Time will tell.

[Eye4Valu]

Why not just give this the time it needs and stop posting on it every hour? You're right that you will eventually find out what is going to happen. I suspect you'll either be right, wrong, or somewhere in between.

[orthopa]

Waiting for 10 years is not enough? Preferreds haven't seen a dividend since 2008 whereas they have paid back principal plus 10% dividend plus much more. Wait, there is more. Government has collected to the tune of 100 billion on GSE's behalf as fines and spent it. Wait there is more. They own 80% equity too. What else do they need? The worth of your shares in next 10 years will be zero. I know many have given up for anything to happen this year and are waiting for Watt to go away in Feb 2019. Watt is indeed a problem but what is the guarantee something will happen once Watt leaves? I doubt anything will happen once Watt leaves as something else in economy will crop up. Time is right now to do something. This Fanniegate movement is a nuisance and some real social movement is necessary like #enoughisenough.

 

Why not just give this the time it needs and stop posting on it every hour? You're right that you will eventually find out what is going to happen. I suspect you'll either be right, wrong, or somewhere in between.

 

You bought your shares in 2008?

[beaufort]

FnF 10% moment:  http://www.rstreet.org/2018/03/06/fannie-has-reached-the-10-moment-after-all/

[blackcoffee]

https://howardonmortgagefinance.com/2018/02/05/waiting-for-mr-corker/comment-page-1/#comment-6099

 

Howard basically saying that the CRT deals are giveaways to their buyers and the FED is basically using it's research function to promote securities that don't do anything for the GSEs but do enrich their buyers.

 

Such a farce.

[beaufort]

There has been some debate re 10% moment.  The important point in my view is that there are now further good facts to continue advancement of the changing narrative:  FnF have held up their end of the bargain.  There has been no gift by taxpayers to FnF etc.

[beaufort]

Pleadings are allegations of fact.  It would be appropriate to plead the allegation that the government has been paid back in full according to the terms of the contract.

 

As time goes on, it would make sense that Sweeney or Lambert courts would find that Treasury holds the junior preferred shareholders' interests, among others, in trust.  I am applying equitable principles to the damages claims that are proceeding both with Sweeney and Lambert.  The appellate court decisions have made clear that equitable relief is not available to stop FHFA from doing anything. 

 

 

 

 

[Guest cherzeca]

Pleadings are allegations of fact.  It would be appropriate to plead the allegation that the government has been paid back in full according to the terms of the contract.

 

As time goes on, it would make sense that Sweeney or Lambert courts would find that Treasury holds the junior preferred shareholders' interests, among others, in trust.  I am applying equitable principles to the damages claims that are proceeding both with Sweeney and Lambert.  The appellate court decisions have made clear that equitable relief is not available to stop FHFA from doing anything.

 

@beaufort

 

see http://gselinks.com/Court_Filings/Jacobs_Hindes/17-3794-0016.pdf

 

hindes/jacobs just filed appellate brief arguing for restitution damages against treasury (which judge sleet completely ignored).  argument is that restitution damages are not barred by equitable bar of HERA

[blackcoffee]

He doesn't - he's what people call an access journalist. Meaning he lies for money.

 

There is no incentive for any of these journalists to go against the grain. If you watch Cohodes at Grant's this is his main point about why its so hard to short sell. That these journalists are all told not to discuss certian things that may upset their advertisers which is why CNBC et all are basically fluff and nonsense. Look what happens when people say things they don't want to be said: https://www.cnbc.com/video/2017/07/24/freddie-mac-going-anti-home-owner-by-investing-in-rental-property-rafferty-capitals-dick-bove.html

 

This trickles down thru all media. I would turn your attention to what happened to Trey Garrison at Housing Wire after he wrote this: https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

 

Trey 'changed jobs' the following November. hmm

 

[Guest cherzeca]

He doesn't - he's what people call an access journalist. Meaning he lies for money.

 

There is no incentive for any of these journalists to go against the grain. If you watch Cohodes at Grant's this is his main point about why its so hard to short sell. That these journalists are all told not to discuss things which is why CNBC et all are basically fluff and nonsense. Look what happens when people say things they don't want to be said: https://www.cnbc.com/video/2017/07/24/freddie-mac-going-anti-home-owner-by-investing-in-rental-property-rafferty-capitals-dick-bove.html

 

This trickles down thru all media. I would turn your attention to what happened to Trey Garrison at Housing Wire after he wrote this: https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

 

Trey 'changed jobs' the following November. hmm

 

+1. welcome to board

[DRValue]

New member, been long FNMA common and prefs about 80:20 in favour of prefs for far too long now.

 

Paul Muolo says both commons and preferreds are worthless. I do not how he knows this.

 

https://www.insidemortgagefinance.com/imfnews/1_1308/daily/fannie-freddie-investors-left-twisting-in-the-wind-1000045099-1.html

 

People like this fall back on the fact that they technically haven't lied as prefs aren't paying out and Equity is so low that it'd go to the senior prefs first in receivership before the commons.

 

He doesn't - he's what people call an access journalist. Meaning he lies for money.

 

There is no incentive for any of these journalists to go against the grain. If you watch Cohodes at Grant's this is his main point about why its so hard to short sell. That these journalists are all told not to discuss certian things that may upset their advertisers which is why CNBC et all are basically fluff and nonsense. Look what happens when people say things they don't want to be said: https://www.cnbc.com/video/2017/07/24/freddie-mac-going-anti-home-owner-by-investing-in-rental-property-rafferty-capitals-dick-bove.html

 

This trickles down thru all media. I would turn your attention to what happened to Trey Garrison at Housing Wire after he wrote this: https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

 

Trey 'changed jobs' the following November. hmm

 

 

Another +1. These people infuriate me, they have a megaphone and a huge platform saying there's nothing wrong with what the government did. Fannie and Freddie are always the enemy even though straight from Hank Paulsons book he says that Fannie and Freddie would save the day and they bought up a great deal of the soured MBS at full price as instructed by Treasury.

 

But the journalists and congress couldn't possibly implicate their wall street donors or the failed government policy of lending to poor credit borrowers. Although I have got to say banks only acted rationally. If they knew these poor credit loans they had to make would default the very first thing they would do is look to get them off their balance sheet.

 

The NWS can't stand, property rights mean nothing if it does. Better stop ranting as I could go on for hours about this!

[Guest cherzeca]

New member, been long FNMA common and prefs about 80:20 in favour of prefs for far too long now.

 

Paul Muolo says both commons and preferreds are worthless. I do not how he knows this.

 

https://www.insidemortgagefinance.com/imfnews/1_1308/daily/fannie-freddie-investors-left-twisting-in-the-wind-1000045099-1.html

 

People like this fall back on the fact that they technically haven't lied as prefs aren't paying out and Equity is so low that it'd go to the senior prefs first in receivership before the commons.

 

He doesn't - he's what people call an access journalist. Meaning he lies for money.

 

There is no incentive for any of these journalists to go against the grain. If you watch Cohodes at Grant's this is his main point about why its so hard to short sell. That these journalists are all told not to discuss certian things that may upset their advertisers which is why CNBC et all are basically fluff and nonsense. Look what happens when people say things they don't want to be said: https://www.cnbc.com/video/2017/07/24/freddie-mac-going-anti-home-owner-by-investing-in-rental-property-rafferty-capitals-dick-bove.html

 

This trickles down thru all media. I would turn your attention to what happened to Trey Garrison at Housing Wire after he wrote this: https://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship

 

Trey 'changed jobs' the following November. hmm

 

 

Another +1. These people infuriate me, they have a megaphone and a huge platform saying there's nothing wrong with what the government did. Fannie and Freddie are always the enemy even though straight from Hank Paulsons book he says that Fannie and Freddie would save the day and they bought up a great deal of the soured MBS at full price as instructed by Treasury.

 

But the journalists and congress couldn't possibly implicate their wall street donors or the failed government policy of lending to poor credit borrowers. Although I have got to say banks only acted rationally. If they knew these poor credit loans they had to make would default the very first thing they would do is look to get them off their balance sheet.

 

The NWS can't stand, property rights mean nothing if it does. Better stop ranting as I could go on for hours about this!

 

likewise

[waynepolsonAtoZ]

True, but why will the status quo change? Yes, there is DE, which could play out relatively soon, and, eventually, there is the Court of Federal Claims, but, in the short run, Mnuchin is hopeless and Watt is OK but relatively impotent. It was clever to do the SPSPAs in a way that requires both TSY and FHFA to sign off on changes--given that TSY never will in a million years ever do something good for someone other than their Wall Street paymasters. 

 

[Midas79]

True, but why will the status quo change? Yes, there is DE, which could play out relatively soon, and, eventually, there is the Court of Federal Claims, but, in the short run, Mnuchin is hopeless and Watt is OK but relatively impotent. It was clever to do the SPSPAs in a way that requires both TSY and FHFA to sign off on changes--given that TSY never will in a million years ever do something good for someone other than their Wall Street paymasters.

 

You're right that the deal was structured to last until the companies could be eliminated. But what then do we make of Mnuchin's comments that the largest 8 banks are too big and that he wants the conservatorships ended before Trump's term in office is over?

[DRValue]

likewise

 

I do have to keep telling myself this though to help me get through it:

[*]Although its never been explicitly said by Mnuchin, It has been implied that a capital build and release is coming

[*]The companies have been allowed to build $3b equity

[*]Treasury is saying to Congress "Tell us what to do"

[*]Congress is saying to treasury "We don't have the skills, you tell us"

[*]Congress has had 10 years, they couldn't get it done then, they won't now

[*]FHFA's recommendations seem to imply a return to shareholder ownership, but whether this is current share owners is unknown

[*]The path of least resistance is recap and release with updated charters

[*]For a long time this was called "Housing Finance Reform" implying a total revamp of the system. Now I seem to hear "GSE Reform" more and more

[*]Any changes to the current system carry too much risk to change and far too many "unknown unknowns" that the risk is too great to change anything drastically

[*]Cries of the 10% moment are becoming louder and louder

[*]Think of the $8 billion dollars that was raised by new preferreds just before conservatorship. What message would that send to shareholders?

[*]What will existing shareholders think if they're wiped out? And past shareholders? Can you own any financial stocks if conservatorship of a performing business means receivership just because the government wants it?

[*]Are we where we are because the businesses have failed and they're no longer needed? Or because there was a Government effort to mik the businesses for all they're worth illegally?

 

[Midas79]

https://www.bloomberg.com/news/videos/2018-03-07/mnuchin-says-dodd-frank-bill-will-be-good-for-economy-banks-video

 

We've talked about housing reform. I'm not sure that's something that will get done this summer before the elections, but we are determined to try to get Fannie and Freddie restructured in some format so that we don't put taxpayers at risk.

 

This was Mnuchin's comment about FnF when asked what Treasury's near-term priorities are.

 

 

Less taxpayer risk would have to mean more private capital. Unfortunately current shareholders are not going to contribute any more future capital unless there is a rights offering of some sort.

 

"Restructured" can have ominous overtones as well. Could that possibly mean anything other than the capital structure? And why would the capital structure need an overhaul anyway?

[investorG]

Mnuchin keeps moving the goal post. They want to try after Watt leaves in Feb 2019 as I read it. I doubt it will happen even after Watt leaves. We may lose Sweeney case by then and lose all the leverage (not sure if Fairlhome would win the takings case as they haven't proved that Treasury and FHFA colluded)

 

yes, emily, it appears he's punting til 2019.  on the positive side, if what he said is true, he has likely prevented a bad bill for America from happening.  and he's not gunshy about lowering expectations so that the pumpers can quiet down.  overall, though, he's taking the easy way out by postponing action.  he likely wants to see some more court cases play out and maybe deal with a different cast of congressional characters / leaders next year.  lots of people have decided not to wait for justice and i expect others will soon do the same.

 

[investorG]

https://www.bloomberg.com/news/videos/2018-03-07/mnuchin-says-dodd-frank-bill-will-be-good-for-economy-banks-video

 

We've talked about housing reform. I'm not sure that's something that will get done this summer before the elections, but we are determined to try to get Fannie and Freddie restructured in some format so that we don't put taxpayers at risk.

 

This was Mnuchin's comment about FnF when asked what Treasury's near-term priorities are.

 

 

Less taxpayer risk would have to mean more private capital. Unfortunately current shareholders are not going to contribute any more future capital unless there is a rights offering of some sort.

 

"Restructured" can have ominous overtones as well. Could that possibly mean anything other than the capital structure? And why would the capital structure need an overhaul anyway?

 

hopefully he wants the charters changed to remove any implicit guaranty, which is reasonable.  or some problematic alternative meanings.

 

[beaufort]

@cherzeca

I read the argument summary for Hindes/Jacob; I'll save the rest for the weekend.  I still have much faith in this one at the appellate level. 

 

Re Mnuchin Bloomberg video

 

I watched the video and my initial reaction was he was punting.  After discussing with a colleague, his reaction to the video was that this was a message to Corker (and maybe Watt):  we are not hostage to getting this done before midterms.  If it doesn't get done, we will wait and get FnF 'restructured' in some fashion that keeps taxpayers safe. 

 

Because I am optimistic, I can see restructuring as raising a bunch of capital and retiring the sr. prefs.  The ball is in Corker's court to get onto draft 30 or whatever it is.

 

 

 

 

[SnarkyPuppy]

Is it me or does he always excessively raise his eyebrows when talking about fannie and freddie?  Also the pause and careful wording is probably another tell.

 

And while typing that above I've realized how insane this trade has become.  I still keep taking a step back and think there's only one realistic outcome but I also am conscious of how silly this is becoming.

[Midas79]

hopefully he wants the charters changed to remove any implicit guaranty, which is reasonable.  or some problematic alternative meanings.

 

I'm not sure a change of charter is possible without Congressional action, which I highly doubt is forthcoming.