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

[Midas79]

 

let's look at this instead https://assets.pershingsquareholdings.com/media/2018/03/26000442/2017-Annual-Report.pdf

 

In recent months, we purchased preferred stock of both companies.  Our preferred stock represents approximately 21% of our total investment in Fannie and Freddie, or about 1% of net assets. While the substantial majority of our investment historically has been in Fannie/Freddie common stock, we acquired preferred stock recently because (1) we believe that the timing of a favorable outcome for the two companies is more proximate (timing is an important consideration for the preferred shares as they are noncumulative and perpetual), (2)  it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares, and (3) we found the trading  prices of the preferred securities attractive at current levels.  We still prefer our investment in the common shares because the government and taxpayers’ interests, as owners of 79.9% of the common stock of both companies, are aligned with the interests of common shareholders.  If housing reform is successful, we believe that both FNMA and FMCC common and preferred stock will likely be worth multiples of their current share prices.

Is this the reason preferred shares have been collapsing?

Ackman appears to be anti-Midas.

 

I don't know whether to be flattered or mortified!  ???

 

On a serious note, my speculation is that the prefs have been collapsing due to more Fairholme redemptions, and perhaps Berkowitz is shorting the common as a hedge in the meantime. If he opens and closes a short common position during a quarter does he have to report it?

 

There is also a lot of tired money that has sold out, as in tired of waiting for a resolution. I am fortunate enough to not have any short-term need of the money I have in FnF as well as no other investments I find more compelling. So while I won't put any more in, I also don't plan to take any out until we get big news one way or another.

 

I guess it's possible that Berkowitz sold some prefs directly to Ackman. Ackman has around 10% of the commons of each company, so right now that's 180M shares at around $1.42 per share, or $256M. A pref position of 20% means he has 1/4 of that amount in prefs, or $64M, which represents around $330M of par value. That's barely 3% of Berkowitz's position as of the last Fairholme annual report.

[rros]

If you have the Midas touch, flattered. Ackman then mirrors (as in opposite) your touch.

 

But... just now... preferreds are moving. Looks like Ackman is back on a buying stampede :)

[locutusoftexas]

I don't know whether to be flattered or mortified!  ???

 

On a serious note, my speculation is that the prefs have been collapsing due to more Fairholme redemptions, and perhaps Berkowitz is shorting the common as a hedge in the meantime. If he opens and closes a short common position during a quarter does he have to report it?

 

There is also a lot of tired money that has sold out, as in tired of waiting for a resolution. I am fortunate enough to not have any short-term need of the money I have in FnF as well as no other investments I find more compelling. So while I won't put any more in, I also don't plan to take any out until we get big news one way or another.

 

I guess it's possible that Berkowitz sold some prefs directly to Ackman. Ackman has around 10% of the commons of each company, so right now that's 180M shares at around $1.42 per share, or $256M. A pref position of 20% means he has 1/4 of that amount in prefs, or $64M, which represents around $330M of par value. That's barely 3% of Berkowitz's position as of the last Fairholme annual report.

 

As of December 31, Fairholme had 27 % of assets in cash, 26 % in FnF prefs, and  31% in common stocks and 16% in bonds. Berkowitz might be selling a large amount of prefs but it would not likely be due to redemption pressure < 3 months after the annual report (see below). He is also involved in serious litigation (regarding FnF), the termination of which has not been reported. He would likely sell FnF before selling JOE, which I infer from an interview last year. He could of course sell a small amount of prefs as part of a selling program to manage redemptions or to raise more cash.

 

I would be surprised and disappointed if he were voluntarily giving up on FnF prefs. That might mean that the Fairholme Fund was starting to liquidate. Always possible but again unlikely, given that over the entirety of last year, which was as bad as it realistically can be, net redemption was around 25% of the Fund shares. If Fairholme were under massive redemption pressure, he could optionally redeem directly from holdings rather than in cash. The recipients might then sell and drive the price down; such an action by the shareholders in this hypothetical situation would not be a surprise.

[DRValue]

It's happened!! The Conservatorship could finally be over!!

 

http://www.foxnews.com/entertainment/2018/03/27/britney-spears-father-reportedly-looking-to-end-stars-longtime-conservatorship.html

[muscleman]

It's happened!! The Conservatorship could finally be over!!

 

http://www.foxnews.com/entertainment/2018/03/27/britney-spears-father-reportedly-looking-to-end-stars-longtime-conservatorship.html

 

 

LOL please don’t go off topic

[DRValue]

Thoughts on whether Tax reform had to be done before Fannie and Freddie, as Mnuchin knew they'd take a DTA hit and you wouldn't want to try and raise capital while the businesses declare a loss?

[investorG]

Thoughts on whether Tax reform had to be done before Fannie and Freddie, as Mnuchin knew they'd take a DTA hit and you wouldn't want to try and raise capital while the businesses declare a loss?

 

from many angles:  no.

 

 

 

[investorG]

I don't know whether to be flattered or mortified!  ???

 

On a serious note, my speculation is that the prefs have been collapsing due to more Fairholme redemptions, and perhaps Berkowitz is shorting the common as a hedge in the meantime. If he opens and closes a short common position during a quarter does he have to report it?

 

There is also a lot of tired money that has sold out, as in tired of waiting for a resolution. I am fortunate enough to not have any short-term need of the money I have in FnF as well as no other investments I find more compelling. So while I won't put any more in, I also don't plan to take any out until we get big news one way or another.

 

I guess it's possible that Berkowitz sold some prefs directly to Ackman. Ackman has around 10% of the commons of each company, so right now that's 180M shares at around $1.42 per share, or $256M. A pref position of 20% means he has 1/4 of that amount in prefs, or $64M, which represents around $330M of par value. That's barely 3% of Berkowitz's position as of the last Fairholme annual report.

 

As of December 31, Fairholme had 27 % of assets in cash, 26 % in FnF prefs, and  31% in common stocks and 16% in bonds. Berkowitz might be selling a large amount of prefs but it would not likely be due to redemption pressure < 3 months after the annual report (see below). He is also involved in serious litigation (regarding FnF), the termination of which has not been reported. He would likely sell FnF before selling JOE, which I infer from an interview last year. He could of course sell a small amount of prefs as part of a selling program to manage redemptions or to raise more cash.

 

I would be surprised and disappointed if he were voluntarily giving up on FnF prefs. That might mean that the Fairholme Fund was starting to liquidate. Always possible but again unlikely, given that over the entirety of last year, which was as bad as it realistically can be, net redemption was around 25% of the Fund shares. If Fairholme were under massive redemption pressure, he could optionally redeem directly from holdings rather than in cash. The recipients might then sell and drive the price down; such an action by the shareholders in this hypothetical situation would not be a surprise.

 

perry and ackman are likely selling too.  hopefully for business reasons, but unfortunately maybe for other ones too.  and then add in those who can't wait another year = here we are.

[racemize]

I don't know whether to be flattered or mortified!  ???

 

On a serious note, my speculation is that the prefs have been collapsing due to more Fairholme redemptions, and perhaps Berkowitz is shorting the common as a hedge in the meantime. If he opens and closes a short common position during a quarter does he have to report it?

 

There is also a lot of tired money that has sold out, as in tired of waiting for a resolution. I am fortunate enough to not have any short-term need of the money I have in FnF as well as no other investments I find more compelling. So while I won't put any more in, I also don't plan to take any out until we get big news one way or another.

 

I guess it's possible that Berkowitz sold some prefs directly to Ackman. Ackman has around 10% of the commons of each company, so right now that's 180M shares at around $1.42 per share, or $256M. A pref position of 20% means he has 1/4 of that amount in prefs, or $64M, which represents around $330M of par value. That's barely 3% of Berkowitz's position as of the last Fairholme annual report.

 

As of December 31, Fairholme had 27 % of assets in cash, 26 % in FnF prefs, and  31% in common stocks and 16% in bonds. Berkowitz might be selling a large amount of prefs but it would not likely be due to redemption pressure < 3 months after the annual report (see below). He is also involved in serious litigation (regarding FnF), the termination of which has not been reported. He would likely sell FnF before selling JOE, which I infer from an interview last year. He could of course sell a small amount of prefs as part of a selling program to manage redemptions or to raise more cash.

 

I would be surprised and disappointed if he were voluntarily giving up on FnF prefs. That might mean that the Fairholme Fund was starting to liquidate. Always possible but again unlikely, given that over the entirety of last year, which was as bad as it realistically can be, net redemption was around 25% of the Fund shares. If Fairholme were under massive redemption pressure, he could optionally redeem directly from holdings rather than in cash. The recipients might then sell and drive the price down; such an action by the shareholders in this hypothetical situation would not be a surprise.

 

perry and ackman are likely selling too.  hopefully for business reasons, but unfortunately maybe for other ones too.  and then add in those who can't wait another year = here we are.

 

Pershing Annual says they were buying and now hold preferreds.  Page 15.

[Luke 532]

Has anything changed? I usually write down why I bought this stock and don't see anything changed. Do you?

I am not sure why preferreds and commons both down significantly. This is the ultimate manipulation, don't give up your shares.

 

It's not manipulation, it's just how the stock market works.  If your thesis hasn't changed but the stock price causes stress, then you need to reconsider your conviction in your thesis.

[Guest cherzeca]

if you dont think you will hear good news from courts in next 6 months, and you just heard mnuchin say that the administration may not address housing finance reform until after midterms, then why would you go out and buy now?  it is one thing to hold, but there is no urgency now to buy.

[blackcoffee]

CSP news was the reason for pessimism. This is an example of exigent circumstance for Mnuchin to act and stop the ruin to housing market, needs to be stopped, now. I thought FHFA said housing finance reform was not their job, so why do it?

http://www.fanniemae.com/portal/media/statements/2018/statement-bon-salle-uniform-mortgage-backed-securities-6685.html

 

ICBA: Launch of the Uniform Mortgage Backed Security should be deferred until both GSEs are recapitalized and released from conservatorship.

 

https://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/--AApril/icbaprinciplesforgsereform.pdf

 

CRT ‘s that FHFA is pursuing aggressivley :  ICBA:  “these transactions also drain revenue away from the GSEs and expose them to operational risks. “

 

https://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/--AApril/icbaprinciplesforgsereform.pdf

 

 

Yeah CRTs appear to me very close to being pure financial obfuscation to drain the GSEs of what would otherwise be equity capital buffers and also are counter-cyclical and therefore will be terrible in a recession as pointed out by both Tim Howard

https://howardonmortgagefinance.com/2017/03/20/risk-transfers-in-the-real-world/

& Landon Parsons (Moelis)

https://www.americanbanker.com/opinion/risk-transfer-alone-is-not-a-viable-solution-for-gses

& Josh Rosner (via Twitter and I'm sure elsewhere)

 

The real question is, if the FHFA knows this, and they should - what is their motivation to continue these programs - why not just keep the capital since it's not properly priced given how, when you dig in, you can see that the payment periods are much shorter than the life of the bond it's supposedly protecting against - the Mezz tranche typically has a principal window that is projected to start in 36 months. So it is very, very obvious what is going to happen there. (and I'm not sure, but I'm willing to bet that most defaults don't happen within the first 36 months).

 

So unless you know what you're looking at, you'd never know that they're doing this... so the question is why? IF the FHFA is supposedly operating with the shareholders (taxpayers or orig equity holder(EG everyone on this board probably)) and the market experts are telling them they are structurally flawed yet they continue down the same path? Well... that seems suspicious to me. I'm no structured finance expert (...), but that tells me there are motives for issuing these products that aren't immediately apparent and are not as advertised.

 

[blackcoffee]

The only thing I can think of  is political motivation. The whole mess is political anyways. So what does it achieve when everyone is saying it is wrong ? The director likley wants to trash the housing market right before he leaves and slowly eroding the two.

 

No one wants to say the banks have captured the congress but they have.

[investorG]

CSP news was the reason for pessimism. This is an example of exigent circumstance for Mnuchin to act and stop the ruin to housing market, needs to be stopped, now. I thought FHFA said housing finance reform was not their job, so why do it?

http://www.fanniemae.com/portal/media/statements/2018/statement-bon-salle-uniform-mortgage-backed-securities-6685.html

 

ICBA: Launch of the Uniform Mortgage Backed Security should be deferred until both GSEs are recapitalized and released from conservatorship.

 

https://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/--AApril/icbaprinciplesforgsereform.pdf

 

CRT ‘s that FHFA is pursuing aggressivley :  ICBA:  “these transactions also drain revenue away from the GSEs and expose them to operational risks. “

 

https://www.housingwire.com/ext/resources/images/editorial/BS_ticker/PDF/--AApril/icbaprinciplesforgsereform.pdf

 

 

Yeah CRTs appear to me very close to being pure financial obfuscation to drain the GSEs of what would otherwise be equity capital buffers and also are counter-cyclical and therefore will be terrible in a recession as pointed out by both Tim Howard

https://howardonmortgagefinance.com/2017/03/20/risk-transfers-in-the-real-world/

& Landon Parsons (Moelis)

https://www.americanbanker.com/opinion/risk-transfer-alone-is-not-a-viable-solution-for-gses

& Josh Rosner (via Twitter and I'm sure elsewhere)

 

The real question is, if the FHFA knows this, and they should - what is their motivation to continue these programs - why not just keep the capital since it's not properly priced given how, when you dig in, you can see that the payment periods are much shorter than the life of the bond it's supposedly protecting against - the Mezz tranche typically has a principal window that is projected to start in 36 months. So it is very, very obvious what is going to happen there. (and I'm not sure, but I'm willing to bet that most defaults don't happen within the first 36 months).

 

So unless you know what you're looking at, you'd never know that they're doing this... so the question is why? IF the FHFA is supposedly operating with the shareholders (taxpayers or orig equity holder(EG everyone on this board probably)) and the market experts are telling them they are structurally flawed yet they continue down the same path? Well... that seems suspicious to me. I'm no structured finance expert (...), but that tells me there are motives for issuing these products that aren't immediately apparent and are not as advertised.

 

even if flawed, I think the CRTs are likely helpful to our cause because they help satisfy those who want, a) more private capital involved and b) to help the big banks, without fully dismantling the GSEs.  Perhaps people like Ed Royce spend at least some of their time pumping up CRTs rather than talking about wind-down.  I understand why purists like Tim Howard point out the flaws, but some proponents of CRTs like Watt likely look at it from a strategic 30000 foot level view.  Interestingly, though, when Mnuchin was asked about CRTs in a Congressional setting recently, he was tight-lipped which might infer he is not as supportive -- it would have been easy for him to say his line of more private capital is good, but he did not.

[investorG]

The only thing I can think of  is political motivation. The whole mess is political anyways. So what does it achieve when everyone is saying it is wrong ? The director likley wants to trash the housing market right before he leaves and slowly eroding the two.

 

for big things, watt very likely simply does what he's told to do.  he was emphatic about no draw on his watch last year in front of congress.  and look what's scheduled to happen today.  that's why I valued his utility report a good bit earlier this year - I'm hoping it was mnuchin's defense mechanism to try to indirectly ward off the corker warner 2.0 bill.  but with these security prices, now I wonder.

[Guest cherzeca]

Time's up: GSE reform ain't happening this year

 

https://www.americanbanker.com/opinion/times-up-gse-reform-aint-happening-this-year

 

What is Mnuchin waiting for?

 

Looks like he was waiting for time’s up

 

[Luke 532]

Time's up: GSE reform ain't happening this year

 

https://www.americanbanker.com/opinion/times-up-gse-reform-aint-happening-this-year

 

What is Mnuchin waiting for?

 

"The timing around housing finance reform is worth considering because Corker, who has been a driver behind efforts to overhaul the GSEs for years, is set to retire at the end of 2018. And without legislative action in the near term, the odds go up that the Trump administration could act unilaterally to make changes to the mortgage market through the Federal Housing Finance Agency."

[muscleman]

Time's up: GSE reform ain't happening this year

 

https://www.americanbanker.com/opinion/times-up-gse-reform-aint-happening-this-year

 

What is Mnuchin waiting for?

 

Looks like he was waiting for time’s up

 

 

I think he is waiting for midterm election. His actions could create easy targets to picture the current administration as risking tax payer to enrich hedge fund

[investorG]

Time's up: GSE reform ain't happening this year

 

https://www.americanbanker.com/opinion/times-up-gse-reform-aint-happening-this-year

 

What is Mnuchin waiting for?

 

"The timing around housing finance reform is worth considering because Corker, who has been a driver behind efforts to overhaul the GSEs for years, is set to retire at the end of 2018. And without legislative action in the near term, the odds go up that the Trump administration could act unilaterally to make changes to the mortgage market through the Federal Housing Finance Agency."

 

Luke, many people are hanging on to hope for an administrative solution.

 

however, mnuchin and phillips have explicitly both said they are waiting until 2019 to try again legislatively first. 

 

why think they are lying or posturing?  imo the sooner the community can get past 2018 admin reform, the better.

 

 

[Midas79]

Luke, many people are hanging on to hope for an administrative solution.

 

however, mnuchin and phillips have explicitly both said they are waiting until 2019 to try again legislatively first. 

 

why think they are lying or posturing?  imo the sooner the community can get past 2018 admin reform, the better.

 

Where did you hear this? I only remember them saying that they won't immediately act once it is clear that legislative reform by the current Congress is dead.

 

And I might be in the minority here, but I am more than willing to wait another year or two if it means actually getting par. I thought I remembered Phillips saying that Mnuchin will resolve the situation before the end of this presidential term, though I can't recall where exactly I heard that.

[investorG]

Luke, many people are hanging on to hope for an administrative solution.

 

however, mnuchin and phillips have explicitly both said they are waiting until 2019 to try again legislatively first. 

 

why think they are lying or posturing?  imo the sooner the community can get past 2018 admin reform, the better.

 

Where did you hear this? I only remember them saying that they won't immediately act once it is clear that legislative reform by the current Congress is dead.

 

And I might be in the minority here, but I am more than willing to wait another year or two if it means actually getting par. I thought I remembered Phillips saying that Mnuchin will resolve the situation before the end of this presidential term, though I can't recall where exactly I heard that.

 

Midas,

 

phillips said it during a presentation at a law firm in february.  he basically said they would wait and try again in 2019 if the legislative action failed this year.  it was disappointing to hear that, but i thought maybe it was posturing.  but then mnuchin confirmed it, i believe, in a fox interview when he brought up on his own in response to an open-ended question that he's working on gse reform but he's not sure if it will get done before the midterm elections.  in addition, he said in front of congress that he specifically wanted an explicit guarantee on the mbs - which can only be accomplished legislatively.   

 

the best we can root for this year, imo, is some potential victory in the courts, a democratic win in november, and no potential inflammatory commentary against us minority shareholders.  the common and preferred shares price in quite pessimistic outcomes, in my view, but there's of course a real potential i'm missing something relevant that justifies their low levels.

 

[merkhet]

I highly doubt that Democrats want to hand shareholders a win.

[rros]

One can easily add a more positive outlook to investorG's viewpoint.  For example, Phillips supported Watt's utility proposal and Munchin expressed at a Senate hearing Treasury has administrative options he will not disclose because of market impact. In addition, it is not a given democrats will make a comeback in Congress. Since they more likely also support Watt's utility proposal gambling it in the hopes of a democratic win in Congress may simply be too risky. Which all leads to better to act before mid term elections. If democrats finally win, they can ratify any admin change legislatively later. If they do not win, they can feel better that some administration reform has taken place. Strategically, for democrats, it is better to see action before midterms rather than risking seeing Republicans consolidate their power and face a stark reality in 2019.

[investorG]

I highly doubt that Democrats want to hand shareholders a win.

 

while they don't care about us, they do like FnF much more than the Republican cartel - even below the surface of corker and henserling.  i'd recommend watching all of the hearings.  especially the House ones.  it's not a coincidence that mr. liberal mel watt wants a shareholder-owned utility while all the congressional committee proposals to date - led by republicans - would shaft the minority shareholders.  tom cotton might be one of the few exceptions, maybe.

 

[investorG]

One can easily add a more positive outlook to investorG's viewpoint.  For example, Phillips supported Watt's utility proposal and Munchin expressed at a Senate hearing Treasury has administrative options he will not disclose because of market impact. In addition, it is not a given democrats will make a comeback in Congress. Since they more likely also support Watt's utility proposal gambling it in the hopes of a democratic win in Congress may simply be too risky. Which all leads to better to act before mid term elections. If democrats finally win, they can ratify any admin change legislatively later. If they do not win, they can feel better that some administration reform has taken place. Strategically, for democrats, it is better to see action before midterms rather than risking seeing Republicans consolidate their power and face a stark reality in 2019.

 

phillips said he wasn't allergic to watt's proposal, something like that.  it wasn't a full-hearted endorsement.

 

mnuchin does have administrative options,  I just believe it's a 2019 potential not 2018 -- based on his statements, rather than my guesses.

 

democrats are ~65pct favorites for the house per betting sites.

 

the one area where I think I might be off is if he does an amendment with watt that a) ends sweep and b) adds in an explicit payment for the backstop until capital is raised.  this could signal that FnF are here to stay and he still wants to work with congress in 2019 to imprint the new housing finance system (as admin action is less permanent).  last week would have been a good chance to do that, but it didnt happen.  another chance could be after the congress passes the dodd frank reform.