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

[Luke 532]

Tim Howard comments...

 

https://howardonmortgagefinance.com/2018/07/10/some-pre-comment-comments/comment-page-1/#comments

 

I just saw this. My initial reaction is that this very is good news for current investors in the companies’ securities, but less good news for mortgage borrowers and, potentially, the purchasers of the new equity the companies will issue if as Moelis advocates they are allowed build capital and released from conservatorship.

 

I’ve only skimmed the Moelis presentation–and will analyze it in much more depth shortly–but I already get its import: something very close to the capital proposal FHFA put out in June will be the “price” for getting the Financial Establishment (the banks and Wall Street firms, and also Treasury) to accept an administrative solution to mortgage reform in which the companies are allowed to emerge from conservatorship. I already suspected something as much when I saw that the risk-based capital numbers FHFA contortedly had backed into in its June proposal were very close to the capital numbers Moelis had advocated in its plan last year. And the statement they make in their Summary of Conclusions on page 7 leaves little doubt that this is the consensus “way out” for the companies: “The differences between FHFA’s rule and U.S. bank capital requirements, or the requirements proposed in the Moelis Blueprint, are minor, explainable and defensible.”

 

So this is the very good news: it looks as if a broad-based consensus has emerged on a path to getting Fannie and Freddie out of conservatorship, which will require settling the lawsuits.

 

I made three major criticisms of the FHFA capital proposal in my latest post: it is a mistake to align the Fannie-Freddie capital requirements with bank capital regulations (since the companies deal only in a single product whose losses are much less than the assets banks finance); the cushions FHFA has built into the risk-based standard, coupled with the countercyclical nature of that standard, will force Fannie and Freddie to hold large amounts of excess capital, which FHFA isn’t taking into account; and its treatment of CRTs is one-sided (not counting their expense), and thus gives Fannie and Freddie an incentive to substitute an inferior form of capital for a superior one.

 

Of these, Moelis only addresses the third. Again, I get not addressing the “bank-like capital” criticism–overcapitalizing the companies is the price that will have to be paid to get them out of conservatorship. The excessive conservatism of the risk-based standard is a different matter. I sent a note to the Moelis team about this the day I did my blog post, so I know they’re aware of the issue. I believe they either don’t agree with my analysis of it, or think if it becomes a problem FHFA can fix it later, by regulation. (If FHFA doesn’t fix this, I believe the “reformed” companies will have to price their new business in a way that will have a significant negative impact on their business volumes, and hence their value as going concerns.) I would lean toward the second explanation: let’s not put any obstacles in the path of getting a deal done. On CRTs, I see Moelis does think FHFA is giving the companies too much credit for them, and proposes giving less capital credit.

 

I’m going do more work on the risk-based capital dynamic (the fact that the way FHFA has structured the test will require much more capital just at the time that capital will be hard to come by, which I don’t think FHFA understands or intends), and address this in more detail in my comment letter to FHFA. And I’ll still make the point about the illogic (and damaging effect on mortgage rates) of using bank capital ratios for mortgages that have one-tenth the loss rates of the types of loans banks make, but I understand I’m not going to win that one.

[Midas79]

An encouraging pricing sign: while pref share prices aren't moving a whole lot, there are relatively large orders (1000 shares and up) on the bid of nearly every series I follow. Perhaps someone is trying to get into the prefs at a good price, but isn't particular about which series.

[Luke 532]

Moelis met with FHFA two weeks ago

 

-Go here: https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx

 

-Search "Moelis"

 

Results:

Meeting on 7/26

Moelis uploads report 8/1

 

Two super interesting quotes (to me at least),

"Moelis is an independent investment bank, and is currently engaged as a financial advisor to certain non-litigating preferred shareholders in the GSEs" (page 6)

 

Seems to me to be more confirmation that non-litigating and litigating shareholders are in the same boat.

 

"This also follows the same general approach laid out in the Moelis Blueprint and is

consistent with GSE reform proposals put forward by other major market participants (e.g., the Mortgage Bankers Association)" (page 7)

 

If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised.  As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks.  This has been much more frequent than at any point in the past few years.

[rros]

Moelis met with FHFA two weeks ago

 

-Go here: https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx

 

-Search "Moelis"

 

Results:

Meeting on 7/26

Moelis uploads report 8/1

 

Two super interesting quotes (to me at least),

"Moelis is an independent investment bank, and is currently engaged as a financial advisor to certain non-litigating preferred shareholders in the GSEs" (page 6)

 

Seems to me to be more confirmation that non-litigating and litigating shareholders are in the same boat.

 

"This also follows the same general approach laid out in the Moelis Blueprint and is

consistent with GSE reform proposals put forward by other major market participants (e.g., the Mortgage Bankers Association)" (page 7)

 

If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised.  As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks.  This has been much more frequent than at any point in the past few years.

The non-litigating shareholder is, most likely, John Paulson. While we are all on the same boat, we may be in different cabins. Paulson might help the Jrs. achieve face value and dividend reinstatement, whereas litigating shareholders may help with a meaningful compensation for the alleged nationalization. Provided we prevail in court.

[Midas79]

If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised.  As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks.  This has been much more frequent than at any point in the past few years.

 

The date on the Moelis comment is August 1. If MBA was going to speak out against it, we would have heard it by now.

[Luke 532]

If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised.  As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks.  This has been much more frequent than at any point in the past few years.

 

The date on the Moelis comment is August 1. If MBA was going to speak out against it, we would have heard it by now.

 

That further drives the point home that MBA isn't balking at the Moelis plan.  Thank you.

[TwoCitiesCapital]

If MBA doesn't come out against this plan in the coming day or two (really tonight as when they do voice their opinion it's usually immediate), then they really must have compromised on what they were seeking. I'm not surprised.  As you can see in my recent posts, the David Stevens mouthpiece (Paul Muolo of IMF) has been publishing very favorable quotes and stories the past few weeks.  This has been much more frequent than at any point in the past few years.

 

The date on the Moelis comment is August 1. If MBA was going to speak out against it, we would have heard it by now.

 

That further drives the point home that MBA isn't balking at the Moelis plan.  Thank you.

 

I'm not saying the two scenarios similar enough to bet on the outcome, but when the two sides stopped being at each other's throats publicly was the tell that a few days later a settlement had been reached in the MBIA case and the equity spiked.

 

 

[SnarkyPuppy]

Sorry just jumping into the FHFA meeting news quickly on my phone (on vacation).  Did the source of the meeting (FHFA website?) disclose similar meetings with other commenters? Or was moelis the only group FHFA met w publicly?

[Luke 532]

Sorry just jumping into the FHFA meeting news quickly on my phone (on vacation).  Did the source of the meeting (FHFA website?) disclose similar meetings with other commenters? Or was moelis the only group FHFA met w publicly?

 

https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx

 

Searched "meeting" and "meet" under Organization.

 

The two results are Moelis (7/26/18) and Andrew Davidson & Co. (6/21/18)

 

Davidson last year: http://knowledge.wharton.upenn.edu/article/why-competition-wont-lead-to-better-outcomes-for-fannie-mae-and-freddie-mac/

[SnarkyPuppy]

Sorry just jumping into the FHFA meeting news quickly on my phone (on vacation).  Did the source of the meeting (FHFA website?) disclose similar meetings with other commenters? Or was moelis the only group FHFA met w publicly?

 

https://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Commentonrule.aspx

 

Searched "meeting" and "meet" under Organization.

 

The two results are Moelis (7/26/18) and Andrew Davidson & Co. (6/21/18)

 

Davidson last year: http://knowledge.wharton.upenn.edu/article/why-competition-wont-lead-to-better-outcomes-for-fannie-mae-and-freddie-mac/

 

Thank you!

[Midas79]

midas, you are onto the core issue in collins, which is that in the 5th circuit, the Mcallister case interpreted "may" as "only may".  McAllister for the 5th circuit is even stronger than CedarMinn for the 8th circuit.

 

I don't know why Cooper & Kirk aren't making a big stink about this in their motion for rehearing.  they mention Mcallister, but only in passing.

 

I just had a daydream about how this could have gone down in oral arguments, complete with expansive hand and arm gestures, incredulous voicing at the proper spots, the whole works.

 

 

 

Thompson: The defendants have argued, successfully in other courts, that the word "may" in section 1367(b)(2)(D) is merely permissive in nature and not exclusionary. But this very court found the opposite to be true in McAllister vs RTC. In that case, this court said that a conservator, quote, 'only', let me repeat only, 'has the power to take actions necessary to restore a financially troubled institution to solvency.  Expenses of liquidation cannot be incurred by a conservator as a matter of law, as', and I emphasize here, 'liquidation is not a function of the conservator.'

 

Allow me to read the relevant section in HERA. 'The Agency may, as conservator, take such action as may be--

    ‘(i) necessary to put the regulated entity in a sound and solvent condition; and'

(I emphasize and)

  ' ‘(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.'

 

Given these things, that FHFA's powers as conservator only, as stated by this court, allow it to take actions to restore the companies to solvency, and that HERA requires FHFA to take both parts of section 1367(b)(2)(D) into account, how can the Net Worth Sweep be anything other than ultra vires? The Net Worth Sweep does the opposite of (i) because it endangers, rather than promotes, the financial soundness of the companies, and it also does the opposite of (ii) because it, rather than preserving and conserving the assets of the companies, instead gives them away to Treasury in perpetuity.

 

As a clearly ultra vires act, the Net Worth Sweep is thus reviewable by this court and the bar of judicial review found in section 4617(f) does not apply. Thank you, your honors.

 

 

 

Alas, the opportunity has likely passed by.

 

The 5th Circuit McAllister vs RTC opinion references RTC vs United Trust Corp. in the 11th Circuit. That opinion, found here: https://caselaw.findlaw.com/us-11th-circuit/1225205.html, says:

 

The CedarMinn court also recognized that the distinct missions of conservators and receivers necessitated that each retain an independent right to repudiate contracts.   The conservator's mission is to conserve assets which often involves continuing an ongoing business.   The receiver's mission is to shut a business down and sell off its assets.

 

They used the 8th Circuit's CedarMinn case as part of an opinion. Does that bind the 11th Circuit? Has a NWS case been brought before the 11th Circuit yet?

[rros]

midas, you are onto the core issue in collins, which is that in the 5th circuit, the Mcallister case interpreted "may" as "only may".  McAllister for the 5th circuit is even stronger than CedarMinn for the 8th circuit.

 

I don't know why Cooper & Kirk aren't making a big stink about this in their motion for rehearing.  they mention Mcallister, but only in passing.

 

I just had a daydream about how this could have gone down in oral arguments, complete with expansive hand and arm gestures, incredulous voicing at the proper spots, the whole works.

 

 

 

Thompson: The defendants have argued, successfully in other courts, that the word "may" in section 1367(b)(2)(D) is merely permissive in nature and not exclusionary. But this very court found the opposite to be true in McAllister vs RTC. In that case, this court said that a conservator, quote, 'only', let me repeat only, 'has the power to take actions necessary to restore a financially troubled institution to solvency.  Expenses of liquidation cannot be incurred by a conservator as a matter of law, as', and I emphasize here, 'liquidation is not a function of the conservator.'

 

Allow me to read the relevant section in HERA. 'The Agency may, as conservator, take such action as may be--

    ‘(i) necessary to put the regulated entity in a sound and solvent condition; and'

(I emphasize and)

  ' ‘(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.'

 

Given these things, that FHFA's powers as conservator only, as stated by this court, allow it to take actions to restore the companies to solvency, and that HERA requires FHFA to take both parts of section 1367(b)(2)(D) into account, how can the Net Worth Sweep be anything other than ultra vires? The Net Worth Sweep does the opposite of (i) because it endangers, rather than promotes, the financial soundness of the companies, and it also does the opposite of (ii) because it, rather than preserving and conserving the assets of the companies, instead gives them away to Treasury in perpetuity.

 

As a clearly ultra vires act, the Net Worth Sweep is thus reviewable by this court and the bar of judicial review found in section 4617(f) does not apply. Thank you, your honors.

 

 

 

Alas, the opportunity has likely passed by.

 

The 5th Circuit McAllister vs RTC opinion references RTC vs United Trust Corp. in the 11th Circuit. That opinion, found here: https://caselaw.findlaw.com/us-11th-circuit/1225205.html, says:

 

The CedarMinn court also recognized that the distinct missions of conservators and receivers necessitated that each retain an independent right to repudiate contracts.   The conservator's mission is to conserve assets which often involves continuing an ongoing business.   The receiver's mission is to shut a business down and sell off its assets.

 

They used the 8th Circuit's CedarMinn case as part of an opinion. Does that bind the 11th Circuit? Has a NWS case been brought before the 11th Circuit yet?

So.. I am curious, Midas.

 

What would you do if the government front-run us within the next 4 months and unwinds the nws as part of a Moelis plan (Watt ordering the companies to come up with a recap plan will be the green light)? Will this and lawsuits seeking similar remedies just deflate?

 

Perhaps there is a reason why Cooper is becoming more aggressive pursuing a nationalization/meaningful compensation strategy, as per his last filing.

[allnatural]

That all depends on how the government treats the Senior prefs. If they mark it to zero/paid off, all the lawsuits are naturally resolved (which is great). If they claim they can stop the sweep and recap the entities while having the senior prefs outstanding, good luck ever achieving a recap in that scenario (no rational investor will commit a penny) and the lawsuits will continue.

 

What you're describing is a best care scenario for shareholders (assuming senior prefs are treated as paid down).

 

So.. I am curious, Midas.

 

What would you do if the government front-run us within the next 4 months and unwinds the nws as part of a Moelis plan (Watt ordering the companies to come up with a recap plan will be the green light)? Will this and lawsuits seeking similar remedies just deflate?

 

Perhaps there is a reason why Cooper is becoming more aggressive pursuing a nationalization/meaningful compensation strategy, as per his last filing.

[rros]

That all depends on how the government treats the Senior prefs. If they mark it to zero/paid off, all the lawsuits are naturally resolved (which is great). If they claim they can stop the sweep and recap the entities while having the senior prefs outstanding, good luck ever achieving a recap in that scenario (no rational investor will commit a penny) and the lawsuits will continue.

 

What you're describing is a best care scenario for shareholders (assuming senior prefs are treated as paid down).

 

So.. I am curious, Midas.

 

What would you do if the government front-run us within the next 4 months and unwinds the nws as part of a Moelis plan (Watt ordering the companies to come up with a recap plan will be the green light)? Will this and lawsuits seeking similar remedies just deflate?

 

Perhaps there is a reason why Cooper is becoming more aggressive pursuing a nationalization/meaningful compensation strategy, as per his last filing.

As per Moelis, a pre-requisite to any recapitalization requires the elimination of the Srs. But the greater question remains.

 

Cooper understands that achieving our monetary goal -amazing for us- may do little to prevent another nws. Something else beyond our monetary gain must happen.

[Midas79]

So.. I am curious, Midas.

 

What would you do if the government front-run us within the next 4 months and unwinds the nws as part of a Moelis plan (Watt ordering the companies to come up with a recap plan will be the green light)? Will this and lawsuits seeking similar remedies just deflate?

 

Perhaps there is a reason why Cooper is becoming more aggressive pursuing a nationalization/meaningful compensation strategy, as per his last filing.

 

That all depends on how the government treats the Senior prefs. If they mark it to zero/paid off, all the lawsuits are naturally resolved (which is great). If they claim they can stop the sweep and recap the entities while having the senior prefs outstanding, good luck ever achieving a recap in that scenario (no rational investor will commit a penny) and the lawsuits will continue.

 

What you're describing is a best care scenario for shareholders (assuming senior prefs are treated as paid down).

 

Basically this. The original SPSPA dividends were based on the senior pref liquidation preference, and the NWS dividends seem to be tied to their existence. Cancelling the seniors, deeming them repaid, or converting them to common (this last one is fraught because it might force the government to consolidate FnF's balance sheets onto their own, a nonstarter in my opinion due to it technically skyrocketing the national debt by $5.3T overnight) will mean no more NWS dividends, so the lawsuits should become moot.

 

I agree with allnatural, that the Moelis plan is more than what the litigants are asking for, so I believe they would drop their lawsuits in exchange for Moelis, though they would likely want something binding in writing from FHFA and Treasury. Dropping lawsuits before that, especially after next week when the statute of limiations expires for the NWS, is not a good idea.

[rros]

So.. I am curious, Midas.

 

What would you do if the government front-run us within the next 4 months and unwinds the nws as part of a Moelis plan (Watt ordering the companies to come up with a recap plan will be the green light)? Will this and lawsuits seeking similar remedies just deflate?

 

Perhaps there is a reason why Cooper is becoming more aggressive pursuing a nationalization/meaningful compensation strategy, as per his last filing.

 

That all depends on how the government treats the Senior prefs. If they mark it to zero/paid off, all the lawsuits are naturally resolved (which is great). If they claim they can stop the sweep and recap the entities while having the senior prefs outstanding, good luck ever achieving a recap in that scenario (no rational investor will commit a penny) and the lawsuits will continue.

 

What you're describing is a best care scenario for shareholders (assuming senior prefs are treated as paid down).

 

Basically this. The original SPSPA dividends were based on the senior pref liquidation preference, and the NWS dividends seem to be tied to their existence. Cancelling the seniors, deeming them repaid, or converting them to common (this last one is fraught because it might force the government to consolidate FnF's balance sheets onto their own, a nonstarter in my opinion due to it technically skyrocketing the national debt by $5.3T overnight) will mean no more NWS dividends, so the lawsuits should become moot.

 

I agree with allnatural, that the Moelis plan is more than what the litigants are asking for, so I believe they would drop their lawsuits in exchange for Moelis, though they would likely want something binding in writing from FHFA and Treasury. Dropping lawsuits before that, especially after next week when the statute of limiations expires for the NWS, is not a good idea.

I partially agree with both of you.

 

But I now feel specific lawsuits may continue based on what the nws really means, as shown by Cooper's new line of attack. Lawsuit(s) seeking some sort of redemption of shareholders who were decimated by the only nationalization to have ever taken place in the US.

 

Redemption comes from the Latin word redimere, a combination of re(d)-, meaning “back,” and emere, meaning “buy.” Redemption is what some people claim happens to your soul when you're saved from evil forces.

 

I know many will simply feel happy by a windfall of any size, if it comes to that. Only a bitter-sweet victory for me. I simply can't believe tens of millions spent over 6 years in meaningful lawsuits will go by the wayside because suddenly the government unwinds the reason behind them. I prefer to believe Cooper is smarter than all of us and there is more to it in his latest filing.

[allnatural]

I like where your head is at rros. What happened here was truly an embarrassment to our nation and it's all factual at this point. I would love to see the government lose in court but unfortunately we might have to agree to a settlement with no acknowledgement from the government of any wrongdoing. After all shareholders are paying Coopers fees... And they would be happy to walk away from this mess with a windfall and reprivatized GSEs.

[Eye4Valu]

If an equitable settlement can be reached, there is no reason to continue on with the lawsuits as a matter of principle. Fannie and Freddie aren't the first nationalization, and won't be the last.

[rros]

If an equitable settlement can be reached, there is no reason to continue on with the lawsuits as a matter of principle. Fannie and Freddie aren't the first nationalization, and won't be the last.

Since the prevailing view is of constructively putting things behind, I will not bring this up again.

[SnarkyPuppy]

Surely it will be challenging to get all common shareholders on board with settling litigation?  There will almost always be some form of contingent liability - in the sense that if Moelis plan is implemented, legacy common shareholders will still be suing over FHFA constitutionality and whether the initial takeover was legal?  The potential windfall to common shareholders is just so huge I don't see them all going away for $8 per share.  Amateur hour over here (me) when it comes to the legal side of the thesis though.

 

Interesting to know that statute of limitations re: NWS is coming up.  It would make sense to have a stopping point for any new litigation before finalizing any settlements w/ preferred litigants.

[SnarkyPuppy]

With that said, buying some more this morning.  It's truly amazing that some of the variable prefs trade at an implied 19% probability of attaining par value.  The odds are clearly much higher. 

[allnatural]

Right there with ya bud.

 

With that said, buying some more this morning.  It's truly amazing that some of the variable prefs trade at an implied 19% probability of attaining par value.  The odds are clearly much higher.

[rros]

rros is right. Shareholders after this loot are willing to settle for a whopping $3 per share? The preferred conversion to commons followed by an IPO to reissue similar junior preferred shares is just to enrich few and financial shenanigans.

 

Moelis plan is the best plan right now but needs lot of tweaking as it is simply funneling money.

 

https://investorshub.advfn.com/boards/read_msg.aspx?message_id=142841825

 

 

I know many will simply feel happy by a windfall of any size, if it comes to that. Only a bitter-sweet victory for me. I simply can't believe tens of millions spent over 6 years in meaningful lawsuits will go by the wayside because suddenly the government unwinds the reason behind them. I prefer to believe Cooper is smarter than all of us and there is more to it in his latest filing.

The point I tried to make is unrelated to any common shares plight, I am sorry. I owned a small amount a long time ago and sold them all back then. I have no opinion on the commons.

[Midas79]

@cherzeca

 

So as not to clutter up Tim Howard's blog, I'll ask my question about your recent post there regarding the unopposed en banc request in the All American case.

 

Collins will likely ask for a review of the NWS claim that was dismissed in addition to the Article II claim, and FHFA will surely oppose the NWS part of it. In your opinion, how likely is it that the 5th Circuit grants en banc on the NWS claims? I take it a review of the Article II claim can be separated from a review of the NWS claim, as in either separately or both could be reviewed without regard to the other.

[Guest cherzeca]

@cherzeca

 

So as not to clutter up Tim Howard's blog, I'll ask my question about your recent post there regarding the unopposed en banc request in the All American case.

 

Collins will likely ask for a review of the NWS claim that was dismissed in addition to the Article II claim, and FHFA will surely oppose the NWS part of it. In your opinion, how likely is it that the 5th Circuit grants en banc on the NWS claims? I take it a review of the Article II claim can be separated from a review of the NWS claim, as in either separately or both could be reviewed without regard to the other.

 

excellent question.  I think all American's motion makes it incrementally more likely that 5th cir does not hear appeal of APA claim or hears it separately en banc, since that would be the non-common claim of any consolidated appeal.  just guessing though