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

[orthopa]

https://www.cato.org/multimedia/media-highlights-tv/mark-calabria-discusses-fannie-mae-freddie-mac-fbns-countdown-closing

 

I think this video was posted before; sorry for the duplication but I thought it relevant now that he's the likely FHFA nominee.

 

:D ;) :D

[DRValue]

Calabria.

White House Expected to Nominate Pence Aide to Lead FHFA

https://www.wsj.com/articles/white-house-expected-to-nominate-pence-aide-to-lead-fhfa-1544457677

 

"Mr. Calabria also has questioned the legality of the current arrangement by which the Treasury Department collects the profits of Fannie and Freddie in exchange for its nearly open-ended support of the mortgage-finance giants since the 2008 crisis. That position sides with shareholders of the firms who have challenged in court the FHFA’s administration of the companies."

 

Do you have the full text?

[DocSnowball]

https://www.cato.org/multimedia/media-highlights-tv/mark-calabria-discusses-fannie-mae-freddie-mac-fbns-countdown-closing

 

I think this video was posted before; sorry for the duplication but I thought it relevant now that he's the likely FHFA nominee.

 

:D ;) :D

 

I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely -

1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that

2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies.

 

My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge. And the receivership announcement may be the catalyst to bring legislators to the table with Treasury leading the way. Mnuchin has repeatedly talked about not wanting to move markets by showing his hand. I have wondered these markets he worries about are not equity but debt markets, and again they will likely do everything they can to reassure GSE debt holders the debt is secure.

[investorG]

https://www.cato.org/multimedia/media-highlights-tv/mark-calabria-discusses-fannie-mae-freddie-mac-fbns-countdown-closing

 

I think this video was posted before; sorry for the duplication but I thought it relevant now that he's the likely FHFA nominee.

 

:D ;) :D

 

I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely -

1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that

2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies.

 

My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge.

 

you likely won't get much support on this (and other) boards for this point of view but I think there's a good chance you're right.  the common price @ 1.20 with endless re-loading supply indicates so.

 

edit:  could they send them through receivership with a pre-arranged ratio of cash flow proceeds directed between the 3 buckets (govt / jr pref / common) rather than the typical full waterfall based on seniority?

[rros]

https://www.cato.org/multimedia/media-highlights-tv/mark-calabria-discusses-fannie-mae-freddie-mac-fbns-countdown-closing

 

I think this video was posted before; sorry for the duplication but I thought it relevant now that he's the likely FHFA nominee.

 

:D ;) :D

 

I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely -

1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that

2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies.

 

My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge.

 

you likely won't get much support on this (and other) boards for this point of view but I think there's a good chance you're right.  the common price @ 1.20 with endless re-loading supply indicates so.

 

edit:  could they send them through receivership with a pre-arranged ratio of cash flow proceeds directed between the 3 buckets (govt / jr pref / common) rather than the typical full waterfall based on seniority?

As long as Calabria/Mnuchin establish the Srs. have been paid off and acknowledge any excess over the 10% return belongs to the companies a receivership scenario with what might be a large waterfall will cover the Jrs. So what really matters is the full removal of the Srs. This would be consistent with all Calabria's prior stance.

[Guest cherzeca]

"Mr. Calabria also has questioned the legality of the current arrangement by which the Treasury Department collects the profits of Fannie and Freddie in exchange for its nearly open-ended support of the mortgage-finance giants since the 2008 crisis. That position sides with shareholders of the firms who have challenged in court the FHFA’s administration of the companies."

 

in the mkrimminger/calabria white paper, they did not question there NWS authority, they stated that the NWS was illegal under HERA

[investorG]

https://www.cato.org/multimedia/media-highlights-tv/mark-calabria-discusses-fannie-mae-freddie-mac-fbns-countdown-closing

 

I think this video was posted before; sorry for the duplication but I thought it relevant now that he's the likely FHFA nominee.

 

:D ;) :D

 

I'm wondering after watching this video and his legal thoughts, which are similar to ours and perhaps any reasonable person, that continued conservatorship is unlikely -

1) scenario 1: exit conservatorship with recap and release - but neither Mnuchin or Calabria have stated support for that

2) scenario 2: receivership - if Treasury/FHFA want to run the companies through receivership and have them re-emerge as whatever they envision (may be 1 or 2 or more likely 4-6 smaller new companies in a competitive market,) then what is the bare minimum they have to do to take care of the preferred and common shareholders in a way that Treasury can still monetize its equity position? That is likely what they will do, with the help of large shareholders who are already friendly with the decision makers - otherwise the alternative to not reaching a negotiated agreement is that restructuring may leave preferred and common owners to fend for themselves in court another decade. And they are not so stupid to leave the big Treasury equity position on the table just to break up/ restructure the companies.

 

My thesis is they will run this through receivership with some legal arrangement for the current shareholders to get equity when the new companies emerge.

 

you likely won't get much support on this (and other) boards for this point of view but I think there's a good chance you're right.  the common price @ 1.20 with endless re-loading supply indicates so.

 

edit:  could they send them through receivership with a pre-arranged ratio of cash flow proceeds directed between the 3 buckets (govt / jr pref / common) rather than the typical full waterfall based on seniority?

As long as Calabria/Mnuchin establish the Srs. have been paid off and acknowledge any excess over the 10% return belongs to the companies a receivership scenario with what might be a large waterfall will cover the Jrs. So what really matters is the full removal of the Srs. This would be consistent with all Calabria's prior stance.

 

I don't believe this is likely, rros, because the common would have some very very major upside potential (since jr pref cash flows are capped at par value) in a receivership whereby the sr pref are cancelled - the cash flows could be large.  and well the common's not showing that at the moment. 

 

if I was a plaintiff and the companies were dumped into a receivership with the legacy assets in wind-down throwing off tons of cash and I was entitled to say 20pct of all cash flows (up to par), i'd likely drop the lawsuit.  this way sr pref would still get some more value (taxpayer win), commons also to some degree, and the system could be created as desired going forward by congress without legacy lawsuits.

[Luke 532]

and well the common's not showing that at the moment. 

 

I'm not responding to the gist of your post, but responding only to say that I'd caution against using market prices as a proxy for value or for what the future may hold.  My comment isn't so much for you, but for some reading this board that might have a tendency to read too much into current prices of any security, and especially a situation like the GSE's.

[rros]

Not sure I understand this scenario.. could you expand? Companies survive receivership and go on run-off. Cash flows to be used partially to repay Jrs. (at 20% of CF) and any excess flows to commons. What would the Srs. benefit be? And taxpayers? Also, this contemplates new companies running with new assets and presumably any reform they want to institute (paid-off guarantees, no charters, etc.).

[investorG]

Not sure I understand this scenario.. could you expand? Companies survive receivership and go on run-off. Cash flows to be used partially to repay Jrs. (at 20% of CF) and any excess flows to commons. What would the Srs. benefit be? And taxpayers? Also, this contemplates new companies running with new assets and presumably any reform they want to institute (paid-off guarantees, no charters, etc.).

 

sure. just guessing, and would stop writing on this if someone says why it cant work, but:  sweep stops now.  commitment fee established to pay for backstop (which is needed).  companies into receivership in 2019.  operational assets carved out into new companies and re-ipo'd eventually with a clean slate (don't need to raise a lot of $ so more doable).  legacy assets (5trn portfolios with some operational assets to wind them down) stay in receivership.  normally in receivership all cash flows go to sr pref until paid off, then jr pref, then common gets anything and everything left over (if there is any).  in this plan, there'd be a pre-arranged waterfall of cash flows:  say sr pref gets 75pct, jr pref 20pct, common 5pct.  since the cash flows would expected to be large as the 5trn portfolio runs down, a jr pref shareholder would expect to get par over the course of a few years.  lawsuits go away.  tsy commitment goes away over time and tsy makes a lot more $ for deficit reduction.

[DRValue]

Not sure I understand this scenario.. could you expand? Companies survive receivership and go on run-off. Cash flows to be used partially to repay Jrs. (at 20% of CF) and any excess flows to commons. What would the Srs. benefit be? And taxpayers? Also, this contemplates new companies running with new assets and presumably any reform they want to institute (paid-off guarantees, no charters, etc.).

 

sure. just guessing, and would stop writing on this if someone says why it cant work, but:  sweep stops now.  commitment fee established to pay for backstop (which is needed).  companies into receivership in 2019.  operational assets carved out into new companies and re-ipo'd eventually with a clean slate (don't need to raise a lot of $ so more doable).  legacy assets (5trn portfolios with some operational assets to wind them down) stay in receivership.  normally in receivership all cash flows go to sr pref until paid off, then jr pref, then common gets anything and everything left over (if there is any).  in this plan, there'd be a pre-arranged waterfall of cash flows:  say sr pref gets 75pct, jr pref 20pct, common 5pct.  since the cash flows would expected to be large as the 5trn portfolio runs down, a jr pref shareholder would expect to get par over the course of a few years.  lawsuits go away.  tsy commitment goes away over time and tsy makes a lot more $ for deficit reduction.

 

Receivership would be incredibly difficult imo.

Also,  not sure I would put money in a company when I know the govt can just take all my money.

[rros]

Not sure I understand this scenario.. could you expand? Companies survive receivership and go on run-off. Cash flows to be used partially to repay Jrs. (at 20% of CF) and any excess flows to commons. What would the Srs. benefit be? And taxpayers? Also, this contemplates new companies running with new assets and presumably any reform they want to institute (paid-off guarantees, no charters, etc.).

 

sure. just guessing, and would stop writing on this if someone says why it cant work, but:  sweep stops now.  commitment fee established to pay for backstop (which is needed).  companies into receivership in 2019.  operational assets carved out into new companies and re-ipo'd eventually with a clean slate (don't need to raise a lot of $ so more doable).  legacy assets (5trn portfolios with some operational assets to wind them down) stay in receivership.  normally in receivership all cash flows go to sr pref until paid off, then jr pref, then common gets anything and everything left over (if there is any).  in this plan, there'd be a pre-arranged waterfall of cash flows:  say sr pref gets 75pct, jr pref 20pct, common 5pct.  since the cash flows would expected to be large as the 5trn portfolio runs down, a jr pref shareholder would expect to get par over the course of a few years.  lawsuits go away.  tsy commitment goes away over time and tsy makes a lot more $ for deficit reduction.

Where are the warrants in this plan? Also, if they institute a fee on the remainder backstop why would the Srs. remain? Something is complicated in this scenario: Srs. remain yet NWS stops? You mean Srs. at 0% yield so that only principal is returned? I know it is the legal view but even Calabria stated the original commitment was not a scheme to profit from. In this scenario, the government will be making an absolute killing for decades.

 

The ultimate goal of a plan like this is to prevent a windfall for shareholders. At all costs.

 

And even then, minimize the gain over a period of many years so as for any solution to become more palatable. It's a bit over the top, in my view. Given some of us have already been on this for almost a decade.

[Guest cherzeca]

Just off top of my head without going to HERA receivership requires finding of insolvency. Not effing likely.

[Midas79]

Just off top of my head without going to HERA receivership requires finding of insolvency. Not effing likely.

 

Section 1367 of HERA actually gives the FHFA director several ways to impose receivership.

 

‘(a) Appointment of the Agency as Conservator or Receiver-

 

    ‘(1) IN GENERAL- Notwithstanding any other provision of Federal or State law, the Director may appoint the Agency as conservator or receiver for a regulated entity in the manner provided under paragraph (2) or (4). All references to the conservator or receiver under this section are references to the Agency acting as conservator or receiver.

 

    ‘(2) DISCRETIONARY APPOINTMENT- The Agency may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.

 

    ‘(3) GROUNDS FOR DISCRETIONARY APPOINTMENT OF CONSERVATOR OR RECEIVER- The grounds for appointing conservator or receiver for any regulated entity under paragraph (2) are as follows:

 

        ‘(H) VIOLATIONS OF LAW- Any violation of any law or regulation, or any unsafe or unsound practice or condition that is likely to--

 

            ‘(i) cause insolvency or substantial dissipation of assets or earnings; or

 

            ‘(ii) weaken the condition of the regulated entity.

 

        ‘(I) CONSENT- The regulated entity, by resolution of its board of directors or its shareholders or members, consents to the appointment.

 

        ‘(J) UNDERCAPITALIZATION- The regulated entity is undercapitalized or significantly undercapitalized (as defined in section 1364(a)(3)), and--

 

            ‘(i) has no reasonable prospect of becoming adequately capitalized;

 

            ‘(ii) fails to become adequately capitalized, as required by--

 

                ‘(I) section 1365(a)(1) with respect to a regulated entity; or

 

                ‘(II) section 1366(a)(1) with respect to a significantly undercapitalized regulated entity;

 

            ‘(iii) fails to submit a capital restoration plan acceptable to the Agency within the time prescribed under section 1369C; or

 

            ‘(iv) materially fails to implement a capital restoration plan submitted and accepted under section 1369C.

 

        ‘(K) CRITICAL UNDERCAPITALIZATION- The regulated entity is critically undercapitalized, as defined in section 1364(a)(4).

 

Once capital standards are actually put in force, (K) will almost certainly apply immediately, as will (J)(i), (J)(iii) and (J)(iv): with the NWS in place, how can the companies build capital and what possible capital restoration plan could they submit?

 

Ironically, (H) could be twisted around to describe the NWS as an "unsafe or unsound practice or condition" that results in a "substantial dissipation of assets or earnings" and "weaken(s) the condition of the regulated entity".

 

Calabria could also try to strongarm the boards into consent and invoke (I), though I think it's unlikely that tactic will work again.

 

I'm afraid that receivership would be not only possible but rather easy for Calabria to unilaterally impose.

[investorG]

Just off top of my head without going to HERA receivership requires finding of insolvency. Not effing likely.

 

Section 1367 of HERA actually gives the FHFA director several ways to impose receivership.

 

‘(a) Appointment of the Agency as Conservator or Receiver-

 

    ‘(1) IN GENERAL- Notwithstanding any other provision of Federal or State law, the Director may appoint the Agency as conservator or receiver for a regulated entity in the manner provided under paragraph (2) or (4). All references to the conservator or receiver under this section are references to the Agency acting as conservator or receiver.

 

    ‘(2) DISCRETIONARY APPOINTMENT- The Agency may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.

 

    ‘(3) GROUNDS FOR DISCRETIONARY APPOINTMENT OF CONSERVATOR OR RECEIVER- The grounds for appointing conservator or receiver for any regulated entity under paragraph (2) are as follows:

 

        ‘(H) VIOLATIONS OF LAW- Any violation of any law or regulation, or any unsafe or unsound practice or condition that is likely to--

 

            ‘(i) cause insolvency or substantial dissipation of assets or earnings; or

 

            ‘(ii) weaken the condition of the regulated entity.

 

        ‘(I) CONSENT- The regulated entity, by resolution of its board of directors or its shareholders or members, consents to the appointment.

 

        ‘(J) UNDERCAPITALIZATION- The regulated entity is undercapitalized or significantly undercapitalized (as defined in section 1364(a)(3)), and--

 

            ‘(i) has no reasonable prospect of becoming adequately capitalized;

 

            ‘(ii) fails to become adequately capitalized, as required by--

 

                ‘(I) section 1365(a)(1) with respect to a regulated entity; or

 

                ‘(II) section 1366(a)(1) with respect to a significantly undercapitalized regulated entity;

 

            ‘(iii) fails to submit a capital restoration plan acceptable to the Agency within the time prescribed under section 1369C; or

 

            ‘(iv) materially fails to implement a capital restoration plan submitted and accepted under section 1369C.

 

        ‘(K) CRITICAL UNDERCAPITALIZATION- The regulated entity is critically undercapitalized, as defined in section 1364(a)(4).

 

Once capital standards are actually put in force, (K) will almost certainly apply immediately, as will (J)(i), (J)(iii) and (J)(iv): with the NWS in place, how can the companies build capital and what possible capital restoration plan could they submit?

 

Ironically, (H) could be twisted around to describe the NWS as an "unsafe or unsound practice or condition" that results in a "substantial dissipation of assets or earnings" and "weaken(s) the condition of the regulated entity".

 

Calabria could also try to strongarm the boards into consent and invoke (I), though I think it's unlikely that tactic will work again.

 

I'm afraid that receivership would be not only possible but rather easy for Calabria to unilaterally impose.

 

thanks, Midas.  a blueprint for receivership + some value for the minority shareholders likely already exists, it was probably embedded in corker's plan from a year ago.  I believe the Moelis-or-bust supporters are underestimating the deal and reputation risk with raising many tens of billions of dollars, especially with the fact that potential investors will likely need certainty from legislative action first before committing $$$.  In fact, I'd bet Paulson and Schwarzman and Moelis view their plan mostly as a negotiating tool to get a better deal in what is now becoming more clearly (but not for sure) some sort of restructuring.  separating the GSEs in receivership into two companies -- legacy (wind-down) and operating -- accomplishes many objectives -- (hopefully) providing a fair outcome for minority shareholders in some creative fashion, limiting the $ amount needed to re-IPO the companies, make it easier for competitors to enter the market, and force the congress to act.

 

all that said, it's not for sure that the Moelis plan isn't happening -- but to me, that would require a material up move in the common shares (and jr pref to some degree) ASAP which suggested the price action in recent months was due mainly to forced selling from closing hedge funds / tax loss selling and a lack of investor demand due to a tight-lipped Tsy secretary team mostly holding the cards.

 

[orthopa]

Just off top of my head without going to HERA receivership requires finding of insolvency. Not effing likely.

 

Section 1367 of HERA actually gives the FHFA director several ways to impose receivership.

 

‘(a) Appointment of the Agency as Conservator or Receiver-

 

    ‘(1) IN GENERAL- Notwithstanding any other provision of Federal or State law, the Director may appoint the Agency as conservator or receiver for a regulated entity in the manner provided under paragraph (2) or (4). All references to the conservator or receiver under this section are references to the Agency acting as conservator or receiver.

 

    ‘(2) DISCRETIONARY APPOINTMENT- The Agency may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.

 

    ‘(3) GROUNDS FOR DISCRETIONARY APPOINTMENT OF CONSERVATOR OR RECEIVER- The grounds for appointing conservator or receiver for any regulated entity under paragraph (2) are as follows:

 

        ‘(H) VIOLATIONS OF LAW- Any violation of any law or regulation, or any unsafe or unsound practice or condition that is likely to--

 

            ‘(i) cause insolvency or substantial dissipation of assets or earnings; or

 

            ‘(ii) weaken the condition of the regulated entity.

 

        ‘(I) CONSENT- The regulated entity, by resolution of its board of directors or its shareholders or members, consents to the appointment.

 

        ‘(J) UNDERCAPITALIZATION- The regulated entity is undercapitalized or significantly undercapitalized (as defined in section 1364(a)(3)), and--

 

            ‘(i) has no reasonable prospect of becoming adequately capitalized;

 

            ‘(ii) fails to become adequately capitalized, as required by--

 

                ‘(I) section 1365(a)(1) with respect to a regulated entity; or

 

                ‘(II) section 1366(a)(1) with respect to a significantly undercapitalized regulated entity;

 

            ‘(iii) fails to submit a capital restoration plan acceptable to the Agency within the time prescribed under section 1369C; or

 

            ‘(iv) materially fails to implement a capital restoration plan submitted and accepted under section 1369C.

 

        ‘(K) CRITICAL UNDERCAPITALIZATION- The regulated entity is critically undercapitalized, as defined in section 1364(a)(4).

 

Once capital standards are actually put in force, (K) will almost certainly apply immediately, as will (J)(i), (J)(iii) and (J)(iv): with the NWS in place, how can the companies build capital and what possible capital restoration plan could they submit?

 

Ironically, (H) could be twisted around to describe the NWS as an "unsafe or unsound practice or condition" that results in a "substantial dissipation of assets or earnings" and "weaken(s) the condition of the regulated entity".

 

Calabria could also try to strongarm the boards into consent and invoke (I), though I think it's unlikely that tactic will work again.

 

I'm afraid that receivership would be not only possible but rather easy for Calabria to unilaterally impose.

 

thanks, Midas.  a blueprint for receivership + some value for the minority shareholders likely already exists, it was probably embedded in corker's plan from a year ago.  I believe the Moelis-or-bust supporters are underestimating the deal and reputation risk with raising many tens of billions of dollars, especially with the fact that potential investors will likely need certainty from legislative action first before committing $$$.  In fact, I'd bet Paulson and Schwarzman and Moelis view their plan mostly as a negotiating tool to get a better deal in what is now becoming more clearly (but not for sure) some sort of restructuring.  separating the GSEs in receivership into two companies -- legacy (wind-down) and operating -- accomplishes many objectives -- (hopefully) providing a fair outcome for minority shareholders in some creative fashion, limiting the $ amount needed to re-IPO the companies, make it easier for competitors to enter the market, and force the congress to act.

 

all that said, it's not for sure that the Moelis plan isn't happening -- but to me, that would require a material up move in the common shares (and jr pref to some degree) ASAP which suggested the price action in recent months was due mainly to forced selling from closing hedge funds / tax loss selling and a lack of investor demand due to a tight-lipped Tsy secretary team mostly holding the cards.

 

I dont think you can reference the stock price as a guide as mentioned before. The prices have been wrong before for nearly every decision/announcement over the past 5-6 years. It was not a predictor of Lamberth, Trump presidency, Mnuchin comments on Fox, etc, etc. It wasn't a guide then and isn't a guide now.  Shares for both are in total wait and see mode. Nothing more, nothing less.

[Guest cherzeca]

Thanks Midas. I was wrong to remember insolvency as opposed to capital inadequacy.

 

If you read Calabria’s Cato pieces you will see he argued for receivership in 2008 as opposed to conservatorship (writing in 2012 and later). The arguments he made then are no longer on point now. He thought conservatorship created excessive risk for taxpayers that could be avoided by receivership. Now with taxpayer having been repaid the risk avoidance to taxpayer feature of receivership is no longer important.

[investorG]

and well the common's not showing that at the moment. 

 

I'm not responding to the gist of your post, but responding only to say that I'd caution against using market prices as a proxy for value or for what the future may hold.  My comment isn't so much for you, but for some reading this board that might have a tendency to read too much into current prices of any security, and especially a situation like the GSE's.

 

I partially agree, it's not fully efficient.  especially with the buyer base limited due to the pink sheets. 

 

However if you are Mnuchin and are taking the minority shareholders' interests seriously, you'd likely prefer to avoid a press deluge writing on multi-baggers for hedge funds upon any action; rather, you'd likely leak out positives in increments such that the final action is only a modest gain on announcement day.  imo our hope is that the clock on this process doesn't really begin until after this congress leaves for good.

[investorG]

 

I dont think you can reference the stock price as a guide as mentioned before. The prices have been wrong before for nearly every decision/announcement over the past 5-6 years. It was not a predictor of Lamberth, Trump presidency, Mnuchin comments on Fox, etc, etc. It wasn't a guide then and isn't a guide now.  Shares for both are in total wait and see mode. Nothing more, nothing less.

 

I look at it a little differently.  The examples you cited were public / binary events where a typical hedge fund couldn't gain an edge with additional research.  The current example is likely different, and the hf sharks -- they are smarter and greedier than many here give credit despite their relative underperformance -- are surely digging in their contacts and avenues to see if something like Moelis is in the cards given the enormous upside potential.  and the market is saying for now, that's not the case.  of course there are some caveats like mnuchin has the tightest vest possible and hasn't started the process yet but i'm trying to be as realistic as possible even though I strongly wish Moelis was implemented for both fairness and policy reasons.

[DocSnowball]

Nevertheless, fellow travelers getting nervous...

 

https://thehill.com/opinion/finance/420633-fannie-and-freddie-investors-want-us-to-forget-about-the-housing-crisis

 

[Eye4Valu]

 

I dont think you can reference the stock price as a guide as mentioned before. The prices have been wrong before for nearly every decision/announcement over the past 5-6 years. It was not a predictor of Lamberth, Trump presidency, Mnuchin comments on Fox, etc, etc. It wasn't a guide then and isn't a guide now.  Shares for both are in total wait and see mode. Nothing more, nothing less.

 

I look at it a little differently.  The examples you cited were public / binary events where a typical hedge fund couldn't gain an edge with additional research.  The current example is likely different, and the hf sharks -- they are smarter and greedier than many here give credit despite their relative underperformance -- are surely digging in their contacts and avenues to see if something like Moelis is in the cards given the enormous upside potential.  and the market is saying for now, that's not the case.  of course there are some caveats like mnuchin has the tightest vest possible and hasn't started the process yet but i'm trying to be as realistic as possible even though I strongly wish Moelis was implemented for both fairness and policy reasons.

 

If you want to be realistic, then wait and see what happens. Maybe Moelis, maybe receivership, maybe something different. I think we all understand now that you think a receivership is likely. Thank you for your input. I appreciate the input of others as well. Reality is, we'll all find out what happens at some point in the future. I actually think the 5th Circuit may be helpful in resolving this matter.

[Wiggins]

Just another thought... what of the bizarre possibility of Calabria who has penned the best repudiation of the NWS in an academic paper becoming the head of an agency that is defending the NWS in court? Wouldn't the plaintiffs reference the Calabria/Krimminger paper heavily in court? It would not only be the words of the FHFA director but it's an elegant work in its own right. What would the defense attorneys say?: that the prior, academic, explicit, expert policy views of the director are not the views of the agency? That just seems bizarre and stupid. So maybe the Calabria possibility should provide some solace to shareholders. At the very least one would expect the NWS to stop. Further, it may also suggest the warrants are in play. Based on Calabria's prior comments he absolutely would not support the warrants being executed. He stated plainly that the Government was not meant to make money, only to recoup its original investment. Of course, he won't be in charge of Treasury which will be making the decisions. And while he wouldn't support the warrants, he would support a massive restructuring of the agencies which could make commons worthless. But with this theory, since the Government is paid back the JPS are first up for any residual value on the table. Just a theory though.

[locutusoftexas]

The above discussion of outcomes seems to assume an orderly real estate/mortgage market. My experience with the stock market, for example, is that things are orderly until they are not. In the latter instance, chaos happens and people can panic as they discover that they are falling down the sinkhole. I believe that we have had orderly markets for the last nine years. That is a long time.

 

A further assumption in the above discussion is that the situation is relatively simple to resolve. By this, I mean that, in many ways the shareholders are helpless and their disposition is at the pleasure of the government. In fact, their existence and basic concepts of stock ownership give them leverage, both in the decision-making process and the public view of stock ownership. The courts' idiocy notwithstanding, arbitrary and demonstrably unfair/unethical treatment of shareholders by the government will leave a stench on stock ownership that will last well beyond this situation.

 

Obama was determined not to let the evil hedge funds profit from the government's "benevolent" rescue of these companies. Like our current president on so many topics, he probably did not understand the stock market but definitely did not care. Failure to realize this has cost the GSE investors a lot of lost opportunities. However, they hold the shares today out of the confidence (and actually hope) that the rule of law will prevail. Maybe they are wrong but at least some of them see the Constitution as worth fighting for.

 

So sooner or later, the fan is going to be hit with some stuff and order will go out the window. From "receivership vs conservatorship" we will transition to a "hot potato" scenario in which the main goal will be to avoid blame for the apparent failure of the housing market.  The growing likelihood of this should drive the government to settle this soon and to honor shareholders' and citizens' contracts (i.e., provisions of the common and preferred shares and the Constitution) with the government.

 

Therefore a more interesting question is what happens when the real estate/mortgage market goes south, perhaps in concert with other segments of the financial markets and economy. Until that happens, I believe that the government will not resolve this situation by doing the right thing.

[rros]

The above discussion of outcomes seems to assume an orderly real estate/mortgage market. My experience with the stock market, for example, is that things are orderly until they are not. In the latter instance, chaos happens and people can panic as they discover that they are falling down the sinkhole. I believe that we have had orderly markets for the last nine years. That is a long time.

 

A further assumption in the above discussion is that the situation is relatively simple to resolve. By this, I mean that, in many ways the shareholders are helpless and their disposition is at the pleasure of the government. In fact, their existence and basic concepts of stock ownership give them leverage, both in the decision-making process and the public view of stock ownership. The courts' idiocy notwithstanding, arbitrary and demonstrably unfair/unethical treatment of shareholders by the government will leave a stench on stock ownership that will last well beyond this situation.

 

Obama was determined not to let the evil hedge funds profit from the government's "benevolent" rescue of these companies. Like our current president on so many topics, he probably did not understand the stock market but definitely did not care. Failure to realize this has cost the GSE investors a lot of lost opportunities. However, they hold the shares today out of the confidence (and actually hope) that the rule of law will prevail. Maybe they are wrong but at least some of them see the Constitution as worth fighting for.

 

So sooner or later, the fan is going to be hit with some stuff and order will go out the window. From "receivership vs conservatorship" we will transition to a "hot potato" scenario in which the main goal will be to avoid blame for the apparent failure of the housing market.  The growing likelihood of this should drive the government to settle this soon and to honor shareholders' and citizens' contracts (i.e., provisions of the common and preferred shares and the Constitution) with the government.

 

Therefore a more interesting question is what happens when the real estate/mortgage market goes south, perhaps in concert with other segments of the financial markets and economy. Until that happens, I believe that the government will not resolve this situation by doing the right thing.

Thank you, Locus. I have always believed in the "exigent circumstances" scenario. But when will Quicken Loans blow up nobody knows. . Or any of the non-bank financial institutions for that case. We know there are great imbalances in markets and that the Fed is in balancing act mode. Unfortunately, the unraveling may take more than one quarter.

[rros]

Just another thought... what of the bizarre possibility of Calabria who has penned the best repudiation of the NWS in an academic paper becoming the head of an agency that is defending the NWS in court? Wouldn't the plaintiffs reference the Calabria/Krimminger paper heavily in court? It would not only be the words of the FHFA director but it's an elegant work in its own right. What would the defense attorneys say?: that the prior, academic, explicit, expert policy views of the director are not the views of the agency? That just seems bizarre and stupid. So maybe the Calabria possibility should provide some solace to shareholders. At the very least one would expect the NWS to stop. Further, it may also suggest the warrants are in play. Based on Calabria's prior comments he absolutely would not support the warrants being executed. He stated plainly that the Government was not meant to make money, only to recoup its original investment. Of course, he won't be in charge of Treasury which will be making the decisions. And while he wouldn't support the warrants, he would support a massive restructuring of the agencies which could make commons worthless. But with this theory, since the Government is paid back the JPS are first up for any residual value on the table. Just a theory though.

In my view, writing a paper from the bench and having godlike powers as the head of the FHFA can radically alter one's perspective. Calabria may be in a position, as Director of the FHFA, to play in a sandbox and follow his dreams responding to nobody once confirmed. So it may be a mistake to nail him down on his paper. Deep down, Calabria believes there is no reason for Fannie and Freddie to exist. Less than deep down there is the market reality which, as Locus has just mentioned, is becoming less orderly. And the housing market in particular has been subject to many headwinds that any head of the FHFA will not be able to ignore.

 

We should also not speculate on a warrants gift to the government. Trump just said on TV that 5 billion will do wonders for the wall. He doesn't need Treasury's warrants. Further, he wants that money to come from Democrats, in a way.

 

Finally, I agree with investorG. For any resolution, which implies unloading vasts amounts of money on Fannie and Freddie's fire (lack of capital), money men will absolutely want to have some kind of legislation as assurance and insurance. Even though HERA, as comprehensive as it was, became useless both as assurance and insurance when one person -just one- decided there was a better way.