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

[orthopa]

I don't believe its impossible for government to maximize warrant value without screwing commons over w/ dilution. It's all about sequencing. Government can easily arrange it so their 80% comes into play post the dilution/capital raise. So they retain full 80% value w/o any dilution.

 

He is consistent and it's crystal clear what he believes.

 

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out.

 

As an aside I would just make a couple of observations: his point that housing prices would fall under his policies is correct, but his implication that housing would be more affordable is not (actually he doesn't make this point so much, more that there will be less risk, which likely IS correct); because prospective buyers would have less incentives/subsidies to buy a home..so they would be able to AFFORD less. So really this just moves prices; it doesn't necessarily make housing more affordable. And the other observation about Calabria's views (#2) is that since they will take a lot of time, they become subjected to the vagaries of political winds and changing administrations over time, which softens their impact. Thus, in my view the recap is coming, and there's no guarantee the GSEs WON'T remain dominant in housing for years to come. Commons could do quite well.

 

I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership.

 

I do agree with Calabria that increasing the housing supply is the best way to promote home ownership.

 

I don't share your optimism about the commons, though, for many reasons.

 

• Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering.
  
• Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic.
  
• You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario.
  

 

Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

 

That has been my hesitation with owning common too but I dont seem to have a good rebuttal when someone says that a common shareholders interest is aligned with govt warrants so in turn high capital levels would dilute gov stake, unless they somehow get out first. If Sr Preferred declared paid how else does gov extract their pound of flesh besides maximizing warrant value?

 

Apparently as I go over this in my head Im obtuse and cant sequence this myself. Anyone mind providing a hypothetical example? that being that the common is heavily diluted first and gov retains relative value via warrants?

[Guest cherzeca]

@orthopa

 

case 1:  treasury exercises warrants for 80% of common. warrants no longer exist. then offers junior prefs conversion at some rate.

 

case 2: treasury offers junior prefs conversion at some rate. then treasury exercises warrants for 80% of common.

 

treasury ends up with more shares in case 2 than 1.

[Jcmeg35]

Assuming that Trsy & Fhfa move to R&R, I would think they would be incentivized to want to have as high a common price as possible to increase the value of warrants and also make it easier to bring in new capital. Other than the capital standards to be set by FHFA and the sequence which the conversions happen, are there any other levers that are available to increase the common value?

 

To be clear I am not saying this will happen, but just trying to think through the incentives. I think the range of outcomes and probabilities associated with those outcomes make the common quite a crapshoot.

[orthopa]

@orthopa

 

case 1:  treasury exercises warrants for 80% of common. warrants no longer exist. then offers junior prefs conversion at some rate.

 

case 2: treasury offers junior prefs conversion at some rate. then treasury exercises warrants for 80% of common.

 

treasury ends up with more shares in case 2 than 1.

 

Is this the only lever? I'm aware of the Jr. Preferred dilultion via Moelis but again govt interest/value still aligned with common.

 

If Calabria wants higher capital reserves it seems like common is where it comes from. The market is saying there has to some way for treasury to disconnect itself from dilution to raise capital due to common stock price. A straight forward dilution does not correlate with current price and receivership is a no go IMO. Again I have to go over the TARP bailout of C, AIG, BAC etc bc Gov diluted common very heavily, capital was raised in the market easily and gov was paid back in full. Ofcourse net worth sweep and Sr. Preferred dividend is in play here.

 

 

[Guest cherzeca]

@orthopa

 

case 1:  treasury exercises warrants for 80% of common. warrants no longer exist. then offers junior prefs conversion at some rate.

 

case 2: treasury offers junior prefs conversion at some rate. then treasury exercises warrants for 80% of common.

 

treasury ends up with more shares in case 2 than 1.

 

Is this the only lever? I'm aware of the Jr. Preferred dilultion via Moelis but again govt interest/value still aligned with common.

 

If Calabria wants higher capital reserves it seems like common is where it comes from. The market is saying there has to some way for treasury to disconnect itself from dilution to raise capital due to common stock price. A straight forward dilution does not correlate with current price and receivership is a no go IMO. Again I have to go over the TARP bailout of C, AIG, BAC etc bc Gov diluted common very heavily, capital was raised in the market easily and gov was paid back in full. Ofcourse net worth sweep and Sr. Preferred dividend is in play here.

 

I do agree that Calabria will be inclined to want more capital than necessary. that fhfa has already put out a proposed rule that is same % as what moelis assumed and gone through one round of comments might make this difficult for him, unless he just says there is a new sheriff in town and ignores pushback.

 

as to common valuation, if you believe that collins en banc will be a P victory then you would believe common is undervalued imo.

[orthopa]

@orthopa

 

case 1:  treasury exercises warrants for 80% of common. warrants no longer exist. then offers junior prefs conversion at some rate.

 

case 2: treasury offers junior prefs conversion at some rate. then treasury exercises warrants for 80% of common.

 

treasury ends up with more shares in case 2 than 1.

 

Is this the only lever? I'm aware of the Jr. Preferred dilultion via Moelis but again govt interest/value still aligned with common.

 

If Calabria wants higher capital reserves it seems like common is where it comes from. The market is saying there has to some way for treasury to disconnect itself from dilution to raise capital due to common stock price. A straight forward dilution does not correlate with current price and receivership is a no go IMO. Again I have to go over the TARP bailout of C, AIG, BAC etc bc Gov diluted common very heavily, capital was raised in the market easily and gov was paid back in full. Ofcourse net worth sweep and Sr. Preferred dividend is in play here.

 

I do agree that Calabria will be inclined to want more capital than necessary. that fhfa has already put out a proposed rule that is same % as what moelis assumed and gone through one round of comments might make this difficult for him, unless he just says there is a new sheriff in town and ignores pushback.

 

as to common valuation, if you believe that collins en banc will be a P victory then you would believe common is undervalued imo.

 

Thats true, I was disregarding the FHFA proposed rule.  Thanks

[Luke 532]

Mulvaney is Acting Chief of Staff.

[rros]

Mulvaney is Acting Chief of Staff.

Thanks.

 

Chief of staff: Manage the flow of information; Protect the interests of the president; Negotiate with Congress, other members of the executive branch, and extra-governmental political groups to implement the president's agenda; and. Advise the president on various issues, including telling the president what they do not want to hear.

While in Congress, he wrote a bill specifically declaring the Srs. paid off.

 

If someone had told me 2 years ago that Mulvaney would become the closest guy to the President of the US and that Calabria might become the head of FHFA I would have instantly peed on myself.

[Wiggins]

Love this comment.

 

I'm excited; I feel like something is happening soon.

 

Mulvaney is Acting Chief of Staff.

Thanks.

 

Chief of staff: Manage the flow of information; Protect the interests of the president; Negotiate with Congress, other members of the executive branch, and extra-governmental political groups to implement the president's agenda; and. Advise the president on various issues, including telling the president what they do not want to hear.

While in Congress, he wrote a bill specifically declaring the Srs. paid off.

 

If someone had told me 2 years ago that Mulvaney would become the closest guy to the President of the US and that Calabria might become the head of FHFA I would have instantly peed on myself.

[rros]

Love this comment.

 

I'm excited; I feel like something is happening soon.

 

Mulvaney is Acting Chief of Staff.

Thanks.

 

Chief of staff: Manage the flow of information; Protect the interests of the president; Negotiate with Congress, other members of the executive branch, and extra-governmental political groups to implement the president's agenda; and. Advise the president on various issues, including telling the president what they do not want to hear.

While in Congress, he wrote a bill specifically declaring the Srs. paid off.

 

If someone had told me 2 years ago that Mulvaney would become the closest guy to the President of the US and that Calabria might become the head of FHFA I would have instantly peed on myself.

Exactly, Wiggins. We should now spread the rumor that with Mulvaney on board it is 100% certain Calabria -if confirmed- will go the receivership way. The likes of which this world has never seen before, as Trump would put it.

 

After all, Mulvaney's scotch was a little too stiff the night he wrote the bill declaring the Srs. paid, allowing for earnings retention and recapitalizing the companies. What was he thinking?

[SnarkyPuppy]

[DRValue]

"We expect to pay Treasury a fourth quarter 2018 dividend of $4.0 billion by December 31, 2018. "

 

Thoughts on whether the dividend gets paid this quarter? Given Watt is in, I would assume so. Calabria/Otting to stop the NWS in Q1?

[Guest cherzeca]

"We expect to pay Treasury a fourth quarter 2018 dividend of $4.0 billion by December 31, 2018. "

 

Thoughts on whether the dividend gets paid this quarter? Given Watt is in, I would assume so. Calabria/Otting to stop the NWS in Q1?

 

Enough to build the friggin wall

[Mephistopheles]

I don’t know why you guys are so excited about Calabria. Yes he wrote the paper saying NWS is invalid, but he also seems to not be a fan of the “government sponsorship” in housing. A conservative bet would be that he’s neutral. Remember how Mnuchin is friends with Paulson and was going to free the GSEs? And how Paulson and Icahn  were both advisors to Trump and how the shares tripled overnight after Trump got elected ? And here we are 2 years later. I know past is independent of the future but my guess is that there are multiple constituents and this is more complicated than it seems. I fear status quo may be easier to maintain than actively do something. Just trying to be conservative in my assessment.

[SnarkyPuppy]

I don’t know why you guys are so excited about Calabria. Yes he wrote the paper saying NWS is invalid, but he also seems to not be a fan of the “government sponsorship” in housing. A conservative bet would be that he’s neutral. Remember how Mnuchin is friends with Paulson and was going to free the GSEs? And how Paulson and Icahn  were both advisors to Trump and how the shares tripled overnight after Trump got elected ? And here we are 2 years later. I know past is independent of the future but my guess is that there are multiple constituents and this is more complicated than it seems. I fear status quo may be easier to maintain than actively do something. Just trying to be conservative in my assessment.

 

The status quo argument doesn't make a lot of sense.  You simply cannot have 1/5 of the economy sitting behind no capital - as somehow else aptly described it - this will turn from a "status quo" situation to a "hot potato" situation.  Markets are not always calm. 

 

The 2-year argument isn't the strongest either:

- Anti-GSE Congress and Watt in place made any administrative moves more difficult

- Lamberth appeal ruling sucked some air out of the room and likely decreased Mnuchin's ability to steer Watt in the right direction

- Other priorities, ie tax reform, not only took precedent but potentially would have been more difficult to achieve if GSE reform was tackled first.

- 10% moment

- Ignores governments incentive - warrant exercise = $100-150bn

- The large majority of the "status quo" was a time when you had anti-GSE members in key positions across the executive and legislative branch funded by anti-GSE lobbyists.  This is clearly a changing tide.

 

I think that sometimes we overcomplicate the obvious.  You have a guy who wrote a 50pg paper solely focused on the rights of shareholders under conservatorship and receivership proceedings based on FDIC precedent.  You have a chief of staff who introduced a bill to consider the SPSA preference as redeemed.  This is THE key variable in the thesis.  And by the way, there really aren't any other actual options in the real world without redeeming the SPSA (a key constraint).  On top of all of this, you have the current regulator in the process of finalizing capital requirements, which is directly consistent with Calabria's writing and Mulvaney's stance. 

 

You don't need a scale to know a man is fat.  Short of actually coming out and literally proclaiming the rights of shareholders, there has been extremely strong signaling which shows where this is directionally headed.  Calabria makes no sense to appoint under the "status quo" argument.

[DRValue]

Moelis uses a $14.57 "IPO" price for the GSEs in 2019. According to Moelis projections that's a 10% annual return. I don't know about you but I'm not sure I'd buy in at that rate. Admittedly though, the P/E ratio is relatively low at 11x, so returns could be higher.

 

Any data on IPO returns for investors historically?

[Guest cherzeca]

I don’t know why you guys are so excited about Calabria. Yes he wrote the paper saying NWS is invalid, but he also seems to not be a fan of the “government sponsorship” in housing. A conservative bet would be that he’s neutral. Remember how Mnuchin is friends with Paulson and was going to free the GSEs? And how Paulson and Icahn  were both advisors to Trump and how the shares tripled overnight after Trump got elected ? And here we are 2 years later. I know past is independent of the future but my guess is that there are multiple constituents and this is more complicated than it seems. I fear status quo may be easier to maintain than actively do something. Just trying to be conservative in my assessment.

 

all well put.  except Mnuchin has said 2019 is the year they address GSEs (after talking about it too much early on).  so yes the status quo may continue but there is somewhat less reason to believe so

[Wiggins]

"The strongest argument for curtailing deference is that the judiciary’s hands-off approach under Chevron and Auer has enabled the agencies of the executive branch to assert power Congress never gave them."

 

https://www.wsj.com/articles/the-supreme-court-may-begin-to-tame-the-administrative-state-11544744606

 

This article seems as if it could have been written by Plaintiffs with their FHFA constitutional arguments in mind. Of course, I'm biased as the GSEs are forefront in my mind. It's surreal that it's written by Wallison. Perhaps it's his signal that he's on board with Calabria's thinking: that the only thing worse than a GSE is an overreaching Government stealing a GSE.

[Midas79]

I was glancing through the defendants' answer document in the Arrowood case.

 

http://www.glenbradford.com/wp-content/uploads/2018/12/13-cv-01439-0104.pdf

 

Paragraph 28 caught my eye

 

Defendants admit that the Companies’ boards consented to conservatorship, and that FHFA was prepared to place the Companies in conservatorships, if necessary, absent the boards’ consent.

 

I don't remember FHFA ever admitting that they would have forced the companies into conservatorship even if the boards didn't consent to it. Which of the grounds for placement into conservatorship in HERA would FHFA have invoked if not for the consent of the boards? All of the accounting shenanigans leading to them being undercapitalized didn't happen until after FHFA appointed itself conservator.

[DRValue]

I was glancing through the defendants' answer document in the Arrowood case.

 

http://www.glenbradford.com/wp-content/uploads/2018/12/13-cv-01439-0104.pdf

 

Paragraph 28 caught my eye

 

Defendants admit that the Companies’ boards consented to conservatorship, and that FHFA was prepared to place the Companies in conservatorships, if necessary, absent the boards’ consent.

 

I don't remember FHFA ever admitting that they would have forced the companies into conservatorship even if the boards didn't consent to it. Which of the grounds for placement into conservatorship in HERA would FHFA have invoked if not for the consent of the boards? All of the accounting shenanigans leading to them being undercapitalized didn't happen until after FHFA appointed itself conservator.

 

I scanned that document today and see the defendants admit a lot of things. Not sure if this is out of the norm though, and I didn't have the plaintiff document to compare to.

[Guest cherzeca]

I was glancing through the defendants' answer document in the Arrowood case.

 

http://www.glenbradford.com/wp-content/uploads/2018/12/13-cv-01439-0104.pdf

 

Paragraph 28 caught my eye

 

Defendants admit that the Companies’ boards consented to conservatorship, and that FHFA was prepared to place the Companies in conservatorships, if necessary, absent the boards’ consent.

 

I don't remember FHFA ever admitting that they would have forced the companies into conservatorship even if the boards didn't consent to it. Which of the grounds for placement into conservatorship in HERA would FHFA have invoked if not for the consent of the boards? All of the accounting shenanigans leading to them being undercapitalized didn't happen until after FHFA appointed itself conservator.

 

what they didn't admit was that board consent was obtained under duress, which was P allegation. 

[Guest cherzeca]

"We expect to pay Treasury a fourth quarter 2018 dividend of $4.0 billion by December 31, 2018. "

 

Thoughts on whether the dividend gets paid this quarter? Given Watt is in, I would assume so. Calabria/Otting to stop the NWS in Q1?

 

Enough to build the friggin wall

 

see "We have other ways that we can get to that $5 billion that we'll work with Congress," White House press secretary Sarah Huckabee Sanders told Fox News on Tuesday morning. She added that the Trump administration could support $1.6 billion in border security funding proposed by Senate Democrats, as long as it can "couple that with other funding resources" to get to $5 billion.

 

we have all read that the trump administration has been chaotic, but I hadn't thought that it is stupid.  do you believe that trump just realized that the GSE sweep dividends this month's end can finance the wall?  This is not a comment on policy but rather execution.  what do those guys in White House do all day?

[allnatural]

Didn't a judge rule last year that obamacare ILLEGALLY funded itself without getting appropriated funds from congress (with GSE profits as admitted by Mnuchin)... Maybe Trump wants to avoid doing something illegal like Obama did.

 

"It’s illegal for the executive branch to spend money that Congress has not appropriated."

 

"We expect to pay Treasury a fourth quarter 2018 dividend of $4.0 billion by December 31, 2018. "

 

Thoughts on whether the dividend gets paid this quarter? Given Watt is in, I would assume so. Calabria/Otting to stop the NWS in Q1?

 

Enough to build the friggin wall

 

see "We have other ways that we can get to that $5 billion that we'll work with Congress," White House press secretary Sarah Huckabee Sanders told Fox News on Tuesday morning. She added that the Trump administration could support $1.6 billion in border security funding proposed by Senate Democrats, as long as it can "couple that with other funding resources" to get to $5 billion.

 

we have all read that the trump administration has been chaotic, but I hadn't thought that it is stupid.  do you believe that trump just realized that the GSE sweep dividends this month's end can finance the wall?  This is not a comment on policy but rather execution.  what do those guys in White House do all day?

[Guest cherzeca]

Didn't a judge rule last year that obamacare ILLEGALLY funded itself without getting appropriated funds from congress (with GSE profits as admitted by Mnuchin)... Maybe Trump wants to avoid doing something illegal like Obama did.

 

"It’s illegal for the executive branch to spend money that Congress has not appropriated."

 

"We expect to pay Treasury a fourth quarter 2018 dividend of $4.0 billion by December 31, 2018. "

 

Thoughts on whether the dividend gets paid this quarter? Given Watt is in, I would assume so. Calabria/Otting to stop the NWS in Q1?

 

Enough to build the friggin wall

 

see "We have other ways that we can get to that $5 billion that we'll work with Congress," White House press secretary Sarah Huckabee Sanders told Fox News on Tuesday morning. She added that the Trump administration could support $1.6 billion in border security funding proposed by Senate Democrats, as long as it can "couple that with other funding resources" to get to $5 billion.

 

we have all read that the trump administration has been chaotic, but I hadn't thought that it is stupid.  do you believe that trump just realized that the GSE sweep dividends this month's end can finance the wall?  This is not a comment on policy but rather execution.  what do those guys in White House do all day?

 

yes, allnatural, this related to reimbursements to insurance companies that were provided for in the statute, but subject to annual appropriation in the statute.  when not appropriated, Obama just went ahead and applied the funds.

 

seems to me border/national security is a different case.  I don't know that there is statute that says the executive branch can spend this much and not more unless congress appropriates it for border/national security.  the sweep dividends go into treasury's general account and I think there is a bunch of things potus can do with this money along the lines of border/national security.  I may be wrong on this. (and just like Obama thought, once the money is spent, would a court require the insurance companies to give it back?  would a court order the wall to be torn down if built from sweep dividends? or in each case just provide prospective relief)

[Guest cherzeca]

@allnatural

 

"Scholars disagree on the extent to which Congress may use appropriations limitations to control the President’s exercise of discretion in carrying out his or her duty to “execute the law,” especially in the area of national security—though all agree that Congress may not, under the guise of exercising its “power of the purse,” interfere with indispensable executive (or judicial) functions. Nor may the President frustrate congressional mandates by refusing to spend directed funds."

 

https://constitutioncenter.org/interactive-constitution/interpretations/appropriations-clause-article-i-section-9-clause-7