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

[Cox022]

Calabria, one month ago in prepared remarks:

 

I will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly. And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital.

  link:https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-Bankers-Association-National-Secondary-Market-Conference-Expo-2019.aspx

 

Calabria, yesterday, in prepared remarks:

 

We will continue to engage with Treasury to develop a responsible plan to end the conservatorships – with a clear road map and mile markers – and to adjust the Treasury share agreements accordingly. And by sometime next year, my hope and expectation is that we will be on the path where Fannie and Freddie can start to build capital.

 

[orthopa]

Calabria, one month ago in prepared remarks:

 

I will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly. And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital.

  link:https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-Bankers-Association-National-Secondary-Market-Conference-Expo-2019.aspx

 

Calabria, yesterday, in prepared remarks:

 

We will continue to engage with Treasury to develop a responsible plan to end the conservatorships – with a clear road map and mile markers – and to adjust the Treasury share agreements accordingly. And by sometime next year, my hope and expectation is that we will be on the path where Fannie and Freddie can start to build capital.

 

My early guess is that the treasury plan will say something like IPO/Initiate capital build Q1-Q2 2020 to give themselves months of leeway. Both of his statements fit that time period. Vague is the way to go apparently.

[Guest cherzeca]

this is going to be a painful process if the process waits for congress

[Guest cherzeca]

“Calabria appears to be a clone of Corker. He could at the every least stop the sweep NOW to CONSERVE their assets than singing the same tune as Watt and Corker. Congress hasn’t done anything in last 11 years and waiting for them to stop the sweep is nonsense. On one hand he is okay to keep sweeping every penny and leave them with just 3 billion capital and on the other hand he wants them to have bank like capital. Ridiculous”

 

who are you quoting?

[Luke 532]

If we are to take the Asset Backed Alert article as valid, why would investors be "ecstatic" about waiting until after Congress has another stretch of time to work on this?  I don't think they would be.  With that said, don't be surprised if a settlement is announced that says something like "preferred shares will be converted to common at par around the time the IPO takes place... in exchange the lawsuits have been dropped, etc."  Obviously we wouldn't trade at par right away, but then you're looking at merely a discount from par based on (1) when the conversion to common actually takes place, and (2) the market's belief on the likelihood that it actually gets done.

 

https://www.abalert.com/search.pl?ARTICLE=183913

Calabria indicated that as part of the effort, Fannie and Freddie would settle a number of lawsuits that investors filed against them after the 2007-2008 market crash. Those complaints stem largely from a series of actions in which the Treasury took control of Fannie and Freddie in 2008 and, starting in 2012, began claiming the agencies’ profits.

 

Shareholders argue that money should have flowed to them as dividend payments instead. While many of the lawsuits have been dismissed, some still are outstanding. Most of the actions could be resolved by making preferred shareholders whole, potentially via a mass “sweep” of profits.

 

Fannie and Freddie stockholders were ecstatic at Calabria’s statements. “It’s exactly what we laid out,” one investor said. “The goal of this president is what can be done administratively. You can see there’s a focus on getting it done.”

[DocSnowball]

Calabria, one month ago in prepared remarks:

 

I will sit down with my counterparts at Treasury to develop a responsible plan to end the conservatorships, with a clear road map and mile markers, and to adjust the Treasury share agreements accordingly. And by January 1 of next year, my hope and expectation is that we will be on the path to a new regime where the GSEs can start to build capital.

  link:https://www.fhfa.gov/Media/PublicAffairs/Pages/Prepared-Remarks-of-Dr-Mark-A-Calabria-Director-of-FHFA-at-Mortgage-Bankers-Association-National-Secondary-Market-Conference-Expo-2019.aspx

 

Calabria, yesterday, in prepared remarks:

 

We will continue to engage with Treasury to develop a responsible plan to end the conservatorships – with a clear road map and mile markers – and to adjust the Treasury share agreements accordingly. And by sometime next year, my hope and expectation is that we will be on the path where Fannie and Freddie can start to build capital.

 

My early guess is that the treasury plan will say something like IPO/Initiate capital build Q1-Q2 2020 to give themselves months of leeway. Both of his statements fit that time period. Vague is the way to go apparently.

 

Reading through his prepared statement (thanks for the link), the overall plan remains consistent. Even the legislative steps are starting to be clearly laid out - explicit guarantee and authorizing FHFA to issue more charters (I'd be curious what the Treasury plan puts down as administrative alternatives to these two).

 

Exactly when the implementation starts, this year or later, is a smaller issue. As bankers I think they understand the value of everything being clearly in writing before it is set in stone, especially given ongoing lawsuits and threat of more as well as the political fallout. Clearly, receivership is out and preferreds and commons have a non-zero value. The odds of recap and release continue to increase with consistency of communications. Even a year of delayed execution only brings down the value of FNMAT by a couple of dollars.

 

The big risks here may be 1) status quo being a less controversial place to be for Treasury if this runs closer to election (so I'll discount NPV by an additional year to account for this) and 2) mechanisms of capital raise and what will happen to current shareholders (so I continue to demand a higher rate of return than alternatives, at least twice as high). Still makes this a good position to hold on to in taxable accounts, and look to add more if prices drop significantly.

[Guest cherzeca]

If we are to take the Asset Backed Alert article as valid, why would investors be "ecstatic" about waiting until after Congress has another stretch of time to work on this?  I don't think they would be.  With that said, don't be surprised if a settlement is announced that says something like "preferred shares will be converted to common at par around the time the IPO takes place... in exchange the lawsuits have been dropped, etc."  Obviously we wouldn't trade at par right away, but then you're looking at merely a discount from par based on (1) when the conversion to common actually takes place, and (2) the market's belief on the likelihood that it actually gets done.

 

https://www.abalert.com/search.pl?ARTICLE=183913

Calabria indicated that as part of the effort, Fannie and Freddie would settle a number of lawsuits that investors filed against them after the 2007-2008 market crash. Those complaints stem largely from a series of actions in which the Treasury took control of Fannie and Freddie in 2008 and, starting in 2012, began claiming the agencies’ profits.

 

Shareholders argue that money should have flowed to them as dividend payments instead. While many of the lawsuits have been dismissed, some still are outstanding. Most of the actions could be resolved by making preferred shareholders whole, potentially via a mass “sweep” of profits.

 

Fannie and Freddie stockholders were ecstatic at Calabria’s statements. “It’s exactly what we laid out,” one investor said. “The goal of this president is what can be done administratively. You can see there’s a focus on getting it done.”

 

the last paragraph in your post compared with calabria prepared remarks recently nicely highlights the disconnect.

 

is it surprising that calabria may be saying different things privately and publicly?  no.  do we know which is closer to what he really believes? probably not.

 

one thing you dont want to see in finance is too many cooks in the kitchen...which is an especial risk posed by a finance deal overseen by politicians.  while calabria is doing all of the talking publicly right now, I imagine there is a lot of talking going on privately, maybe even a little jockeying for power and backstabbing.  again, not conducive to a successful financial transaction even if it is politics as usual.

 

my hope is that the treasury plan will speak for itself sufficiently so that we dont have all of this Calabrian banter.  while the plan, as written by a committee, will likely have a little something in it for everyone, it will hopefully establish a course of action.  at some point, that action needs to start, and I am hopeful it is after publication of the plan and not after congress dicks around for a few months

[Ahab]

I think this board is in a near-term "trough of disillusionment" re the possibility of getting significant things done in the next 6-12 months. At this point, Calabria needs to do more doing and less talking to get the market on board with his plan. Notice people's reaction to his joke yesterday asking if 'anyone had $100 billion lying around.' Give us the terms..

There are diminishing returns on telling people in generalities what you are going to do and then having them not believe you or question the timeline/integrity of your plans. Show, don't tell...

[muscleman]

“Calabria appears to be a clone of Corker. He could at the every least stop the sweep NOW to CONSERVE their assets than singing the same tune as Watt and Corker. Congress hasn’t done anything in last 11 years and waiting for them to stop the sweep is nonsense. On one hand he is okay to keep sweeping every penny and leave them with just 3 billion capital and on the other hand he wants them to have bank like capital. Ridiculous”

 

who are you quoting?

 

Wow, you are still not blocking emily?

[Guest cherzeca]

“Calabria appears to be a clone of Corker. He could at the every least stop the sweep NOW to CONSERVE their assets than singing the same tune as Watt and Corker. Congress hasn’t done anything in last 11 years and waiting for them to stop the sweep is nonsense. On one hand he is okay to keep sweeping every penny and leave them with just 3 billion capital and on the other hand he wants them to have bank like capital. Ridiculous”

 

who are you quoting?

 

Wow, you are still not blocking emily?

 

I block Emily but Emily post shows up as being blocked and offering the opportunity to click to see it, which is what I did.  Emily is eminently blockable, but I still sometimes look to see anyway...

[Wiggins]

There seems to be an impasse between the economic reality that the GSEs need to continue to exist which involves recapitalization and making investors feel confident to put new money in, and the massive political sentiment against the GSEs held by the TBTF banking cartel. It's hard to imagine the tremendous pressure felt by Mnuchin, Calabria and Trump from the TBTF banking lobby. Given this intense pressure I'd say they're doing a fine job.

This would be a perfect time for en banc. I put the odds of a favorable ruling at 60-65%. I also factor there's more upside with a favorable ruling than downside with an unfavorable ruling, perhaps 50% upside and 30% downside depending on the ruling. So overall, I plan to hold on and wait for that ruling. I would also add: wouldn't it make sense for Calabria/Mnuchin to wait for en banc? I mean, with an unfavorable ruling they're essentially where they are now, nothing lost. But with a favorable ruling a huge political decision has been made for them. The bankers cannot be angered with stopping the NWS if it's the courts that decide, but they COULD be truly pissed off if it's Calabria/Mnuchin that decides. Therefore I think it's quite natural that they wait. I wouldn't read anything else into other than that.

 

In the meantime, everything has incrementally gotten better.

[Ahab]

Well said Wiggins. I can't imagine the pressure the administration is under. Hopefully we see a favorable en banc ruling before months end to further help propel GSE reform forward. Have a nice weekend!

[Guest cherzeca]

@wiggins

 

interestingly in light of your comment, calabria has spoken to all of the "enemy" meetings.  MBA last week I believe, GNMA this week (I say GNMA is the enemy only because Demarco bright and others would replace GSEs with GNMA wraps).  so one might even think that the calabria plan is to proactively engage before waiting for incoming...

[Luke 532]

Listen for commentary on the Asset-Backed Alert article.  Discussion starts at 26 minutes, 25 second point and lasts for about 7 minutes.

https://valueplays.podbean.com/

[Guest cherzeca]

Listen for commentary on the Asset-Backed Alert article.  Discussion starts at 26 minutes, 25 second point and lasts for about 7 minutes.

https://valueplays.podbean.com/

 

who was speaking?

 

the Ps claim (collins) is not for par + damages.  it is to invalidate NWS, which would essentially eliminate senior pref and get back into GSEs an added $20B or so.  Ps claim in court of claims (which maybe the speaker is alluding to) is on a very slow track and depends upon an untrustworthy j. lamberth 

[Luke 532]

 

who was speaking?

 

 

Todd Sullivan

[Ahab]

I heard something about Lamberth ordering a jury trial floating around on Twitter this week, but wasn't able to verify it elsewhere...

[orthopa]

Barclays GSE event from yesterday - https://imgur.com/VrqjZkb

 

thanks for the link.

 

Maybe Calabria thinks/knows that anything he may request from congress for more power for FHFA doesn't get passed either. Maybe the competition request is just a show too.

[Guest cherzeca]

@Luke

 

I think treasury/fhfa/large junior holders/litigants all realize that a settlement is necessary, and I think it is no secret that junior holders generally will be satisfied with par, likely converting par into the common at re-IPO price.  since the litigation ask is to kill the seniors, and killing the seniors just so happens to be necessary to re-IPO, it would seem that this settlement would be not a heavy lift. 

 

so introducing the concept of damages beyond par is not incorrect, just not that relevant imo

[Luke 532]

Thanks, Christian.

 

The two comments below work perfectly together (seniors being fully paid back)...

since the litigation ask is to kill the seniors, and killing the seniors just so happens to be necessary to re-IPO, it would seem that this settlement would be not a heavy lift.

 

Barclays GSE event from yesterday - https://imgur.com/VrqjZkb

[muscleman]

For those who believe after all the industry wide talks with Craig Philips, who is supposed to keep a poker face, don't forget one thing: Craig Philips finished his work and currently seeking for a job on Wall Street. Guess what interview questions people on WS are gonna ask him? And what would he say to get the biggest offer package?  ::)

 

[Guest cherzeca]

For those who believe after all the industry wide talks with Craig Philips, who is supposed to keep a poker face, don't forget one thing: Craig Philips finished his work and currently seeking for a job on Wall Street. Guess what interview questions people on WS are gonna ask him? And what would he say to get the biggest offer package?  ::)

 

you have it backwards. street firms won't be doing the picking

[muscleman]

A question for Chris. I was puzzled by this table here:

 

It almost looks like 50-50 to me for affirm/reverse decisions.

 

Didn't we say it was 14 reversals out of 16 before?  :o

[Guest cherzeca]

A question for Chris. I was puzzled by this table here:

 

It almost looks like 50-50 to me for affirm/reverse decisions.

 

Didn't we say it was 14 reversals out of 16 before?  :o

 

13/16 reversals of merits panel appellate decision.  I guess this tweeter went to rev/aff of original district court decisions.

[muscleman]

A question for Chris. I was puzzled by this table here:

 

It almost looks like 50-50 to me for affirm/reverse decisions.

 

Didn't we say it was 14 reversals out of 16 before?  :o

 

13/16 reversals of merits panel appellate decision.  I guess this tweeter went to rev/aff of original district court decisions.

 

Got it. Thank you.

 

Still, the timeline in this tweet is quite interesting. The longest so far is 244 days. Given the complexity of this case, I'd assume it takes that long, which puts us to October ruling.