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

[Jcmeg35]

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.

 

Given Calabria's public comments, does anyone else think that the Court is going to hold off as long as possible in issuing a ruling to see if the matter will settle itself with an Admin change to the NWS? I guess the question is if one thinks the mindset of the Judges is to kick the can down the road and see if the case settles itself. Does anyone else have a different view?

[Guest cherzeca]

@J35

 

you have 2 difficult claims, APA and separation of powers, and with both the merits and remedy of each claim to decide, it is like 4 claims.  you know you will have a dissent on each claim. so you have a lot of opinion writing to do, and responses to the other side once the original draft of each opinion is handed over to the other side.  plus you have 16 judges so you may have some concurring opinions.  plus you are likely to have some negotiations cum arm twisting

 

so this will take awhile quite apart from the political aspect you mention.  a settlement that would preempt the need for publishing the opinions seems well down the road imo, but some (in the minority) judges in the process may have that as a tactic. I tend to doubt it

[Jcmeg35]

@J35

 

you have 2 difficult claims, APA and separation of powers, and with both the merits and remedy of each claim to decide, it is like 4 claims.  you know you will have a dissent on each claim. so you have a lot of opinion writing to do, and responses to the other side once the original draft of each opinion is handed over to the other side.  plus you have 16 judges so you may have some concurring opinions.  plus you are likely to have some negotistions cum arm twisting

 

so this will take awhile quite apart from the political aspect you mention.  a settlement that would preempt the need for publishing the opinions seems well down the road imo, but some (in the minority) judges in the process may have that as a tactic. I tend to doubt it

 

@chereza - thanks for the color. That all makes sense. I guess it was a little naive to think they could kick the can but then wake up one day to see that Admin didn't follow through etc.

[muscleman]

Here is my worthless prediction:

Based on the charts, I would guess the to be released treasury plan favors common far more than preferred. It kinda makes sense because that's where treasury's upside comes from after 3rd amendment is killed.

But how? Maybe preferred is converted to common at an unfavorable ratio?

[Guest cherzeca]

Here is my worthless prediction:

Based on the charts, I would guess the to be released treasury plan favors common far more than preferred. It kinda makes sense because that's where treasury's upside comes from after 3rd amendment is killed.

But how? Maybe preferred is converted to common at an unfavorable ratio?

 

remember that treasury cant force junior prefs to convert...unless treasury gets 2/3rds of each class to do so.  a bad conversion ratio will not help treasury get that.

 

the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

[DRValue]

I really hope they listen to Tim Howard. Logic and truth in every post.

[Midas79]

the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

 

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

[Guest cherzeca]

the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

 

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

 

well that fixed amount will be less than it would otherwise be if capital levels had been lower.  any way you look at it, treasury has an incentive for lower cap levels than fhfa, which has no skin in the game, might otherwise set.  whether treasury can be an effective countervailing force on fhfa is behind my pay grade to assess.

[Jcmeg35]

the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

 

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

 

@Midas, this is an interesting thought and would make it much easier for Treasury to quickly "get out" of its position. The one pushback I would have is how would FnF buyback the warrant position pre cap raise? I would think, this would only be able to take place after FnF had been fully recapped and then + some, which would have to be many years down the road. As @chereza mentions, would still require lower capital levels for Treasury to realize max value, otherwise, once we got to that point, the warrants would have a lower value.

[DRValue]

the pivot point in this capital raise will be what capital level will fhfa set.  a high level means that investors will want a low re-IPO price, meaning treasury proceeds go down.  fhfa has no skin in the game, whereas treasury has all of the skin the game.

 

Watch out for the possibility of Treasury selling the warrants back to FnF for a fixed amount, then. If that happens then their incentive to push for lower capital levels, and thus a higher share price, disappears.

 

Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

[Midas79]

@Midas, this is an interesting thought and would make it much easier for Treasury to quickly "get out" of its position. The one pushback I would have is how would FnF buyback the warrant position pre cap raise? I would think, this would only be able to take place after FnF had been fully recapped and then + some, which would have to be many years down the road. As @chereza mentions, would still require lower capital levels for Treasury to realize max value, otherwise, once we got to that point, the warrants would have a lower value.

 

FnF wouldn't buy them back before the raise, they would do it in conjunction with it. Instead of raising, say, $60B in commons with an implied warrant value of $40B, they raise $100B and give $40B of it to Treasury in exchange for the warrants.

 

This gives Treasury some certainty over what they would get and also gets them their money right now, allowing them to "get out" quickly as you say.

[Midas79]

Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

 

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

[DRValue]

Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

 

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

 

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

[Midas79]

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

 

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

 

This is one downside scenario for the commons, especially compared to the juniors.

[Guest cherzeca]

if treasury sells its exercised warrants in the market, this is capital neutral.  if it redeems the warrants, this is capital negative.

[orthopa]

Conservator would never allow it and the business would never do it if  it leads to more dilution than the treasury retaining the warrants and selling in the market.

 

Why would FHFA care? And what do you mean by "the business would never do it"? More dilution equals more money for the new investors, not less.

 

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

I think the one thing the common holders forget or get mixed up is the thought that treasury will push for a high share price but forget about how that essentially dilutes the new money.  A share price higher then 3 and change would be good for common holders but treasury owns 80% of the business for nothing. They paid .00000001 for their 80% and can exercise whenever and however much they want. Also how much more did get they get in the sweep as a profit? Is anyone counting that towards what the treasury would count? What if the treasury counts this as profit in addition and is willing to take less to raise more capital? I know its altruistic but should be considered

 

Looking back at other TARP bailouts how much did the gov make?

13.4B from Citi

5B from AIG

4.5B from BAC

3.5B from GMAC

 

The gov has gotten paid back on the sr prfd, swept extra (although could be considered fee for backstop), and is going to make $$$ on the warrants even at a penny a share. Again I dont think for one second the fed gov is going to be nice and not make extra $$$ but the people buying the new shares are in the drivers seat. Not the gov. The gov needs to unload and can only dictate price so much. Yes they will push for a high price but the new $$$ will push back. Wound'nt you?

 

I have talked about this with many common holders and the end arguement is always who is going to buy the new shares if they cant get a good return? Correct! But what they confuse is the fact that there is an inverse relationship between the new capitals' return and the legacy common share price. Same with the Sr. Preferred via conversion.

 

What if the gov puts execution/speed over gross profit in light of the demands of new money/market expectations?

 

[DRValue]

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

 

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

 

This is one downside scenario for the commons, especially compared to the juniors.

 

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

 

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

[Guest cherzeca]

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

 

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

 

This is one downside scenario for the commons, especially compared to the juniors.

 

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

 

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

 

disagree.  the entire capital raise will be multistep process and fhfa/treasury will run the show at the beginning.  at some point after the initial raise the companies will take over

[orthopa]

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

 

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

 

This is one downside scenario for the commons, especially compared to the juniors.

 

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

 

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

 

disagree.  the entire capital raise will be multistep process and fhfa/treasury will run the show at the beginning.  at some point after the initial raise the companies will take over

 

+1 No way fannie and freddie are going to raise capital themselves. They are powerless at this time and likely will be to the very end. FHFAs proposed capital rules are the antitheses of not having imput.  They have no control over how much capital they are going to need/get or how they get it. They are going to be told what to do every step along the way by treasury. Who has a fiduciary duty to common share holders at this time?

 

I guess this is the point that many common holders have (not arguing with you or at you DRValue) not quite understood or get. In this situation no one is the legacy common holders friend. No one. Not treasury, not new capital, not "Fannie and Freddie", not the jr preferred.  Both new capital and Jr Preferred only benefit to gain more the lower the prices goes. My return as a Jr Prd share holder and new moneys return gets significantly higher the lower the price goes in a conversion. Secondly I wouldn't trust treasury for shit. They do not have the common shareholders best interest in mind and have no duty to do so. Almost nearly if not all of the new equity is going to come at the legacy commons expense. At this time, not knowing the governments plan it is a complete 100% gamble as to what the outcome could be in regards to dilution.  At least in the jr prfd there is a par value, a contract, and capital structure. Hell there are some on the board who are still leary of getting par for the prfd, let alone the outcome of the common.

 

Commons outcome is best if the capital build takes forever, jr prd doesn't convert or is nice in conversion, new equity is ok getting hosed, and capital levels are held low. What are the chances of that happening?

 

Ill get on my soap box for this but lastly AFAIK Tim Howard holds mostly common shares and thus his latest piece on how FnF shouldn't hold too much capital. But in all honesty aren't we all in this mess because FnF did not have enough capital in the first place? Yes the banks Fd em and they were at fault too, and fannie needed some reform but at the end of the day a FnF that holds more capital is going to be safer.  If anyone else looked at this from the outside it would be insanity to think that less capital should be held to support common legacy stock prices. Lastly if FnF really dont "need" that much capital they why the explicit or implicit guarantee? Why not have more capital in front of it for the MBS investors? Have less like he proposes so their is less dilution? Talk about insanity. The same was said of banks when the CCAR results came out and we heard that investors will never invest because they hold too much capital and returns will dwindle and yet today the banks seem to manage.  Sure FnF are fundamentally different then banks but if an extra .5-1.5% of capital is needed to finally get them adequately capitalized at the risk of some lower returns and modestly higher G fees then so be it.

[DRValue]

Well, as you point out doing the raise and then buying the warrants may be a possibility, I guess SPO investors would see that as a massive share buyback. I agree the conservtor wouldn't have an issue with that in that order.

 

I thought your original post implied that treasury would no longer push for a high share price which means more dilution than exercising the warrants, something I would assume the directors wouldn't go for.

 

Instead of a share buyback, I see it as a cost of doing business. A reason to get Treasury to agree to the deal, since they have to approve release anyway.

 

Your second statement is correct, that's exactly what I was implying. What you're missing is that the directors won't have any say over it because it will happen during, and likely right at the end of, conservatorship. FHFA and Treasury hold all the cards, and neither has a fiduciary duty to shareholders. FHFA has no reason to care at what price the share offering is conducted, and if the warrants are sold for a fixed price then Treasury doesn't either. At that point the "more dilution equals more money for new investors" principle kicks in.

 

This is one downside scenario for the commons, especially compared to the juniors.

 

Calabria has said a few times that Fannie and Freddie will be left to raise the capital themselves. How much behind the scenes input treasury and fhfa have in reality is something that probably won't ever be known.

 

If it is left up to the co's then i don't see the need for a super low common price, especially if they have multiple years to raise capital, but we'll see. You pay your money, you take your choice.

 

disagree.  the entire capital raise will be multistep process and fhfa/treasury will run the show at the beginning.  at some point after the initial raise the companies will take over

 

We basically agree. Treasury controls nws and warrants so are largest shareholder at the table. Fnf won't decide any of what happens there and will be steered by what the warrants want.

 

However calabria has said milestones not timeframe, so the exact mechanics over years will likely have some flexibility imo.

[Guest cherzeca]

I will say this, while there may be a roadmap with milestones and hopefully a timeline for congress before the ship sets sail, all of this is really written out of whole cloth.  not only has this type of transaction, raising $100B for massive companies to get out of conservatorship, not been done before, but the guy at the helm has utterly no experience with capital markets.  worse, Calabria clearly holds himself and his intelligence in high regard, which normally is a plus for someone with his responsibility, but given that he doesn't know what he doesn't know, this whole process is going to be white-knuckle.  I just hope the bankers do a good job.

[DRValue]

I will say this, while there may be a roadmap with milestones and hopefully a timeline for congress before the ship sets sail, all of this is really written out of whole cloth.  not only has this type of transaction, raising $100B for massive companies to get out of conservatorship, not been done before, but the guy at the helm has utterly no experience with capital markets.  worse, Calabria clearly holds himself and his intelligence in high regard, which normally is a plus for someone with his responsibility, but given that he doesn't know what he doesn't know, this whole process is going to be white-knuckle.  I just hope the bankers do a good job.

 

I do want this whole thing over now. Roll-on the release of the plan.

[Luke 532]

Roughly one more week, plus or minus, until we get the plan (hopefully).

[Guest cherzeca]

watched the SBC hearing on SIFI designation.  as far as I could tell, only 6 senators showed up for it.  this should not give anyone in administration comfort that congress will pass legislation re GSEs.

 

ms wachtler made a lot of sense and is a voice to watch in the debate going forward

[investorG]

watched the SBC hearing on SIFI designation.  as far as I could tell, only 6 senators showed up for it.  this should not give anyone in administration comfort that congress will pass legislation re GSEs.

 

ms wachtler made a lot of sense and is a voice to watch in the debate going forward

 

Crapo, Calabria, and the banks would like additional competitors and explicit guarantee.  Brown appears to favor the utility.  And this is before getting Maxine involved.  I'm guessing additional competitors and the utility model plans would be difficult to implement together?  And also guessing that Brown wouldn't give Crapo both things he wants for free. 

 

So, is it possible to go both utility and explicit guarantee to give each side one piece of what they want?