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

Luke 532 · August 30, 2019

Hannah Lang's article tonight in American Banker...

https://www.americanbanker.com/list/will-gse-reform-get-some-clarity-from-long-awaited-blueprints?utm_medium=social&utm_content=socialflow&utm_campaign=amerbanker-tw&utm_source=twitter

Midas79 · August 30, 2019

Does anyone here think that the Citi preferred to common conversion is worth studying as a parallel to a pontial one for FnF? The circumstances are rather different given the timing, capital situations, and comparative leverage, but it could be worth looking into.

August 30, 2019

Does anyone here think that the Citi preferred to common conversion is worth studying as a parallel to a pontial one for FnF? The circumstances are rather different given the timing, capital situations, and comparative leverage, but it could be worth looking into.

I think past FC bailout recap templates are all worth reviewing since one would think Phillips had someone in treasury review them for guidance. but Phillips and Mnuchin are deal makers and this recap involves a deal specific to the issues and facts relating to the GSEs and the prominent holders of preferred (assuming as I do that part of the plan will be to get everyone into the pool as it were). I believe it would have made sense for phillips to have had discussions with these holders, though I couldn't say what the takeaways might be.

August 30, 2019

Hannah Lang's article tonight in American Banker...
https://www.americanbanker.com/list/will-gse-reform-get-some-clarity-from-long-awaited-blueprints?utm_medium=social&utm_content=socialflow&utm_campaign=amerbanker-tw&utm_source=twitter

I think the plan will be more general and nonspecific than many would want, but there is one point that I expect to be made, and if it is I will be satisfied.

I expect the plan to make clear that the GSEs will be returned to private ownership by means of retention of earnings and capital raises, market conditions permitting. right there, this would imply that the NWS must end. whether the plan specifically states this, and even goes on to discuss the 10% moment and how we have reached the 12% moment as phillips has said, I know not, but I would rather expect that these details will await the Calabria/mnuchin negotiation. any references to capital will be bromide like...safety etc rather than specific amounts and %s. there will likely be no reference to settling litigation, but again this would be implied.

we know that the plan will call upon congress to permit additional guarantors and a limited fed guaranty. I expect the plan will not state that moving to private capital will await congressional action. I would hope the plan sets forth next steps which would refer to fhfa negotiation and regulatory action.

the whole HUD angle is an unknown. how it affects the GSEs is hard to predict, but I expect the plan will call for HUD to improve operations and reduce risk...without saying how.

Luke 532 · August 30, 2019

Hannah Lang's article tonight in American Banker...
https://www.americanbanker.com/list/will-gse-reform-get-some-clarity-from-long-awaited-blueprints?utm_medium=social&utm_content=socialflow&utm_campaign=amerbanker-tw&utm_source=twitter

I think the plan will be more general and nonspecific than may would want, but there is one point that I expect to be made, and if it is I will be satisfied.

I expect the plan to make clear that the GSEs will be returned to private ownership by means of retention of earnings and capital raises, market conditions permitting. right there, this would imply that the NWS must end. whether the plan specifically states this, and even goes on to discuss the 10% moment and how we have reached the 12% moment as phillips has said, I know not, but I would rather expect that these details will await the Calabria/mnuchin negotiation. any references to capital will be bromide like...safety etc rather than specific amounts and %s. there will likely be no reference to settling litigation, but again this would be implied.

we know that the plan will call upon congress to permit additional guarantors and a limited fed guaranty. I expect the plan will not state that moving to private capital will await congressional action. I would hope the plan sets forth next steps which would refer to fhfa negotiation and regulatory action.

the whole HUD angle is an unknown. how it affects the GSEs is hard to predict, but I expect the plan will call for HUD to improve operations and reduce risk...without saying how.

I think cherzeca may very well be right. I wonder how the prefs would react the week following the plan release in terms of percentage of par under cherzeca's scenario.

orthopa · August 30, 2019

Does anyone here think that the Citi preferred to common conversion is worth studying as a parallel to a pontial one for FnF? The circumstances are rather different given the timing, capital situations, and comparative leverage, but it could be worth looking into.

I think its worth a look. I looked at Citi a while back, and most recently at AIG. I think its worth referencing. Its been hashed out here before but probably buried hundreds of pages back, but I think the preferred to common conversion, new preferred issues, and eventual sale of warrants/exercise by treasury has been tested multiple times since the financial crisis with some tweaks along the way. Mnuchin and Phillips may have their own tweaks but the above builds capital faster, gets rid of expensive legacy preferred, and has been executed successfully before.

Remember back in May supposedly some investors met with Calabria and were "thrilled" with the discussion. My assumption has to be these were preferred holders as there were/are still too many unknowns regarding the common to make a valuation call within reason. With common we still dont know capital ratios, how much or if preferred get converted, What the ratio of conversion is, and does treasury exercise warrants and how many, how much capital is retained and when does it start? With the preferred it could be as simple as you get converted at par, etc. Much easier to predict that IMO.

Of course that could all be rubbish and a waste of time but something to think about in regards to why there were so thrilled.

August 31, 2019

Does anyone here think that the Citi preferred to common conversion is worth studying as a parallel to a pontial one for FnF? The circumstances are rather different given the timing, capital situations, and comparative leverage, but it could be worth looking into.

I think its worth a look. I looked at Citi a while back, and most recently at AIG. I think its worth referencing. Its been hashed out here before but probably buried hundreds of pages back, but I think the preferred to common conversion, new preferred issues, and eventual sale of warrants/exercise by treasury has been tested multiple times since the financial crisis with some tweaks along the way. Mnuchin and Phillips may have their own tweaks but the above builds capital faster, gets rid of expensive legacy preferred, and has been executed successfully before.

Remember back in May supposedly some investors met with Calabria and were "thrilled" with the discussion. My assumption has to be these were preferred holders as there were/are still too many unknowns regarding the common to make a valuation call within reason. With common we still dont know capital ratios, how much or if preferred get converted, What the ratio of conversion is, and does treasury exercise warrants and how many, how much capital is retained and when does it start? With the preferred it could be as simple as you get converted at par, etc. Much easier to predict that IMO.

Of course that could all be rubbish and a waste of time but something to think about in regards to why there were so thrilled.

to put it perhaps too simply, if you think that it makes sense for the recap to try to have all junior prefs exchange into common, then you would rather be a future common holder by exchange rather than a current common holder from the get go. since junior prefs are going to be induced to exchange (and really only compelled to if 2/3rds of your class have already agreed to), there may be an advantage in being the recipient of the inducement (ie a favorable exchange ratio) rather than a common holder watching as a spectator.

Luke 532 · August 31, 2019

Plan will outline a path to privatization. What can the executive branch do and where do they need Congress. Building capital through retention of profits will listed as consistent with Exec Power and HERA.

In other words, the NWS will be ending soon. For what it's worth, Gasparino agrees that this is what is happening.

Based on what I have reported on the @USTreasury GSE plan this sounds accurate. BUT it also displays a kick-the-can approach so there probably won’t be a full reform in an election year

Midas79 · September 1, 2019

@cherzeca

I saw your post on Tim Howard's blog about a possible 4th amendment rescuing the 3rd. Is it possible that the sides are in confidential settlement talks and have asked the court to delay its decision until those talks either break down completely or lead to a successful settlement? From everything I can tell, Treasury is willing to give up the seniors and the NWS because those are necessary steps towards raising capital. What, then, do Treasury or FHFA have to lose by settling the case? Or are there too many potential leaks for this to be plausible given that we haven't heard anything at all about a possible settlement?

One potential piece of disconfirming evidence, though, is Calabria's letter reversing Otting's position and claiming that the for cause removal is constitutional after all. If the Collins case is settled and dismissed rather than being ruled on by the en banc panel, what happens to the FHFA director removal clause? Does it remain in its original HERA state (for cause) because the state of the world would be as if the Collins case never happened? Or would it change to at will because that's what the Fifth Circuit merits panel ruled? Or would its fate be part of the negotiations?

September 1, 2019

@cherzeca

I saw your post on Tim Howard's blog about a possible 4th amendment rescuing the 3rd. Is it possible that the sides are in confidential settlement talks and have asked the court to delay its decision until those talks either break down completely or lead to a successful settlement? From everything I can tell, Treasury is willing to give up the seniors and the NWS because those are necessary steps towards raising capital. What, then, do Treasury or FHFA have to lose by settling the case? Or are there too many potential leaks for this to be plausible given that we haven't heard anything at all about a possible settlement?

One potential piece of disconfirming evidence, though, is Calabria's letter reversing Otting's position and claiming that the for cause removal is constitutional after all. If the Collins case is settled and dismissed rather than being ruled on by the en banc panel, what happens to the FHFA director removal clause? Does it remain in its original HERA state (for cause) because the state of the world would be as if the Collins case never happened? Or would it change to at will because that's what the Fifth Circuit merits panel ruled? Or would its fate be part of the negotiations?

you ask a lot here, but one thing that interests me about your post is that IF there was a Ps/treasury settlement and some Treasury/fhfa negotiation outcome acceptable to Ps, then all parties would want Calabria to serve out the full term, and any succeeding term, in order to "protect" the recap process.

edit: if collins en banc is decided in favor of Ps, then you have a split in circuits and the issue of constitutionality of singe director for cause removal would need to be decided by SCOTUS...and would remain unclear if not taken up by SCOTUS. there is a SCOTUS case being argued this fall about the Puerto Rico finance board that could go a long way to deciding issues regarding agency appointments/removal...the case does not involve single director removal for cause but its reasoning could be readable over

muscleman · September 3, 2019

I think the next leg down will come soon. Whenever everyone expects the stock to go one way, it usually goes the other. This time I can see everyone talking about the treasury plan after Labor Day and it should help the stock reach par, so I think there is a fairly good chance to go the other way.

james22 · September 3, 2019

Are you willing to bet on that, muscleman?

muscleman · September 3, 2019

Are you willing to bet on that, muscleman?

No. I do not short stocks, and even if I do, the possible ruling from Collins may create a gap up that causes risks to be unable to control.

Luke 532 · September 3, 2019

UPDATE on the @WhiteHouse/@USTreasury plan to reform @FannieMae

@FreddieMac — Administration pushing to release it this week but several issues are said to remain in flux that could delay. Will advise as I get more info $FNMA $FMCC

Luke 532 · September 3, 2019

https://www.realvision.com/tv/shows/interviews/videos/when-geopolitics-moves-markets