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

[investorG]

If you are a FnF operational purist or a common shareholder expecting a windfall, the report is a disappointment imo.  the democrats will likely complain.  not sure what the repubs will focus on.

 

I have no idea how the preferreds trade in the short term with the receivership nugget and high expectations but there's  some positives in the report, imo (listed below).  it's a professional-style report with lots of detail.  obviously the congressional hearing on Tuesday is highly relevant to flush out whatever priorities all sides have.  and collins results of course.  but mnuchin has said virtually nothing specific for 3 years and now we have a 53 pager.

 

- the 3bn capital buffer may be raised soon (sr pref amount increased 1:1)

- at some point the pspa is likely to be adjusted to end the sweep and replaced by periodic committment fee

- clear on not waiting for congress

- some chance of an intermediate level of equity capital to exit conservatorship rather than waiting for it all

- included actual language of potentially scratching the sr pref (collins outcome perhaps a swing factor here)

- while FnF might be a sifi in the end, no extreme focus on it in document

- timing of some important proposals uses the word 'promptly'

- potential use of private capital to provide initial slug of recap $

- potential use of convertible debt in some capital cushion manner; all else equal this likely reduces the equity capital levels needed to prevent a Tsy draw (the goal) + possibly sooner exit conservatorship

 

good luck everyone.

[james22]

Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth.

 

I think that's about right.

 

The report is very positive in that it confirms many things we've assumed/hoped for. We'll see today how much of that is priced in.

 

But necessarily vague to allow freedom of action (acknowledging the role of congress, etc.).

 

I like to believe they've a plan they're not sharing (acting administratively), but we'll see over the next month or so.

[orthopa]

mm called it again--wow was this report underwhelming. with mnuchin occupied with china trade negotiations why should we expect any real progress rest of the year? the wait for godot continues.

 

this also makes me wonder if craig philips was hamstrung/castrated by admin (excluding mnuchin) and resigned in frustration.

 

Knowing what other steps are needed to get "real progress" I didn't think the report was that disappointing.  I think a certain surprise was the discussion about the NWS ending. Didn't we know that we would need the NWS to end, FHFA captial rules, and recap plans to really get "progress". None of that was going to be released out right in the plan I thought as an absolute but is clearly laid out as mile markers. Also congress is no longer a roadblock and clearly laid out as such.

 

Another positive is the preferred conversion which is now put on paper. Looking at the recap scenario laid out I do not see how preferred does not get par or a very close % with the recap options listed. The preferred clearly have a seat at the table and Treasury is going to negotiate. As suspected those holding preferred are sitting side by side with Paulson et al.  Receivership would be a disaster but as cherecza said its there to placate the mob.

 

I really don't know how one could be really disappointed with this plan or the suspected treatment for the preferred. Next step is NWS stopping adjusted then FHFA capital rules. Waiting surely blows but we can at least see godot in the distance now.

[orthopa]

If you are a FnF operational purist or a common shareholder expecting a windfall, the report is a disappointment imo.  the democrats will likely complain.  not sure what the repubs will focus on.

 

I have no idea how the preferreds trade in the short term with the receivership nugget and high expectations but there's  some positives in the report, imo (listed below).  it's a professional-style report with lots of detail.  obviously the congressional hearing on Tuesday is highly relevant to flush out whatever priorities all sides have.  and collins results of course.  but mnuchin has said virtually nothing specific for 3 years and now we have a 53 pager.

 

- the 3bn capital buffer may be raised soon (sr pref amount increased 1:1)

- at some point the pspa is likely to be adjusted to end the sweep and replaced by periodic committment fee

- clear on not waiting for congress

- some chance of an intermediate level of equity capital to exit conservatorship rather than waiting for it all

- included actual language of potentially scratching the sr pref (collins outcome perhaps a swing factor here)

- while FnF might be a sifi in the end, no extreme focus on it in document

- timing of some important proposals uses the word 'promptly'

- potential use of private capital to provide initial slug of recap $

- potential use of convertible debt in some capital cushion manner; all else equal this likely reduces the equity capital levels needed to prevent a Tsy draw (the goal) + possibly sooner exit conservatorship

 

good luck everyone.

 

Who cares if congress complains. There is nothing they can do to stop the recap and FHFA moving forward. Let them complain all they want.

[Guest cherzeca]

@IG

 

that is a good review, thanks. 

 

I got the sense that this was the work product of a committee and not just a single person (Phillips).  for example the history section which I only cursorily scanned was likely taken from the annals of prior anti-GSE material.  the rec to congress to replace the duty to serve with a market fund was taken from parrott/zandi past proposal.

 

going forward, if you separate the treasury plan into two segments that will follow two separate paths, the congress rec segment will be delivered to congress next Tuesday and I suspect it will be left there for congress to take up or not.  I wouldn't think treasury will spend a lot of time trying to help congress work through these recs.  then there is the treasury/fhfa recap segment, which is the most encouraging part of the plan, and which will go into action mode, though likely much more slowly than we would like.  so net net, I am encouraged.

[Luke 532]

Maybe I'm a Pollyanna, but I am overall pleased with the plan.  Many of the stuff mentioned we already suspected/knew but it wasn't in an official document.  Now it is, that is important.

 

The most important near-term action I noticed is that it is very likely the capital buffer is increased (reduce NWS) in September.  So the full sweeps may already be a thing of the past.  This happens before the Sr. Preferred Agreement is amended.  Calabria has said he wants to amend it only once.  He previously said negotiations for adjustments would be in September/October.  The plan released yesterday said they want to increase the capital buffer immediately to start the recap process while they figure out the Sr. Preferred Agreement amendment.

 

Of course we'll get crazy price action as short-timers exit, and commons may get hit as heavy dilution is likely.  But I don't concern myself with price action so it was probably a waste to even spend a few seconds to type these last two sentences.

[orthopa]

Maybe I'm a Pollyanna, but I am overall pleased with the plan.  Many of the stuff mentioned we already suspected/knew but it wasn't in an official document.  Now it is, that is important.

 

The most important near-term action I noticed is that it is very likely the capital buffer is increased (reduce NWS) in September.  So the full sweeps may already be a thing of the past.  This happens before the Sr. Preferred Agreement is amended.  Calabria has said he wants to amend it only once.  He previously said negotiations for adjustments would be in September/October.  The plan released yesterday said they want to increase the capital buffer immediately to start the recap process while they figure out the Sr. Preferred Agreement amendment.

 

Of course we'll get crazy price action as short-timers exit, and commons may get hit as heavy dilution is likely.  But I don't concern myself with price action so it was probably a waste to even spend a few seconds to type these last two sentences.

 

Calabria certainly in focus now and a nice reminder that he said negotiations would be in the time frame we are in right now. Place your bets on whether Q3 earnings are swept.

[Guest cherzeca]

this plan has the smell of lawyer's advice to it (I have a lawyer's nose).

 

I say this because I can see some lawyer saying that hey, if you want the treasury/fhfa deal to stick, you have to make sure that it is arms'-length, that fhfa has all of the appearances of being independent, and that there cant be too much detail in the treasury plan because all of that detail needs to be the product of the arms'-length negotiation with fhfa. 

 

it is not inconceivable that the tbtf crowd seeks to attack the deal even by bringing litigation.

[investorG]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

[muscleman]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

 

Well, maybe. But the stock going down is quite expected. I said yesterday "Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth."

Whenever that happens, the stock goes down on a disappointing quarter. No difference here.

 

[DRValue]

For what its worth... I've now read through and thought about the most important parts of the plan (to me). A few observations and comments.

 

Section E: ENDING THE CONSERVATORSHIPS

 

Pre-Conditions:

 

• FHFA has prescribed regulatory capital requirements for both GSEs;
  

 

COMMENT: In progress, expected Q4.

 

• FHFA has approved the GSE’s capital restoration plan, and the GSE has retained or raised sufficient capital and other loss-absorbing capacity to operate in a safe and sound manner;
  

 

COMMENT: The Treasury qualifies the amount of capital needed as not fully capitalised, but sufficiently capitalised. They could have easily said, "FHFA has approved the GSE’s capital restoration plan, and the GSE are considered fully capitalized under that plan.

 

• The PSPA between Treasury and the GSE has been amended to: (i) require the GSE to fully compensate the Federal Government in the form of an ongoing payment for the ongoing support provided to the GSE under the PSPA; (ii) focus the GSE’s activities on its core statutory mission and otherwise tailor Government support to the underlying rationale for that support; (iii) further limit the size of the retained mortgage portfolio of the GSE; (iv) subject the GSE to heightened prudential requirements and safety and
  soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability; and (v) ensure that the
  risk posed by the GSE’s activities is calibrated to the amount of the remaining commitment under the PSPA;
  

 

COMMENT: Commitment Fee, expected as compensation for support. Implication of PSPA is quasi-Treasury control of GSE activities. This safe guards Treasury losses, guarantees support, and maintains some (read a lot) of control from Treasury as a very important stakeholder. FHFAs regulator may change positions overtime, but the PSPA terms wont allow too much shift.

 

• Appropriate provision has been made to ensure there is no disruption to the market for the GSE’s MBS, including its previously issued MBS;
  

 

COMMENT: Expected.

 

• FHFA, after consulting with the Financial Stability Oversight Council (“FSOC”), has determined that the heightened prudential requirements incorporated into the amended
  PSPAs are, together with the requirements and restrictions imposed by FHFA in its capacity as regulator, appropriate to minimize risks to financial stability; and
  

 

COMMENT: Maintains Treasury control as mentioned. So you pay for the commitment of capital in two ways; 1) fee compensation. 2) tight limit of activities. No issue, expected.

 

• Any other conditions that FHFA, in its discretion, determines are necessary to ensure thatthe GSE would operate in a safe and sound manner after the conservatorship, including asto the GSE’s compliance with FHFA’s directives or other requirements and also as to the build out of FHFA’s supervisory function.
  

 

COMMENT: Allows FHFA to have final say before release from conservatoship.

 

• Treasury recommends: Pending legislation, FHFA should exercise its authority as conservator to begin the process to end each GSE’s conservatorship in a manner consistent with the preconditions set forth in this plan. (administrative)
  

 

COMMENT: Start Now!

 

• Recapitalizing the GSEs:
  Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred shares or exchanging all or a portion of that interest for common stock or other interests
  in the GSE;
  

 

COMMENT: Elimination of preference expected following Collins opinion. Converting to common prior to Collins opinion would lead to a refund of cash to the GSE and immediately recap them. Outside of this, conversion or elimination of some seems unlikely as it all has to go, I'm not certain of the benefits of not eliminating all the of liquidation preference.

 

• Adjusting the variable dividend on Treasury’s senior preferred shares so as to allow the GSE to retain earnings in excess of the $3 billion capital reserve currently permitted;
  

 

COMMENT: Retaining capital with a payment in kind principal increase is effectively the end of the NWS if the Collins opinon finds the GSEs have repaid the principal and interest at the 10% moment. That's likely IMO and the NWS stops now in practice.

 

• Issuing shares of common or preferred stock, and perhaps also convertible debt or other loss-absorbing instruments, through private or public offerings, perhaps in connection with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;
  

 

COMMENT: Raising capital through offerings is expected, the issue is how much and how. I expect a junior conversion to common. Issuing preferred or convertible debt (CoCo bonds in the UK) is a positive for common, good to see CoCo's are on the table. Private offerings... Buffett or similar? The line "perhaps in connection

with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock" is difficult for me to interpret. It could mean that Treasury would like to maximize the Governments return, or perhaps allow FnF to buy them, or sell them off. Could be anything.

 

• Negotiating exchange offers for one or more classes of the GSE’s existing junior preferred stock; and
  

 

COMMENT: All Juniors will all be offered a conversion to common, which would; increase earnings, or give more capacity for further junior preferred issuance, or allow dividends to be turned on ahead of a capital raise.

 

• Placing the GSE in receivership, to the extent permitted by law, to facilitate a restructuring of the capital structure.
  

 

COMMENT: Many people have said that Receivership is now not legal but with the PSPA outstanding with the current terms there is no prospect of becoming adequately capitalized and therefore a restructure is technically justifiable IMO. This is not easy though and would likely disrupt demand for FnF backed MBS which the plan must not do as well as cause all sorts of legal issues outlined in the Moelis plan. I don't expect a receivership. the prospect and commitment to it could give FHFA / Treasury leverage over junior pref holders or give FHFA leverage over Treasury in PSPA negotiations. However, Treasury wouldn't write a paper that negotiates against itself, so this is unlikely.

 

• Each of these options poses a host of complex financial and legal considerations that will merit
  careful consideration as Treasury and FHFA continue their effort, already underway, to identify
  and assess these and other strategic options.
  

 

COMMENT: Legal considerations could cover current lawsuits amongst other things. Recap planning is already underway.

 

• Treasury recommends:
  Treasury and FHFA should develop a recapitalization plan for each GSE after identifying and assessing the full range of strategic options. (administrative)
  

 

COMMENT: This is already underway.

 

• Pending that recapitalization plan, and as an interim step toward the eventual PSPA amendment contemplated by this plan, Treasury and FHFA should consider permitting
  each GSE to retain earnings in excess of the $3 billion capital reserve currently permitted, with appropriate compensation to Treasury for any deferred or forgone dividends.
  (administrative)
  

 

COMMENT: The NWS is dead assuming Collins goes our way. A commitment fee is a compensation, but so is a principal increase.

 

CONCLUSIONS:

 

[*]The GSEs may not need to be fully capitalized to leave conservatorship.

[*]Receivership is extremely unlikely IMO.

[*]The NWS has ended, in practice.

[*]At least some Juniors to convert to common.

[*]Common dilution will happen. It definitely will happen, and meaningfully so (just to get ahead of the common holder death squads...) but it appears by reading the plan Treasury / FHFA is open to skinning this cat in a number of ways. Issuing CoCo bonds or more prefs is a plus.

[*]Juniors will either get par at conversion or take a hair cut but ultimately receive par through common appreciation. Although I would hold out for par myself.

[DRValue]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

 

Well, maybe. But the stock going down is quite expected. I said yesterday "Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth."

Whenever that happens, the stock goes down on a disappointing quarter. No difference here.

 

There is effectively no change for shareholders at the moment. Bit of a let down to be honest.

[Guest cherzeca]

@DR. thanks for that.  I would only add that the discussion of treasury's warrants and what treasury might end up with in terms of economics after the fhfa negotiation is necessarily vague.

[Luke 532]

DRValue, very nice synopsis.  Thank you.

[orthopa]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

 

No shit. Even quoting irrelevants like Jim Parrott, really? Jim Parrott? They just cant bring themselves to just take the side of shareholders. Those losing the grip are trying anything to scare off shareholders. All the stuff that those dick heads were wrong about and now they warn about the "wait" oh the horror! LOL. Next will be comments about the NWS and how it isnt enough, then the FHFA capital levels and how bad those are, then the recap plan may not be favorable for shareholders yada yada. We went from salting the earth with FNF to having to wait to  "mint riches" and those dick heads are "warning" about it. Unbelievable.

 

https://www.bloomberg.com/news/articles/2019-09-06/fannie-freddie-bulls-might-need-trump-win-in-2020-to-mint-riches

[Luke 532]

No shit. Even quoting irrelevants like Jim Parrott, really? Jim Parrott? They just cant bring themselves to just take the side of shareholders. Those losing the grip are trying anything to scare off shareholders. All the stuff that those dick heads were wrong about and now they warn about the "wait" oh the horror! LOL. Next will be comments about the NWS and how it isnt enough, then the FHFA capital levels and how bad those are, then the recap plan may not be favorable for shareholders yada yada.

 

https://www.bloomberg.com/news/articles/2019-09-06/fannie-freddie-bulls-might-need-trump-win-in-2020-to-mint-riches

 

As frustrating as the media can be, I always remind myself that fear and worry created by headlines is largely responsible for where I am today.  It helps a ton on entry price and is irrelevant once you're already invested if you have the right mindset and temperament.

[investorG]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

 

Well, maybe. But the stock going down is quite expected. I said yesterday "Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth."

Whenever that happens, the stock goes down on a disappointing quarter. No difference here.

 

good point muscleman.  not long until the next scheduled observation point on Tuesday.  they know their words, urgencies, priorities will probably impact the stock prices, and will likely want to either entrench this preferred selloff or refute it.

[muscleman]

I was wondering why the preferreds were trading down this AM.  and then I saw the Bloomberg article from early this AM (search for 'fannie' on Bloomberg.com).  wow they are intent on fighting this with all they have, that headline certainly can scare away marginal people.

 

Well, maybe. But the stock going down is quite expected. I said yesterday "Today's GSE treasury plan is like when the market is expecting a high growth stock with no earnings to report a 200% revenue growth but it only reported a 190% growth."

Whenever that happens, the stock goes down on a disappointing quarter. No difference here.

 

There is effectively no change for shareholders at the moment. Bit of a let down to be honest.

 

That's right, but that's not what moves the stock prices. It is never true to see stocks going flat all the way until some material news come out and if it is good, it goes up, if it is bad, it goes down, if it is neutral, stock goes flat. It never works like this.

 

What happens is that people have expectations for what SHOULD happen, and starts bidding up the stock ahead of time, hoping to make a gain when good news come out, and when what ACTUALLY happened is less than what SHOULD happen, the stock goes down, even if what ACTUALLY happened is positive. This is exactly how boom bust cycles work. I think George Soros' books explained this very well.

 

[Gregmal]

The stocks didn't move much headed into this because they plans are adulterated garbage. They say nothing new or binding, and continue to leave this an ambiguous mess where everyone can read the material and form whatever conclusion continues to suite their purpose...

[Guest cherzeca]

the treasury plan is a document that accepts political reality.  that reality is that congress needs to be dealt with even as the administration has ample authority to pursue the recap independently.

 

so either you are bummed out that the administration is being too solicitous of congress, or you are pleased that treasury has once and for all said in a formal document as opposed to sound bites that it will pursue an administrative recap path independent of congress while congress dithers.

 

if you understood the political reality, this plan is not disappointing.  if you think the congressional recs intimate some weakness on the part of administration to pursue recap then the plan is disappointing. 

 

 

[rros]

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” - James Carville

A hint of what the real issue could be... And why all the cautiousness and baby-steps. I did reduce my stake this past June/July after Calabria's switch. I figured he must have seen something really disturbing to change his tune. I now have only a small stake.. just for Collins. But I would not be surprised to learn judges too are intimidated by the bond market. As IG usually says, good luck everybody.

[Luke 532]

https://www.bloomberg.com/news/articles/2019-09-06/fannie-freddie-slump-as-trump-plan-disappoints-wall-street

 

Dick Bove: Investors in the preferred issues of both Fannie Mae and Freddie Mac are about to make a great deal of money.

[Jcmeg35]

While most on this board have actually read the full report (and provided terrific thoughts and insight - thanks!) and also have the context of the past and recent history, I think it is important to take a step back. This is probably the first time in years that anything related to GSEs has received such wide media coverage. If you are an investor and seeing the headlines for the first time in a while your impression is that this is basically more of the same and if it happens (or as Bloomberg and other's are saying it won't if Trump loses) we are still years out. If you are a holder today, like many on this board I believe are, we are betting that today's perception of a recap (if it happens) is moving forward ASAP and is not years out, which is what the market seems to think (basically market is wrong in its view about timing of recap and risk of it not fully happening).

[DRValue]

https://www.bloomberg.com/news/articles/2019-09-06/fannie-freddie-slump-as-trump-plan-disappoints-wall-street

 

Dick Bove: Investors in the preferred issues of both Fannie Mae and Freddie Mac are about to make a great deal of money.

 

Hopefully I get another buying opportunity before the NWS PSPA renegotiation is announced.

[orthopa]

No shit. Even quoting irrelevants like Jim Parrott, really? Jim Parrott? They just cant bring themselves to just take the side of shareholders. Those losing the grip are trying anything to scare off shareholders. All the stuff that those dick heads were wrong about and now they warn about the "wait" oh the horror! LOL. Next will be comments about the NWS and how it isnt enough, then the FHFA capital levels and how bad those are, then the recap plan may not be favorable for shareholders yada yada.

 

https://www.bloomberg.com/news/articles/2019-09-06/fannie-freddie-bulls-might-need-trump-win-in-2020-to-mint-riches

 

As frustrating as the media can be, I always remind myself that fear and worry created by headlines is largely responsible for where I am today.  It helps a ton on entry price and is irrelevant once you're already invested if you have the right mindset and temperament.

 

I know and believe me I get that. I just have to give Parrott and those guys a lot of credit. I would have run off and would be hiding in the hills switching the focus of my consulting business. There must have been a big fat prize at the end of the rainbow for him to still give a shit at this point with where things are going. They tried very hard to kill FnF and came very close but what blows my mind is they are still trying, they are some persistent bastards.