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

[Midas79]

A few of the cases in front of Sweeney seek to be certified as class actions. Does anyone know if Sweeney ever actually certified them? If not it should make settlements easier, right?

 

Were there any other class actions in other courts?

[Guest cherzeca]

A few of the cases in front of Sweeney seek to be certified as class actions. Does anyone know if Sweeney ever actually certified them? If not it should make settlements easier, right?

 

Were there any other class actions in other courts?

 

as I recall none of the Sweeney cases have been certified yet since they are the subject of motions to dismiss, to be argued November. the Lamberth case is styled as a class action and since it is on a trial schedule I would think it has been certified, but dont know for sure.

 

but the larger point is whether the collective action problem posed by having many different Ps is a good thing or a bad thing for investors.  It may inhibit settlement, but also may inhibit settlement on less than the most advantageous terms for investors. 

 

then again, I dont know how many investors are funding the litigation. if there is only a few funders then the multiplicity of Ps is really an illusion.

[investorG]

settling the damages cases in lamberth and Sweeney sounds quite hard.  is the Sweeney case similar to the lamberth one where any damages are paid by the companies, or is the target the Tsy?  if it's the latter, I don't see why the Sweeney cases need settlement as part of this process.  thank you.

[SnarkyPuppy]

On the Investorsunite call the lawyer said that in the event of a plaintiff win, the companies (not the government) is liable for paying the remedy. 

 

Is there not a risk that the government converts its $200bn in preference to convertible debt (above junior prefs) to recapitalize (in addition to exercising warrants) and if the Collins case is won by P's the companies have to deal with it (issue more equity).  No longer govt problem?

 

Obviously inconsistent w IPO comments from Calabria and would be weird to do relative to the easy  solution.  But basically couldn't the govt just push the contingent liability to the companies? 

[allnatural]

You're taking that investors unite call comment out of context. Specifically the Lamberth contracts case would require the damages to be paid by the GSEs themselves to the shareholders. But if the NWS were ever reversed (APA claim + constitutional remedy claim), the government (not the companies) would be on the hook. Also as per the original PSPA terms, the government is not allowed to get new securities of the GSEs past 2009 other than the warrants and the original senior pfds they already own so I doubt they are even allowed to swap out for debt bc that would be a new security.

 

 

On the Investorsunite call the lawyer said that in the event of a plaintiff win, the companies (not the government) is liable for paying the remedy. 

 

Is there not a risk that the government converts its $200bn in preference to convertible debt (above junior prefs) to recapitalize (in addition to exercising warrants) and if the Collins case is won by P's the companies have to deal with it (issue more equity).  No longer govt problem?

 

Obviously inconsistent w IPO comments from Calabria and would be weird to do relative to the easy  solution.  But basically couldn't the govt just push the contingent liability to the companies?

[Luke 532]

"The settlement will allow..." Typo? Freudian slip?

 

https://www.insidemortgagefinance.com/articles/215848-fhfa-the-end-of-the-net-worth-profit-sweep-is-imminent

 

The Federal Housing Finance Agency and the Treasury Department are close to signing a letter agreement that will eliminate the net worth sweep by the end of September, FHFA Director Mark Calabria told Inside Mortgage Finance this week.

 

The settlement will allow Fannie Mae and Freddie Mac to retain most of their earnings beginning with the third quarter.

 

The letter agreement is not a complete replacement of the preferred stock purchase agreement, Calabria said. It’s a temporary expedient to end the sweep as quickly as possible.

 

The FHFA director pointed to the December 2017 agreement between his predecessor, Mel Watt, and Treasury Secretary Steven Mnuchin, which created the GSEs’ modest capital buffers. “There were no broader policy changes,” he said. “It was just, ‘Okay, you get to have a $3 billion capital buffer.’” For more details, see the new edition of Inside Mortgage Finance, now available online.

[SnarkyPuppy]

"The settlement will allow..." Typo? Freudian slip?

 

https://www.insidemortgagefinance.com/articles/215848-fhfa-the-end-of-the-net-worth-profit-sweep-is-imminent

 

The Federal Housing Finance Agency and the Treasury Department are close to signing a letter agreement that will eliminate the net worth sweep by the end of September, FHFA Director Mark Calabria told Inside Mortgage Finance this week.

 

The settlement will allow Fannie Mae and Freddie Mac to retain most of their earnings beginning with the third quarter.

 

The letter agreement is not a complete replacement of the preferred stock purchase agreement, Calabria said. It’s a temporary expedient to end the sweep as quickly as possible.

 

The FHFA director pointed to the December 2017 agreement between his predecessor, Mel Watt, and Treasury Secretary Steven Mnuchin, which created the GSEs’ modest capital buffers. “There were no broader policy changes,” he said. “It was just, ‘Okay, you get to have a $3 billion capital buffer.’” For more details, see the new edition of Inside Mortgage Finance, now available online.

 

No because plaintiffs wouldn't settle w a new letter agreement similar to dec 2017

[investorG]

"The settlement will allow..." Typo? Freudian slip?

 

https://www.insidemortgagefinance.com/articles/215848-fhfa-the-end-of-the-net-worth-profit-sweep-is-imminent

 

The Federal Housing Finance Agency and the Treasury Department are close to signing a letter agreement that will eliminate the net worth sweep by the end of September, FHFA Director Mark Calabria told Inside Mortgage Finance this week.

 

The settlement will allow Fannie Mae and Freddie Mac to retain most of their earnings beginning with the third quarter.

 

The letter agreement is not a complete replacement of the preferred stock purchase agreement, Calabria said. It’s a temporary expedient to end the sweep as quickly as possible.

 

The FHFA director pointed to the December 2017 agreement between his predecessor, Mel Watt, and Treasury Secretary Steven Mnuchin, which created the GSEs’ modest capital buffers. “There were no broader policy changes,” he said. “It was just, ‘Okay, you get to have a $3 billion capital buffer.’” For more details, see the new edition of Inside Mortgage Finance, now available online.

 

at this point it's head-spinning to follow calabria's public commentary.  it's unfortunate because his potential is so high given his skills.  there is some chance however all the misdirection is on purpose with them either trying to manage the stock prices on a short term basis or buy time to adjust their potential plan. 

 

[investorG]

You're taking that investors unite call comment out of context. Specifically the Lamberth contracts case would require the damages to be paid by the GSEs themselves to the shareholders. But if the NWS were ever reversed (APA claim + constitutional remedy claim), the government (not the companies) would be on the hook. Also as per the original PSPA terms, the government is not allowed to get new securities of the GSEs past 2009 other than the warrants and the original senior pfds they already own so I doubt they are even allowed to swap out for debt bc that would be a new security.

 

 

On the Investorsunite call the lawyer said that in the event of a plaintiff win, the companies (not the government) is liable for paying the remedy. 

 

Is there not a risk that the government converts its $200bn in preference to convertible debt (above junior prefs) to recapitalize (in addition to exercising warrants) and if the Collins case is won by P's the companies have to deal with it (issue more equity).  No longer govt problem?

 

Obviously inconsistent w IPO comments from Calabria and would be weird to do relative to the easy  solution.  But basically couldn't the govt just push the contingent liability to the companies?

 

the lawyer mentioned the lamberth case legal $ liability fell to the companies.  he did not clarify on the sweeney cases.  perhaps the liability to those are to the Tsy/govt? 

 

[allnatural]

Sweeney liability would fall to the government, we are literally sueing the government for TAKING our private property (the GSEs private shares).

 

 

You're taking that investors unite call comment out of context. Specifically the Lamberth contracts case would require the damages to be paid by the GSEs themselves to the shareholders. But if the NWS were ever reversed (APA claim + constitutional remedy claim), the government (not the companies) would be on the hook. Also as per the original PSPA terms, the government is not allowed to get new securities of the GSEs past 2009 other than the warrants and the original senior pfds they already own so I doubt they are even allowed to swap out for debt bc that would be a new security.

 

 

On the Investorsunite call the lawyer said that in the event of a plaintiff win, the companies (not the government) is liable for paying the remedy. 

 

Is there not a risk that the government converts its $200bn in preference to convertible debt (above junior prefs) to recapitalize (in addition to exercising warrants) and if the Collins case is won by P's the companies have to deal with it (issue more equity).  No longer govt problem?

 

Obviously inconsistent w IPO comments from Calabria and would be weird to do relative to the easy  solution.  But basically couldn't the govt just push the contingent liability to the companies?

 

the lawyer mentioned the lamberth case legal $ liability fell to the companies.  he did not clarify on the sweeney cases.  perhaps the liability to those are to the Tsy/govt?

[Guest cherzeca]

agree with allnatural on Sweeney/lamberth cases

 

watch for whether there is any capital dollar amount for the new letter agt. last one permitted $3B capital, new one may be open ended or have a capital cap.  totally immaterial imo that the senior pref is added since there has been no 4th A or settlement, so of course the senior pref will increase.  as David Thompson said, that just adds to the relief to be claimed (and amount of senior pref to be cancelled by way of settlement/4th A).  one step at a time

 

I think junior pref prices are undervaluing developments.  of course there is reason to take position that admin talk is cheap and discount the turning off of the sweep until it actually happens.  but given that SBC has signed off and both calabria and Mnuchin have discussed it as an end of month item, I dont see what would stop it.

[investorG]

agree with allnatural on Sweeney/lamberth cases

 

watch for whether there is any capital dollar amount for the new letter agt. last one permitted $3B capital, new one may be open ended or have a capital cap.  totally immaterial imo that the senior pref is added since there has been no 4th A or settlement, so of course the senior pref will increase.  as David Thompson said, that just adds to the relief to be claimed (and amount of senior pref to be cancelled by way of settlement/4th A).  one step at a time

 

I think junior pref prices are undervaluing developments.  of course there is reason to take position that admin talk is cheap and discount the turning off of the sweep until it actually happens.  but given that SBC has signed off and both calabria and Mnuchin have discussed it as an end of month item, I dont see what would stop it.

 

thanks for the legal answers allnatural and cherzeca.  the list of things that could go wrong from here is unfortunately still long.  that's why the shares are @ 50pct of par, no free $ out there.  every day plenty of smart people wake up and decide its a great day to sell FnF securities.

[Guest cherzeca]

agree with allnatural on Sweeney/lamberth cases

 

watch for whether there is any capital dollar amount for the new letter agt. last one permitted $3B capital, new one may be open ended or have a capital cap.  totally immaterial imo that the senior pref is added since there has been no 4th A or settlement, so of course the senior pref will increase.  as David Thompson said, that just adds to the relief to be claimed (and amount of senior pref to be cancelled by way of settlement/4th A).  one step at a time

 

I think junior pref prices are undervaluing developments.  of course there is reason to take position that admin talk is cheap and discount the turning off of the sweep until it actually happens.  but given that SBC has signed off and both calabria and Mnuchin have discussed it as an end of month item, I dont see what would stop it.

 

thanks for the legal answers allnatural and cherzeca.  the list of things that could go wrong from here is unfortunately still long.  that's why the shares are @ 50pct of par, no free $ out there.  every day plenty of smart people wake up and decide its a great day to sell FnF securities.

 

dont disagree but I think the big issue is the huge % of institutional investors who have put GSEs in the too hard pile.  at some point there will be clarity and these IIs will look at these GSE cash flows and say ok time to get into the pool.  I am happy for the market to agree with me.....later. would be nice though if later came soon

[Cox022]

Every once in a while someone (snarky maybe) asks: what could go wrong, what is the downside?

 

I'd love to hear your answers...For argument's sake: if we knew 2 years from now we would be really disappointed, what would you say is the most likely cause?

 

My top answer, as most likely, is Treasury for whatever reason never gets around to making the big changes to the PSPA and status quo continues. 

 

This seems more likely to me than the actual recapitalization being disappointing.  Hence, I'm quite bullish but constantly worried if I'm missing something.

 

 

[hardincap]

IMO you always need a MOS for unknown unknowns. Say 25%. Add to it 10% discount rate assuming IPO in a year, and another 10% chance of a serious market dislocation. You can easily get to a 40-50% discount to par this way.

[Guest cherzeca]

Every once in a while someone (snarky maybe) asks: what could go wrong, what is the downside?

 

I'd love to hear your answers...For argument's sake: if we knew 2 years from now we would be really disappointed, what would you say is the most likely cause?

 

My top answer, as most likely, is Treasury for whatever reason never gets around to making the big changes to the PSPA and status quo continues. 

 

This seems more likely to me than the actual recapitalization being disappointing.  Hence, I'm quite bullish but constantly worried if I'm missing something.

 

the most likely snafu is not being able to raise money in capital markets.  lots of possible reasons.  then you are in a very slow cap rebuild through retained earnings. but even then, based upon a leak of a calabria talk to FHFA staff, it seems fhfa will release GSEs from conservatorship pursuant to an agreement covering their operations.  that was very encouraging to hear...if it happens.  I assume that there is a 4th A in connection with any release that nukes the seniors prefs.  there are many other snafus other than cap markets lockdown, such as scotus reversing collins, but I dont think they would be the headline risk.

[SnarkyPuppy]

Alex Pollock - https://www.realclearmarkets.com/articles/2019/09/20/have_fannie_and_freddie_paid_the_taxpayers_back_yet__103920.html

 

Didn't this same clown write about the 10% moment?

[orthopa]

Every once in a while someone (snarky maybe) asks: what could go wrong, what is the downside?

 

I'd love to hear your answers...For argument's sake: if we knew 2 years from now we would be really disappointed, what would you say is the most likely cause?

 

My top answer, as most likely, is Treasury for whatever reason never gets around to making the big changes to the PSPA and status quo continues. 

 

This seems more likely to me than the actual recapitalization being disappointing.  Hence, I'm quite bullish but constantly worried if I'm missing something.

 

the most likely snafu is not being able to raise money in capital markets.  lots of possible reasons.  then you are in a very slow cap rebuild through retained earnings. but even then, based upon a leak of a calabria talk to FHFA staff, it seems fhfa will release GSEs from conservatorship pursuant to an agreement covering their operations.  that was very encouraging to hear...if it happens.  I assume that there is a 4th A in connection with any release that nukes the seniors prefs.  there are many other snafus other than cap markets lockdown, such as scotus reversing collins, but I dont think they would be the headline risk.

 

The day after that happens we should wake up to preferred close to par +/- some arbitrage opportunity I would imagine.

[allnatural]

Lucky for us we don't have to speculate what the periodic committement fee would have been. We found out in the unsealed docs from the Sweeney case and on the eve of the sweep internal government docs showed it would have been $400m annual for Freddie (25bps on the commitment line). So safe to assume around $1b/yr for both companies. Pollack's anti gse bias is very clear.

 

Source: https://fanniefreddiesecrets.org/freddie-mac-pcf-presentation-redacted/ - page 27

 

quote author=SnarkyPuppy " data-ipsquote-contentapp="forums" data-ipsquote-contenttype="forums" data-ipsquote-contentid="3656" data-ipsquote-contentclass="forums_Topic" 382509#msg382509 data-ipsquote-timestamp=1568938856]

Alex Pollock - https://www.realclearmarkets.com/articles/2019/09/20/have_fannie_and_freddie_paid_the_taxpayers_back_yet__103920.html

 

Didn't this same clown write about the 10% moment?

[rros]

Lucky for us we don't have to speculate what the periodic committement fee would have been. We found out in the unsealed docs from the Sweeney case and on the eve of the sweep internal government docs showed it would have been $400m annual for Freddie. So safe to assume around $1.2b/yr for both companies, or roughly 50bps on the $250b committement line. Pollack's anti gse bias is very clear.

 

Alex Pollock - https://www.realclearmarkets.com/articles/2019/09/20/have_fannie_and_freddie_paid_the_taxpayers_back_yet__103920.html

 

Didn't this same clown write about the 10% moment?

He calculates the fee on total liabilities, not on the funding that is or will be made available. He knows perfectly well what he is doing. Which doesn't make things easier for us. A clever, believable narrative that is complete fiction can be thrown out there and people will buy it. In fact, he just did.

 

I maybe mistaken and can't exactly remember but I think the Sweeney math for the cf was part of the defense by the plaintiff. So even then, not set in stone (correct me if I am wrong). Still, cf's are not punitive in nature but mean a discrete compensation for opportunity cost.

[SnarkyPuppy]

It's less about the substance (obviously a fee above the unfunded liability is ridiculous), it's more interesting his 180 given he came up (at least made popular) the concept of the 10% moment.  Why suddenly is this coming into play?   

 

Only reason I care is this guy clearly has a relationship w/ Calabria and Craig Phillips.  Pollock has written articles together w/ Calabria in "thinktank" clown land and Phillips referred to him has his "hero".

[Guest cherzeca]

It's less about the substance (obviously a fee above the unfunded liability is ridiculous), it's more interesting his 180 given he came up (at least made popular) the concept of the 10% moment.  Why suddenly is this coming into play?   

 

Only reason I care is this guy clearly has a relationship w/ Calabria and Craig Phillips.  Pollock has written articles together w/ Calabria in "thinktank" clown land and Phillips referred to him has his "hero".

 

pollock is aghast that his good work calculating the 10% moment is being used by Ps and thus he has to make up a fictitious CF to balance the equities...but the equities dont balance based upon fictitious fees.

[Midas79]

pollock is aghast that his good work calculating the 10% moment is being used by Ps and thus he has to make up a fictitious CF to balance the equities...but the equities dont balance based upon fictitious fees.

 

I'm going to respond to your post on Tim Howard's blog here, the one about why Treasury never charged a commitment fee, because I'm not sure my post will survive over there.

 

I believe that the commitment fee wasn't charged before the NWS because FnF didn't have the money to pay it, and wasn't charged after the NWS because Treasury was getting all the income anyway.

 

FnF have never been in a situation where they can afford to pay a separate commitment fee. Pollock's use of the entire liability base of $5.5T when calculating the fee is asinine and indefensible, but if the NWS had never happened and the seniors were paid down (and able to be paid down), I could see Treasury restarting the commitment fee once the seniors were paid off. But that is 1-2 years of back fees, not 11, and only calculated on the $250B outstanding.

 

 

I also made my own spreadsheet to calculate the 10% moment and overages based on different dividend rates (if the 10% were to ever be recharacterized for some reason) and commitment fee rates. While Pollock, as far as I know, coined the "10% moment" term, anybody could do the calculations based on FHFA's Tables 1 and 2.

 

https://ethercalc.org/r9ddbdfjw46x

[Midas79]

I finally got around to doing my analysis of the Citi conversion.

 

Citi's official announcement: https://www.citigroup.com/citi/news/2009/090227a.htm

Citi's summary of the terms: https://www.citigroup.com/citi/news/2009/090227a.pdf?ieNocache=262

 

Series AA, E, F, and T were offered conversions. According to this link (https://preferredstockinvesting.blogspot.com/2009/09/citi-preferred-stock-conversion-rare.html) the conversion was voluntary, and it appears that each shareholder could choose which shares to convert. Another story I found (https://www.forbes.com/sites/dividendchannel/2014/10/30/citigroup-non-cumulative-preferred-stock-series-aa-ex-dividend-reminder/#666b206069c6) shows that C.PRP (Series AA) traded at $28.60 on 11/3/14 and was still paying dividends, so evidently it wasn't called before then. This series pays 8.125% dividends, and given the low interest rate environments prevailing at the time and now, I would expect the high-div FnF series to similarly trade above par post-release.

 

I misplaced the link that said this, but it said that series T (6.50% rate) was converted at 85% of par at $3.25, and the other three (AA 8.125%, E 8.4%, F 8.5%) were converted at 95% of par at $3.25. This link also calculated $3.25 as a 20-day average; the closest I could get was $3.24 as the average of the 20 closing prices up to and including Feb 25. But HoldenWalker on Twitter said that the 22 days up to and including Feb 26 average to $3.2495, so I think this is more accurate.

 

That means that the market was not given a chance to react to the conversion at all. On Feb 27, the day of the announcement, the prefs spiked and the commons tanked. Of course that hurt the converted prefs, but the commons eventually got back to the $3.25 mark after a few months. Also, they still came out way ahead even in the immediate term as shown below.

 

On Feb 26, Series AA ($25 par) closed at $5.48. Historical prices on these are really, really hard to find. The only source I found was this page (https://www.preferredstockchannel.com/symbol/c.prp/), and the only way to get Feb 26's closing price was to put in 2/26/09 and 2/28/09 in the Performance part on the top right, and then click "Chart $10K invested in C.PRP". Citi commons closed at $2.46 on Feb 26, for a ratio of 2.3:1 the day before the conversion. At 95% of par at $3.25, Series AA holders ended up with 7.31 commons for each $25 in par value, more than 3 times the previous day's ratio.

 

For Series T ($50 par, https://www.preferredstockchannel.com/symbol/c.pri/), the Feb 26 closing price was $10.54, for a ratio of 2.14:1 (normalized to $25-par). The conversion ratio was 85% of par at $3.25, or 6.54:1. This again represents a bit more than 3 times the previous day's ratio.

 

I couldn't even find price data for Series E and F, but I would imagine that their conversion ratios were similar.

 

This means that if Treasury and FHFA follow this playbook, current junior pref holders can expect to receive roughly 3 times as many commons in a conversion than they would by converting in the open market by selling the prefs and buying commons. And the commons wouldn't necessarily have time to react to the possibility, given the relative price movement immediately following Citi's conversion.

 

I think Dick Bove has it exactly right, that owning the juniors now is a (potentially much) cheaper way to own commons in the future, compared to owning commons now.

 

Of course the current litigation complicates things, but a payout to common shareholder plaintiffs plus a generous conversion (perhaps really generous) could get things done pretty fast. It appears that Treasury is no stranger to really generous pref-to-common conversions.

[allnatural]

Thank you Midas. While circumstances surrounding the GSEs are different due to litigation and the amount of funds the taxpayers have already received, this is a helpful resource that the treasury might model their conversion after.