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

[Guest cherzeca]

@midas

 

good stuff, thanks for the work.  I am not sure how closely GSE recap will track C; while very much on point, few bankers that worked on C are still around. but the 20 day average price for the common is a common term used in many deals, and yes you would want to use a 20 day period before the announcement of any exchange offer to avoid contamination of the exchange ratio.  if you give any credence to notion that the big junior holders are also involved in the litigation, then junior holders "should" get even better treatment than in C

[Luke 532]

https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202?redirect=amp#click=https://t.co/pK0HQAfwok

[DRValue]

https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202?redirect=amp#click=https://t.co/pK0HQAfwok

 

Thanks Luke.

 

"Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now."

 

Seems like a liquidation pref. increase to me.

 

If Luke's link didn't work for you, you can try this one:

 

https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202

 

which for some reason, worked once for me.

[Luke 532]

https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202?redirect=amp#click=https://t.co/pK0HQAfwok

 

By Andrew Ackerman

Sept. 22, 2019 9:00 am ET

INDIANAPOLIS—Mortgage-finance companies Fannie Mae FNMA 1.03% and Freddie Mac FMCC 0.82% are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department.

 

The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again.

 

Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion, Mark Calabria, the Federal Housing Finance Agency chief, said in an interview after touring a senior center financed in part by the Federal Home Loan Bank of Indianapolis. FHFA oversees Fannie, Freddie and the Federal Home Loan Bank system.

 

“We’re still in the middle of negotiations with Treasury, but I think we’re close,” Mr. Calabria said. “I hope to have it done by the end of the month.”

 

Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them during the 2008 crisis in a bid to stabilize the housing market as mortgage defaults mounted. How the government addresses the companies’ future could resolve the last major problem from the financial crisis.

 

At present, the companies hold just $3 billion each in capital, and the agreement under consideration would substantially increase that figure. The move would be significant because it would start a process of the companies raising a combined $100 billion-plus that they will likely need to hold before they can return to private hands.

 

“If you’re leveraged 1,000-to-1, you could have Superman as your regulator and Wonder Woman as your CEO, and you’re still going to fail at some point,” Mr. Calabria said.

The timing of the agreement and the precise amount of earnings the companies would be allowed to retain hasn’t been completed. The overall deal could slip to the end of the year, he said.

 

Every quarter Fannie and Freddie send nearly all of their profits, minus the $3 billion they are currently permitted to retain as capital, to the Treasury Department as payment for their ongoing support from the department. Under the terms of the 2008 conservatorship, the firms have access to more than $250 billion in support, though they have been generally profitable in recent years and have drawn on that support only once since 2012. Should the companies report a loss going forward, they could continue to draw on their support from the government. They just wouldn’t send their profits to Treasury until they had retained more than about $20 billion in profits.

 

The upcoming change comes after a federal appellate court in New Orleans criticized the profit sweep in a Sept. 6 ruling. The decision, in litigation brought by investors in the companies, gave new life to court challenges over the handling of Fannie and Freddie’s profits. The administration is deciding whether to appeal.

 

The Trump administration wants to recapitalize the companies through a mix of retained earnings and raising tens of billions of dollars from investors, a process likely to take years. It is a priority for the administration, which outlined a path to return the firms to private ownership earlier this month.

 

“They’ve been in conservatorship for too long, and we want to make sure they’re not in conservatorship on a permanent basis,” Treasury Secretary Steven Mnuchin said in a Sept. 9 interview on Fox Business Network.

 

Any move now to pause the profit sweep would give Treasury and the FHFA time to negotiate bigger changes to the terms of the companies’ existing support agreement with Treasury, Mr. Calabria said. That includes the creation of a fee the companies’ would be required to pay in exchange for ongoing support from Treasury, which is necessary for their business model. The broader changes could also encompass new restrictions on the companies’ activities, as envisioned by the recent Treasury report, which urged FHFA to scrutinize the firms’ purchases of cash-out refinancings and loans for investment and vacation properties.

 

Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now.

 

Through June, the companies have paid about $300 billion in dividends to the Treasury, while taking some $190 billion from taxpayers in the years after the 2008 financial crisis. The companies have paid an average $18.2 billion annually over the past three years to the Treasury.

 

Reducing those payments would add to a widening U.S. budget deficit that is on track to exceed $1 trillion a year.

 

The government seized the companies during the George W. Bush administration, and agreed to inject money to support some $5 trillion in debt securities issued by the companies.

[muscleman]

I bought back my positions plus more. I think the TA is finally ready.

I am being aggressive here for a 20% position because I've accumulated good profits on this stock since the start of the year, so I earned the right to be aggressive. (I use Soros and Stan Druckenmiller's approach for both analysis and risk control, not Buffet's approach)

 

[investorG]

I bought back my positions plus more. I think the TA is finally ready.

I am being aggressive here for a 20% position because I've accumulated good profits on this stock since the start of the year, so I earned the right to be aggressive. (I use Soros and Stan Druckenmiller's approach for both analysis and risk control, not Buffet's approach)

 

muscleman, good luck.  we'll likely need it against the media, big bank team, selected politicians, and unexpected events -- it's rarely comfortable in this pool.

 

[Guest cherzeca]

I bought back my positions plus more. I think the TA is finally ready.

I am being aggressive here for a 20% position because I've accumulated good profits on this stock since the start of the year, so I earned the right to be aggressive. (I use Soros and Stan Druckenmiller's approach for both analysis and risk control, not Buffet's approach)

 

now you have me worried...

[muscleman]

I bought back my positions plus more. I think the TA is finally ready.

I am being aggressive here for a 20% position because I've accumulated good profits on this stock since the start of the year, so I earned the right to be aggressive. (I use Soros and Stan Druckenmiller's approach for both analysis and risk control, not Buffet's approach)

 

now you have me worried...

 

On which part?

[muscleman]

I bought back my positions plus more. I think the TA is finally ready.

I am being aggressive here for a 20% position because I've accumulated good profits on this stock since the start of the year, so I earned the right to be aggressive. (I use Soros and Stan Druckenmiller's approach for both analysis and risk control, not Buffet's approach)

 

muscleman, good luck.  we'll likely need it against the media, big bank team, selected politicians, and unexpected events -- it's rarely comfortable in this pool.

 

When everyone is comfortable, it is usually the top. 2018 January is a great example. My friend in Canada told me he tried to open an account in TD AM and was told to wait 3 months in line because too many retail investors were lined up to open accounts

[james22]

Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now.

 

Sigh.

[investorG]

for what appears to be a simple exercise, they are taking their time, making us sweat.  or punting again.

[Midas79]

for what appears to be a simple exercise, they are taking their time, making us sweat.  or punting again.

 

No kidding. The letter agreement in December 2017 came out on the 21st, and all indications are that this is just a copy of that with bigger numbers.

 

Maybe there's something more to it, but rushing negotiations on a 4th amendment is not necessary; the 30th of this month is not a hard deadline for that while it is for the letter agreement.

[Cardboard]

What is the impeachment inquiry impact on this?

 

I would think that money grabbers such as Warren would want to nationalize and confiscate such things. They will just amend the Constitution while brainwashing people that it is in their own interest.

 

Even if Trump makes it through and gets re-elected, shouldn't we expect a delay or this being put on back burner?

 

If have a small position in FNMAH.

[Guest cherzeca]

What is the impeachment inquiry impact on this?

 

I would think that money grabbers such as Warren would want to nationalize and confiscate such things. They will just amend the Constitution while brainwashing people that it is in their own interest.

 

Even if Trump makes it through and gets re-elected, shouldn't we expect a delay or this being put on back burner?

 

If have a small position in FNMAH.

 

I suppose that if trump is expected to be impeached by house but has not yet been exonerated by senate, one might think that the likelihood of a public market capital raise is less likely.  I dont see it personally, but it is not unreasonable to think so. my view is that once the admin starts down the path, with the first step being the letter agt. that should be soon, there is a momentum build up that gets increasingly hard to reverse, and the most important step will be the fhfa/treasury negotiation to kill the senior pref before the public offering.  once that happens I dont see any reversal as that would be just another NWS type event that would occasion massive claims.

[orthopa]

I would also add the person who has distanced himself the most from this has been Trump. Outside of a comment on FnF back in May? about very smart people working on FnF I dont think he has even commented on it in nearly 3 years.

 

Once the ball gets rolling as cherzeca says and even worse case if Pence takes over Mnuchin/Calabria still in place. Trump leaving via losing the election is more concering to me as that means Mnuchin and Calabria (maybe) go to.

[Mephistopheles]

Mnuchin and Calabria have got to know the big risk of Trump losing the election and what that means for their plan, unless they're idiots. Why go through all this and not have a plan for that? This tells me everything will be in place to go for an ipo prior to inauguration day

[Midas79]

Mnuchin and Calabria have got to know the big risk of Trump losing the election and what that means for their plan, unless they're idiots. Why go through all this and not have a plan for that? This tells me everything will be in place to go for an ipo prior to inauguration day

 

Good point.

 

I must be severely underestimating the political and logistical difficulties of the recap and release program, because it seems very easy to just amend away the NWS, issue Watt's capital rule as-is (with Calabria using his statutory to impose greater standards if he wants), and do a massive equity raise in January or February followed immediately by release. That should be early enough that it will be out of the news cycle by the time campaign season really gets going.

[hardincap]

@luke ortphopa and other uber bulls, what would you say is a prudent margin of safety for the prefs, to protect against unknown unknowns? 10%? 20%? Then adding time value of money, what price range do you consider the prefs still a buy?

[Luke 532]

@luke ortphopa and other uber bulls, what would you say is a prudent margin of safety for the prefs, to protect against unknown unknowns? 10%? 20%? Then adding time value of money, what price range do you consider the prefs still a buy?

 

It just depends on what is in the letter agreement, if there is one.  Then it depends on capital levels, amendment to SPSA, etc.  My desired exit price will adjust based on what happens with those events if/when they occur. 

 

I think a 25% discount for unknown unknowns is steep.  Perhaps it made sense before we had all the major players tell us what they're going to do, getting their desires in writing, favorable court ruling, etc., but now I think adding that much of a discount is being far too conservative.  I don't know what the discount should be, probably whatever number allows the investor to sleep at night.

[DRValue]

I personally don't invest when the upside is less than 100% so about 50% of par is round about right.

Regardless of how great the business is or how confident you are, there's so much out of your control to risk capital for 10%.

 

So a sure thing with plenty of scope to be wrong and still come out on top is the only way for me.

[muscleman]

I am stopped out of the position today, unfortunately.  :'(

I require tight stops for big positions. If I am very bullish, it has to start working right away, or I am out.

I'll never be extremely bullish about a stock, buy a big position, and then as it goes lower, keep buying more. If it is not working right away, then I am wrong to be very bullish to begin with, hence the position size doesn't make sense.

[hardincap]

Looks like prefs falling on bove issuing a bearish report calling prefs fully valued, reversing his long standing bullish outlook. Has anyone seen the report?

[orthopa]

@luke ortphopa and other uber bulls, what would you say is a prudent margin of safety for the prefs, to protect against unknown unknowns? 10%? 20%? Then adding time value of money, what price range do you consider the prefs still a buy?

 

Maybe I have drunk too much of the Kool Aid but I don't think it worth the time of worrying about unknowns at this point in the game. Mainly because if the shit hits the fan and this process is upended in a permanent fashion I am stuck in an illiquid security that will open the next day down multiples of 10 down in percentage. I feel that if this works out I do well and get par (maybe par plus). More or less its a homerun or your done. I've positioned it accordingly as a result. In my mind I have taken the treasury plan as well as comments made by both in to account. I think if it was still mainly a legal driven investment I would be much, much less bullish and less invested but the 2 most important people in the equation I think have laid out the path pretty good. I think the biggest unknown unknown and that could detract from rate of return is the timing of all of this. We have been disappointed timing wise before and certainly could happen again. I would be confident assuming par for preferred by Jan 2021 and discounting back 8% or so till now to get fair value, because in the end I think par is inevitable.

 

I know this may sound naive but I think this is all being driven/done by/for Paulson. I think there is no question it as because I find it hard to believe the Mnuchin/Calabria really care that much about Housing Finance to go through all of this and deal with the skepticism, hassle, and, criticism unless there was a greater objective or benefit. Not to mention this has been very carefully calculated process from those put in power, to timeline and comments made by those in charge. This is Paulsons pay pack from Trump. This is why you don't hear Paulson talk about it, Trump talk about it and Mnuchin/Calabria have made very pointed comments about shareholders and how they don't care about any return they may receive. The much, much easier thing would be to leave this as is and drag it, leave to the next administration or leave it up the courts. But they aren't and you have to ask your self why I think.

[Wiggins]

I think this is from his investor letter issued before the en banc decision, and Value Walk is thus reporting fake news. It sounds like it was issued on the Friday after the Treasury report was released, but immediately prior to the en banc decision coming down. If you scroll down the bottom of this link you will see this quote:

 

"My belief is to continue to relay [sic] on the Fifth Circuit Court in Houston," he wrote. "If this court finds for the plaintiffs in some meaningful way, the debate on the Treasury Report will begin in earnest. Some resolution that makes all constituencies happy will be put in place. If the Fifth Circuit Court does not find for the plaintiffs, the debate on the Treasury Report will not begin in earnest until April of 2021."

 

https://www.valuewalk.com/2019/09/fannie-mae-junior-preferred-shares/

 

Looks like prefs falling on bove issuing a bearish report calling prefs fully valued, reversing his long standing bullish outlook. Has anyone seen the report?

[Guest cherzeca]

bove is an idiot, imho.  one doesn't have to realize that the 5th C en banc was held in New Orleans and not Houston to believe this.  I have read him gaffe his way around the GSEs for too long, giving Biden a run for his money