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

[Luke 532]

Architect of the plan saying twice in the past two weeks that junior are going to be converted to common. Nothing to see here.

[Guest cherzeca]

Architect of the plan saying twice in the past two weeks that junior are going to be converted to common. Nothing to see here.

 

while I fully agree, I haven't see this reported Luke.  links?

[Midas79]

Architect of the plan saying twice in the past two weeks that junior are going to be converted to common. Nothing to see here.

 

while I fully agree, I haven't see this reported Luke.  links?

 

Glen tweeted a link to the transcript a little while ago.

https://twitter.com/DoNotLose/status/1197974087349473281

[Luke 532]

Architect of the plan saying twice in the past two weeks that junior are going to be converted to common. Nothing to see here.

 

while I fully agree, I haven't see this reported Luke.  links?

 

Glen tweeted a link to the transcript a little while ago.

https://twitter.com/DoNotLose/status/1197974087349473281

 

The private talk he gave two weeks ago hasn't been reported in the news.

[Guest cherzeca]

question for board but especially Midas:  just watched ACG vid: 

at around 14:40, gabby says that an exchange of junior pref for common increases capital.  Is this right?  she says this would help GSEs meet statutory capital level.  seems to me this would not affect capital.

[Midas79]

question for board but especially Midas:  just watched ACG vid: 

at around 14:40, gabby says that an exchange of junior pref for common increases capital.  Is this right?  she says this would help GSEs meet statutory capital level.  seems to me this would not affect capital.

 

https://twitter.com/midas79_/status/1197572823004467205

I don't think a conversion affects core capital levels. It just moves the junior pref amount into additional paid-in capital (the commons have no par value).

 

I looked up how to account for this conversion a while back. You subtract (I never remember the whole debit or credit thing) the total amount of the juniors from the balance sheet, bringing them to zero, and add that amount to additional paid-in capital. If the commons had par value then that would be part of it, but they don't for FnF. No other balance sheet entries are affected. Since both the juniors and additional paid-in capital count as core capital, the process is core capital-neutral.

 

I think ACG Analytics just plain got this one wrong. Unless they meant that a conversion allows more (or any) new non-cumulative prefs to be sold; that sale would accrete to core capital.

 

I find it hard to imagine selling new non-cumulative prefs while the juniors still exist. $33B of prefs is already a good chunk of the post-recap equity; too much more puts a lot of dividends (in addition to the commitment fee) ahead of a potential common divided, which I think needs to be offered to sell commons more easily.

[Guest cherzeca]

thanks Midas.  gabby may have just got some wires crossed because, and correct me if i am wrong, but by the time just before the 2020 election, with earnings retention, the GSEs should be close to their statutory levels (eg the $25B letter agt. cap for Fannie would approximate this statutory level), so I think they could enter into a consent decree phase then, and make it impervious to attack by a new potus/fhfa director by doing a settlement which could provide for junior into common exchange, but I dont see the exchange affecting capital, but rather the other way around, that by retaining earnings and getting to the statutory level, the consent decree/settlement/exchange would then be possible

[SnarkyPuppy]

Craig Phillips now explicitly aligning to this threads views.  Unbelievable how far things have come over the last year.  This past weeks prices were a gift. 

[Wiggins]

Craig Phillips now explicitly aligning to this threads views.  Unbelievable how far things have come over the last year.  This past weeks prices were a gift.

 

Agreed. Bought some more JPS on Wednesday, but just a bit since I'm already fully allocated.

[allnatural]

To put Phillips comments into prospective, the architect of the plan believes:

 

a) receivership is impractical

b) shareholder rights should be respected

c) treasury should write down in FULL it's SNR pfds

d) convert JR pfds to common

e) warrants will be exercised

 

Sounds like Moelis

[orthopa]

Craig Phillips now explicitly aligning to this threads views.  Unbelievable how far things have come over the last year.  This past weeks prices were a gift.

 

Agree things are lining up nice, everything except timing but like Munger says "the big money is not in the buying and selling … but in the waiting".  ACG has been pretty spot on with things but I agree in this video Gabby may have miss spoke. Again as informed as ACG may be, she is speculating like we are. It seems as if the court cases especially the SCOTUS cert could directionally speed things up or slow things down in regard for the PSPA.

 

A year from now hopefully we are sitting at a much higher level then now. Whats another year?

[Midas79]

To put Phillips comments into prospective, the architect of the plan believes:

 

a) receivership is impractical

b) shareholder rights should be respected

c) treasury should write down in FULL it's SNR pfds

d) convert JR pfds to common

e) warrants will be exercised

 

Sounds like Moelis

 

Those are all parts of the Moelis plan, yes. But I wouldn't assume that the conversion would happen at anything close to Moelis prices. They think the juniors will convert at 1.7 to 2.1 commons per $25 of par value, when the market ratio now is closer to 3.5. It is quite easy to keep everything in Moelis the same other than the conversion rate, and end up with a common share price in the mid to high single digits. Moelis also only has half of juniors converting, when it could be either all of them or even a voluntary conversion, when the total amount won't be known until the end, as with Citi.

 

Also ask yourself this: why would junior pref holders hire Moelis to come out with a plan that gives the commons a much greater return? "Smokescreen" is a much more plausible explanation than "generosity".

[Guest cherzeca]

To put Phillips comments into prospective, the architect of the plan believes:

 

a) receivership is impractical

b) shareholder rights should be respected

c) treasury should write down in FULL it's SNR pfds

d) convert JR pfds to common

e) warrants will be exercised

 

Sounds like Moelis

 

Those are all parts of the Moelis plan, yes. But I wouldn't assume that the conversion would happen at anything close to Moelis prices. They think the juniors will convert at 1.7 to 2.1 commons per $25 of par value, when the market ratio now is closer to 3.5. It is quite easy to keep everything in Moelis the same other than the conversion rate, and end up with a common share price in the mid to high single digits. Moelis also only has half of juniors converting, when it could be either all of them or even a voluntary conversion, when the total amount won't be known until the end, as with Citi.

 

Also ask yourself this: why would junior pref holders hire Moelis to come out with a plan that gives the commons a much greater return? "Smokescreen" is a much more plausible explanation than "generosity".

 

I agree with this. moelis is the blueprint, but I expect the exchange offer will be harsh on the common. why? because the junior pref big holders understand that the re-IPO will be harsh on the common, as the bankers will insist on a low price to build their book for what can be expected to be a very large offering...and the junior pref big holders will insist that their exchange ratio will incorporate the discounted common share price that will obtain in the re-IPO.

 

as to phillips, I recall a video from an interview by vartanian of Phillips for the George mason law school institute vartaninan heads, with pollock in the audience (with his new job one hopes pollack will become less of a Zelig), where phillips refers to pollack as "his hero" when phillips refers to the "10% moment", saying that there is a good argument that the treasury has already been paid back, then phillips pauses and says, there is a "very good argument".  while the treasury plan did not get into any of this, this gave me some comfort that there was acceptance at treasury for the proposition that the senior pref would be eliminated.

[orthopa]

To put Phillips comments into prospective, the architect of the plan believes:

 

a) receivership is impractical

b) shareholder rights should be respected

c) treasury should write down in FULL it's SNR pfds

d) convert JR pfds to common

e) warrants will be exercised

 

Sounds like Moelis

 

Those are all parts of the Moelis plan, yes. But I wouldn't assume that the conversion would happen at anything close to Moelis prices. They think the juniors will convert at 1.7 to 2.1 commons per $25 of par value, when the market ratio now is closer to 3.5. It is quite easy to keep everything in Moelis the same other than the conversion rate, and end up with a common share price in the mid to high single digits. Moelis also only has half of juniors converting, when it could be either all of them or even a voluntary conversion, when the total amount won't be known until the end, as with Citi.

 

Also ask yourself this: why would junior pref holders hire Moelis to come out with a plan that gives the commons a much greater return? "Smokescreen" is a much more plausible explanation than "generosity".

 

I agree with this. moelis is the blueprint, but I expect the exchange offer will be harsh on the common. why? because the junior pref big holders understand that the re-IPO will be harsh on the common, as the bankers will insist on a low price to build their book for what can be expected to be a very large offering...and the junior pref big holders will insist that their exchange ratio will incorporate the discounted common share price that will obtain in the re-IPO.

 

as to phillips, I recall a video from an interview by vartanian of Phillips for the George mason law school institute vartaninan heads, with pollock in the audience (with his new job one hopes pollack will become less of a Zelig), where phillips refers to pollack as "his hero" when phillips refers to the "10% moment", saying that there is a good argument that the treasury has already been paid back, then phillips pauses and says, there is a "very good argument".  while the treasury plan did not get into any of this, this gave me some comfort that there was acceptance at treasury for the proposition that the senior pref would be eliminated.

 

+1 not to mention if Treasury truly means it when they say this is a priority and they want them out of conservatorship the above has to happen. Really no other option as it blocks a recap immediately.

[investorG]

Today's WSJ article confirms (to me) the accuracy of the July12 Bloomberg article (admin wary of moving before the election) and explains why Calabria has been instructed to delay.

 

I expect the SC to take the APA case.  Despite the technical reasons why they wouldn't, it's big, ripe, and split regional court views.

 

In the event we lose the APA case (or I'm wrong and the SC doesn't take the case) and also if Trump does not win in 2020:  how confident could we be that any actions -- potential 4th amendment and potential consent decree plan -- that Mnuchin could possibly take in his final 2 months and Calabria perhaps a tad longer (maybe through his deputies until a new FHFA person confirmed) would stick? 

[Guest cherzeca]

Today's WSJ article confirms (to me) the accuracy of the July12 Bloomberg article (admin wary of moving before the election) and explains why Calabria has been instructed to delay.

 

I expect the SC to take the APA case.  Despite the technical reasons why they wouldn't, it's big, ripe, and split regional court views.

 

In the event we lose the APA case (or I'm wrong and the SC doesn't take the case) and also if Trump does not win in 2020:  how confident could we be that any actions -- potential 4th amendment and potential consent decree plan -- that Mnuchin could possibly take in his final 2 months and Calabria perhaps a tad longer (maybe through his deputies until a new FHFA person confirmed) would stick?

 

here is link:  https://www.wsj.com/articles/firms-warn-of-risks-in-plan-to-take-fannie-mae-freddie-mac-private-11574591423?mod=hp_lead_pos4

 

I am not surprised this meeting was held in the summer and these mbs buyers want a direct government guaranty.  it is now fall entering winter and the administrative process is proceeding albeit slowly.  this market has existed some 50 years without a guaranty on far less capital (and a wink/nod implicit guarantee), and it will be proceeding with far more capital and a direct paid for back stop line (which of course is far more than there has been in terms of credit in that 50 year period).  when I see a leak to a reporter of a meeting held some 6 months ago, I see desperation.

[allnatural]

If a direct treasury credit line of $250b (backstopping $150b+ of potential first loss equity) isn't considered "explicit" i'm not sure what is. Especially considering gses have been operating under that model with no market issues since conservatorship began with no equity infront of it, and pre 2008 with no explicit credit line. This straw man argument has been beaten to death at this point.

[SnarkyPuppy]

If a direct treasury credit line of $250b (backstopping $150b+ of potential first loss equity) isn't considered "explicit" i'm not sure what is. Especially considering gses have been operating under that model with no market issues since conservatorship began with no equity infront of it, and pre 2008 with no explicit credit line. This straw man argument has been beaten to death at this point.

 

Well the article doesn't necessarily say that it's insufficient - it says that it is fundamentally vulnerable to future administrations (i.e. a future administration can say no more credit line).  From a practical perspective, this logic is silly as if there would be disruption to the market (as the article states), the cause of the disruption would be directly the result of the future administration that unwinds the credit line - creating a natural disincentive to ever touch it.

 

This also ignores the fact that these companies will be sitting on $150bn+ of capital, far more than they lost in a severe housing crisis and far more than they've ever historically had explicitly. 

 

To be honest, the only thing that gives me pause at all is why these lobbyists/journalists are still trying if the final outcome can't be stopped (as we believe).  Makes me think that they believe they can still influence the outcome. 

[allnatural]

That vulnerable to future administrations argument is just as bad. Congressional action is not permenant and also equally vulnerable to future congress coming in and changing the status quo. That risk will always be there (in all industries not just housing).

[Guest cherzeca]

good points allnatural. as to snarky, this is all just desperation by some dweeb institutional investor.  Ackerman is a hack at WSJ and needs stories, and a leak of a 6 month old meeting apparently will just have to do.  after Ackerman got the leak he followed up seeking confirmation and quotes, and what could these guys say other than what they did.  WSJ has good reporters but they seem to keep them away from GSE stories.

[Luke 532]

Judge Sweeney transcript attached...

Fairholme-Condensed-Transcript.pdf

[Luke 532]

Judge Sweeney transcript attached...

 

Not only is the government schizophrenic (Judge Sweeney's words previously), they have also acted like the mob (again, according to Sweeney).  According to this transcript, she has already completed a rough draft of her ruling.  Seems to me like this case won't be dismissed: "I want the parties to have their day -- well, we’ll have many days in court, but I mean, for this initial oral argument. Let me just -- we’re going to go off the record just for 10 minutes so we can just..."

 

 

[Guest cherzeca]

Mammoth argument. My take is that motion to dismiss will be denied. Some question as to whether just some or all plaintiffs will have standing. But this will be another case the govt must settle

 

Edit:  Sweeney also seemed receptive to the Wash Fed claim challenging the manner in which the conservatorship was initiated

[Luke 532]

Tim Pagliara...

The Fifth Circuit didn’t argue with David Thompson either.  I doubt that this was a cosmic coincidence.

[Midas79]

Judge Sweeney transcript attached...

 

Not only is the government schizophrenic (Judge Sweeney's words previously), they have also acted like the mob (again, according to Sweeney).  According to this transcript, she has already completed a rough draft of her ruling.  Seems to me like this case won't be dismissed: "I want the parties to have their day -- well, we’ll have many days in court, but I mean, for this initial oral argument. Let me just -- we’re going to go off the record just for 10 minutes so we can just..."

 

Yeah, I don't see how "I want the parties to have their....[day] in court" squares with her granting the motion to dismiss.