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

[Luke 532]

Not sure if anybody is listening to the press conference tonight, but moments ago Trump said (and I paraphrase): "We don't nationalize businesses.  Ask Venezuela how that goes."  Certainly seems good for those that fear F&F will be nationalized due to a bad economy.

[orthopa]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

 

 

[Guest cherzeca]

Hopefully he is an idiot who's view on this one issue, exercise warrants and provide 'balance sheet support' (with Treasury recapping both Fannie and Freddie instantly), gets some traction. 

 

They can sell the commons later, along with Boeing and whatever else Treasury buys.

 

I didn't read Whalen's piece but exercising the warrants brings in about $100 in fresh capital

[Guest cherzeca]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

it is my view that if scotus decides seila the way I expect, then the NWS is toasty if not toast.  I believe Ps should not give any credence to the seniors in a settlement negotiation unless the seila outcome is bad

[investorG]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

it is my view that if scotus decides seila the way I expect, then the NWS is toasty if not toast.  I believe Ps should not give any credence to the seniors in a settlement negotiation unless the seila outcome is bad

 

given current circumstances, it's not likely they will cancel an OID that would indirectly cost the federal govt $180bn when another simple option (forward looking relief) exists.

[orthopa]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

it is my view that if scotus decides seila the way I expect, then the NWS is toasty if not toast.  I believe Ps should not give any credence to the seniors in a settlement negotiation unless the seila outcome is bad

 

If things start to unravel or the treasury sees a window to settle and/or return some money over the 10% do you see them doing so before selia is decided? The could suddenly be operating from a position of weakness if the MBS market takes a shit right?

[investorG]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

swapping the sr pref for common would involve some arbitrary exchange ratio whereas the warrants were set in place 12 years ago and thus less random and more clean.

[investorG]

Hopefully he is an idiot who's view on this one issue, exercise warrants and provide 'balance sheet support' (with Treasury recapping both Fannie and Freddie instantly), gets some traction. 

 

They can sell the commons later, along with Boeing and whatever else Treasury buys.

 

I didn't read Whalen's piece but exercising the warrants brings in about $100 in fresh capital

 

I think I agree with your conclusion that it's unlikely to happen given other priorities but exercising the warrants -- which aren't subject to court challenges (unlike sr pref) -- could be more of an attempt to bring in the gapped-out spread between mbs - tsy (to allow for refinancing) rather than inject capital.

[investorG]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

it is my view that if scotus decides seila the way I expect, then the NWS is toasty if not toast.  I believe Ps should not give any credence to the seniors in a settlement negotiation unless the seila outcome is bad

 

If things start to unravel or the treasury sees a window to settle and/or return some money over the 10% do you see them doing so before selia is decided? The could suddenly be operating from a position of weakness if the MBS market takes a shit right?

 

I'd be guessing but I think their first priority is and should be helping Americans by using FnF rather than worrying about legacy shareholders, for now.

[james22]

In other words, are we setting up for an insane perfect storm where prefs are made whole (or close to it) while the entire stock market is on sale? 

 

-junior prefs go close to par

 

Plaintiffs do this because they see everything is depressed in price and they want to take advantage and buy some companies on the cheap rather than wait around for the courts/settlement/Admin/etc.

 

Yes, please.

 

 

 

 

[orthopa]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

it is my view that if scotus decides seila the way I expect, then the NWS is toasty if not toast.  I believe Ps should not give any credence to the seniors in a settlement negotiation unless the seila outcome is bad

 

If things start to unravel or the treasury sees a window to settle and/or return some money over the 10% do you see them doing so before selia is decided? The could suddenly be operating from a position of weakness if the MBS market takes a shit right?

 

I'd be guessing but I think their first priority is and should be helping Americans by using FnF rather than worrying about legacy shareholders, for now.

 

No and I agree with that too, Im just hypothesizing a quick recap via the Sr preferred.  Isnt a recapped FnF a stronger FnF?

 

My assumption for price would be last 30 days trading price like other bailouts, C etc.

[Midas79]

At this time wouldnt it be best to swap the Sr Preferred for common and scrap the warrants? Would get to own way more of the company, common does get screwed way more then warrants but would recap faster right? Would have to watch out for owning more then 80% though. In any scenario where the Srs are gone preferred should go to par. Maybe if anything this helps move along another PSPA amendment?

 

Settling the whole FnF issue although projected to go longer would be a nice kitchen sink move while everything is hitting the fan. If whalen is right (I dont have a good feel for if he is or not as I dont have access to any of the markets he speaks of) this could unravel fast along with the market.

 

swapping the sr pref for common would involve some arbitrary exchange ratio whereas the warrants were set in place 12 years ago and thus less random and more clean.

 

Converting the seniors to commons gives UST around 99% of the commons ($205B of liquidation preference of the seniors vs $2.5B of market cap of the commons right now).

 

If the seniors get converted, UST can name its ratio. They can also structure the transaction to convert piecemeal and avoid ever having a controlling stake, let alone the 80% that would trigger a balance sheet consolidation.

[Luke 532]

Full unlimited backstop of agency MBS (attached)...

[SnarkyPuppy]

Tax question.  Has anyone looked into whether selling one issue and buying another constitutes a wash sale?  A quick google seems to imply that if they have different interest rates (as many of the different series do) it does not constitute “substantially identical”.  What if you sell and buy different series from the same issuer (Freddie)?

[Luke 532]

There it is, open-ended MBS buying:

The Fed's firehose is fully open. Open-ended Treasury & MBS buying, sets up a TALF program for ABS, student loans, credit card and small business loans. Also planning a small-business lending program. Treasuries rally. The dollar weakens. @TheTerminal

 

FHFA authorizes @FannieMae and @FreddieMac to support additional liquidity in the secondary mortgage market https://t.co/enpXJUXzG4

[orthopa]

Tax question.  Has anyone looked into whether selling one issue and buying another constitutes a wash sale?  A quick google seems to imply that if they have different interest rates (as many of the different series do) it does not constitute “substantially identical”.  What if you sell and buy different series from the same issuer (Freddie)?

 

I have thought about moving from Fannie to Freddie  and vice versa which I think would not constitute a wash sale. Different companies entirely.

 

The issue I have come across is the bid ask and volume. In the end I believe I would get less shares as I would get caught on the wrong side of the spread in both.

[Luke 532]

The issue I have come across is the bid ask and volume. In the end I believe I would get less shares as I would get caught on the wrong side of the spread in both.

 

Do a combo order.  Either they both fill simultaneously, or neither fill.  Makes it less likely to execute, of course, but ensures you don't get on the wrong side of the spread on both.

 

Do keep in mind the possibility that Fannie may exit conservatorship or have consent decree prior to Freddie.  I currently only own Fannie prefs in part due to this, although all prefs should do well both Fannie and Freddie.

[DRValue]

The issue I have come across is the bid ask and volume. In the end I believe I would get less shares as I would get caught on the wrong side of the spread in both.

 

Do a combo order.  Either they both fill simultaneously, or neither fill.  Makes it less likely to execute, of course, but ensures you don't get on the wrong side of the spread on both.

 

Do keep in mind the possibility that Fannie may exit conservatorship or have consent decree prior to Freddie.  I currently only own Fannie prefs in part due to this, although all prefs should do well both Fannie and Freddie.

 

Think i'll do this, take the tax loss and re balance.

 

Cobf members should team up for some extras liquidity :-)

[DRValue]

The issue I have come across is the bid ask and volume. In the end I believe I would get less shares as I would get caught on the wrong side of the spread in both.

 

Do a combo order.  Either they both fill simultaneously, or neither fill.  Makes it less likely to execute, of course, but ensures you don't get on the wrong side of the spread on both.

 

Do keep in mind the possibility that Fannie may exit conservatorship or have consent decree prior to Freddie.  I currently only own Fannie prefs in part due to this, although all prefs should do well both Fannie and Freddie.

 

Think i'll do this, take the tax loss and re balance.

 

Cobf members should team up for some extras liquidity :-)

 

Balanced FNMAS and FMCKJ, got more shares, and spread my risk too. Well done Orthopa!

 

Overall I own more Fannie than Freddie still, but I'm OK with that.

[investorG]

I didn't read Whalen's piece but exercising the warrants brings in about $100 in fresh capital

 

-warrants exercised

-junior prefs go close to par

-plaintiffs sell their juniors at close to par

-plaintiffs drop lawsuits because they've sold near par

 

Plaintiffs do this because they see everything is depressed in price and they want to take advantage and buy some companies on the cheap rather than wait around for the courts/settlement/Admin/etc.  That's surely what I would do if warrants are exercised.

 

Result: companies have many billions more capital, lawsuits are dropped, plaintiffs are happy, housing market stabilized by GSE's, etc. :)

 

how would this raise capital?

 

the dems and media are going to watch the corporate bailout side like a hawk.  It'd be a large political risk to act in a manner that surges the jr pref before November.

[Luke 532]

how would this raise capital?

 

Nevermind, think I was wrong.  Going to delete my post not to confuse anybody.  Thanks.

[Luke 532]

Ackman today on GSE's at 14-minute mark: https://finance.yahoo.com/video/bill-ackman-u-recession-threat-192341688.html

[Midas79]

To me, receivership/insolvency seems to be the elephant in the room. Calabria said in his November Fox News interview, twice, that if FnF go insolvent he will wipe out shareholders (3:00 and 13:30).

https://video.foxbusiness.com/v/6100433182001/#sp=show-clips

 

It seems quite possible that FnF could sustain losses greater than the $23B of capital they have (combined). Then they would have to draw once again on Treasury's support to avoid mandatory receivership under HERA, which is triggered by 60 consecutive days of balance sheet insolvency (liabilities exceed assets). Calabria could choose to not draw the money if receivership is his goal.

 

However, his interview makes it pretty clear that receivership is not his goal at all, and that he would only invoke it if HERA requires it. His quotes at 13:40 "If we are in a condition where the statutory requirements of receivership are met, then we're gonna do receivership and that would result in shareholders being wiped out. But it's my intention that we don't find ourselves in that position." and 14:00 "Even in receivership, if there's value then shareholders will get something, but if there's not value the shareholders get wiped out. So again if we find ourselves in a situation where they are insolvent, that's the path we will be taking."

 

That last part is telling imo because Calabria ties receivership to insolvency, as opposed to the rest of the list given in 12 USC 4617(a)(3).

https://www.law.cornell.edu/uscode/text/12/4617

Insolvency is covered by (A), (F), and (G), though this last one is tied to capital classifications that Calabria has refused to apply to FnF.

 

While a wave of missed mortgage payments seems like exactly how FnF can deplete their thin capital margin, Calabria declaring receivership is fraught with danger. For one, 4617(a)(5) allows challenges to FHFA appointing itself receiver. You can bet your last dollar such challenges would immediately come from multiple angles. The more important consideration, though, is the court cases. If the NWS had never happened, then instead of FnF having $23B of capital to absorb losses they would have at least $148B, and more if any penalties or interest are applied to the overage (Treasury received $125B more in dividends than they would have if the NWS had never happened).

 

As long as FnF sustain losses less than $148B, then a court victory or settlement that unwinds the NWS means that the receivership would have to be unwound as well, because the conditions for it being imposed would not have been fulfilled. This is where Calabria's refusal to stick capital classifications on FnF matters because if he did, they would certainly be critically undercapitalized: FnF reported core capital of negative $170B at the end of 2019 and receiving $125B from Treasury still doesn't bring that positive, therefore FnF would be critically undercapitalized because their core capital is negative.

 

Unless the boards consent to receivership, but that's a whole new can of worms because not only would it be immediately challenged, this option isn't related to insolvency, while Calabria's interview makes it clear that he would only (?, correct me if I'm wrong) impose receivership in connection to insolvency.

 

There's also the possibility that a settlement involves the seniors being retroactively wiped out (treated as if FnF could have paid them down at any time). This is problematic for two reasons, though:

 

1) The original PSPAs don't allow FnF to pay down the seniors any time they want.

2) Treasury would only return $25B in this case, and not necessarily all at once. If FnF sustain losses greater than $23B (or $48B if Treasury does return the whole $25B at once) then it justifies receivership after all. The plaintiffs would not agree to a settlement with this end result, though with the seniors gone and FnF with $25B in capital, the juniors get around 75% of par ($25B / $33.2B ~= 75%).

 

In the end, I don't think receivership is a credible threat, at least as long as we assume that the plaintiffs end up prevailing in Lamberth or get granted backward relief in Collins.

 

Another good point from seysmont (from the Google Groups board) is that if FnF end up sustaining enough losses to wipe out their $23B in capital, that means all holders of CRTs get zeroed out. Will Calabria and Mnuchin go the receivership route when this is a consequence? I doubt it. For all the bellyaching over the lack of economic sense that the CRTs make for FnF, it would be ironic if those are what keep FnF out of receivership.

[Luke 532]

Midas, well said. I agree that's likely the elephant in the room given the uncertainty of the markets and economy as a whole.  To everybody reading, if r'ship doesn't happen, what else can realistically kill/severely hurt the prefs?  That's the big question.  If the answer is "nothing really" then the only concern is how long it will take.  The duration is a big concern, of course, as the longer it takes the more it depletes rate of return.

 

-election risk (if irreversible action isn't taken by the current Admin prior to Inauguration)

-losses in court

-some other black swan event

[Luke 532]

Democrat House Bill: https://appropriations.house.gov/sites/democrats.appropriations.house.gov/files/COVIDSUPP3_xml.pdf

 

Searched the following terms with no hits: Fannie, Freddie, Mae

Searched the following with hits but nothing related to GSE's: Mac, housing

Searched the following with a hit: GSE

 

Here's what it says...

(k) EXTENSION  OF  THE GSE PATCH.—The Director 18of  the  Bureau  of  Consumer  Financial  Protection  shall  re-19vise section 1026.43(e)(4)(iii)(B) of title 12, Code of Fed-20eral  Regulations,  to  extend  the  sunset  of  the  special  rule  21provided  under  such  section  1026.43(e)(4)  until  January  221,  2022,  or  such  later  date  as  may  be  determined  by  the  23Bureau.