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

[COBFInfinity]

The Washington Federal case to overturn the conservatorship has always been viewed as a long shot, but these are some smoking guns right here:

 

[Midas79]

I agree with you that common has the pie that everyone wants to eat.  But at this late hour, scenarios where the pie gets devoured (jr pref exchange, sr pref exchange) start withering and the pie might be getting put in the fridge.  Amending sr pfd to kill NWS but leaving the pref outstanding, for example, turns time into the friend of the common shareholders.  Recapping over time is far better for the common than the preferred.

 

Your best point is that the incentives of the companies and the management team favor recapping ASAP.  In a scenario where TSY steps out of the picture  and a consent decree with FHFA is signed, I agree.  But you need both of those things to happen to raise private capital.

 

If that doesn't happen, the common at 1x earnings could easily do better than prefs at 40c on the dollar.  Imagine if TSY amends PSPA, changes its prefs to non cumulative, reverts the dividend back to 10%, and says thou shalt not exit c-ship nor sign a consent decree until minimum capital requirements met.  Now you have recap over retained earnings, you run through SC (if $125B of NWS overage comes back, that's to the common), etc.  Prefs are in time out while this happens.  And what happens if Calabria is replaced?!  At least the common accrue value over time.  At 1x you're paid to wait.  At 40c on the dollar, you get paid a lot less in the prefs.

 

Unfortunately, Jr preferred do not have a seat at the GSE recap table.

 

Look, I own a ton of jr pfds.  I've never been tempted by the common shares until now.  But I find it hard to imagine a complicated recap/exchange offer happening with no momentum.  And unfortunately the optics still matter since the Senate is in play in Georgia, so Mnuchin might not do anything until the last two weeks of lame duck.

 

I'd love to be wrong, but I've lost a little love for my jr pfd position.

 

1) The late hour means that actions taking away the pie from current commons and giving it to others becomes more likely, not less.

2) A slow recap benefits absolutely nobody other than current commons, who have no voice and no say in the process.

3) By contrast, a fast recap benefits Treasury (taxpayer gets protected sooner), FHFA (safety and soundness is maximized by FnF having more capital sooner), and the FAs (they get paid when capital is raised, so they want it to be sooner). Fast recap is the base case, not the alternate case.

4) In what scenario do the commons gain more than the prefs from here but there is not both a stepping out of the picture by Treasury and a consent decree? I'm struggling to see how both of those things not happening is good for any class of FnF shares, let alone the common in isolation.

5) If the seniors are converted to non-cumulative prefs, the juniors and commons are both economically worthless. Treasury would get just about all of FnF's earnings going forward ($19.3B, or 10% of the $193B senior pref liquidation preference). Retained earnings then all go to Treasury and FnF never get recapped at all, unless Treasury is willing to forego their dividends in favor of existing commons, which makes no sense whatsoever.

6) The juniors have a better seat at the recap table than existing commons, that's for sure. Raising capital is much easier when FnF are allowed to issue new non-cumulative prefs (only possible if the juniors are converted to common) and immediate dividends are available (meaning junior pref dividends paid in full).

7) Losing love for the prefs is fine. But if the juniors do badly, the commons will do far worse. That's just how capital structures work.

[WB_fan82]

#1:  The later we go, the harder it is to do complex things.  Converting sr pfd to common is complex (issues:  setting the ratio, fiscal ramifications of consolidation, explicit ownership, exiting the govt's senior position).  It makes the most sense as part of comprehensive action which would also involve a jr conversion.  But as time ticks away, tweaking the sr pfd is far easier.  It's the easiest way, actually, to get the GSEs to the point where retained earnings are truly building up capital (not this fake accounting where retained earnings go up but nothing reflected for higher sr pfd liq pref)

 

#2:  Agree.  The operative question should be are we heading in that direction...

 

#3:  Agree on all of that except I don't know what base case is anymore after WSJ article and Mnuchin comments.  Base case might be slow recap.

 

#4:  One where TSY steps out but forces Calabria to keep them in real c-ship until minimum capital.  Agree common do not benefit if SM just removes the reserves but keeps NWS in place.

 

#5:  Disagree!  You are missing that Calabria will not be declaring divs on ANY securities, including new govt non-cum prefs.  That means retained earnings over time.  That benefits the common.  a 10% coupon doesn't mean much if Calabria doesn't declare the divs, which as conservator he definitely won't.

 

#6:  I agree, but emphasize this happens at the end of a recap not the beginning.  Buyers of new prefs need divs right away.

 

#7:  It's so reflexive that it's hard to be definitive.  I tend to agree in quick recap scenarios.  But in extended scenarios, or counting a win in the courts on the NWS, the common could easily do far better.

 

Thanks for the thoughts.  I joined the boards to get out of my own head on this situation, and I've greatly appreciated the posts from you and others.

[asterisk]

 

Waters is getting worried :)

[Guest cherzeca]

 

Waters is getting worried :)

 

Calabria was a former chief of staff of the senate banking committee, to which he clearly maintains fealty.  he will likely not be predisposed to accommodate Ms. Waters and the HFSC, especially when she notes that Calabria's tenure is soon to end...something that he has disputed and may resist next year.  the HFSC is the very weak sister to the SBC, and the Chairman of the SBC as recently as Monday told Mnuchin to continue with important steps.

 

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

[asterisk]

 

Waters is getting worried :)

 

Calabria was a former chief of staff of the senate banking committee, to which he clearly maintains fealty.  he will likely not be predisposed to accommodate Ms. Waters and the HFSC, especially when she notes that Calabria's tenure is soon to end...something that he has disputed and may resist next year.  the HFSC is the very weak sister to the SBC, and the Chairman of the SBC as recently as Monday told Mnuchin to continue with important steps.

 

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

100% agree. Exactly my point, it's a continuation of a trend in the last few weeks.

[investorG]

 

Waters is getting worried :)

 

It is inappropriate that they waited until the 'lame' duck to potentially remedy the absurd NWS and unfortunately there is a real chance -- which the market agrees with @ 35pct of par pricing -- that they don't have the capacity and/or courage to act before they depart. 

[orthopa]

There are several scenarios where the common do far better than the preferred.

 

If the jr preferred gets converted to common, it won't be when the common are trading at $2-3 per share.  The common will be trading far higher than that.  This is an ultra reflexive scenario with respect to common share price, and extrapolating common price at current 1x earnings is a mistake.  And keep in mind there is no real reason or urgency for this to happen until the very end of recap.  As earnings retain, the common stock goes up while the pfd patiently wait for this conversion.  It's not going to happen early in the process.

 

Converting the sr pfds is the "right" economic scenario, but it's also messy.  Time might be up for this one.  That leaves other scenarios with amending the sr pfd that are far more favorable to the common and earnings retention scenarios, and also far easier to Mnuchin to do.

 

There wont be urgency to recap the company as soon as possible? Why, to pay out an exorbitant % of earnings in commitment fee to treasury? To withhold dividends as long as possible to current and new investors? To keep a lid of CEO pay? That makes no sense and you know it. That only makes sense to the retail common investor who hasn't read the capital rule.

 

Preferred get converted early and enjoy the upside of the common not at the end. Where has preferred getting converted at the end happened? C? AIG? and why does where the common trade in relation to eps matter now all of a sudden?

 

Place in the capital stack matters as will be shown in the recap plans. Maybe its warrants, maybe its a better then market conversion but preferred holders, hold preference in the capital stack and a 33B key to getting out of conservatorship early. What do common hold? Just the pie that will be taken from.

 

No way the preferred holders that have ridden these cases up to the SCOTUS for the benefit for all involved don't come away with a sweet deal in the recap. You think Paulson, Berkowitz et al are doing this for the good retail common holder when they will have a seat at the table with the GSEs in recap? For "the rule of law"? Get out of here. You think he was throwing $150,000 plate fund raisers for Trump 4 years ago trying to get to make the retail common holder a millionaire while he holds preferred? Nope. This is for him, its simple, hold what he holds.

 

 

 

Unfortunately, Jr preferred do not have a seat at the GSE recap table.

 

 

 

How do you figure this? Calabria has already said that the GSEs will deal with the shareholders and you will need 2/3 approval to convert some if not all issuances of the Jr Preferred. How do either of those facts reconcile with "The Jr Preferred do not have a seat at the GSE table."?

[Luke 532]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive. 

[WB_fan82]

They don't have a seat at the table b/c they are just along for the ride.  The preferred stock is just a pile of securities with a set of rights that FHFA and advisers will consider when solving for the recap.  Nobody will be asking the preferred holders for their input.

 

And while a conversion at par to common is very possible eventually it would happen at the end.  The reason is simple.  Converting the prefs creates CET1 and frees up Tier 1 room to sell new preferred.  It is far easier to sell $30ish B preferred than it is to sell $30B ish common.  But you can't sell preferred while in c-ship or under a consent decree with the buffers binding b/c Calabria won't be declaring dividends until the GSEs are out.  It happens at the end to get the GSEs out of c-ship.

 

That end could come fast if TSY converts sr pfd to common or there is grand administrative action, but I suspect the end is actually several years away when the dust has settled on the courts and the NWS outages.

 

That doesn't mean the prefs are a bad outcome - far from it - but it does mean they sit patiently while retained earnings accrete to the common.

 

As an aside, it's frustrating to watch this.  The govt recapped Citi easily in 2009/2010.  The GSEs could easily offer exchange offers to their CORPORATE DEBT HOLDERS and create an arbitrage mechanism by offering common shares that are worth more than market value of those bonds.  There's a whole lot more bonds outstanding than preferred stock outstanding.

 

Maybe this is all in the works and everyone is just holding their breath for Treasury to exit the picture by amending the NWS and making the sr prefs payable by the GSEs.  I guess anything else is jumping the gun, right?

[orthopa]

They don't have a seat at the table b/c they are just along for the ride.  The preferred stock is just a pile of securities with a set of rights that FHFA and advisers will consider when solving for the recap.  Nobody will be asking the preferred holders for their input.

 

And while a conversion at par to common is very possible eventually it would happen at the end.  The reason is simple.  Converting the prefs creates CET1 and frees up Tier 1 room to sell new preferred.  It is far easier to sell $30ish B preferred than it is to sell $30B ish common.  But you can't sell preferred while in c-ship or under a consent decree with the buffers binding b/c Calabria won't be declaring dividends until the GSEs are out.  It happens at the end to get the GSEs out of c-ship.

 

That end could come fast if TSY converts sr pfd to common or there is grand administrative action, but I suspect the end is actually several years away when the dust has settled on the courts and the NWS outages.

 

That doesn't mean the prefs are a bad outcome - far from it - but it does mean they sit patiently while retained earnings accrete to the common.

 

As an aside, it's frustrating to watch this.  The govt recapped Citi easily in 2009/2010.  The GSEs could easily offer exchange offers to their CORPORATE DEBT HOLDERS and create an arbitrage mechanism by offering common shares that are worth more than market value of those bonds.  There's a whole lot more bonds outstanding than preferred stock outstanding.

 

Maybe this is all in the works and everyone is just holding their breath for Treasury to exit the picture by amending the NWS and making the sr prefs payable by the GSEs.  I guess anything else is jumping the gun, right?

 

So Calabria is lying is what your saying and you know the answer?

 

No my friend your along for the ride and riding the coat tails of someone else. Apparently this hasn't hit you in the head  yet. So you think this entire thing from start to finish, the players involved, the parts of the capital rule incentivising converting preferred to the exact dollar amount of par to meet capital requirements, the dividend exception to allow paying for dividends is all one big coincidence?

 

Some healthy skepticism is warranted but its clear your having a hard time seeing the big picture here.

 

I think a better question is this. Whats your theory on why we are here where we are right now based on my previous post regarding Paulson? Do you honestly believe the Mnuchin and Calabria have a soft spot for housing finance and if so why are they doing this? The system worked for 12 years as is and still does. Why are they doing this?

[Luke 532]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive.

 

Forgot to give link:

On Wednesday night, Senators @MarkWarner & @MikeCrapo took Secretary Mnuchin to dinner, two sources tell me. Among other topics, they discussed the bipartisan COVID relief framework. Warner is one of the Dems most involved - so here's another way lawmakers are working the WH.

[asterisk]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive.

 

Forgot to give link:

On Wednesday night, Senators @MarkWarner & @MikeCrapo took Secretary Mnuchin to dinner, two sources tell me. Among other topics, they discussed the bipartisan COVID relief framework. Warner is one of the Dems most involved - so here's another way lawmakers are working the WH.

 

Thanks Luke! Likely GSE reform came up.

 

As Otherpa has said very well, there is no reason for Mnuchin to care about GSE reform besides helping out some friends. We are seeing a slow burn of cards starting to play out. As Cherzeca said where there is smoke is indicating fire. The fire is getting bigger little by little.

[Guest cherzeca]

" Nobody will be asking the preferred holders for their input."

 

GSEs won't want to pay JP divs. w/o JP divs no common divs. w/o common divs, no cap raise. if JP dont have a seat at the table they certainly will be on zoom speed dial

[Williams406]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive.

 

Forgot to give link:

On Wednesday night, Senators @MarkWarner & @MikeCrapo took Secretary Mnuchin to dinner, two sources tell me. Among other topics, they discussed the bipartisan COVID relief framework. Warner is one of the Dems most involved - so here's another way lawmakers are working the WH.

 

As luck would have it, I may have been dining at the same restaurant that night. Upon seeing the trio, I sent over an appetizer of beautifully plated goose-eggs benedict to Warner and offered to pick up the tab for them if anything positive for junior preferreds was finalized at the dinner. Crapo said if I was a taxpayer I would be picking up the tab either way. When I said "that doesn't sound like protecting the taxpayer to me" Mnuchin just shrugged.

[WB_fan82]

Ortho,

 

I DO believe the prefs will be offered a conversion.  At least all except the floaters.  It's just going to happen at the end.  I could be wrong b/c, as you point out, there is flexibility to pay some distributions after they meet the core requirements.  But that just leaks out capital for no reason and I don't see what is accomplished by converting the prefs early.

 

What part is me saying Calabria is lying?  I think Calabria has been transparent Day 1 and he's the GSE holders' best and only friend.  Huge fan of that guy.

[Luke 532]

SCOTUS live oral arguments, December 9th at 10am...

https://www.c-span.org/video/?477438-1/federal-housing-finance-agency-consolidated-oral-arguments

 

Credit to this Twitter account:

[undervalued]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive.

 

Forgot to give link:

On Wednesday night, Senators @MarkWarner & @MikeCrapo took Secretary Mnuchin to dinner, two sources tell me. Among other topics, they discussed the bipartisan COVID relief framework. Warner is one of the Dems most involved - so here's another way lawmakers are working the WH.

 

As luck would have it, I may have been dining at the same restaurant that night. Upon seeing the trio, I sent over an appetizer of beautifully plated goose-eggs benedict to Warner and offered to pick up the tab for them if anything positive for junior preferreds was finalized at the dinner. Crapo said if I was a taxpayer I would be picking up the tab either way. When I said "that doesn't sound like protecting the taxpayer to me" Mnuchin just shrugged.

 

Almost got a seat at the table?

[TwoCitiesCapital]

but the takeaway as I think you allude to is that the smoke (such as this letter, Bright's letter and Warner/Rounds letter) would indicate that there is fire

 

Also, Warner and Crapo took Mnuchin out to dinner Wednesday night, after the hearing in which Warner said nothing negative about GSE's and Crapo was positive.

 

Forgot to give link:

On Wednesday night, Senators @MarkWarner & @MikeCrapo took Secretary Mnuchin to dinner, two sources tell me. Among other topics, they discussed the bipartisan COVID relief framework. Warner is one of the Dems most involved - so here's another way lawmakers are working the WH.

 

As luck would have it, I may have been dining at the same restaurant that night. Upon seeing the trio, I sent over an appetizer of beautifully plated goose-eggs benedict to Warner and offered to pick up the tab for them if anything positive for junior preferreds was finalized at the dinner. Crapo said if I was a taxpayer I would be picking up the tab either way. When I said "that doesn't sound like protecting the taxpayer to me" Mnuchin just shrugged.

 

Almost got a seat at the table?

 

They were in the room where it happened! Some would kill for that privilege.

 

/hamiltonjokes

[COBFInfinity]

It's nothing new to anyone here, but I am still astonished at the many parties interested in the GSE conservatorship, but don't have the slightest concern for shareholder rights or are antagonistic to shareholder rights. I am so naive that I thought those rights would matter.

[Luke 532]

A few bullish quotes, in my opinion, from hearings this week...

 

Senator Crapo:

“While my preference was for Congress to pass a bipartisan deal, it is long past time to make the hard decisions and address this last unfinished business of the financial crisis. Because of that, I would encourage you and the director of the FHFA to continue to take important steps that move the system in the right direction. The status quo continues to be unacceptable.”

 

Mnuchin:

“Well, let me just say, I don't think that they should be let out from conservatorship without appropriate capital. There is obviously different opportunities to accumulate capital and to raise capital. This is one of the areas that I will continue to try to work with this committee and others. I think there should be housing reform. I think that the appropriate scenario is for these to have real capital and ultimately them be released.”

 

Powell:

“I would just echo the Secretary's point that I think we would all—I would certainly like to see—the GSEs return to private hands over time and the housing finance sector and system standing on its own two feet with a lot of private capital behind it.”

 

Mnuchin on consent order:

“Despite the fact that the Director and I are having conversations, we have made no decisions at Treasury whatsoever. We are contemplating. There could be a scenario where at some point between the zero capital and the full capital requirement, there would be a consent order and they would be released subject to consent order. There has got to be significant capital to be released.”

[Luke 532]

Plus Warner's silence.

Plus the Warner, Crapo, Mnuchin dinner Wednesday night.

Plus the Maxine panic letter 11pm last night.

[Guest cherzeca]

"Plus the Warner, Crapo, Mnuchin dinner Wednesday night."

 

Warner wants to know when to buy stock. I bet Mnuchin was toying with him

[onyx1]

Plus Warner's silence.

Plus the Warner, Crapo, Mnuchin dinner Wednesday night.

Plus the Maxine panic letter 11pm last night.

 

Plus Mnuchin's planted question with Timmons-SC designed to clarify the trigger point for release during the capital build.  IMO, Mnuchin is unlikely to make this type of effort if he wasn't serious about a PSPA amendment/consent decree.

 

Overall, I looked for any sign of a change in direction away from the objectives written out in the UST Housing Reform plan.  I didn't see any, and new signals (from Powell/Crapo/Warner) left me feeling even more positive.  Mnuchin appears to be a man of his word who works in an administration that prides itself on keeping promises. 

 

Like it or not that's a wager we are all making.

[COBFInfinity]

Ortho,

 

I DO believe the prefs will be offered a conversion.  At least all except the floaters.  It's just going to happen at the end.  I could be wrong b/c, as you point out, there is flexibility to pay some distributions after they meet the core requirements.  But that just leaks out capital for no reason and I don't see what is accomplished by converting the prefs early.

 

I added emphasis. The logic for a common stock dividend is that more investors will buy the stock, making it easier to raise capital. I don't know if that will be part of the plan early on or not, but if so the preferred go to par early, not late.