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

[Luke 532]

New by the Wall Street Journal (Mr. Ackerman) https://www.wsj.com/articles/fannie-freddie-privatization-decisions-likely-to-be-left-to-biden-administration-11608028200

 

Seems like we are getting lots of inputs on both sides.

 

See Bloomberg Intelligence's take attached...

 

More just now from Bloomberg Intelligence...

 

1. Treasury's Stake Is Key Variable, Not Conservatorship End

Key Points:

Lack of contemporaneous consent order doesn't affect timeline of ultimate exit from conservatorship, in our view.

4th Amendment still "likely"; scope is now key question

"You need to raise third-party capital and you need to retain capital. That's, to me, the issue."

"the Trump administration is likely to allow Fannie and Freddie to retain more of their own earnings, Mr. Mnuchin suggested"

Additional Reading:

"Fannie, Freddie Privatization Decisions Likely to Be Left to Biden Administration"

​​Fannie Mae PSPA

Treasury Secretary Mnuchin's Dec. 15 acknowledgement that third-party capital may be necessary for Fannie and Freddie to exit conservatorship suggests to us a fourth amendment in which Treasury substantially writes down its senior preferred stake, albeit with additional compensation either in the form of more common equity or an ongoing fee. Mnuchin's comments highlight the uncertainty remaining in a process driven almost entirely by a single decision maker. Both a full writedown of Treasury's senior preferred stock liquidation preference and a simple agreement to allow the companies to continue retaining capital offset by increases to the liquidation preference lie within the scope of Mnuchin's comments. We continue to believe the administration will achieve a substantial fourth amendment. (12/15/20)

[COBFInfinity]

8.  To reiterate, YOU DO NOT NEED SR PFD TO GO POOF to accomplish Mnuchin's or Calabria's objectives

 

Maybe if you don't care how many years it takes. I care how many years it takes to get my preferred to par value.

[COBFInfinity]

8.  To reiterate, YOU DO NOT NEED SR PFD TO GO POOF to accomplish Mnuchin's or Calabria's objectives

 

Maybe if you don't care how many years it takes. I care how many years it takes to get my preferred to par value.

 

I also don't see any outside capital being raised for a very long time in this scenario. Mnuchin says he wants outside capital. Your argument is that he doesn't care whether that happens in 2021 or 2031. Possible, but makes no practical sense,

[Luke 532]

That latest Bloomberg Intelligence piece sure reads like they are expecting a significant (if not full) write-down of seniors.

 

New by the Wall Street Journal (Mr. Ackerman) https://www.wsj.com/articles/fannie-freddie-privatization-decisions-likely-to-be-left-to-biden-administration-11608028200

 

Seems like we are getting lots of inputs on both sides.

 

See Bloomberg Intelligence's take attached...

 

More just now from Bloomberg Intelligence...

 

1. Treasury's Stake Is Key Variable, Not Conservatorship End

Key Points:

Lack of contemporaneous consent order doesn't affect timeline of ultimate exit from conservatorship, in our view.

4th Amendment still "likely"; scope is now key question

"You need to raise third-party capital and you need to retain capital. That's, to me, the issue."

"the Trump administration is likely to allow Fannie and Freddie to retain more of their own earnings, Mr. Mnuchin suggested"

Additional Reading:

"Fannie, Freddie Privatization Decisions Likely to Be Left to Biden Administration"

​​Fannie Mae PSPA

Treasury Secretary Mnuchin's Dec. 15 acknowledgement that third-party capital may be necessary for Fannie and Freddie to exit conservatorship suggests to us a fourth amendment in which Treasury substantially writes down its senior preferred stake, albeit with additional compensation either in the form of more common equity or an ongoing fee. Mnuchin's comments highlight the uncertainty remaining in a process driven almost entirely by a single decision maker. Both a full writedown of Treasury's senior preferred stock liquidation preference and a simple agreement to allow the companies to continue retaining capital offset by increases to the liquidation preference lie within the scope of Mnuchin's comments. We continue to believe the administration will achieve a substantial fourth amendment. (12/15/20)

[TonyG]

Luke thanks for posting both Bloomberg Intelligence pieces.

[Guest cherzeca]

I'm hanging in there.  if the big news is Mnuchin doesn't like consent decrees, remember he has no input on that if he writes down senior pref.

[WB_fan82]

IG:

 

Some levers:  they can extend exchange offers to the mountains of GSE corporate debt.  They can convert junior preferred and then place a slug of new preferred to Berkshire.  They can convert part of the government preferred into equity.

 

I think the prefs will trade quite well once it's clear that TSY is out of the picture and Calabria can kick off a recap with no chance of putting genie back in the bottle.  Par in 7 years at the latest on securities trading at 35c on the dollar is a very nice return.  And the reality is Calabria is gone in June after the SC ruling and I would expect a good chance of significant capital rule loosening within three years of that, so really it's probably par in 5 years at the outside.  The only real lynchpin is Mnuchin getting Treasury's veto power out of the equation.

 

I think the common could also do well, just depends on the specific scenario.

[WB_fan82]

Writing down sr pfd is a fantasy.  Texas asked what their motivations are.. I'll tell you for Mnuchin.

 

The self-respect and ego of a guy who made a huge fortune in banking.  It's just embarrassing to write it down.  It makes him look like a milquetoast puppet to somebody else's money, which he doesn't even need.  And the kicker is it doesn't even need to happen to accomplish what he promised to do.  So why on earth would he do it.  It only maybe made sense as part of a grand recap where he converts it to common, but time ran out on that.

 

Re: COBF, our urgency on the timing is irrelevant to them.  Consistent w/ their actions to date and their stated objectives going forward.

 

 

[investorG]

IG:

 

Some levers:  they can extend exchange offers to the mountains of GSE corporate debt.  They can convert junior preferred and then place a slug of new preferred to Berkshire.  They can convert part of the government preferred into equity.

 

I think the prefs will trade quite well once it's clear that TSY is out of the picture and Calabria can kick off a recap with no chance of putting genie back in the bottle.  Par in 7 years at the latest on securities trading at 35c on the dollar is a very nice return.  And the reality is Calabria is gone in June after the SC ruling and I would expect a good chance of significant capital rule loosening within three years of that, so really it's probably par in 5 years at the outside.  The only real lynchpin is Mnuchin getting Treasury's veto power out of the equation.

 

I think the common could also do well, just depends on the specific scenario.

 

non credible levers imo, for reasons already discussed. 

 

your prediction on sr pref remaining fully in place post jan20 may be right but prepare for a lower starting point on the future journey than 35% of par.

[investorG]

I'm hanging in there.  if the big news is Mnuchin doesn't like consent decrees, remember he has no input on that if he writes down senior pref.

 

Despite it looking bleak, it's hard to turn away from such a clear-cut case of tens of thousands of US citizens standing up against an act of betrayal (NWS) by their own government.  My hope is sadly fading for Trump / Mnuchin acting honorably to fix the situation but I've been proven wrong many times before.

[james22]

They can convert junior preferred and then place a slug of new preferred to Berkshire.

 

I do still like to imagine Berkshire will play some role here.

 

Buffett is probably the only one who could be portrayed as saving the mortgage system rather than benefiting himself.

[orthopa]

Much of the discussion seems to revolve around what Mnuchin might be thinking or what his strategy might be, etc. As someone said, no one can read Mnuchin's mind. Similar gaming logic has been applied to Calabria. This has probably reduced confusion on the technical details of different approaches to ending the conservatorship. However, because of our lack of clairvoyance, this clarification has apparently not resulted in actionable ideas on how to approach this investment.

 

Maybe another tack would be fruitful:

(1) What does Mnuchin stand to gain by actually implementing a plan to release the companies from conservatorship?

(2) What does he stand to lose by not doing so?

(3) Similarly, what does Calabria stand to gain if the companies are released from conservatorship?

(4) What does he stand to lose by not doing so?

 

The two have very different backgrounds and therefore are likely to have very different goals and values. Mnuchin comes from a transactional background, i.e., investment banking with the goal of financial gain. Calabria's background, on the other hand, is in studies and analysis related to economics and government policy.

 

Does this stimulate any ideas regarding the most likely actions that Manuchin or Calabria would take to maximize their personal gains, given their likely value systems and careers?

 

I think a better set of questions who gets you to your answers are;

 

1. How did Mnuchin go from a nobody campaign finance guy to Treasury Secretary in a matter of months? Why was he picked as Treasury Secretary? To do a job? He got to dispose of his investments once tax free to lock in all appreciated gains. What does someone else get in reciprocation for that multi million dollar favor?

2. Why did Mnuchin mention FnF as a priority immediately on Fox news after the election? Trump never ran on it and outside of a singular comment has been mute since. Why does Mnuchin care so much about it.

3. Who stands to benefit the most if Mnuchin comes through?

4. Why was Calabria picked to be FHFA director? His past comments on twitter and the paper he wrote was well known before. Why pick this guy unless you wanted him to act on it.

5. Why has John Paulson been so quiet? We havent heard from this guy in 3-4 years. Whats up with that?

 

 

[beaufort]

I'll add number 6. 

 

Why is the capital rule being published in the federal register tomorrow?

 

[orthopa]

I'll add number 6. 

 

Why is the capital rule being published in the federal register tomorrow?

 

 

Just because these two are just dicking everyone around and wasting everyone's time.

 

If Mnuchin/Calabria were not going to act they wasted A TON of their time, Treasury's time, Congress's time with 3,4,5,6 hearings, confirmation of Calabria, making of an interim amendment, publishing a capital rule, yada yada.

 

If they were not going to act a good way to go about it would to have not done a god damn thing 2 years ago before Calabria was nominated and the Treasury Plan was requested by Trump.

[orthopa]

I think its good to refresh ourselves with the Treasury Housing Finance reform plan.

 

1. Preconditions for Ending the Conservatorships

 

The guiding principle for ending the conservatorships should be that each GSE should remain in

conservatorship until FHFA determines that that particular GSE can operate safely and soundly

and without posing an undue systemic risk. The specific preconditions for FHFA considering a

particular GSE’s exit from conservatorship should include, at a minimum, that:

 

 FHFA has prescribed regulatory capital requirements for both GSEs;

 

 FHFA has approved the GSE’s capital restoration plan, and the GSE has retained or

raised sufficient capital and other loss-absorbing capacity to operate in a safe and sound

manner;

 

 The PSPA between Treasury and the GSE has been amended to: (i) require the GSE to

fully compensate the Federal Government in the form of an ongoing payment for the

ongoing support provided to the GSE under the PSPA; (ii) focus the GSE’s activities on

its core statutory mission and otherwise tailor Government support to the underlying

rationale for that support; (iii) further limit the size of the retained mortgage portfolio of

the GSE; (iv) subject the GSE to heightened prudential requirements and safety and

soundness standards, including increased capital requirements, designed to prevent a

future taxpayer bailout and minimize risks to financial stability; and (v) ensure that the

risk posed by the GSE’s activities is calibrated to the amount of the remaining

commitment under the PSPA;

 

 Appropriate provision has been made to ensure there is no disruption to the market for

the GSE’s MBS, including its previously issued MBS;

 

 FHFA, after consulting with the Financial Stability Oversight Council (“FSOC”), has

determined that the heightened prudential requirements incorporated into the amended

PSPAs are, together with the requirements and restrictions imposed by FHFA in its

capacity as regulator, appropriate to minimize risks to financial stability; and

 

 Any other conditions that FHFA, in its discretion, determines are necessary to ensure that

the GSE would operate in a safe and sound manner after the conservatorship, including as

to the GSE’s compliance with FHFA’s directives or other requirements and also as to the

build out of FHFA’s supervisory function.

59

 

2. Recapitalizing the GSEs

 

As described above, each GSE should remain in conservatorship until it has retained or raised

sufficient capital or other loss-absorbing capacity to operate in a safe and sound manner.

Potential approaches to recapitalizing a GSE could entail one or more of the following, among

other options:

 

 Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred

shares or exchanging all or a portion of that interest for common stock or other interests

in the GSE;

 Adjusting the variable dividend on Treasury’s senior preferred shares so as to allow the

GSE to retain earnings in excess of the $3 billion capital reserve currently permitted;

 

 Issuing shares of common or preferred stock, and perhaps also convertible debt or other

loss-absorbing instruments, through private or public offerings, perhaps in connection

with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;

 

 Negotiating exchange offers for one or more classes of the GSE’s existing junior

preferred stock; and

 

 Placing the GSE in receivership, to the extent permitted by law, to facilitate a

restructuring of the capital structure.

 

Each of these options poses a host of complex financial and legal considerations that will merit

careful consideration as Treasury and FHFA continue their effort, already underway, to identify

and assess these and other strategic options.

 

Treasury recommends:

 Treasury and FHFA should develop a recapitalization plan for each GSE after identifying

and assessing the full range of strategic options. (administrative)

 

What is needed in the 4th PSPA is spelled out in preconditions for ending the conservatorships and eliminating all or a portion of the Sr preferred is also listed. Its seems to me FHFA and Treasury have followed the plan pretty closely. I dont know why they would veer off now and and completely eliminate the possiblity of writing off the Sr preferred.

[locutusoftexas]

 

I think a better set of questions who gets you to your answers are;

 

1. How did Mnuchin go from a nobody campaign finance guy to Treasury Secretary in a matter of months? Why was he picked as Treasury Secretary? To do a job? He got to dispose of his investments once tax free to lock in all appreciated gains. What does someone else get in reciprocation for that multi million dollar favor?

2. Why did Mnuchin mention FnF as a priority immediately on Fox news after the election? Trump never ran on it and outside of a singular comment has been mute since. Why does Mnuchin care so much about it.

3. Who stands to benefit the most if Mnuchin comes through?

4. Why was Calabria picked to be FHFA director? His past comments on twitter and the paper he wrote was well known before. Why pick this guy unless you wanted him to act on it.

5. Why has John Paulson been so quiet? We havent heard from this guy in 3-4 years. Whats up with that?

 

Thank you for the information and for the more knowledgeable set of questions. This is very helpful in terms of what to investigate next. Thanks for mentioning Paulson.

[TwoCitiesCapital]

I think its good to refresh ourselves with the Treasury Housing Finance reform plan.

 

1. Preconditions for Ending the Conservatorships

 

The guiding principle for ending the conservatorships should be that each GSE should remain in

conservatorship until FHFA determines that that particular GSE can operate safely and soundly

and without posing an undue systemic risk. The specific preconditions for FHFA considering a

particular GSE’s exit from conservatorship should include, at a minimum, that:

 

 FHFA has prescribed regulatory capital requirements for both GSEs;

 

 FHFA has approved the GSE’s capital restoration plan, and the GSE has retained or

raised sufficient capital and other loss-absorbing capacity to operate in a safe and sound

manner;

 

 The PSPA between Treasury and the GSE has been amended to: (i) require the GSE to

fully compensate the Federal Government in the form of an ongoing payment for the

ongoing support provided to the GSE under the PSPA; (ii) focus the GSE’s activities on

its core statutory mission and otherwise tailor Government support to the underlying

rationale for that support; (iii) further limit the size of the retained mortgage portfolio of

the GSE; (iv) subject the GSE to heightened prudential requirements and safety and

soundness standards, including increased capital requirements, designed to prevent a

future taxpayer bailout and minimize risks to financial stability; and (v) ensure that the

risk posed by the GSE’s activities is calibrated to the amount of the remaining

commitment under the PSPA;

 

 Appropriate provision has been made to ensure there is no disruption to the market for

the GSE’s MBS, including its previously issued MBS;

 

 FHFA, after consulting with the Financial Stability Oversight Council (“FSOC”), has

determined that the heightened prudential requirements incorporated into the amended

PSPAs are, together with the requirements and restrictions imposed by FHFA in its

capacity as regulator, appropriate to minimize risks to financial stability; and

 

 Any other conditions that FHFA, in its discretion, determines are necessary to ensure that

the GSE would operate in a safe and sound manner after the conservatorship, including as

to the GSE’s compliance with FHFA’s directives or other requirements and also as to the

build out of FHFA’s supervisory function.

59

 

2. Recapitalizing the GSEs

 

As described above, each GSE should remain in conservatorship until it has retained or raised

sufficient capital or other loss-absorbing capacity to operate in a safe and sound manner.

Potential approaches to recapitalizing a GSE could entail one or more of the following, among

other options:

 

 Eliminating all or a portion of the liquidation preference of Treasury’s senior preferred

shares or exchanging all or a portion of that interest for common stock or other interests

in the GSE;

 Adjusting the variable dividend on Treasury’s senior preferred shares so as to allow the

GSE to retain earnings in excess of the $3 billion capital reserve currently permitted;

 

 Issuing shares of common or preferred stock, and perhaps also convertible debt or other

loss-absorbing instruments, through private or public offerings, perhaps in connection

with the exercise of Treasury’s warrants for 79.9% of the GSE’s common stock;

 

 Negotiating exchange offers for one or more classes of the GSE’s existing junior

preferred stock; and

 

 Placing the GSE in receivership, to the extent permitted by law, to facilitate a

restructuring of the capital structure.

 

Each of these options poses a host of complex financial and legal considerations that will merit

careful consideration as Treasury and FHFA continue their effort, already underway, to identify

and assess these and other strategic options.

 

Treasury recommends:

 Treasury and FHFA should develop a recapitalization plan for each GSE after identifying

and assessing the full range of strategic options. (administrative)

 

What is needed in the 4th PSPA is spelled out in preconditions for ending the conservatorships and eliminating all or a portion of the Sr preferred is also listed. Its seems to me FHFA and Treasury have followed the plan pretty closely. I dont know why they would veer off now and and completely eliminate the possiblity of writing off the Sr preferred.

 

+1

 

 

[SnarkyPuppy]

The extremely high volume and price action has me wondering if there were other events which occurred behind the scenes which we are all attributing to this WSJ quote.  If it's simply the @amacker joke article the price action doesn't make sense to me.  Could be fast money who bought subsequent to the capital rule with the clear short term catalyst in mind bailing out due to the WSJ article - but I'm always curious if there's false attribution. 

 

Orthopa's made a few strong arguments that strongly counteract any WSJ inferences.

 

Haven't sold a share, but given my obnoxious position sizing I'm not adding either. 

[Luke 532]

SCOOP—Wall Street bankers have met w @USTreasury in recent weeks to discuss GSE reform including creation of a framework for eventual recap and release from conservatorship. The framework could be announced through an amended PSPA or regulation $FNMA $FMCC more @FoxBusiness 345

[Luke 532]

SCOOP—Wall Street bankers have met w @USTreasury in recent weeks to discuss GSE reform including creation of a framework for eventual recap and release from conservatorship. The framework could be announced through an amended PSPA or regulation $FNMA $FMCC more @FoxBusiness 345

 

The plan is sitting on Mnuchin's desk right now ready to be signed.

 

More: Wall Street bankers tell @FoxBusiness that the framework is on the desk of @stevenmnuchin1 and it has input from @MarkCalabria. No immediate comment from @USTreasury or @FHFA. Unclear if and when it will be released cc @FannieMae

@FreddieMac $FNMA $FMCC will discuss at 345

[orthopa]

SCOOP—Wall Street bankers have met w @USTreasury in recent weeks to discuss GSE reform including creation of a framework for eventual recap and release from conservatorship. The framework could be announced through an amended PSPA or regulation $FNMA $FMCC more @FoxBusiness 345

 

The plan is sitting on Mnuchin's desk right now ready to be signed.

 

More: Wall Street bankers tell @FoxBusiness that the framework is on the desk of @stevenmnuchin1 and it has input from @MarkCalabria. No immediate comment from @USTreasury or @FHFA. Unclear if and when it will be released cc @FannieMae

@FreddieMac $FNMA $FMCC will discuss at 345

 

Thats weird! Day after amacker and Joe Light run their mouths someone from Treasury/FHFA rights the ship. Right on time!

 

...and now we are wasting wall street bankers time too. Do wall street bankers waste their time? How do they get paid you think, for their time? That incentive will lead you to your answer of what will happen.

[typicalvalue]

SCOOP—Wall Street bankers have met w @USTreasury in recent weeks to discuss GSE reform including creation of a framework for eventual recap and release from conservatorship. The framework could be announced through an amended PSPA or regulation $FNMA $FMCC more @FoxBusiness 345

 

The plan is sitting on Mnuchin's desk right now ready to be signed.

 

More: Wall Street bankers tell @FoxBusiness that the framework is on the desk of @stevenmnuchin1 and it has input from @MarkCalabria. No immediate comment from @USTreasury or @FHFA. Unclear if and when it will be released cc @FannieMae

@FreddieMac $FNMA $FMCC will discuss at 345

 

At this point Q is what will include? Seems market is pricing a soft PSPA or whatever we can call this.

[orthopa]

SCOOP—Wall Street bankers have met w @USTreasury in recent weeks to discuss GSE reform including creation of a framework for eventual recap and release from conservatorship. The framework could be announced through an amended PSPA or regulation $FNMA $FMCC more @FoxBusiness 345

 

The plan is sitting on Mnuchin's desk right now ready to be signed.

 

More: Wall Street bankers tell @FoxBusiness that the framework is on the desk of @stevenmnuchin1 and it has input from @MarkCalabria. No immediate comment from @USTreasury or @FHFA. Unclear if and when it will be released cc @FannieMae

@FreddieMac $FNMA $FMCC will discuss at 345

 

At this point Q is what will include? Seems market is pricing a soft PSPA or whatever we can call this.

 

Im not smart enough to guess this question right but why are wall street bankers involved in the "blueprint"? There has to be some offering of a security/initial placement/etc something. Why are wall street bankers involved already and why is mnuchin meeting with them. The cap restoration plans go through FHFA.

[Guest cherzeca]

I would think the "Wall Street bankers" are FnF's FA's, and the "framework" is in effect the capital restoration plans.  so Mnuchin is all set to go and do that which Mnuchin has said for 4 years he has wanted to do.  the guy has balls made out of sponge

[Gregmal]

LOL and this is why I really just dont GAF here and just let it be. God bless all you guys who do the work. But for the life of my investment in these, its basically been this....rumor this way, rumor that way, huge run, huge retrace, vice versa. Chicken with the head cut off. I'll care when its either worthless, or within a few ticks of par. Otherwise, not worth the brain damage.