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

[james22]

It has nothing to do with whether trump is a better person, but literally everything to do with the fact that this time he has gone to far for anyone to listen to now.

 

Really? Anyone? You project, cameron.

 

Why would someone who previously believed the media was biased, for example, now believe the media claim he incited a coup? (Especially when they can read the transcript themselves?)

 

Look, I don't know what Mnunchin will do. He might distance himself from Trump as you suggest. But people tend to double-down when they feel wronged. I just think that's more likely.

[cameronfen]

It has nothing to do with whether trump is a better person, but literally everything to do with the fact that this time he has gone to far for anyone to listen to now.

 

Really? Anyone? You project, cameron.

 

Why would someone who previously believed the media was biased, for example, now believe the media claim he incited a coup? (Especially when they can read the transcript themselves?)

 

Look, I don't know what Mnunchin will do. He might distance himself from Trump as you suggest. But people tend to double-down when they feel wronged. I just think that's more likely.

 

I feel like at this point I am having a pointless conversation. Let’s just wait until the 20th and rehash this then. 

[SnarkyPuppy]

[cameronfen]

 

Hindsight is 20/20 but looking back what Gasparino is suggesting will happen should have been the obvious baseline that didn’t cross my mind. Something somewhat symbolic but without a whole lot of bite.  SM tells his banker friends he tried and he and the rest of administration don’t get pilloried by the press.  Let’s see what happens.   

[WB_fan82]

My prediction on what Mnuchin does:

 

1.  Kill the retained caps

2.  Keep the variable div (NWS) in place

3.  BUT, make the sr pfd non-cumulative

4.  Make the srs repayable at par (except for the $1B needed to maintain the lines).  Dividend goes from NWS to 10% once liquidation preference is down to $1B.

5.  TSY permission not needed to release GSEs from c-ship as long as GSEs meet minimum capital requirements

6.  Charge an FDIC-like fee on the committed lines

 

This puts them on the path to exit via truly retaining earnings.  It lets the GSEs raise external capital to exit c-ship.  And it provides maximum return to the taxpayer possible while allow the two things above.

 

 

 

[undervalued]

https://www.bloomberg.com/news/articles/2021-01-11/biden-s-team-explores-ways-to-replace-fannie-freddie-regulator

[DocSnowball]

https://www.bloomberg.com/news/articles/2021-01-11/biden-s-team-explores-ways-to-replace-fannie-freddie-regulator

This is what the "too hard" pile feels like. This investment is an education in behavioral investing isn't it!

[TwoCitiesCapital]

My prediction on what Mnuchin does:

 

1.  Kill the retained caps

2.  Keep the variable div (NWS) in place

3.  BUT, make the sr pfd non-cumulative

4.  Make the srs repayable at par (except for the $1B needed to maintain the lines).  Dividend goes from NWS to 10% once liquidation preference is down to $1B.

5.  TSY permission not needed to release GSEs from c-ship as long as GSEs meet minimum capital requirements

6.  Charge an FDIC-like fee on the committed lines

 

This puts them on the path to exit via truly retaining earnings.  It lets the GSEs raise external capital to exit c-ship.  And it provides maximum return to the taxpayer possible while allow the two things above.

 

I don't agree with this:

 

• It doesn't settle the lawsuits which are problematic to any new capital raise
  
• It doesn't maximize the value of the taxpayer stake because it's eliminating the value of the 80% of common stock the government retains of the enterprises.
  

For the second bullet, the reason the common would be worthless can be viewed through 2 scenarios: if we win the case or if we lose the case.

 

If SC rules for us, external capital can be raised quickly, but then the government risks being diluted to hell if the companies have to repay the sr. preferred again AND meet capital buffers. The government's 80% is nearly $0 (even if capital is retained b/c of how long it would take to retain enough earnings to pay off sr. preferred, again, and build capital levels.

 

If SC rules against us, capital raise is out because no one in their right mind will give money to them while they're still controlled by the government b/c now we know the gov't can steal with impunity. Only value is via retained earnings, which for several years will still accrue to sr. preferred and capital requirements.

 

In either scenario, taxpayer asset of 80% ownership is worth nearly nothing and not maximizing return to taxpayers. Any return that does flow to taxpayers is subject to the outcome of the SC ruling which could reverse those 'returns'. Taxpayer is not protected in these scenarios but rather subject to huge variability in outcome and risking the value of the surest thing - the value of the 80% owned in the enterprises themselves.

 

So I don't think this path is likely. Mnuchin may not be able to settle the lawsuits before he leaves, but he could certainly do a better job of setting the groundwork to get them settled than what the above would do. Marking the sr preferred as 'paid' now moves this forward in a good way - it opens optionality to maximize the value of the retained 80% of ownership AND allows for next steps like settlement negotiations and a capital plan.

[Midas79]

My prediction on what Mnuchin does:

 

1.  Kill the retained caps

2.  Keep the variable div (NWS) in place

3.  BUT, make the sr pfd non-cumulative

4.  Make the srs repayable at par (except for the $1B needed to maintain the lines).  Dividend goes from NWS to 10% once liquidation preference is down to $1B.

5.  TSY permission not needed to release GSEs from c-ship as long as GSEs meet minimum capital requirements

6.  Charge an FDIC-like fee on the committed lines

 

This puts them on the path to exit via truly retaining earnings.  It lets the GSEs raise external capital to exit c-ship.  And it provides maximum return to the taxpayer possible while allow the two things above.

 

The PSPA would still have to be amended for this to work. Right now, any missed dividend payments add to the SPS liquidation preference, which prevents any later recap; by the time FnF have enough capital to think about exiting the SPS balance will be worth more than their market cap. At that point, even if new investors would be willing to invest enough money to pay off the SPS, they would demand 99.999% of the equity and wipe legacy common shareholders out.

 

UST does have to give permission for release per the terms of the current PSPAs, so #5 will also require an amendment.

 

What's the purpose of keeping the NWS on non-cumulative shares if FnF will never pay it anyway? An incentive to pay down the SPS as quickly as possible? That would increase taxpayer risk because FnF wouldn't be able to retain any capital beyond the thin cushion they have now.

[Midas79]

I don't agree with this:

 

• It doesn't settle the lawsuits which are problematic to any new capital raise
  
• It doesn't maximize the value of the taxpayer stake because it's eliminating the value of the 80% of common stock the government retains of the enterprises.
  

For the second bullet, the reason the common would be worthless can be viewed through 2 scenarios: if we win the case or if we lose the case.

 

If SC rules for us, external capital can be raised quickly, but then the government risks being diluted to hell if the companies have to repay the sr. preferred again AND meet capital buffers. The government's 80% is nearly $0 (even if capital is retained b/c of how long it would take to retain enough earnings to pay off sr. preferred, again, and build capital levels.

 

If SC rules against us, capital raise is out because no one in their right mind will give money to them while they're still controlled by the government b/c now we know the gov't can steal with impunity. Only value is via retained earnings, which for several years will still accrue to sr. preferred and capital requirements.

 

In either scenario, taxpayer asset of 80% ownership is worth nearly nothing and not maximizing return to taxpayers. Any return that does flow to taxpayers is subject to the outcome of the SC ruling which could reverse those 'returns'. Taxpayer is not protected in these scenarios but rather subject to huge variability in outcome and risking the value of the surest thing - the value of the 80% owned in the enterprises themselves.

 

So I don't think this path is likely. Mnuchin may not be able to settle the lawsuits before he leaves, but he could certainly do a better job of setting the groundwork to get them settled than what the above would do. Marking the sr preferred as 'paid' now moves this forward in a good way - it opens optionality to maximize the value of the retained 80% of ownership AND allows for next steps like settlement negotiations and a capital plan.

 

UST writing off the seniors but trying to maximize the value of the warrants makes no sense whatsoever. If UST is in maximization mode they will convert the seniors (and it must be to commons due to CET1 capital requirements), not cancel them. The warrant shares were always going to be diluted by later capital raises anyway; there's a reason UST has never valued them at a full 80% of FnF's estimated market cap (Craig Phillips said UST's internal valuation was around $60B, or $8.33 per share).

 

Also, Perry is the only case that affects the viability of capital raises because it holds the GSEs themselves liable. All other cases only involve UST eventually paying money to FnF if the plaintiffs win; with the seniors and NWS gone there is nothing else to fight over. Prospective investors would then price the capital raise shares conservatively relative to the assumed probability of success in the court cases. Any upside surprises in those cases would then mostly accrete to the new investors.

 

In a SCOTUS loss scenario, there is no such thing as retained earnings, at least not for FnF or shareholders. UST would continue to sweep all profits because the NWS would be legal.

[WB_fan82]

The lawsuits are not problematic to a capital raise.  The main reason this is true is that the GSEs aren't liable for anything.  The lawsuits either result in nothing, or they result in $125B of credits for the overage (either through deemed paydown, or cash back) back to the GSEs.  New investors lose nothing and gain only optionality by investing new capital.

 

My way is the only way to maximize value to the taxpayer.  They get paid back the entire liquidation preference AND 80% of all value that flows to the common.  Your way, to just forgive sr pfd, is not only optically terrible but economically suboptimal since it's an economic loss of 20% of the entire sr pfd.

[TwoCitiesCapital]

The lawsuits are not problematic to a capital raise.  The main reason this is true is that the GSEs aren't liable for anything.  The lawsuits either result in nothing, or they result in $125B of credits for the overage (either through deemed paydown, or cash back) back to the GSEs.  New investors lose nothing and gain only optionality by investing new capital.

 

My way is the only way to maximize value to the taxpayer.  They get paid back the entire liquidation preference AND 80% of all value that flows to the common.  Your way, to just forgive sr pfd, is not only optically terrible but economically suboptimal since it's an economic loss of 20% of the entire sr pfd.

 

New investors risk the gov't, 80% owner,  deciding it can sweep all profits and capital (their new capital no less!) to itself in perpetuity and do so with impunity.

 

And seeing as the current administration was present when the Obama administration opted to steal the first time, I don't think you're going to find many takers until the lawsuits make certain that it won't happen again.

 

[Gregmal]

So the folks associated with the incoming administration have a history of stealing things?

 

[WB_fan82]

Yes Midas, the PSPAs would still be amended.  I just listed what I thought he major provisions would be.

 

Keeping the NWS but making it non-cum allows the GSEs to retain earnings over time (and the taxpayer to get 80% of it) while keeping the entire liquidation preference for the taxpayer, and the (non-cumulative) NWS ensures that nobody gets paid a cent until the government is paid back on the sr pref while still permitting the raising of external capital.

 

To me this looks like the smallest "movement" that can happen in terms of optics, and it also maximizes the economics.

 

I would have thought an exchange of sr pref into common would be better, but that worked best as part of a grand recap, potentially involving settlements.  Simply ran out of time on that one.  As long as sr pfd is amended to be prepayable, though, the GSEs can synthetically create the same via exchange offers to the existing pfd and the agency corporate bonds.  Right now they can only be repaid with proceeds from newly issued capital stock, and exchange offers to the bonds wouldn't qualify.  So I definitely see some changes here.

[WB_fan82]

Two Cities:

 

The whole "stealing" narrative is pretty irrelevant.  First, investors are forward looking.  But more importantly, that's the kind of thing that can (and did) only happen in conservatorship.  It is impossible to raise capital while in conservatorship for that exact reason.  That is why raising capital is the bridge OUT of c-ship.  Retention over time and a big bang capital raise to get out of c-ship.  Once out, they can't be stuffed back in.

 

That is why changes must be paid so that external capital could even be raised.  Cumulative senior preferred just keeps widening the capital chasm to exit c-ship over time.  So they need to either be cumulative with a fixed dividend, non-cumulative with the variable dividend, or non-cumulative with a fixed dividend.  I think the middle is most likely, but either one would do.  Cumulative with a fixed dividend (say, 10%) doesn't help that much but they could still there through exchange offers + earnings retention + new slug of pfd if the cumulative srs were deemed repayable at par.  And who knows, maybe we get lucky with lawsuits.

 

 

 

 

[TwoCitiesCapital]

So the folks associated with the incoming administration have a history of stealing things?

 

Yes. Biden was VP when Geithner et al decided to renegotiate the 10% coupon into "all earnings and capital into perpetuity" - right after hearing Blackstone say the companies were going to be fantastically profitable. What better to then unilaterally re-negotiate the terms of the bailout with yourself to make sure you get 100% of all of that when only entitled to 80%?

 

I think we all know that if this happened with a private company, and the renegotiation was done by the CEO holding the board members under duress, that the CEO would've gone to jail. But instead of the CEO, it was the Treasury Secretary and conservator so it's all a-ok. White-collar theft at its finest.

 

Two Cities:

 

The whole "stealing" narrative is pretty irrelevant.  First, investors are forward looking.  But more importantly, that's the kind of thing that can (and did) only happen in conservatorship.  It is impossible to raise capital while in conservatorship for that exact reason.  That is why raising capital is the bridge OUT of c-ship.  Retention over time and a big bang capital raise to get out of c-ship.  Once out, they can't be stuffed back in.

 

That is why changes must be paid so that external capital could even be raised.  Cumulative senior preferred just keeps widening the capital chasm to exit c-ship over time.  So they need to either be cumulative with a fixed dividend, non-cumulative with the variable dividend, or non-cumulative with a fixed dividend.  I think the middle is most likely, but either one would do.  Cumulative with a fixed dividend (say, 10%) doesn't help that much but they could still there through exchange offers + earnings retention + new slug of pfd if the cumulative srs were deemed repayable at par.  And who knows, maybe we get lucky with lawsuits.

 

 

Yes. Forward looking as in fool me once, shame on you. Fool me twice, shame on me. Forward looking says to not the gov't fool you again to steal your capital with impunity.

[WB_fan82]

I bet a whole lot of holders bought the stock post the 2012 "theft".  Every single person who did is forward looking...  The simple reality is that can only happen in c-ship.  And given the capital these guys will have, they aren't going back anytime soon.

 

The far bigger risk and restraint on external capital is political/legislative uncertainty.

[TwoCitiesCapital]

I bet a whole lot of holders bought the stock post the 2012 "theft".  Every single person who did is forward looking...  The simple reality is that can only happen in c-ship.  And given the capital these guys will have, they aren't going back anytime soon.

 

The far bigger risk and restraint on external capital is political/legislative uncertainty.

 

They bought it with the expectation rule of law would be upheld in the court cases. You take that away with a negative ruling, or no ruling, and NOBODY will be buying with that hope again and everyone of us who bought with that hope will be sellers.

 

And anyone who bought after the theft, bought securities that reflected the risk of the theft and the rights to any potential recoveries at severe discounts.

 

It's the people who held the securities when that decision was made that really got f*cked. And there will be an even more severe discount if you remove that hope - a discount that approaches $0 for new investment.

 

[orthopa]

"Meanwhile, Maxine Waters is Chairwoman of the House Committee on Financial Services, and sorry to say, yes she can do something, and she will probably have something to do with this. Your comments about her are erroneous and therefore unhelpful."

 

Can you please provide some hypothetical examples of precisely what she can do under an optimistic PSPA amendment unwinding the senior preferred & releasing the GSEs subject to pre-defined capital levels dictated by a consent decree?

 

We have ten days left. I do not accept your hypothetical that an "optimistic PSPA amendment unwinding the senior preferred... consent decree" will appear before January 20. The key is that both Treasury and FHFA must officially reach an agreement, which has not occurred yet. On the 20th a new Secretary will be installed. So, in that case, no agreement at least for a while. Then the alternatives are (1) They remain in conservatorship, etc., forever; (2) A new agreement between FHFA and Treasury will be reached; or (3) Congress settles this with a new law. Waters will have a lot to do with (3) and perhaps (2).

 

If your hypothesis is correct (fat chance on reaching an official agreement after the 20th), then they will probably exit conservatorship, and Waters would ideally only be able to hold hearings. Even in that increasingly unlikely instance, however, remember what the greatest philosopher of the 20th century said: "It's not over 'til it's all over."

 

I predict that you and Orthopa will be feasting on crow after the Inauguration. However, I remain never in doubt and often wrong. I am rooting for you both to be enjoying a better meal at that time. It's about money, and not about winning an argument.

 

In direct reference to his reasonable question you could have saved everyones time reading if you just typed "nothing".

[orthopa]

 

Regarding this if it was PSPA "lite" no reason to have bankers involved. Bankers were not involved for other letter agreements. What is going to happen if both Bankers and DOJ maybe signing off? Something much more that needs to be legally parsed.

 

Regarding "not everything" plantiffs wanted end of NWS PLUS overpayments since NWS is legal. Mnuchin could write down Srs and punt to SCOTUS to decide on any damages or whether NWS was illegal and what that implies. This correlates nicely with his "easier if SCOTUS rules for Gov, more litigation if not." If SCOTUS decides for GOV case is done over and if FnF on Consent Decree and Sr Preferred not blocking a path to 3rd party capital then you can go to market.

 

Mnuchins comment regarding  "easier if SCOTUS rules for Gov, more litigation if not." implies FnF are ready to raise 3rd party capital at the ruling by SCOTUS. How can they raise 3rd party capital if SCOTUS rules for gov but FnF not on CD and Srs treated in a way not a road block to 3rd Party capital. I believe FnF can raise capital even if NWS deemed legal by SCOTUS at the right price very cheap) but no way if Srs in place and not out of convservatorship on CD. I wonder if an AIG type ruling where the gov was found wrong but no monetary damages are possible. Who knows at this point.

[Arski]

So I'm relatively new here and don't want to read 16xx pages to understand this discussion but am still very curious. Maybe someone could summarize what has been going on or refer to some important posts.

Thanks!

[Sunrider]

So I'm relatively new here and don't want to read 16xx pages to understand this discussion but am still very curious. Maybe someone could summarize what has been going on or refer to some important posts.

Thanks!

 

- Government amended a perfectly normal agreement that bailed out the GSEs during the GFC to sweep all profits the companies are making and part of their net worth to the Treasury.

- It did this knowing (as court evidence shows) that the companies were about to be very profitable again.

- In doing so, it did not pay anything to shareholders (whether common or preferred), thus it effectively expropriated without compensation.

- The court cases take various angles to fight this expropriation, and aim to reverse that bailout amendment (the net worth sweep).

- Steve Mnuchin, shortly after being appointed, went on tv and said that the GSE should not be government owned, need to have private capital in them, etc. So the second angle is that he will do the right things before the new team comes in to get that on the road - what 'the right things' is, is open to debate on these boards.

- Most people here are invested in the pref shares, which offer somewhere around 3 - 4x upside to par if the above works out as people (me included) hope.

 

[investorG]

So I'm relatively new here and don't want to read 16xx pages to understand this discussion but am still very curious. Maybe someone could summarize what has been going on or refer to some important posts.

Thanks!

 

The Trump admin has for 99.5% of its time continued a disgusting policy from Obama 2012 of blatantly stealing from tens of thousands of U.S. citizens via two private companies and now we're pathetically waiting during the last week to see if they right the wrong by stopping the Net Worth Sweep and writing down their senior preferred investment to reflect the fact that the taxpayer has already made well over $100bn in net profits on their initial 2008 investment with more to potentially come from warrants of 80% of the companies' common equity.

[orthopa]

Ive added about 20% across the board to FNMAS, FMCCL, FNMAH today.

 

*salutes*

 

These seems to undoubtedly be the right move at these prices. Just to review as its easy to let the market guide you not serve you on slow news days.

 

A quick review of recent history reported regarding Mnuchin.

 

https://www.wsj.com/articles/fannie-freddie-overseer-seeks-to-end-federal-control-before-trump-leaves-11605873600?mod=article_inline

 

"The Treasury secretary must agree to any move to alter the terms of either the companies’ bailout agreement or the government’s stakes. One person familiar with the effort said Mr. Mnuchin is supportive of locking in a path to private ownership but mindful of steps that could disrupt the housing-finance market."

 

"Mr. Calabria has met twice recently with Mr. Mnuchin to discuss an expedited exit of the companies from government control, most recently the week of Nov. 9, according to people familiar with the meetings, which also involved Larry Kudlow, the director of the White House’s National Economic Council. Mr. Mnuchin was noncommittal about the push, the people said."

 

https://www.bloomberg.com/news/articles/2020-12-10/mnuchin-says-he-s-likely-to-back-changes-to-fannie-and-freddie

 

Speaking to reporters on Wednesday, Mnuchin said he supports amending the companies’ bailout agreements “to set them on the right direction.” Revamping the accords, established after the government took control of Fannie and Freddie at the height of the 2008 financial crisis, is crucial to releasing them from U.S. control.

 

Federal Housing Finance Agency Director Mark Calabria, Fannie and Freddie’s regulator, has recently pushed for a sweeping amendment that would set them on an irreversible path to leave conservatorship, according to people familiar with the matter.

 

“We’re going to create a blueprint,” said Mnuchin, adding that he had spoken to both Republicans and Democrats in the past few weeks.

 

 

 

At a minimum we have weak hands leaving with the recent rumors of Mnuchin leaving and I believe the market pricing in a "lite" 4th PSPA that does not eliminate the Sr Preferred but only raises the retained earnings cap. This certainly would hamstring Calabria and certainly does not set them on a path anymore then they are now.  Those who have followed along know the unlikelihood of locking in a path to private ownership as Mnuchin says with the Sr. Preferred still in place.

 

So we wait. Only 9 business days left for the crystallization event to occur.

 

From the best we can gather a decision is coming soon up for debate good or bad for shareholders. Piecing together what we have heard from Mnuchin (paraphrased) along with other quotes, what does this mean to everyone?

 

1. If treasury wins, easier, if plantiffs win more litigation.

2. The key is getting them to raise third party capital, how do we do that.

3. Plan will be broad and plantiffs will not get everything they are asking for.

4. We are going to create a blueprint.

5. Supportive of locking in a path to private ownership

6. "Will set them in the right direction"

7. Mindful of the steps that disrupt the housing market.

 

I dont know you get to 2. and 5. without dealing with the Sr preferred either written down or into a subordinate position and a consent decree. There have been some ideas here but certainly not the most straightforward and seems to complicate things, vs just writing down the Sr. preferred as Phillips suggests.

 

I think 4. are recommendations for the government for an explicit paid for guarantee and changes only congress can make via the Treasury plan for actions taken by congress or legislative.

 

What are plantiffs not going to get in 3.? They could still get a Sr Preferred right down and give up other requests in Collins correct?

 

I think 7. is covered by an explicit paid for guaranteed fee until congress legislates. This is essentially how FnF are operating now and more capital can only make MBS for safe.

 

Just wanted to see how everyone here meshes all this together in an action that hits everything he has hinted or talked about.

[locutusoftexas]

In direct reference to his reasonable question you could have saved everyones time reading if you just typed "nothing".

 

My answer was that the question was unreasonable, being based on an apparently self-evident hypothetical. Therefore his question did in fact waste everyone's time. If one asks a question that attempts to answer itself, then it is just being snarky, true to his moniker. As I continue to say, there are in fact two other possibilities besides his game over scenario: (1) Ample evidence indicates that Mnuchin will do nothing so that Snarky's hypothetical has no practical significance. (2) In addition, as we know, new legislation and in fact the upcoming supreme court decision on the ability of Biden to fire Calabria can result in reversal of  the consent decree. Once again, Waters would be involved.