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

[investorG]

Does that seem right to everyone else?

 

Yes, good job summarizing it.  I agree.  Wonder where prefs trade tomorrow?  Being dependent on a Biden Administration (Yellen) is awful.

 

JP are dependent on not to be trusted Ds only if scotus doesn't come through. friends, this has always been a legal special situation

 

so basically SC rules on collins in June and that gives Yellen and plaintiffs 3 months after to settle before the Sep30 deadline to congress?  if we win remand then we have some leverage and if we lose then we have just sweeney and lamberth minor leverage?

[Guest cherzeca]

if I were Calabria, I would file with scotus tomorrow saying that the 5thC en banc APA claim ruling should be upheld.  lets see how independent he is...knowing there is no chance he doesn't get canned immediately after scotus ruling on const claim

[Guest cherzeca]

Does that seem right to everyone else?

 

Yes, good job summarizing it.  I agree.  Wonder where prefs trade tomorrow?  Being dependent on a Biden Administration (Yellen) is awful.

 

JP are dependent on not to be trusted Ds only if scotus doesn't come through. friends, this has always been a legal special situation

 

so basically SC rules on collins in June and that gives Yellen and plaintiffs 3 months after to settle before the Sep30 deadline to congress?  if we win remand then we have some leverage and if we lose then we have just sweeney and lamberth minor leverage?

 

i dont follow your reasoning. if scotus gives P a win then that effectively eliminates SP (either right away on const claim or after SJ on APA claim).  congress can do what it wants, but if you are a JP, your laser focus is on scotus.  congress can always act....or not like the past decade

[COBFInfinity]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

[investorG]

Does that seem right to everyone else?

 

Yes, good job summarizing it.  I agree.  Wonder where prefs trade tomorrow?  Being dependent on a Biden Administration (Yellen) is awful.

 

JP are dependent on not to be trusted Ds only if scotus doesn't come through. friends, this has always been a legal special situation

 

so basically SC rules on collins in June and that gives Yellen and plaintiffs 3 months after to settle before the Sep30 deadline to congress?  if we win remand then we have some leverage and if we lose then we have just sweeney and lamberth minor leverage?

 

i dont follow your reasoning. if scotus gives P a win then that effectively eliminates SP (either right away on const claim or after SJ on APA claim).  congress can do what it wants, but if you are a JP, your laser focus is on scotus.  congress can always act....or not like the past decade

 

A report is due to congress by sep30 on how they are thinking about restructuring tsy's investment.  I assume we won't win constitutional collins and APA remand would take well more than 3 months to resolve.  also the bankers would be itching to do 70bn dollar deals which can't happen until legal resolved (which is many years probably for lamberth).  so after the SC ruling in june and before the sep30 deadline (see tsy blueprint release), that would be a window to settle the legal cases (in return for a potential adjustment in sr pref) with us having various levels of leverage depending on how collins is ruled.

[investorG]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

You'd have to assume Yellen is eager to get on with this process to take this view imo (or be super confident on collins constitutional which i'm not).  bc she could stall for years if she wanted, although the bankers would likely be pushing for her to settle so they can raise big $$ and collect fees.

[Guest cherzeca]

scotus should rule by April. I have said June previously when I expected the argument in February. scotus fast tracked the argument to December.

 

assume Calabria is replaced in may. Yellen's T and fhfa under wachner/zandi will be writing a report about T's investment, and then scotus eviscerates that investment. wachner/zandi will likely realize that you cant raise money in conservatorship such that this agreement's 3% requirement capital before C release is unachievable.

 

if scotus rules adverse to Ps, then this agreement makes a GSE investment look like dreck. if scotus finds in favor of Ps, then much of this agreement is a never mind.

 

 

[Guest cherzeca]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

I dont like negotiating from a position of weakness resulting from the agreement (as opposed to the litigation merits, which I think is a position of strength).  I hope Ps agree.

[COBFInfinity]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

You'd have to assume Yellen is eager to get on with this process to take this view imo (or be super confident on collins constitutional which i'm not).  bc she could stall for years if she wanted, although the bankers would likely be pushing for her to settle so they can raise big $$ and collect fees.

 

I did a simple balance sheet analysis a few weeks back that no one commented on, but it broke me out of my inertial thinking that started in 2014, which was: "We have to win the lawsuits and get paid the overage." But when it became clear that Mnuchin was not going to settle, I had to rethink what may happen. And when I did, I understood the dynamic clearly for the first time that since writing down the Sr Pfd mostly accrues to the Tsy-owned warrants anyway, what matters much more to preferred shareholders is that the NWS ends and that there is a method to pay down Sr Pfd. Any writedown of the Sr Pfd is cake, of course, but much of the benefit moves from one pocket of Tsy to the other pocket. Common shareholders are hurt badly without a writedown of Sr Pfd, but that's the reason most of us here are only or mostly in preferred. So if you are a big preferred holder plaintiff like Berkowitz, who has been in the trade for 6-7 years with little to show for it, are you willing to sacrifice a potential big legal win that is years away and only changes the timing of your upside to par, but not the magnitude, in order to get a recap done ASAP? I think Berko says, "Hell, yeah!"

[investorG]

scotus should rule by April. I have said June previously when I expected the argument in February. scotus fast tracked the argument to December.

 

assume Calabria is replaced in may. Yellen's T and fhfa under wachner/zandi will be writing a report about T's investment, and then scotus eviscerates that investment. wachner/zandi will likely realize that you cant raise money in conservatorship such that this agreement's 3% requirement capital before C release is unachievable.

 

if scotus rules adverse to Ps, then this agreement makes a GSE investment look like dreck. if scotus finds in favor of Ps, then much of this agreement is a never mind.

 

but if we get a remand and yellen / zandi want to wait 18 months for that to be resolved / appealed etc. then they can. the sep 30 report can have fluff, more recommendations than actions.  if for instance plaintiffs asked for the moon in a settlement.  we are incentivized to settle ASAP, along with the investment bankers.  we have some leverage if collins goes well and vice versa.  the stakes on collins are even higher now.  if yellen wants to stall then at least we'd stall at a higher price level if collins goes well.

[investorG]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

You'd have to assume Yellen is eager to get on with this process to take this view imo (or be super confident on collins constitutional which i'm not).  bc she could stall for years if she wanted, although the bankers would likely be pushing for her to settle so they can raise big $$ and collect fees.

 

I did a simple balance sheet analysis a few weeks back that no one commented on, but it broke me out of my inertial thinking that started in 2014, which was: "We have to win the lawsuits and get paid the overage." But when it became clear that Mnuchin was not going to settle, I had to rethink what may happen. And when I did, I understood the dynamic clearly for the first time that since writing down the Sr Pfd mostly accrues to the Tsy-owned warrants anyway, what matters much more to preferred shareholders is that the NWS ends and that there is a method to pay down Sr Pfd. Any writedown of the Sr Pfd is cake, of course, but much of the benefit moves from one pocket of Tsy to the other pocket. Common shareholders are hurt badly without a writedown of Sr Pfd, but that's the reason most of us here are only or mostly in preferred. So if you are a big preferred holder plaintiff like Berkowitz, who has been in the trade for 6-7 years with little to show for it, are you willing to sacrifice a potential big legal win that is years away and only changes the timing of your upside to par, but not the magnitude, in order to get a recap done ASAP? I think Berko says, "Hell, yeah!"

 

it depends on what yellen offers -- i agree we are incentivized to settle but only if it's not for peanuts relative to our legal prospects at the time.

[COBFInfinity]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

I dont like negotiating from a position of weakness resulting from the agreement (as opposed to the litigation merits, which I think is a position of strength).  I hope Ps agree.

 

See my post right after yours and also consider that, compared to Tsy, plaintiffs will now always be in a position of weakness because a) we want a recap way more than Janet Yellen does and b) playing out the case for several more years will cost a lot in increased liquidation preference and dividends. If your upside is limited to par value and the value of the lawsuit will not accrue to you anyway, why would you keep fighting?

[Guest cherzeca]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

You'd have to assume Yellen is eager to get on with this process to take this view imo (or be super confident on collins constitutional which i'm not).  bc she could stall for years if she wanted, although the bankers would likely be pushing for her to settle so they can raise big $$ and collect fees.

 

I did a simple balance sheet analysis a few weeks back that no one commented on, but it broke me out of my inertial thinking that started in 2014, which was: "We have to win the lawsuits and get paid the overage." But when it became clear that Mnuchin was not going to settle, I had to rethink what may happen. And when I did, I understood the dynamic clearly for the first time that since writing down the Sr Pfd mostly accrues to the Tsy-owned warrants anyway, what matters much more to preferred shareholders is that the NWS ends and that there is a method to pay down Sr Pfd. Any writedown of the Sr Pfd is cake, of course, but much of the benefit moves from one pocket of Tsy to the other pocket. Common shareholders are hurt badly without a writedown of Sr Pfd, but that's the reason most of us here are only or mostly in preferred. So if you are a big preferred holder plaintiff like Berkowitz, who has been in the trade for 6-7 years with little to show for it, are you willing to sacrifice a potential big legal win that is years away and only changes the timing of your upside to par, but not the magnitude, in order to get a recap done ASAP? I think Berko says, "Hell, yeah!"

 

I mostly agree with this, which is why the JP was always the best place in cap structure to invest imo.  of course, the IRR time clock is ticking away, and the longer we wait the more adversity may be visited upon us...

[investorG]

Preferred +30%.

 

That's awfully optimistic given Senior Prefs remain and liquidation pref keeps increasing.  I think it would be a pleasant surprise if we're not red.

 

The only thing I know for sure is that there will be massive volume and volatility in both the common and preferred. And while I have close to 0% success predicting security price movements, I actually wouldn't be surprised if the preferred does even better than +30%. Because here is what Mnuchin's punitive blueprint provides for options right now*: Fast Recap or No Recap. So given those two choices, Fast Recap is the one that preferred investor plaintiffs and the companies will choose.  I think a settlement occurs before SCOTUS ruling and then capital raise begins.

 

*Based on the assumption that SCOTUS ruling is uncertain. Some, of course, think it's a lock, but we've been disappointed too many times for me to take that view.

 

I dont like negotiating from a position of weakness resulting from the agreement (as opposed to the litigation merits, which I think is a position of strength).  I hope Ps agree.

 

See my post right after yours and also consider that, compared to Tsy, plaintiffs will now always be in a position of weakness because a) we want a recap way more than Janet Yellen does and b) playing out the case for several more years will cost a lot in increased liquidation preference and dividends. If your upside is limited to par value and the value of the lawsuit will not accrue to you anyway, why would you keep fighting?

 

a) lamberth - berkowitz might hold out for that if yellen's offer is weak. could get $40.

b) its a race to conversion or dividend resumption for the jr pref -- the sooner the sr pref goes away the sooner the latter (and perhaps the former) occurs.

[investorG]

it would have been relevant for yellen to signal her approval of this deal since calabria will likely be gone later this year and in theory this arrangement isn't fully binding on yellen / zandi perhaps in july.

[COBFInfinity]

a) lamberth - berkowitz might hold out for that if yellen's offer is weak. could get $40.

b) its a race to conversion or dividend resumption for the jr pref -- the sooner the sr pref goes away the sooner the latter (and perhaps the former) occurs.

 

Do you really have confidence that any lawsuit will deliver a big win? I was as gung ho as anyone back in 2014, thinking that Lamberth's first decision was such an obvious mistake. But even the likes of Sweeney, who seemed to be sympathetic for a few years, ultimately implied that she was on Lamberth's side, even after much more evidence of the dirty dealing was revealed. So while there might be temptation to hit it big, my confidence is pretty low that it will ever happen. And preferred is already priced for 400% upside - if you can get that fast, it seems like you should take it. I obviously have no clue what plaintiffs will do or when, but I expect must of them will take a solid victory in share price and sacrifice potential damages in the courts.

[COBFInfinity]

it would have been relevant for yellen to signal her approval of this deal since calabria will likely be gone later this year and in theory this arrangement isn't fully binding on yellen / zandi perhaps in july.

 

Exactly why plaintiffs should look to settle before SCOTUS ruling, because if Calabria is shown the door, we may get screwed.

[SnarkyPuppy]

If I understand correctly, it seems in the plaintiffs best interest to settle as there is a clear path to junior preferreds receiving par value in 2 to 3 years.  The big assumption of course is Yellen's appetite for settling. 

 

Are there any inaccuracies in the below?

 

$35bn = retained equity capital 9/30/2020

$198bn = 3% of assets 9/30/2020 (required for exit from conservatorship)

$228.8bn = current liquidation preference 9/30/2020

 

Assume $30bn of incremental retained equity capital via earnings through 9/30/2021. 

= $65bn = retained equity capital 9/30/2021  (=$35bn+$30bn)

= $258.8bn = liquidation preference 9/30/2021 (=$228.8bn+$30bn)

 

The GSEs are *each* allowed to raise $70bn under two conditions:

- settlement of all litigation with > $5bn at stake

- UST exercises its warrants (which would occur concurrently with settlement)

 

Assume $140bn capital is raised on 10/1/2021.

= $205bn = retained equity capital 10/1/2021  (=$65bn + $140bn)

= $258.8bn = liquidation preference 10/1/2021 (*pretty confident that the equity raises would not increase the liquidation preference but would appreciate challenges)

 

At this point, the GSEs will have achieved the required 3% of assets milestone which, aside from resolution of all material litigation, is the key milestone required to exit conservatorship. 

 

If the capital structure at this point remains as is (it wont), you're looking at the senior pref dividend of $26bn against ~$30bn net income which should cover dividends for the $33bn junior pref.  Of course, additional common equity can be raised to further reduce the senior preferred position. 

 

[investorG]

mnuchin really went heavy on us.  I can't comprehend his level of greed and I hope the SC is watching and is savvy enough to observe and react appropriately such that all sides can win. 

[investorG]

If I understand correctly, it seems in the plaintiffs best interest to settle as there is a clear path to junior preferreds receiving par value in 2 to 3 years.  The big assumption of course is Yellen's appetite for settling. 

 

Are there any inaccuracies in the below?

 

$35bn = retained equity capital 9/30/2020

$198bn = 3% of assets 9/30/2020 (required for exit from conservatorship)

$228.8bn = current liquidation preference 9/30/2020

 

Assume $30bn of incremental retained equity capital via earnings through 9/30/2021. 

= $65bn = retained equity capital 9/30/2021  (=$35bn+$30bn)

= $258.8bn = liquidation preference 9/30/2021 (=$228.8bn+$30bn)

 

The GSEs are *each* allowed to raise $70bn under two conditions:

- settlement of all litigation with > $5bn at stake

- UST exercises its warrants (which would occur concurrently with settlement)

 

Assume $140bn capital is raised on 10/1/2021.

= $205bn = retained equity capital 10/1/2021  (=$65bn + $140bn)

= $258.8bn = liquidation preference 10/1/2021 (*pretty confident that the equity raises would not increase the liquidation preference but would appreciate challenges)

 

At this point, the GSEs will have achieved the required 3% of assets milestone which, aside from resolution of all material litigation, is the key milestone required to exit conservatorship. 

 

If the capital structure at this point remains as is (it wont), you're looking at the senior pref dividend of $26bn against ~$30bn net income which should cover dividends for the $33bn junior pref.  Of course, additional common equity can be raised to further reduce the senior preferred position.

 

a) would need to settle lawsuits before can raise the $140bn in october -- which is up to yellen as you point out and isn't clear.

b) I dont think you can raise $140bn in october with the 260bn of sr pref on top of it -- that would also need to be reduced via yellen or SC thru collins.

[WB_fan82]

oh man this is a stinker.  Not just nws/cumulative but this new blockade of 3% CET-1 to exit, which is nearly the full capital requirement.  Both companies are deeply in the hole on a CET-1 basis, even assuming $70B of equity (even for FMCC!).

 

This just simplified things greatly.  The WSJ was correct.  There is no exit.  none, nada without Biden approval.  Mnuchin just made a consent order impossible. 

 

The good news is we know this thing got rammed down Calabria's throat.  No way he wanted any piece of it, except the one thing he felt he had to have at any price:  the permanent removal of the caps.  And the other thing that there is a path out w/o TSY approval, even if Mnuchin just put a huge boulder blocking that road.

 

That's good news insofar as he should be calling Yellen on the 22nd and asking for another go.  But this time he has more leverage b/c he already has the one thing he wanted.  He can trade something the D's would like such as G fee caps on affordable housing in return for flexibility on a consent order.

 

Still probably need TSY to exercise the warrant, but Biden isn't any stranger to exiting investments.  Obama had GM, AIG, and C under his watch.  If we win Collins, then no sr pfd restructuring.  If we lose Collins, then need a sr pfd conversion. 

 

All of this assumes no legislation, and I find it very interesting that the two R ranking dudes are calling tonight for working with Ds for housing reform.

 

It might take a year for the dust to settle, and I'm definitely disappointed, but I'm very optimistic about the long-term outcome here.

 

 

[WB_fan82]

Snarky, You (and apparently Tim howard too with his comment on it) seem to be missing that common equity is defined in the capital rule as a formula and one of those parameters is retained earnings.  This is a hugely negative account for both entities.

 

Unless I'm missing something, your math is about $200B off.

[investorG]

oh man this is a stinker.  Not just nws/cumulative but this new blockade of 3% CET-1 to exit, which is nearly the full capital requirement.  Both companies are deeply in the hole on a CET-1 basis, even assuming $70B of equity (even for FMCC!).

 

This just simplified things greatly.  The WSJ was correct.  There is no exit.  none, nada without Biden approval.  Mnuchin just made a consent order impossible. 

 

The good news is we know this thing got rammed down Calabria's throat.  No way he wanted any piece of it, except the one thing he felt he had to have at any price:  the permanent removal of the caps.  And the other thing that there is a path out w/o TSY approval, even if Mnuchin just put a huge boulder blocking that road.

 

That's good news insofar as he should be calling Yellen on the 22nd and asking for another go.  But this time he has more leverage b/c he already has the one thing he wanted.  He can trade something the D's would like such as G fee caps on affordable housing in return for flexibility on a consent order.

 

Still probably need TSY to exercise the warrant, but Biden isn't any stranger to exiting investments.  Obama had GM, AIG, and C under his watch.  If we win Collins, then no sr pfd restructuring.  If we lose Collins, then need a sr pfd conversion. 

 

All of this assumes no legislation, and I find it very interesting that the two R ranking dudes are calling tonight for working with Ds for housing reform.

 

It might take a year for the dust to settle, and I'm definitely disappointed, but I'm very optimistic about the long-term outcome here.

 

the math doesn't work without a Collins win or yellen sr pref write down.  the boulder is likely too big.

 

or i guess yellen and zandi could rip this up if she really doesn't support it.  seems like tim howard is banking on that.

[investorG]

Snarky, You (and apparently Tim howard too with his comment on it) seem to be missing that common equity is defined in the capital rule as a formula and one of those parameters is retained earnings.  This is a hugely negative account for both entities.

 

Unless I'm missing something, your math is about $200B off.

 

the math seems right but i don't think you can raise 140bn of equity with 265bn of sr pref on top even if its non-cumulative as you have suggested.

[WB_fan82]

How is the math right?

 

Take FNMA.  I calculate common equity at negative ~$130B at end of Q3.  He's looking at the $20 ish B of positive total shareholder equity, but that includes a $121B positive entry for the sr pfd which is explicitly not counted as common equity.  The PSPA even restated that for the avoidance of doubt, lol.

 

I would love to be wrong on this, but I don't think I am.