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

[beaufort]

I am underwhelmed and still digesting, but it could be worse. 

 

The litigation now screams for a settlement and JPS holders are incentivized to settle very quickly.  If plaintiffs want everything, we'll be waiting a decade.   

 

If we get what we want with SCOTUS NWS held to be illegal, with accounting remedy of liquidation preference deemed paid down, we get a long way to exiting.  The warrants still need to be exercised and that requires Yellen.  Expiration I recall is in 2028, but I don't recall exactly.   

 

If not clean SCOTUS victory re NWS with pay down, or if remand to trial level for fact finding, negotiation with Yellen will be required, and JPS holders have less leverage and may have to settle for less than the totality of the past sweep payments written down.  Overage over the SPS liquidation preference should be given up by litigants to get this done and my guess is that will not be a problem.   

 

Consent decree 'lite' s. 5.3(b)

 

Then Calabria has the right to push them out unilaterally if they meet the conditions agreed to in this letter agreement:  3% of CET1 assets, and no outstanding litigation.  The amendment to s.5.3 is very significant.

 

No more periodic commitment fee arguments for the past. 

 

There is a path out.  And the incentives are to get out very quickly. 

 

 

 

[WB_fan82]

He doesn't really have the right to get them out unilaterally.  It's a fig leaf.

 

That is b/c to exit, even with a Collins win, they need to raise equity.  They can't raise equity under this new PSPA until the warrant is exercised (and they are past the litigation date).  You need TSY to cooperate for both of those things.

 

So TSY still has an implicit veto right over exiting, as far as I can tell.

 

And forget all about settlements.  The optics of bailing out hedge funds are absolutely not going to work for Democrats.  Even if somehow that wasn't an issue, there are so many cases.  And only $5B litigation bucket.  I'm not sure how many even fit into that bucket, but probably not many.

[investorG]

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.

 

I'm not sure if calabria's numerator is core capital or book capital for his required levels.  but if you're right and it's core then yes Tsy would have to flip it to non-cumulative which at the time of settlement / restructuring should be fine to yellen assuming that she really wants to get them moving towards privatization.  the bigger road block for her would be how much sr pref to forgive if necessary.

[WB_fan82]

Sorry to be debbie downer, but I don't think that's correct either.  All of these things are defined in the capital rule.

 

Getting sr pfd to non-cumulative doesn't improve common equity.  They still aren't counted.  It would improve tier 1 capital by being non-cum, but the exit test is CET-1 capital.  Only common equity, sadly.

 

Calabria has some authority to deem things differently on the capital front, but sadly this latest PSPA even stops that b/c it explicitly states the sr pfd cannot count as common equity! 

 

Mnuchin blocked all the ways I can see that Calabria might move things along unilaterally.  I try not to hate on people, but I'm going to allow it this time.  What a mofo.

[investorG]

Sorry to be debbie downer, but I don't think that's correct either.  All of these things are defined in the capital rule.

 

Getting sr pfd to non-cumulative doesn't improve common equity.  They still aren't counted.  It would improve tier 1 capital by being non-cum, but the exit test is CET-1 capital.  Only common equity, sadly.

 

Calabria has some authority to deem things differently on the capital front, but sadly this latest PSPA even stops that b/c it explicitly states the sr pfd cannot count as common equity! 

 

Mnuchin blocked all the ways I can see that Calabria might move things along unilaterally.  I try not to hate on people, but I'm going to allow it this time.  What a mofo.

 

it wouldn't get counted if it moves to non cumulative but it would stop being negatively counted. it goes to a wash and so snarky's original view of 60bn of retained capital plus 140bn of raised = 200bn which is the threshold needed.

[WB_fan82]

I encourage you to read the capital rule.  It's a simple formula.  Making the sr pfd non-cumulative does not change any of the parameters of the formula.

[beaufort]

He doesn't really have the right to get them out unilaterally.  It's a fig leaf.

 

That is b/c to exit, even with a Collins win, they need to raise equity.  They can't raise equity under this new PSPA until the warrant is exercised (and they are past the litigation date).  You need TSY to cooperate for both of those things.

 

So TSY still has an implicit veto right over exiting, as far as I can tell.

 

And forget all about settlements.  The optics of bailing out hedge funds are absolutely not going to work for Democrats.  Even if somehow that wasn't an issue, there are so many cases.  And only $5B litigation bucket.  I'm not sure how many even fit into that bucket, but probably not many.

 

Yeah the warrant issue is a problem.  Litigation can be resolved by winning at SCOTUS if it's the one I referenced and abandoning the other lawsuits with prejudice.  That leaves the warrant to cooperate on. 

Most of the cases are deep pocketed investors who will want to get these done. 

 

We were sold out and Mnuchin has been running the clock for a long time. 

[investorG]

I encourage you to read the capital rule.  It's a simple formula.  Making the sr pfd non-cumulative does not change any of the parameters of the formula.

 

ok. so it needs to go away or get converted to common.  or a combo of both.

[investorG]

He doesn't really have the right to get them out unilaterally.  It's a fig leaf.

 

That is b/c to exit, even with a Collins win, they need to raise equity.  They can't raise equity under this new PSPA until the warrant is exercised (and they are past the litigation date).  You need TSY to cooperate for both of those things.

 

So TSY still has an implicit veto right over exiting, as far as I can tell.

 

And forget all about settlements.  The optics of bailing out hedge funds are absolutely not going to work for Democrats.  Even if somehow that wasn't an issue, there are so many cases.  And only $5B litigation bucket.  I'm not sure how many even fit into that bucket, but probably not many.

 

Yes but Tsy might want to monetize their position at some point.  hopefully.  could be ~ $100bn left for them in some form that they can't access if they sit still.

[asterisk]

What are the reasons to stay in this investment? On a first look at what came out today there are a lot of roadblocks and we become dependent on two parties... treasury and JPS. Each with their own motivations. To me the whole the preferred shares could be worth $40 is dangerous. We currently have a FHFA who just got screwed by Mnuchin and was ready to make significant progress. We have less than 1/2 a year till we potentially have an unfriendly FHFA director.

[investorG]

What are the reasons to stay in this investment? On a first look at what came out today there are a lot of roadblocks and we become dependent on two parties... treasury and JPS. Each with their own motivations. To me the whole the preferred shares could be worth $40 is dangerous. We currently have a FHFA who just got screwed by Mnuchin and was ready to make significant progress. We have less than 1/2 a year till we potentially have an unfriendly FHFA director.

 

it's not a slam dunk and many will exit but the reasons would be a) the low price b) potential court victories and their impact on stock price even if still in conservatorship and c) Tsy might want to move the ball forward at some point for progress / collect their billions for pet projects.

[Guest cherzeca]

there are roadblocks set up here. but if we get a scotus win, then they can be dealt with. if not then not

[asterisk]

What are the reasons to stay in this investment? On a first look at what came out today there are a lot of roadblocks and we become dependent on two parties... treasury and JPS. Each with their own motivations. To me the whole the preferred shares could be worth $40 is dangerous. We currently have a FHFA who just got screwed by Mnuchin and was ready to make significant progress. We have less than 1/2 a year till we potentially have an unfriendly FHFA director.

 

it's not a slam dunk and many will exit but the reasons would be a) the low price b) potential court victories and their impact on stock price even if still in conservatorship and c) Tsy might want to move the ball forward at some point for progress / collect their billions for pet projects.

 

I have no intentions to exit my position. While Yellen/Biden were briefed on the LA, what's to say they don't decide to make another agreement?

[investorG]

What are the reasons to stay in this investment? On a first look at what came out today there are a lot of roadblocks and we become dependent on two parties... treasury and JPS. Each with their own motivations. To me the whole the preferred shares could be worth $40 is dangerous. We currently have a FHFA who just got screwed by Mnuchin and was ready to make significant progress. We have less than 1/2 a year till we potentially have an unfriendly FHFA director.

 

it's not a slam dunk and many will exit but the reasons would be a) the low price b) potential court victories and their impact on stock price even if still in conservatorship and c) Tsy might want to move the ball forward at some point for progress / collect their billions for pet projects.

 

I have no intentions to exit my position. While Yellen/Biden were briefed on the LA, what's to say they don't decide to make another agreement?

 

Yes this is possible, assuming the new fhfa head goes along.  So yellen's intentions matter and we don't know them.

[Midas79]

there are roadblocks set up here. but if we get a scotus win, then they can be dealt with. if not then not

 

What if Collins is settled? Does it depend on the settlement parameters?

 

And if the Collins plaintiffs drop the case and ask SCOTUS not to rule, in order to preserve Calabria in office (until Biden files a copycat suit but that adds at least a year to the timeline), would SCOTUS comply?

[investorG]

Nov 20:  wsj article saying calabria pushing for consent order

Dec 2:  Hearing where mnuchin says tsy 'contemplating' consent order

Dec 9:  Supreme court hearing

Dec 15: WSJ saying no to consent decree, but Light at bberg says some chance sr pref written down.

Jan 14: Letter agreement

 

anyone have guesses on if the SC hearing impacted mnuchin's decision to not go for consent order during the first 2 weeks of dec? 

 

Given how hostile the deal is and the important role played by lawsuit settlement in letter agreement I also wonder if settlement negotiations went on during mid-dec to yday that pissed off mnuchin (i.e. our plaintiffs shot for the moon).

[investorG]

gasparino on monday reported that since the letter agreements don't address what the shareholders wanted, that preferred shareholders were asking for a "negotiated settlement as part of their lawsuit."

 

do we still have a chance for 5 days of that settlement or did that ship sail between jan 11 and jan 14?

 

edit:  guessing out loud here but we could settle lamberth for an immediate swap of jr pref to common at a discount to par.   

 

or we could settle various cases if Tsy sends over 20bn of cash to FnF (in return for more sr pref) which is used to buy out Jr pref @ 60pct of par.  capital neutral overall and positive to common equity levels bc retained earnings would go up by the 40% of value of par that was surrendered.

[Spekulatius]

Is there any difference between FNMAS and FNMAT other than higher liquidity for FNMAS?

[Luke 532]

Is there any difference between FNMAS and FNMAT other than higher liquidity for FNMAS?

 

No.  Much better bang for your buck on FNMAT.

[COBFInfinity]

Unreal. Pre-market bid/ask imply that commons will be down slightly while preferreds get hammered again. A lot of people must have read a different agreement than I did last night.

[Sunrider]

Is there any difference between FNMAS and FNMAT other than higher liquidity for FNMAS?

Slightly higher ration FNMAT, if memory serves, 8.25? vs. 7.5?

[SnarkyPuppy]

Unreal. Pre-market bid/ask imply that commons will be down slightly while preferreds get hammered again. A lot of people must have read a different agreement than I did last night.

 

I cannot understand Ackman not plowing out here

[Gregmal]

Not to sound like a dipshit, but you guys should know by now that these trade like molasses. Good news bleeds up and bad news bleeds down, and Ive never really seen the entirety of this play out at the open or even by noon after an "announcement". Typically days or weeks.

 

My NGAF read is that this is reasonably positive for the preferreds and not so great for common. But I have no clue otherwise as this is just a never-ending drama. See you in court as they say.

 

I'd probably lean towards marginally adding here.

[SnarkyPuppy]

Not to sound like a dipshit, but you guys should know by now that these trade like molasses. Good news bleeds up and bad news bleeds down, and Ive never really seen the entirety of this play out at the open or even by noon after an "announcement". Typically days or weeks.

 

My NGAF read is that this is reasonably positive for the preferreds and not so great for common. But I have no clue otherwise as this is just a never-ending drama. See you in court as they say.

 

I'd probably lean towards marginally adding here.

 

My favorite dipshits are those who enter threads to tell people who are having a bad day that about their prescient forecast, after the forecasted event occurs.  Yikes. 

[Gregmal]

Yea well thats the beauty of the market and people who get emotional about investing.