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


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Guest cherzeca

The SC issued an opinion today regarding judicial review (https://www.scotusblog.com/2021/02/divided-court-favors-judicial-review-of-agency-decision-on-railroad-worker-benefits/).

 

Curious to hear ROLG's thoughts on any tea leaves that could be read through this to Collins. If i'm correct, JR was a tactic used by the government in it's defense.

 

I just read the link, not the opinion, and this is an interesting case...not the least because most of those favoring judicial review in this majority are justices that I would expect to side with govt in collins re anti-injunction clause.  these cases for statutory interpretation often are decided based upon the precise language of the statute, which is usually different from case to case and statute to statute. but yes you can take this case as indicating a judicial slant in favor of judicial review...and indeed the justices who were in dissent argued that there was another statute that limited review, not that the statute in question didnt support it.  so directly readable to collins? no.  but better than a poke in the eye with a sharp stick

 

collins is interesting since while the justices might recoil at the notion that govt can siphon off >$100B and not have its action subject to judicial review, while at the same time considering granting a remedy in that amount constitutes a tough swallow. 

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FYI Tim and Michael, and by extension the rest of us, have been asked not to share that link on Twitter.

 

It was certainly an excellent interview and well worth listening to for any current or prospective FnF investor.

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The SC issued an opinion today regarding judicial review (https://www.scotusblog.com/2021/02/divided-court-favors-judicial-review-of-agency-decision-on-railroad-worker-benefits/).

 

Curious to hear ROLG's thoughts on any tea leaves that could be read through this to Collins. If i'm correct, JR was a tactic used by the government in it's defense.

 

I just read the link, not the opinion, and this is an interesting case...not the least because most of those favoring judicial review in this majority are justices that I would expect to side with govt in collins re anti-injunction clause.  these cases for statutory interpretation often are decided based upon the precise language of the statute, which is usually different from case to case and statute to statute. but yes you can take this case as indicating a judicial slant in favor of judicial review...and indeed the justices who were in dissent argued that there was another statute that limited review, not that the statute in question didnt support it.  so directly readable to collins? no.  but better than a poke in the eye with a sharp stick

 

collins is interesting since while the justices might recoil at the notion that govt can siphon off >$100B and not have its action subject to judicial review, while at the same time considering granting a remedy in that amount constitutes a tough swallow.

 

I also found it interesting that the judges who were in favor of JR were on the 'left' side of the bench. Agree that it's quite different than our case, but happy to see more JR in general.

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The common dilution could be far less than expected if a) we win Collins in 1-2 years  b) the housing market doesn't crumble  c) the Biden admin takes a 4 year view to craft their solution / release and/or d) the capital buffers are reduced in a transition to utility.

 

A lot of "ifs" in the above but the dilution could in theory end with the 80% warrants and slightly also from jr pref conversion (perhaps at a far higher price reducing the new shares issued).

 

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“US Federal Government debt.

 

2000: $5.6 trillion

 

2005: $7.9 trillion

 

2010: $13.5 trillion

 

2015: $18.1 trillion

 

Now: $27.9 trillion

 

Debt has reduced a bit from stealing from GSE’s though.

 

Watch what happens next. The debt swells to 35 trillion, with bitcoin to 500,000 from 40,000, Tesla to P/E of 4000 from 1700 , everyone’s student debt paid off, $5000 per family stimulus that flows to stock market and none of us have to go back to work anymore with commercial properties plunging and landlords for residential filing for bankruptcy as no one pays rent for another 5 years. We are in lalaland. Hope everyone is enjoying the loot from GSE’s and pay 7-8% to buy/refinance their home to MBA members and big lobbyist”

 

I refinanced at 2 3/4% for my 30 year loan with a no/low cost refinance this year, so not sure what you are talking about. Only idiots believe they mortgages will get cheaper if FRE/FNM get privatized, imo.

 

Other than that, I agree with your concerns regarding debt.

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He seems to be quite gleeful about the current state of endless status-quo and its continuation.

Filled my cup with joy hearing of Parrott, Deese et al.

Supreme Court ruling will be interesting. We have gone from depending on the kindness of strangers to asking for mercy from looters...I think cherzeca you are correct when you say we are back to the legal thesis.

 

And in the longer term (2-3 years), weighing the TINA factor for GSEs and comparing the rate of expected return/risk premium in this investment to alternatives.

 

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He seems to be quite gleeful about the current state of endless status-quo and its continuation.

Filled my cup with joy hearing of Parrott, Deese et al.

Supreme Court ruling will be interesting. We have gone from depending on the kindness of strangers to asking for mercy from looters...I think cherzeca you are correct when you say we are back to the legal thesis.

 

And in the longer term (2-3 years), weighing the TINA factor for GSEs and comparing the rate of expected return/risk premium in this investment to alternatives.

 

In one of my earliest posts to this thread (in 2017) I said that the legal thesis was going to be the route to resolving the fates of Fannie and Freddie. I even provided a simple probability model for positive resolution based on the progress in courts as of that post. My basis for this assertion was simple human nature where money is involved -- especially when a policymaker is getting free money (e.g., NWS). I believe that a legislative path for resolution is possible, but the court cases must be resolved first. Even in the absence of the NWS, this could take a long time, so that the time value of money is a key factor in the potential status of the common and Jr Prefs as so-called value investments.

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@locutus

 

I'm with you on that. I've been posting here since 2018 and have been focused on the court cases the whole time.

 

At this point, given that the NWS is no longer flowing into Treasury, it's important to ask how our wonderful politicians can unlock further value out of these companies for themselves. The NWS was a pretty unusual mechanism of government grift. We should look to the conventional, usual mechanism which is lobbying, and thus how politicians will serve those interests.

 

A helpful resource is to look at where the lobbying dollars are coming from in various industries: the securities and investment industry (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2018&id=F07), commercial banks (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2020&id=F03), mortgage bankers (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F4600), and savings and loans (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F04).

 

Most of the lobbying groups that wanted the GSEs shuttered have moved to a more neutral position, now mainly asking for an explicit guarantee. SIFMA, the largest contributor in the securities and investment department published a white paper advocating for an explicit guarantees, found here (https://www.sifma.org/wp-content/uploads/2020/12/SIFMA-letter-to-Treasury-on-GSEs-2020-11-30-1.pdf). This group also includes parties such as Capital Group that have very much to gain since they are large shareholders of JPS and commons. Capital group gives 1.8 million a year alone. Of course the financial underwriters, also large lobbyists, have a lot to gain. And others such as CMLA are on these lists. Thus, many players now have a lot to gain and a lot to give, a good combo.

 

I think Michael Kao is correct with the idea of an "Indiana Jones switch". Treasury will want to get the GSEs out of conservatorship in a way that absolutely maximizes value for incoming shareholders (ie the lobbyists), so they will want to keep share prices down as much as possible until announcements are made. The only thing Treasury cannot firmly control is the SCOTUS decision and subsequent market reaction. But other than that, I think we will see a grand settlement announcement at the exact same time we see an announcement of massive new money commitment and terms that are made before the market has time to react.

 

Part of the above views are the believe that JPS are the fulcrum security and thus will do well, hence the massive buying opportunity that is present now.

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@locutus

 

I'm with you on that. I've been posting here since 2018 and have been focused on the court cases the whole time.

 

At this point, given that the NWS is no longer flowing into Treasury, it's important to ask how our wonderful politicians can unlock further value out of these companies for themselves. The NWS was a pretty unusual mechanism of government grift. We should look to the conventional, usual mechanism which is lobbying, and thus how politicians will serve those interests.

 

A helpful resource is to look at where the lobbying dollars are coming from in various industries: the securities and investment industry (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2018&id=F07), commercial banks (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2020&id=F03), mortgage bankers (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F4600), and savings and loans (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F04).

 

Most of the lobbying groups that wanted the GSEs shuttered have moved to a more neutral position, now mainly asking for an explicit guarantee. SIFMA, the largest contributor in the securities and investment department published a white paper advocating for an explicit guarantees, found here (https://www.sifma.org/wp-content/uploads/2020/12/SIFMA-letter-to-Treasury-on-GSEs-2020-11-30-1.pdf). This group also includes parties such as Capital Group that have very much to gain since they are large shareholders of JPS and commons. Capital group gives 1.8 million a year alone. Of course the financial underwriters, also large lobbyists, have a lot to gain. And others such as CMLA are on these lists. Thus, many players now have a lot to gain and a lot to give, a good combo.

 

I think Michael Kao is correct with the idea of an "Indiana Jones switch". Treasury will want to get the GSEs out of conservatorship in a way that absolutely maximizes value for incoming shareholders (ie the lobbyists), so they will want to keep share prices down as much as possible until announcements are made. The only thing Treasury cannot firmly control is the SCOTUS decision and subsequent market reaction. But other than that, I think we will see a grand settlement announcement at the exact same time we see an announcement of massive new money commitment and terms that are made before the market has time to react.

 

Part of the above views are the believe that JPS are the fulcrum security and thus will do well, hence the massive buying opportunity that is present now.

 

What is the impetus to make the gov act post SCOTUS if the ruling is favorable? If it seems the gov will end up paying no matter what why wont they just drag things along? Best case is a SJ as cherzeca has said. The is the language at the end of the last agreement to address treasury's stake but at this point Im not sure thats anything more then a deadline that will come and go.

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@locutus

 

I'm with you on that. I've been posting here since 2018 and have been focused on the court cases the whole time.

 

At this point, given that the NWS is no longer flowing into Treasury, it's important to ask how our wonderful politicians can unlock further value out of these companies for themselves. The NWS was a pretty unusual mechanism of government grift. We should look to the conventional, usual mechanism which is lobbying, and thus how politicians will serve those interests.

 

A helpful resource is to look at where the lobbying dollars are coming from in various industries: the securities and investment industry (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2018&id=F07), commercial banks (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2020&id=F03), mortgage bankers (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F4600), and savings and loans (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F04).

 

Most of the lobbying groups that wanted the GSEs shuttered have moved to a more neutral position, now mainly asking for an explicit guarantee. SIFMA, the largest contributor in the securities and investment department published a white paper advocating for an explicit guarantees, found here (https://www.sifma.org/wp-content/uploads/2020/12/SIFMA-letter-to-Treasury-on-GSEs-2020-11-30-1.pdf). This group also includes parties such as Capital Group that have very much to gain since they are large shareholders of JPS and commons. Capital group gives 1.8 million a year alone. Of course the financial underwriters, also large lobbyists, have a lot to gain. And others such as CMLA are on these lists. Thus, many players now have a lot to gain and a lot to give, a good combo.

 

I think Michael Kao is correct with the idea of an "Indiana Jones switch". Treasury will want to get the GSEs out of conservatorship in a way that absolutely maximizes value for incoming shareholders (ie the lobbyists), so they will want to keep share prices down as much as possible until announcements are made. The only thing Treasury cannot firmly control is the SCOTUS decision and subsequent market reaction. But other than that, I think we will see a grand settlement announcement at the exact same time we see an announcement of massive new money commitment and terms that are made before the market has time to react.

 

Part of the above views are the believe that JPS are the fulcrum security and thus will do well, hence the massive buying opportunity that is present now.

 

What is the impetus to make the gov act post SCOTUS if the ruling is favorable? If it seems the gov will end up paying no matter what why wont they just drag things along? Best case is a SJ as cherzeca has said. The is the language at the end of the last agreement to address treasury's stake but at this point Im not sure thats anything more then a deadline that will come and go.

 

The impetuses are:

1) *lobbyists of representative industries that stand to gain are happy

2) stability to the housing market making many other stakeholders (smaller industry players, housing groups, voters) happy

3) warrants, funds to Treasury

4) *underwriters make money

5) *new investors make a ton of money

6) Yellen and Biden get bragging rights

 

Think about it in the reverse: what impetus does the gov't have now that NWS is not flowing to NOT do anything? Nothing, it just adds risk to the system and makes them look foolish

 

*note, many of these activities directly or indirectly lead to grift for politicians

 

 

I'm sure there is more to add.

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@locutus

 

I'm with you on that. I've been posting here since 2018 and have been focused on the court cases the whole time.

 

At this point, given that the NWS is no longer flowing into Treasury, it's important to ask how our wonderful politicians can unlock further value out of these companies for themselves. The NWS was a pretty unusual mechanism of government grift. We should look to the conventional, usual mechanism which is lobbying, and thus how politicians will serve those interests.

 

A helpful resource is to look at where the lobbying dollars are coming from in various industries: the securities and investment industry (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2018&id=F07), commercial banks (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2020&id=F03), mortgage bankers (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F4600), and savings and loans (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F04).

 

Most of the lobbying groups that wanted the GSEs shuttered have moved to a more neutral position, now mainly asking for an explicit guarantee. SIFMA, the largest contributor in the securities and investment department published a white paper advocating for an explicit guarantees, found here (https://www.sifma.org/wp-content/uploads/2020/12/SIFMA-letter-to-Treasury-on-GSEs-2020-11-30-1.pdf). This group also includes parties such as Capital Group that have very much to gain since they are large shareholders of JPS and commons. Capital group gives 1.8 million a year alone. Of course the financial underwriters, also large lobbyists, have a lot to gain. And others such as CMLA are on these lists. Thus, many players now have a lot to gain and a lot to give, a good combo.

 

I think Michael Kao is correct with the idea of an "Indiana Jones switch". Treasury will want to get the GSEs out of conservatorship in a way that absolutely maximizes value for incoming shareholders (ie the lobbyists), so they will want to keep share prices down as much as possible until announcements are made. The only thing Treasury cannot firmly control is the SCOTUS decision and subsequent market reaction. But other than that, I think we will see a grand settlement announcement at the exact same time we see an announcement of massive new money commitment and terms that are made before the market has time to react.

 

Part of the above views are the believe that JPS are the fulcrum security and thus will do well, hence the massive buying opportunity that is present now.

 

Can you please define 'Fulcrum Security' - I rarely hear that phrase and am curious to understand what it means in specific terms.

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Guest cherzeca

I think Kao is off base insofar as he brings a distress analysis to what is a legal special situation re GSEs.

 

but as to fulcrum security, if you are in bankruptcy and you look at the cap stack and assume that the common is toast, then you have to figure out what "replaces" the common post bankruptcy exit...this may be pref stock, junior debt or even senior unsecured if there is senior secured. if you buy into the fulcrum security, ie the security that will lever the whole cap structure into sustainability post exit, then you can launch yourself from a depressed fixed income security (usually) into a growth new common post exit

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@mrswanky

 

https://uk.practicallaw.thomsonreuters.com/8-383-9148?transitionType=Default&contextData=(sc.Default)&firstPage=true

 

A fulcrum is also a physics term for example the center support under a seesaw. Equity gets squashed on one end but the fulcrum is unharmed. The other side (eg secured debt) goes up and is safe but there's little value there. The reason you want to find the fulcrum is that's where the value is. It's the lowest part of the cap structure that does well.

 

Agree with cherzeca although the legal special situation you refer to doesn't provide good guidance on restructuring whereas it seems a distressed debt picture does, right?  So I guess I don't really understand the comment.

 

I view the lawsuits as the tow truck pulling the car out of the ditch but the restructuring experts are the ones that will steer it.

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I view the lawsuits as the tow truck pulling the car out of the ditch but the restructuring experts are the ones that will steer it.

 

Well put. I think this is both a legal special situation and a distressed company investment, they are not mutually exclusive.

 

FnF are severely undercapitalized (which is the source of their distress, regardless of their profitability), even under a more reasonable capital rule, and a recapitalization is a form of restructuring. That's where placement in the capital stack comes in.

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Guest cherzeca

Wiggins/Midas

 

So rather than the distress situation where the common is toast this legal special situation is one where the senior most security may become toast. So apples/oranges

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Wiggins/Midas

 

So rather than the distress situation where the common is toast this legal special situation is one where the senior most security may become toast. So apples/oranges

 

I still don't see this as an either/or. If the seniors are converted to common then the seniors are "toast" but the existing commons get crushed. And if the seniors are written off, they are actual toast and it's the capital raises and junior conversion that toasts the existing common.

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Guest cherzeca

Wiggins/Midas

 

So rather than the distress situation where the common is toast this legal special situation is one where the senior most security may become toast. So apples/oranges

 

I still don't see this as an either/or. If the seniors are converted to common then the seniors are "toast" but the existing commons get crushed. And if the seniors are written off, they are actual toast and it's the capital raises and junior conversion that toasts the existing common.

 

so if you want to look for a pivot security in this stack, I would agree that it is the junior prefs, because the seniors may become legal toast and the common become financially diluted toast...but youdont have to adopt the typical distress analysis to see that

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FHFA is directing Fannie Mae and Freddie Mac to contribute a record high $1.09 billion to the national Housing Trust Fund & Capital Magnet Fund, more than *double* the amount the GSEs contributed last year. The $ is distributed through Treasury & HUD to further affordable housing

 

Still stealing money from the GSEs, the robbery has not ended...

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Guest cherzeca

FHFA is directing Fannie Mae and Freddie Mac to contribute a record high $1.09 billion to the national Housing Trust Fund & Capital Magnet Fund, more than *double* the amount the GSEs contributed last year. The $ is distributed through Treasury & HUD to further affordable housing

 

Still stealing money from the GSEs, the robbery has not ended...

 

I didnt see this TV, can you provide link?

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FHFA is directing Fannie Mae and Freddie Mac to contribute a record high $1.09 billion to the national Housing Trust Fund & Capital Magnet Fund, more than *double* the amount the GSEs contributed last year. The $ is distributed through Treasury & HUD to further affordable housing

 

Still stealing money from the GSEs, the robbery has not ended...

 

I didnt see this TV, can you provide link?

 

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Authorizes-More-than-$1-Billion-for-Affordable-Housing-Funds.aspx

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