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

[allnatural]

On 12/2/2021 at 6:03 AM, Wiggins said:

Nice work!

 

I have been thinking we could be setting up for another move up similar to that seen Dec '18 to Jan '19. I think there was heavy tax loss selling in '18 and then investors got back in with a new basis and there was additionally some optimism over releasing the GSEs at that time. Now, especially after the Drumpf letter my thesis is that Dec '21 to Jan '22 will be a repeat.

 

Between the court cases (Collins, Takings, Lamberth) + GSEs continuing to retain capital, Biden lowering the capital requirements, expanding the GSE footprints to be more profitable, and wants to transition them to utility model (hinted at with the leak for FHFA pick Calhoun)... 2022 is setting up to be a interesting year

 

GSEs currently have $67b in capital, at the end of the year that will be closer to $75b. New minimum requirement is $180b and they are earning ~$30b a year (so ~3 years to organic earnings retention). But in Collins case, worst case the Judges don't agree privatization would have been completed in time if Trump could have fired Watt day 1, the GSEs at a minimum should get over $45b in cash back to balance sheet since the NWS suspension would have happened day 1 instead of 2 years later as Trump stopped the NWS immediately so no need for hypotheticals (Yes the liquidation preference would go up, but the government would still need to write a $45b CASH check in exchange back over to the GSEs which is definitely not a desired outcome and hopefully prompts some kind of resolution). This would cut ~3 years down to ~1.5 years to get to $180b of cash capital on the balance sheet. At some point the government should be forced to deal with this issue as not only have the GSEs been completely reformed for the better but now have their desired cash capital on the books.

[Wiggins]

6 hours ago, allnatural said:

 

Between the court cases (Collins, Takings, Lamberth) + GSEs continuing to retain capital, Biden lowering the capital requirements, expanding the GSE footprints to be more profitable, and wants to transition them to utility model (hinted at with the leak for FHFA pick Calhoun)... 2022 is setting up to be a interesting year

 

GSEs currently have $67b in capital, at the end of the year that will be closer to $75b. New minimum requirement is $180b and they are earning ~$30b a year (so ~3 years to organic earnings retention). But in Collins case, worst case the Judges don't agree privatization would have been completed in time if Trump could have fired Watt day 1, the GSEs at a minimum should get over $45b in cash back to balance sheet since the NWS suspension would have happened day 1 instead of 2 years later as Trump stopped the NWS immediately so no need for hypotheticals (Yes the liquidation preference would go up, but the government would still need to write a $45b CASH check in exchange back over to the GSEs which is definitely not a desired outcome and hopefully prompts some kind of resolution). This would cut ~3 years down to ~1.5 years to get to $180b of cash capital on the balance sheet. At some point the government should be forced to deal with this issue as not only have the GSEs been completely reformed for the better but now have their desired cash capital on the books.

I'm 100% JPS but thinking about taking a common stake in case there's a ruling or announcement causing preferential accumulation of common vs. JPS. So far I have been piling in to the JPS since they're still so ridiculously depressed (e.g. some are still under 10%), but seriously thinking about a common position.

[asterisk]

Sandra Thompson will be nominated by Biden. Shares sold off modestly yesterday and have continued today. The reality is admin hasn’t been on the table and likely never will be without being forced. I expect the shares to trade down and then we will rally up to Lamberth. 

[Wiggins]

Class certification by Lamberth was underrated. I think this should have been news.

There will be a trial in Lamberth's court next year regarding a breach of the implied covenant of good faith and fair dealing with respect to stock liquidation preference and dividend rights. I am getting the popcorn ready. How can there not be damages when the Treasury lied and then "siphoned" $300 billion out of the GSEs? In a case like AIG there was no money, but with the GSEs they have of course been highly profitable. I think Lamberth just may be the one to unwind the Treasury's Orwellian tales of greedy hedge funds awaiting a windfall or the Government "rescuing" the GSEs. Any shares bought today have the same rights as all others.

[allnatural]

22 hours ago, asterisk said:

Sandra Thompson will be nominated by Biden. Shares sold off modestly yesterday and have continued today. The reality is admin hasn’t been on the table and likely never will be without being forced. I expect the shares to trade down and then we will rally up to Lamberth. 

 

You are correct the market is disappointed with Thompson's pick (over Calhoun), but I think its misplaced to think she is "status quo" in the sense that Watt was. From what we've seen so far from Thompson, she is pro-retained earnings, lower capital requirements (to what extent TBD when rule is finalized early next year), expanding the GSEs businesses (makes them larger and more profitable), and anti-competitors (opposite of Calabria). So while Watt's status quo was zero progress being made and all the cash being swept to Treasury, Thompson's "status quo" involves organically retaining earnings while strengthening the GSEs fundamentals which puts the GSEs on an inevitable track to eventually hit their capital requirements (see my post above re: how fast they can get there).

 

Does that mean she has an agenda to end the conservatorship? Doesn't look like it as of now (might get more information on this during her confirmation hearing). I think you need an event to force Biden to address the issue administratively vs the organic recap path they are on today. That event could be either 1 of the court cases (Collins [all eyes on Jan 19 oral arguments], Lamberth [Trial July 2022], or Takings case [Pending appeal court decision any day] all T'eed up for 2022), or if Democrats get swept in the mid-terms Biden might be desperate for an administrative win and direct her to proceed with warrant monetization (in the name of affordable housing).

[allnatural]

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Proposes-Capital-Planning-Rule-for-Fannie-Mae-and-Freddie-Mac.aspx

 

"The proposed rule mandates that the Enterprises' capital plans include:

• An assessment of the expected sources and uses of capital over the planning horizon;
• Estimates of projected revenues, expenses, losses, reserves, and pro forma capital levels under a range of the Enterprise's internal scenarios, as well as under FHFA's scenarios;
• A description of all planned capital actions over the planning horizon;
• A discussion of how the Enterprise will, under expected and stressful conditions, maintain capital commensurate with the business risks and continue to serve the housing market; and
• A discussion of any expected changes to the Enterprise's business plan that are likely to have a material impact on the Enterprise's capital adequacy or liquidity."

 

"For purposes of the proposal, a capital action would be defined as any issuance of a debt or equity capital instrument, any capital distribution, and any similar action that FHFA determines could impact an Enterprise’s consolidated capital"

 

"The Enterprises are currently in conservatorship, are subject to the restrictions of the Senior Preferred Stock Purchase Agreements between them and the U.S. Treasury, and do not hold capital anywhere near the levels specified in the ERCF. The capital plans will allow the Enterprises to identify the amount of capital they need to raise to close the gap with the ERCF, and to consider the timing of when to raise capital, and what types of capital to raise"

Edited December 16, 2021 by allnatural

[asterisk]

1 hour ago, allnatural said:

 

You are correct the market is disappointed with Thompson's pick (over Calhoun), but I think its misplaced to think she is "status quo" in the sense that Watt was. From what we've seen so far from Thompson, she is pro-retained earnings, lower capital requirements (to what extent TBD when rule is finalized early next year), expanding the GSEs businesses (makes them larger and more profitable), and anti-competitors (opposite of Calabria). So while Watt's status quo was zero progress being made and all the cash being swept to Treasury, Thompson's "status quo" involves organically retaining earnings while strengthening the GSEs fundamentals which puts the GSEs on an inevitable track to eventually hit their capital requirements (see my post above re: how fast they can get there).

 

Does that mean she has an agenda to end the conservatorship? Doesn't look like it as of now (might get more information on this during her confirmation hearing). I think you need an event to force Biden to address the issue administratively vs the organic recap path they are on today. That event could be either 1 of the court cases (Collins [all eyes on Jan 19 oral arguments], Lamberth [Trial July 2022], or Takings case [Pending appeal court decision any day] all T'eed up for 2022), or if Democrats get swept in the mid-terms Biden might be desperate for an administrative win and direct her to proceed with warrant monetization (in the name of affordable housing).

I believe the concerns with her is that she is not going to be the one to have the willpower for a sustained fight for R&R. Additionally, to my knowledge Thompson has never really stated an interest in pursuing R&R.

 

I agree that 2022 will be interesting and you provided a great concise summary. Part of me is hoping with get below $2 on the high dividends for purchases. 

[Wiggins]

On 11/4/2021 at 10:30 PM, Midas79 said:

 

Yup, lots of time and patience. I'm lucky to have a work-from-home desk job that lets me both have the time to develop the model I made (been improving it for 4 years) and monitor prices. My success in this investment is no longer dependent on recap and release, though this wasn't true until recently.

 

Ironically for a member of this board, I'm not really a value investor. I don't like stock-picking at all. I have owned stock in precisely 4 individual companies in my life, and Fannie and Freddie are two of them. If I make enough money from this stock to retire I will happily index from there and enjoy life.

 

I also have the advantage (if you can call it one) of not believing in opportunity costs in the way that most people seem to, so I'm not bothered at all by other people making huge returns on things other than FnF. My method is working and I'm quite comfortable with it as opposed to either doing lots of research (classic value investing) or just jumping on the meme coin of the moment (FOMO-driven investing).

Question for Midas or anyone else who has thoughts on this:

Can the GSEs issue new stock for a capital raise that is senior to existing JPS? I think existing JPS certificates say no, but the SPS was made possible by HERA.

My answer is yes -mainly for the reason that FHFA/Treasury will do whatever the hell they want-, but it could start a whole new round of takings claims. Interested in thoughts on this.

[Wiggins]

Just now, Wiggins said:

Question for Midas or anyone else who has thoughts on this:

Can the GSEs issue new stock for a capital raise that is senior to existing JPS? I think existing JPS certificates say no, but the SPS was made possible by HERA and only pertains to Treasury's capital infusion.

My answer is yes -mainly for the reason that FHFA/Treasury will do whatever the hell they want-, but it could start a whole new round of takings claims. Interested in thoughts on this.

 

[sholland]

In the 9/6/2019 en banc opinion, (9) 5th Circuit judges ruled for prospective relief (sever the “for cause” restriction), (7) judges dissented saying that the proper remedy was retrospective (vacate the Third Amendment). 

 

The Supreme Court has since ruled that “the shareholders no longer have any ground for prospective relief, but they retain an interest in the retrospective relief they have requested.”  The Supreme Court also ruled that “Only harm caused by a confirmed Director’s implementation of the third amendment could then provide a basis for relief.”

 

IMO the proper remedy is to vacate the implementation of the third amendment by Senate-confirmed Director Watt starting at the beginning of the Trump Administration ($27B for $FNMA & $18B for $FMCC). 

 

However, the Trump letter provides the argument that if not for the unconstitutionally structured FHFA then Mel Watt would have been fired 20-Jan-2016 and the GSEs would be released from Conservatorship by now. (JPS worth par)

 

What other retrospective relief is possible?

 

https://assets.realclear.com/files/2021/11/1921_trump_letter_to_rand_paul.pdf

[allnatural]

I mentioned Democrats losing midterms being a potential "event" to force Biden to seek an administrative GSE solution, BBB failure might be another one. BBB had $170b allocated for "affordable housing" (https://www.cnbc.com/2021/11/24/build-back-better-includes-170-billion-for-housing.html). Now that the BBB is dead, will Biden potentially look to tap another source of funds for his affordable housing agenda ($100b+ in warrant money?).

 

Rob Zimmer (DC Insider) floated this possibility on twitter last month:

 

Tim Rood reiterated this yesterday:

 

 

Bonus points if a favorable Collins ruling by Q1 in favor of shareholders gives Biden admin cover...

Edited December 20, 2021 by allnatural

[allnatural]

On 12/19/2021 at 6:19 AM, sholland said:

In the 9/6/2019 en banc opinion, (9) 5th Circuit judges ruled for prospective relief (sever the “for cause” restriction), (7) judges dissented saying that the proper remedy was retrospective (vacate the Third Amendment). 

 

The Supreme Court has since ruled that “the shareholders no longer have any ground for prospective relief, but they retain an interest in the retrospective relief they have requested.”  The Supreme Court also ruled that “Only harm caused by a confirmed Director’s implementation of the third amendment could then provide a basis for relief.”

 

IMO the proper remedy is to vacate the implementation of the third amendment by Senate-confirmed Director Watt starting at the beginning of the Trump Administration ($27B for $FNMA & $18B for $FMCC). 

 

However, the Trump letter provides the argument that if not for the unconstitutionally structured FHFA then Mel Watt would have been fired 20-Jan-2016 and the GSEs would be released from Conservatorship by now. (JPS worth par)

 

What other retrospective relief is possible?

 

https://assets.realclear.com/files/2021/11/1921_trump_letter_to_rand_paul.pdf

 

Those are the only 2 remedies I can think of.. Base case reverse the NWS cash payments made from the start of Trump's presidency to the end of Watt's term ($45b +interest potentially). Best case Judges agree that the unconstitutional provision prevented Trump from having 4 years instead of 2 to accomplish recap and release (Jr Pfd holders made whole). Maybe the Judges find a way to be creative and craft up a more unique remedy.

 

It will be interesting if the Collins oral arguments on 1/19 will be focused on either a) crafting an appropriate remedy or b) figuring out if the Trump letter satisfies the SCOTUS condition that proves shareholders were harmed.

[allnatural]

In the Rop v FHFA plaintiff brief filed today (same case as Collins essentially), plaintiffs requested the following remedy "Because HERA’s unconstitutional removal restriction violated the Constitution and clearly harmed Plaintiffs, the Court should direct the district court to issue an injunction that puts Plaintiffs in the position they would be in if the President had the ability to implement his policy of either zeroing out Treasury’s liquidation preference or converting Treasury’s senior preferred stock to common stock."

 

In the brief it discusses how putting the plaintiffs back in that position should be valuable for both jr pfd and common shareholders, "President Trump’s reference to the government profiting from the sale of common stock is also important for a second reason: If common stock owned by Treasury is valuable and can be sold for a “huge profit,” then the junior preferred and common stock owned by Plaintiffs must also be valuable because the junior preferred has a higher priority in the capital structure and other common stock has equal priority to the stock President Trump has indicated the government would have sold."

 

It's interesting to see how little faith the market is putting into this case. Collins oral arguments are on Jan 19 with a ruling expected by the end of Q1. If the Willet & Co en banc judges agree with shareholders (again), the jr pfds are worth $25/shr vs $3 today. If we lose (as expected) these probably go back to $2 when the SCOTUS ruling first hit ($1 down $22 up or <5% implied odds). Seems low given a) the trump letter development and b) the makeup of the en banc judge panel who have previously ruled in our favor and now have the green light from SCOTUS/TRUMP.

[Sunrider]

I’m not sure that they care much about Trump giving any sort of light … though I agree that at least he put on record that he would’ve acted in shareholder interests following that SC statement. 

[allnatural]

15 hours ago, Sunrider said:

I’m not sure that they care much about Trump giving any sort of light … though I agree that at least he put on record that he would’ve acted in shareholder interests following that SC statement. 

It is interesting to think about. Whether it's fair or not the courts in this country are extremely politically motivated. The 5th circuit en banc panel is made up of 12 conservatives and 5 democrats. 6 of those conservatives are also fresh Trump appointees. Before it was shareholders vs Trumps DOJ, today it's shareholders vs Bidens DOJ and Trump is publicly siding with shareholders. 9 of those judges were already ok siding with shareholders that the NWS was illegal, 7 of them were ok saying the remedy for a constitutional violation was to vacate the NWS.

 

If you read the en banc majority ruling re: unconstitutional remedy closely, the 9 judges who ruled against vacating the NWS claimed to do so because President Trump wasn’t opposed to the NWS as one of their main points so they believed only prospective relief to be appropriate… This rationale is completely disproven by the recent Trump letter as well as the fact that the ruling was written in September 2019 and the admin promptly ended the cash payments of the NWS shortly after the ruling was released with the Trump picked Calabria/Mnuchin duo in charge (to my recollection not 1 cash NWS payment was made under Trump appointed Calabria). How can those 9 judges square that ruling with the Trump letter and SCOTUS instructions re: shareholders being entitled to retrospective remedy if Trumps agenda was aggravated by the unconstitonal provision? 

 

Less than 5% odds seem extreme (w/o assigning any value to Lambeth or takings case (or organic recap path the GSEs are currently on).

Edited December 22, 2021 by allnatural

[allnatural]

On 12/16/2021 at 10:22 AM, allnatural said:

 

You are correct the market is disappointed with Thompson's pick (over Calhoun), but I think its misplaced to think she is "status quo" in the sense that Watt was. From what we've seen so far from Thompson, she is pro-retained earnings, lower capital requirements (to what extent TBD when rule is finalized early next year), expanding the GSEs businesses (makes them larger and more profitable), and anti-competitors (opposite of Calabria). So while Watt's status quo was zero progress being made and all the cash being swept to Treasury, Thompson's "status quo" involves organically retaining earnings while strengthening the GSEs fundamentals which puts the GSEs on an inevitable track to eventually hit their capital requirements (see my post above re: how fast they can get there).

 

Does that mean she has an agenda to end the conservatorship? Doesn't look like it as of now (might get more information on this during her confirmation hearing). I think you need an event to force Biden to address the issue administratively vs the organic recap path they are on today. That event could be either 1 of the court cases (Collins [all eyes on Jan 19 oral arguments], Lamberth [Trial July 2022], or Takings case [Pending appeal court decision any day] all T'eed up for 2022), or if Democrats get swept in the mid-terms Biden might be desperate for an administrative win and direct her to proceed with warrant monetization (in the name of affordable housing).

 

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Targeted-Increases-to-Enterprise-Pricing-Framework.aspx

 

Thompson trying to generate more fees for GSEs.. why? 

 

"These targeted pricing changes will allow the Enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time," said Acting Director Sandra L. Thompson. "

 

why does their regulatory capita position matter if they will never exit conservatorship?

[DRValue]

All this crt kool aid is just so tiring. Either none of them care about the economics or they choose not to see the problem. Really doubting the chance of exiting conservatorship outside of the courts, except maybe 2027/8. They could consider the pspa paid and the rate of capital gain still won't allow them to earn their way out. Really don't see why people see Thompson as a competent and good pick, just building favour I suspect. 

[COBFInfinity]

Thompson was asked about timeline for end of conservatorships. She said she'd defer to Congress on that, but that many other parties would be involved. I don't know if she's just appeasing the audience, but that's a pretty lame answer for someone who has worked at FHFA for 8 years.

[DRValue]

Just now, COBFInfinity said:

Thompson was asked about timeline for end of conservatorships. She said she'd defer to Congress on that, but that many other parties would be involved. I don't know if she's just appeasing the audience, but that's a pretty lame answer for someone who has worked at FHFA for 8 years.

It's an horrendous answer. They really aren't looking to let them leave. It's week one day one stuff now, there is literally no excuse.

[DRValue]

'Defer to Congress'

When? You've had 13 years. 

[DRValue]

29 minutes ago, DRValue said:

'Defer to Congress'

When? You've had 13 years. 

That was a total waste of time, Thompson will do nothing. 

[allnatural]

good news is we still have the courts and we all know how quickly those move 

[DRValue]

On 1/14/2022 at 10:47 PM, allnatural said:

good news is we still have the courts and we all know how quickly those move 

Anyone have any guess to when Collins en banc opinion? 

[MrSwankyPants]

Was just posted. Remanded to lower courts. 

 

 

[MrSwankyPants]

https://www.washingtonpost.com/us-policy/2022/03/14/raskin-fed-manchin/
 

 

Wasn't she nominated with ST? Will this further delay a vote of confirmation?