Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3554501 times)

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13840 on: September 19, 2019, 07:22:39 PM »
Lucky for us we don't have to speculate what the periodic committement fee would have been. We found out in the unsealed docs from the Sweeney case and on the eve of the sweep internal government docs showed it would have been $400m annual for Freddie. So safe to assume around $1.2b/yr for both companies, or roughly 50bps on the $250b committement line. Pollack's anti gse bias is very clear.

Alex Pollock - https://www.realclearmarkets.com/articles/2019/09/20/have_fannie_and_freddie_paid_the_taxpayers_back_yet__103920.html

Didn't this same clown write about the 10% moment?
He calculates the fee on total liabilities, not on the funding that is or will be made available. He knows perfectly well what he is doing. Which doesn't make things easier for us. A clever, believable narrative that is complete fiction can be thrown out there and people will buy it. In fact, he just did.

I maybe mistaken and can't exactly remember but I think the Sweeney math for the cf was part of the defense by the plaintiff. So even then, not set in stone (correct me if I am wrong). Still, cf's are not punitive in nature but mean a discrete compensation for opportunity cost.


SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13841 on: September 20, 2019, 04:52:39 AM »
It's less about the substance (obviously a fee above the unfunded liability is ridiculous), it's more interesting his 180 given he came up (at least made popular) the concept of the 10% moment.   Why suddenly is this coming into play?   

Only reason I care is this guy clearly has a relationship w/ Calabria and Craig Phillips.   Pollock has written articles together w/ Calabria in "thinktank" clown land and Phillips referred to him has his "hero".

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13842 on: September 20, 2019, 08:33:48 AM »
It's less about the substance (obviously a fee above the unfunded liability is ridiculous), it's more interesting his 180 given he came up (at least made popular) the concept of the 10% moment.   Why suddenly is this coming into play?   

Only reason I care is this guy clearly has a relationship w/ Calabria and Craig Phillips.   Pollock has written articles together w/ Calabria in "thinktank" clown land and Phillips referred to him has his "hero".

pollock is aghast that his good work calculating the 10% moment is being used by Ps and thus he has to make up a fictitious CF to balance the equities...but the equities dont balance based upon fictitious fees.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13843 on: September 20, 2019, 10:35:48 AM »
pollock is aghast that his good work calculating the 10% moment is being used by Ps and thus he has to make up a fictitious CF to balance the equities...but the equities dont balance based upon fictitious fees.

I'm going to respond to your post on Tim Howard's blog here, the one about why Treasury never charged a commitment fee, because I'm not sure my post will survive over there.

I believe that the commitment fee wasn't charged before the NWS because FnF didn't have the money to pay it, and wasn't charged after the NWS because Treasury was getting all the income anyway.

FnF have never been in a situation where they can afford to pay a separate commitment fee. Pollock's use of the entire liability base of $5.5T when calculating the fee is asinine and indefensible, but if the NWS had never happened and the seniors were paid down (and able to be paid down), I could see Treasury restarting the commitment fee once the seniors were paid off. But that is 1-2 years of back fees, not 11, and only calculated on the $250B outstanding.


I also made my own spreadsheet to calculate the 10% moment and overages based on different dividend rates (if the 10% were to ever be recharacterized for some reason) and commitment fee rates. While Pollock, as far as I know, coined the "10% moment" term, anybody could do the calculations based on FHFA's Tables 1 and 2.

https://ethercalc.org/r9ddbdfjw46x

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13844 on: September 20, 2019, 01:00:13 PM »
I finally got around to doing my analysis of the Citi conversion.

Citi's official announcement: https://www.citigroup.com/citi/news/2009/090227a.htm
Citi's summary of the terms: https://www.citigroup.com/citi/news/2009/090227a.pdf?ieNocache=262

Series AA, E, F, and T were offered conversions. According to this link (https://preferredstockinvesting.blogspot.com/2009/09/citi-preferred-stock-conversion-rare.html) the conversion was voluntary, and it appears that each shareholder could choose which shares to convert. Another story I found (https://www.forbes.com/sites/dividendchannel/2014/10/30/citigroup-non-cumulative-preferred-stock-series-aa-ex-dividend-reminder/#666b206069c6) shows that C.PRP (Series AA) traded at $28.60 on 11/3/14 and was still paying dividends, so evidently it wasn't called before then. This series pays 8.125% dividends, and given the low interest rate environments prevailing at the time and now, I would expect the high-div FnF series to similarly trade above par post-release.

I misplaced the link that said this, but it said that series T (6.50% rate) was converted at 85% of par at $3.25, and the other three (AA 8.125%, E 8.4%, F 8.5%) were converted at 95% of par at $3.25. This link also calculated $3.25 as a 20-day average; the closest I could get was $3.24 as the average of the 20 closing prices up to and including Feb 25. But HoldenWalker on Twitter said that the 22 days up to and including Feb 26 average to $3.2495, so I think this is more accurate.

That means that the market was not given a chance to react to the conversion at all. On Feb 27, the day of the announcement, the prefs spiked and the commons tanked. Of course that hurt the converted prefs, but the commons eventually got back to the $3.25 mark after a few months. Also, they still came out way ahead even in the immediate term as shown below.

On Feb 26, Series AA ($25 par) closed at $5.48. Historical prices on these are really, really hard to find. The only source I found was this page (https://www.preferredstockchannel.com/symbol/c.prp/), and the only way to get Feb 26's closing price was to put in 2/26/09 and 2/28/09 in the Performance part on the top right, and then click "Chart $10K invested in C.PRP". Citi commons closed at $2.46 on Feb 26, for a ratio of 2.3:1 the day before the conversion. At 95% of par at $3.25, Series AA holders ended up with 7.31 commons for each $25 in par value, more than 3 times the previous day's ratio.

For Series T ($50 par, https://www.preferredstockchannel.com/symbol/c.pri/), the Feb 26 closing price was $10.54, for a ratio of 2.14:1 (normalized to $25-par). The conversion ratio was 85% of par at $3.25, or 6.54:1. This again represents a bit more than 3 times the previous day's ratio.

I couldn't even find price data for Series E and F, but I would imagine that their conversion ratios were similar.

This means that if Treasury and FHFA follow this playbook, current junior pref holders can expect to receive roughly 3 times as many commons in a conversion than they would by converting in the open market by selling the prefs and buying commons. And the commons wouldn't necessarily have time to react to the possibility, given the relative price movement immediately following Citi's conversion.

I think Dick Bove has it exactly right, that owning the juniors now is a (potentially much) cheaper way to own commons in the future, compared to owning commons now.

Of course the current litigation complicates things, but a payout to common shareholder plaintiffs plus a generous conversion (perhaps really generous) could get things done pretty fast. It appears that Treasury is no stranger to really generous pref-to-common conversions.

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13845 on: September 20, 2019, 01:44:07 PM »
Thank you Midas. While circumstances surrounding the GSEs are different due to litigation and the amount of funds the taxpayers have already received, this is a helpful resource that the treasury might model their conversion after.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13846 on: September 20, 2019, 03:09:32 PM »
@midas

good stuff, thanks for the work.  I am not sure how closely GSE recap will track C; while very much on point, few bankers that worked on C are still around. but the 20 day average price for the common is a common term used in many deals, and yes you would want to use a 20 day period before the announcement of any exchange offer to avoid contamination of the exchange ratio.  if you give any credence to notion that the big junior holders are also involved in the litigation, then junior holders "should" get even better treatment than in C
« Last Edit: September 20, 2019, 03:20:37 PM by cherzeca »


DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13848 on: September 22, 2019, 08:59:13 AM »
https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202?redirect=amp#click=https://t.co/pK0HQAfwok

Thanks Luke.

"Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now."

Seems like a liquidation pref. increase to me.

If Luke's link didn't work for you, you can try this one:

https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202

which for some reason, worked once for me.
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Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13849 on: September 22, 2019, 06:50:21 PM »
https://www.wsj.com/articles/fannie-freddie-poised-to-keep-profits-in-an-initial-privatization-move-11569157202?redirect=amp#click=https://t.co/pK0HQAfwok

By Andrew Ackerman
Sept. 22, 2019 9:00 am ET
INDIANAPOLIS—Mortgage-finance companies Fannie Mae FNMA 1.03% and Freddie Mac FMCC 0.82% are expected to start keeping their earnings as early as this week, pausing a yearslong arrangement in which they handed nearly all of their profits to the Treasury Department.

The move, in an expected agreement between the Trump administration and their federal regulator, would be an initial major step in allowing the companies to build up capital so they can operate as private companies again.

Under the forthcoming agreement, the companies would be allowed to retain about a year’s worth of profits, or about $20 billion, Mark Calabria, the Federal Housing Finance Agency chief, said in an interview after touring a senior center financed in part by the Federal Home Loan Bank of Indianapolis. FHFA oversees Fannie, Freddie and the Federal Home Loan Bank system.

“We’re still in the middle of negotiations with Treasury, but I think we’re close,” Mr. Calabria said. “I hope to have it done by the end of the month.”

Fannie and Freddie are central players in the housing market, buying about half of all U.S. mortgages from lenders and packaging them for issuance as securities. The government effectively nationalized them during the 2008 crisis in a bid to stabilize the housing market as mortgage defaults mounted. How the government addresses the companies’ future could resolve the last major problem from the financial crisis.

At present, the companies hold just $3 billion each in capital, and the agreement under consideration would substantially increase that figure. The move would be significant because it would start a process of the companies raising a combined $100 billion-plus that they will likely need to hold before they can return to private hands.

“If you’re leveraged 1,000-to-1, you could have Superman as your regulator and Wonder Woman as your CEO, and you’re still going to fail at some point,” Mr. Calabria said.
The timing of the agreement and the precise amount of earnings the companies would be allowed to retain hasn’t been completed. The overall deal could slip to the end of the year, he said.

Every quarter Fannie and Freddie send nearly all of their profits, minus the $3 billion they are currently permitted to retain as capital, to the Treasury Department as payment for their ongoing support from the department. Under the terms of the 2008 conservatorship, the firms have access to more than $250 billion in support, though they have been generally profitable in recent years and have drawn on that support only once since 2012. Should the companies report a loss going forward, they could continue to draw on their support from the government. They just wouldn’t send their profits to Treasury until they had retained more than about $20 billion in profits.

The upcoming change comes after a federal appellate court in New Orleans criticized the profit sweep in a Sept. 6 ruling. The decision, in litigation brought by investors in the companies, gave new life to court challenges over the handling of Fannie and Freddie’s profits. The administration is deciding whether to appeal.

The Trump administration wants to recapitalize the companies through a mix of retained earnings and raising tens of billions of dollars from investors, a process likely to take years. It is a priority for the administration, which outlined a path to return the firms to private ownership earlier this month.

“They’ve been in conservatorship for too long, and we want to make sure they’re not in conservatorship on a permanent basis,” Treasury Secretary Steven Mnuchin said in a Sept. 9 interview on Fox Business Network.

Any move now to pause the profit sweep would give Treasury and the FHFA time to negotiate bigger changes to the terms of the companies’ existing support agreement with Treasury, Mr. Calabria said. That includes the creation of a fee the companies’ would be required to pay in exchange for ongoing support from Treasury, which is necessary for their business model. The broader changes could also encompass new restrictions on the companies’ activities, as envisioned by the recent Treasury report, which urged FHFA to scrutinize the firms’ purchases of cash-out refinancings and loans for investment and vacation properties.

Meanwhile, Mr. Calabria said, taxpayers would receive additional shares in the companies—the equivalent of new stakes in a firm preparing to launch an initial public offering—in exchange for allowing the companies to retain earnings now.

Through June, the companies have paid about $300 billion in dividends to the Treasury, while taking some $190 billion from taxpayers in the years after the 2008 financial crisis. The companies have paid an average $18.2 billion annually over the past three years to the Treasury.

Reducing those payments would add to a widening U.S. budget deficit that is on track to exceed $1 trillion a year.

The government seized the companies during the George W. Bush administration, and agreed to inject money to support some $5 trillion in debt securities issued by the companies.
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