Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 2737748 times)

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9510 on: March 09, 2018, 09:51:57 AM »
https://www.insidemortgagefinance.com/imfnews/1_1310/daily/federal-reserve-worries-about-nonbank-mortgage-firms-1000045140-1.html?ET=imfpubs:e10636:73599a:&st=email&s=imfnews
With GSE reform looking deader than a $31,000 conference room table ordered (and then cancelled) by HUD, we’ve come up with a simple plan that might be amenable to all the different warring factions who waste their time slamming each other on Twitter. Here is a rough outline: Let Fannie and Freddie live but as government utilities with three classes of stock (senior preferred, junior preferred and subordinated juniors). Each class of stock pays a quarterly dividend based on profits, with the seniors earning the most. Only Treasury can own the seniors and all profits would go into the general fund and would be used exclusively to pay down the nation’s debt. The other two classes of stock would be given to current shareholders with their existing holdings retired. (Investment bankers, after completing a course in business ethics, can work out the ratios.) This would be done in exchange for dropping all legal claims. The federal guarantee on MBS would remain implicit (yes, implicit) for federal budget purposes and loan limits would be reduced and kept flat for a 10-year period while the private sector explores whether it can really make (enough) money as guarantors. And one last thing: never ever give Fannie and Freddie the right to lobby Congress or the states. This is just a basic outline. Congress can fill in the details or maybe Craig Phillips and Mel Watt…


blackcoffee

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9511 on: March 09, 2018, 09:53:17 AM »
If you missed this - even if you didn't - it's time to revisit
http://www.fidererongses.com/params/post/1120535/perry-v-mnuchin-a-case-study-in-disingenuity

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9512 on: March 09, 2018, 01:08:38 PM »
https://www.insidemortgagefinance.com/imfnews/1_1310/daily/federal-reserve-worries-about-nonbank-mortgage-firms-1000045140-1.html?ET=imfpubs:e10636:73599a:&st=email&s=imfnews
With GSE reform looking deader than a $31,000 conference room table ordered (and then cancelled) by HUD, we’ve come up with a simple plan that might be amenable to all the different warring factions who waste their time slamming each other on Twitter. Here is a rough outline: Let Fannie and Freddie live but as government utilities with three classes of stock (senior preferred, junior preferred and subordinated juniors). Each class of stock pays a quarterly dividend based on profits, with the seniors earning the most. Only Treasury can own the seniors and all profits would go into the general fund and would be used exclusively to pay down the nation’s debt. The other two classes of stock would be given to current shareholders with their existing holdings retired. (Investment bankers, after completing a course in business ethics, can work out the ratios.) This would be done in exchange for dropping all legal claims. The federal guarantee on MBS would remain implicit (yes, implicit) for federal budget purposes and loan limits would be reduced and kept flat for a 10-year period while the private sector explores whether it can really make (enough) money as guarantors. And one last thing: never ever give Fannie and Freddie the right to lobby Congress or the states. This is just a basic outline. Congress can fill in the details or maybe Craig Phillips and Mel Watt…

you know that when the fine folks at IMF start making mortgage finance reform proposals the MBA/TBTF boys are at the end of their rope

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9513 on: March 09, 2018, 07:13:01 PM »
when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

Meh.   Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

Spekulatius

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9514 on: March 10, 2018, 08:19:50 AM »
when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

Meh.   Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

Seems to be thwt the conclusion of this argument is too keep everything the way it is , since it seems to work just fine.
To be a realist, one has to believe in miracles.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9515 on: March 10, 2018, 08:58:46 AM »
when bankers "restructure", they are talking about the capital structure.  while there may be a host of other things that mnuchin will try to do with fhfa, i think that when he says restructure, as a former banker what he is looking to do is make FnF capital structures sound again...and not expose taxpayer to bailout risk in future.  and he didnt talk about other guarantors or introducing further competition, which is what the leaked sen bnk ctee staff draft #29 was looking to do

Meh.   Quote from Michael Berman:  "As chairman, Berman's top priority will be to continue MBA's role in redesigning the government sponsored enterprises, Fannie Mae and Freddie Mac. "I am honored to serve our industry as MBA's 2011 chairman," Berman said. "MBA will continue to lead the battle to restructure GSEs with private capital and a new, clearly defined, but limited government role in guaranteeing mortgage-backed securities."

Context of Michael Berman for those unfamiliar:  https://www.nytimes.com/2015/12/07/business/a-revolving-door-helps-big-banks-quiet-campaign-to-muscle-out-fannie-and-freddie.html

Seems to be thwt the conclusion of this argument is too keep everything the way it is , since it seems to work just fine.

Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

Midas79

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9516 on: March 10, 2018, 01:45:00 PM »
Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

This is why Tim Howard advocates for hard up-front equity capital, i.e. shareholder ownership, as opposed to the pro-cyclical risk sharing deals that don't actually transfer risk in any economical fashion.

But I still don't know where current shareholders fit in. All of their capital was put up when the shares were issued and then eventually swept to Treasury, so the equity capital to absorb first losses has to be put up by others, and they would have to receive actual equity for their capital. Dilution of commons is basically necessary here, right?

rros

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9517 on: March 10, 2018, 02:18:38 PM »
Exactly. People are slowly coming to that realization. Those motivated to change the way it is see opportunity but so far has proven very difficult. I mean the entity has functioned since the great depression with one hiccup, albeit large no doubt. The source is up for debate but it seems most are finding there is no better system how imperfect it may be.  Those involved also have come to this conclusion during a time of little to no market stress or panic  and not when the GSEs maybe needed to function again the most. All this talk of private capital is a luxury when private capital will assuredly dry up during bad times or a panic.

This is why Tim Howard advocates for hard up-front equity capital, i.e. shareholder ownership, as opposed to the pro-cyclical risk sharing deals that don't actually transfer risk in any economical fashion.

But I still don't know where current shareholders fit in. All of their capital was put up when the shares were issued and then eventually swept to Treasury, so the equity capital to absorb first losses has to be put up by others, and they would have to receive actual equity for their capital. Dilution of commons is basically necessary here, right?
put up by others (raised by dilution) , retained and/or converted from preferreds.

locutusoftexas

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9518 on: March 11, 2018, 12:59:38 PM »
I am trying to make sense of all of this. Having visited the links recently provided by this thread, here are my conclusions:
1. This is a highly politicized and extralegal situation because a large segment of Congress and perhaps federal judges seem to hate FnF (due to past history) and a group of powerful financial interests would like to take over the business of FnF.
2. The Treasury Department has in my opinion robbed at least the junior preferred shareholders of their just proceeds.
3. According to the ruling of the DC District Court, the relevant law, as amended, apparently gives the Treasury the power to rob the shareholders.
4. The DC Court demurred on judging the constitutionality of the law.
5. The Supreme Court demurred on hearing the case, probably with the excuse that there were other relevant cases ongoing in the lower courts.
6. In an ideal world, the Treasury Department would be exceedingly vulnerable to civil suits and the enabling law would have already been declared unconstitutional with the strongest possible rebuke to Congress and the Treasury Department.
7. In our current reality, the odds that private shareholders will receive reasonable compensation by 2019 are, in my opinion, no better than around 50-50 (see next item).
8. In the long term (several years), if enough court cases are filed, the odds will increase geometrically as the power of the number of cases N (i.e., the probability P of success in at least one of the cases will be something like P ~1 - (1 - p)^N, where the caret (^) indicates exponentiation and the probability of plaintiff success in any one court case is p). I have assigned the value p ~ 1/3 based on the split of the justices on the Perry case, which is the only source of an actual number for the estimate.
9. Note that the probability of ultimate success is never one in the model proposed in item 8 above.

The point is that this case involves factors that are counter to our Constitution, including improper legislation (i.e., unconstitutional), Executive Branch actions that would be considered criminal if a private citizen had done the same thing, and apparently criminal collusion against FnF on the part of interests competing for the same business and perhaps with the conscious complicity of government employees. This is a massive headwind for private shareholders and could easily end with the shareholders receiving little or nothing for their initial investments, including the amount of the original investments, especially if the government and the judicial system are able to delay significantly the ultimate proper judgement for the plaintiffs.

Please tell me that the above is too negative or that my conclusions are simply wrong. Thanks.
« Last Edit: March 12, 2018, 01:49:56 PM by locutusoftexas »

Eye4Valu

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #9519 on: March 11, 2018, 02:04:35 PM »
I am trying to make sense of all of this. Having visited the links recently provided by this thread, here are my conclusions:
(1) This is a highly politicized and extralegal situation because a large segment of Congress and perhaps federal judges seem to hate FnF (due to past history) and a group of powerful financial interests would like to take over the business of FnF.
(2) The Treasury Department has in my opinion robbed at least the junior preferred shareholders of their just proceeds.
(3) According to the ruling of the DC District Court, the relevant law, as amended, apparently gives the Treasury the power to rob the shareholders.
(4) The DC Court demurred on judging the constitutionality of the law.
(5) The Supreme Court demurred on hearing the case, probably with the excuse that there were other relevant cases ongoing in the lower courts.
(6) In an ideal world, the Treasury Department would be exceedingly vulnerable to civil suits and the enabling law would have already been declared unconstitutional with the strongest possible rebuke to Congress and the Treasury Department.
(7) In our current reality, the odds that private shareholders will receive reasonable compensation by 2019 are, in my opinion, no better than around 50-50 (see next item).
(8) In the long term (several years), if enough court cases are filed, the odds will increase geometrically as the power of the number of cases N (i.e., the probability P of success in at least one of the cases will be something like P ~1 - (1 - p)^N, where the caret (^) indicates exponentiation and the probability of plaintiff success in any one court case is p). I have assigned the value p ~ 1/3 based on the split of the justices on the Perry case, which is the only source of an actual number for the estimate.
(9) Note that the probability of ultimate success is never one in the model proposed in item (8).

The point is that this case involves factors that are counter to our Constitution, including improper legislation (i.e., unconstitutional), Executive Branch actions that would be considered criminal if a private citizen had done the same thing, and apparently criminal collusion against FnF on the part of interests competing for the same business and perhaps with the conscious complicity of government employees. This is a massive headwind for private shareholders and could easily end with the shareholders receiving little or nothing for their initial investments, including the amount of the original investments, especially if the government and the judicial system are able to delay significantly the ultimate proper judgement for the plaintiffs.

I am not a troll-- just a fairly ignorant indirect shareholder trying to decide on my best option. Please tell me that the above is too negative or that my conclusions are simply wrong. Thanks.

Emily will answer all of these questions for you.