Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 2804909 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11020 on: December 12, 2018, 09:40:01 AM »
I wonder if Otting for interim is still on the table while confirmation process takes place.

Quote
It could well be that Collins en banc decision comes out before Calabria is confirmed. Oral arg is 1/23 and the en banc court has two opinions from the merits panel both pro P (of course one was a dissent, the majority didn’t bother to write an opinion on the APA claim, the othering re constitutional claim  needs to go further and provide relief to Ps). So the groundwork for an en banc opinion has been laid. As for senate confirmation the senate banking committee needs to hold a hearing and dems are likely to stall it until cloture is reached through lapse of time.

Someone already confirmed is going in and tell watt not to let the door hit his hindside on the way out.


DocSnowball

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11021 on: December 12, 2018, 09:59:22 AM »
I think we all see this. But in the best Pavlov fashion we have been trained to expect bad outcomes. In my own case I know I am now terrified of a windfall. Maybe I will even give it away to Corker. Or Stevens. Parrot?
I share the feeling - in addition bad karma from corrupt stakeholders (the opposite of honest and trustworthy management as Buffet and Munger would say).

emily

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11022 on: December 12, 2018, 10:02:19 AM »
Mulvaney or someone else, who is already confirmed by Senate will come in as an acting director and clean it up for Calabria. Most of the lawsuits should drop during the interim’s term and would no longer matter what Calabria has said in the past and not haunt him. The announcement says that it is the intent to nominate him and he is not nominated yet.

Eye4Valu

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11023 on: December 12, 2018, 10:23:20 AM »
I think we all see this. But in the best Pavlov fashion we have been trained to expect bad outcomes. In my own case I know I am now terrified of a windfall. Maybe I will even give it away to Corker. Or Stevens. Parrot?
I share the feeling - in addition bad karma from corrupt stakeholders (the opposite of honest and trustworthy management as Buffet and Munger would say).

Not sure you can be considered a "corrupt" stakeholder by owning common or preferred stock. To me, what the government has admittedly done, seems corrupt and along the lines of bad management. Unless I misunderstand what you're saying. 

DRValue

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11024 on: December 12, 2018, 10:24:26 AM »
I can't see how calabria or anyone could put the companies through receivership if they haven't got a legislated alternative to move to. Also hera couldn't give fhfa director carte Blanche on housing reform or they could act unilaterally and housing finance could change every 5 years on political whims. I think we're set.
Not Investment Advice. Do Your Own Research.

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11025 on: December 12, 2018, 11:51:03 AM »
He is consistent and it's crystal clear what he believes.

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out.

As an aside I would just make a couple of observations: his point that housing prices would fall under his policies is correct, but his implication that housing would be more affordable is not (actually he doesn't make this point so much, more that there will be less risk, which likely IS correct); because prospective buyers would have less incentives/subsidies to buy a home..so they would be able to AFFORD less. So really this just moves prices; it doesn't necessarily make housing more affordable. And the other observation about Calabria's views (#2) is that since they will take a lot of time, they become subjected to the vagaries of political winds and changing administrations over time, which softens their impact. Thus, in my view the recap is coming, and there's no guarantee the GSEs WON'T remain dominant in housing for years to come. Commons could do quite well.

I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership.

I do agree with Calabria that increasing the housing supply is the best way to promote home ownership.

I don't share your optimism about the commons, though, for many reasons.

  • Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering.
  • Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic.
  • You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario.

Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

That has been my hesitation with owning common too but I dont seem to have a good rebuttal when someone says that a common shareholders interest is aligned with govt warrants so in turn high capital levels would dilute gov stake, unless they somehow get out first. If Sr Preferred declared paid how else does gov extract their pound of flesh besides maximizing warrant value?

allnatural

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11026 on: December 12, 2018, 11:53:59 AM »
I don't believe its impossible for government to maximize warrant value without screwing commons over w/ dilution. It's all about sequencing. Government can easily arrange it so their 80% comes into play post the dilution/capital raise. So they retain full 80% value w/o any dilution.

He is consistent and it's crystal clear what he believes.

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out.

As an aside I would just make a couple of observations: his point that housing prices would fall under his policies is correct, but his implication that housing would be more affordable is not (actually he doesn't make this point so much, more that there will be less risk, which likely IS correct); because prospective buyers would have less incentives/subsidies to buy a home..so they would be able to AFFORD less. So really this just moves prices; it doesn't necessarily make housing more affordable. And the other observation about Calabria's views (#2) is that since they will take a lot of time, they become subjected to the vagaries of political winds and changing administrations over time, which softens their impact. Thus, in my view the recap is coming, and there's no guarantee the GSEs WON'T remain dominant in housing for years to come. Commons could do quite well.

I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership.

I do agree with Calabria that increasing the housing supply is the best way to promote home ownership.

I don't share your optimism about the commons, though, for many reasons.

  • Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering.
  • Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic.
  • You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario.

Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

That has been my hesitation with owning common too but I dont seem to have a good rebuttal when someone says that a common shareholders interest is aligned with govt warrants so in turn high capital levels would dilute gov stake, unless they somehow get out first. If Sr Preferred declared paid how else does gov extract their pound of flesh besides maximizing warrant value?

orthopa

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11027 on: December 12, 2018, 01:04:16 PM »
I don't believe its impossible for government to maximize warrant value without screwing commons over w/ dilution. It's all about sequencing. Government can easily arrange it so their 80% comes into play post the dilution/capital raise. So they retain full 80% value w/o any dilution.

He is consistent and it's crystal clear what he believes.

I agree here. I think this makes it less likely that Calabria is just going to be a yes-man for Trump, and instead that Trump actually supports Calabria's views and appointed him in order for them to be carried out.

As an aside I would just make a couple of observations: his point that housing prices would fall under his policies is correct, but his implication that housing would be more affordable is not (actually he doesn't make this point so much, more that there will be less risk, which likely IS correct); because prospective buyers would have less incentives/subsidies to buy a home..so they would be able to AFFORD less. So really this just moves prices; it doesn't necessarily make housing more affordable. And the other observation about Calabria's views (#2) is that since they will take a lot of time, they become subjected to the vagaries of political winds and changing administrations over time, which softens their impact. Thus, in my view the recap is coming, and there's no guarantee the GSEs WON'T remain dominant in housing for years to come. Commons could do quite well.

I see your point about affordable housing: Calabria argues that having lower home prices while keeping incomes unchanged makes housing more affordable, but if you can't get a loan even with a better loan value-to-income ratio, it doesn't necessarily make housing more available. Or, more accurately, home ownership.

I do agree with Calabria that increasing the housing supply is the best way to promote home ownership.

I don't share your optimism about the commons, though, for many reasons.

  • Calabria wants very, very high capital standards, arguing for at least 5% in some places and as high as 8% in others. FHFA's proposal, by contrast, calls for 3.25%. The amount of dilution needed to get to Calabria's standards while Trump is still in office is staggering.
  • Calabria and Treasury both want the GSEs to have a smaller footprint, meaning less in earnings power. Predictions based on current income levels, as Moelis includes, are likely to be overly optimistic.
  • You can get the best of both worlds if the junior preferreds are offered a conversion, because it would have to be voluntary and thus at a premium to what you could get in the market. Many see par as the ceiling for the juniors, but the plaintiffs will be starting their negotiations at par plus back dividends, interest, etc. so they might be able to get more, especially in a conversion scenario.

Every time I think about selling some of my juniors to buy commons I hesitate, and end up being glad that I did. I do think the commons have a higher upside in the best-case scenario, but there is real and substantial downside risk there if enough new shares get issued for a recap.

That has been my hesitation with owning common too but I dont seem to have a good rebuttal when someone says that a common shareholders interest is aligned with govt warrants so in turn high capital levels would dilute gov stake, unless they somehow get out first. If Sr Preferred declared paid how else does gov extract their pound of flesh besides maximizing warrant value?

So along the same lines are the TARP programs? I have to look at AIG bailout mechanics again but Treasury took 92% of company then sold holdings over ~3 year period afterwards. At a minimum if heavy dilution immediately doesn't crush value alone the overhang of shares outstanding will cap value for years as it did for AIG. I was an AIG warrant holder after TARP and the govt share overhang capped common value until entirely sold.

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11028 on: December 13, 2018, 05:05:37 AM »
A bit stunning that the share price hasn't reacted in a meaningful way after Calabria was nominated.  Even in the unlikely event that he doesn't get confirmed, the administration undoubtedly would have been aware of his views on the treatment of shareholders and has effectively just "signaled" it's directional view on shareholder treatment.  Alternative explanation could be blatant incompetence by the Trump administration (actually not sure we can rule this out) and maybe focusing more on his views of receivership/getting rid of securitization and wanting to move to depository institutions holding mortgages on balance sheet. 

It's amazing that this paper was written by the next FHFA director:  http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

On receivership:  My quick read of what he has written is that his comments on receivership were criticism of what the government "should" have done during the small window of opportunity where it may have been feasible to move towards receivership prior to 2012. 

Regardless - in conjunction w/ comments on legality of net worth sweep and the following statement found in the paper above, I think shareholders do fine in a radical receivership given the PSPA will be (has to be) deemed paid -> assets greater than liabilities -> par liquidation preference on jr pref is paid

"Under a receivership, a troubled institution is closed and liquidated. Its assets and liabilities may be transferred to a third party, or they may be temporarily transferred to a bridge bank until the bridge bank can be sold, recapitalized, and returned to the private sector, or liquidated. But stakeholders are protected by the rules of priority of distributing proceeds of asset sales, the liquidation minimum (requiring that stakeholders receive no less than what they would receive in a liquidation), and the claims process. Under this framework, a conservator must, by definition, allow the company under its control to build capital and certainly cannot take actions that are designed to deplete its capital."

On shareholders:  As a result of investor fatigue and continued disappointment in how negative events seem to pop up out of nowhere, I'm definitely biased in reading certain things in a negative context.  With that backdrop, Calabria's paper purposely goes out of the way to use "pre-existing" or "pre-conservatorship" shareholders when talking about common/jr prefs.  This may just be parlance to distinguish between the government and other 'stakeholders'...  I'm 99% sure this is the how it should be read but I'm exhausted and simply stunned at the current share price. 

The Third Amendment implemented a “net worth sweep” that strips the Companies of their entire net worth each quarter and prevents the accumulation of any funds to repay pre-conservatorship shareholders, or build capital or any buffer against future losses.

As described below, the Third Amendment strips any net worth from the Companies with the intended effect of leaving them with a declining capital buffer against future losses and guaranteeing that the preexisting shareholders would receive no value from any future operations of the Companies.

Again, to the extent rights are transferred at the time of a stock being sold, this isn't an issue.  But Calabria seems to be a principled guy and I'm trying to handicap the likelihood that he draws the line on paying out liquidation preference to only those who held prior to 2012. 

Aside from that, it's always been interesting to me how the "value investor" pitches systemic reasons for mispricing due to investor fatigue, surface level news without analysis, misunderstanding of key events, and mistaking "uncertainty" with "risk".  Yet the investing community thinks this situation has so much hair on it that I'm actually not entirely sure that if recap/release is literally announced, there won't be an arbitrage opportunity
« Last Edit: December 13, 2018, 05:24:11 AM by SnarkyPuppy »

SnarkyPuppy

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11029 on: December 13, 2018, 05:18:37 AM »
Also continued props to cherzeca who was fundamental in shifting my perspective to view this as an engineering problem with "constraints" that must be solved for.   (who is also seemingly a dead fan... talk about a misunderstood undervalued mispricing...)
« Last Edit: December 13, 2018, 05:23:02 AM by SnarkyPuppy »