Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 2950812 times)

Eye4Valu

  • Sr. Member
  • ****
  • Posts: 355
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11190 on: January 11, 2019, 10:40:58 AM »
there is a lot that could go wrong.

you would think that, with MI now adopting a stop to NWS divs (albeit only as a step to motivate congress to act) and bright seeing the light and leaving gnma, those who have a good opportunity to know a lot more about admin plans than we do are  not pleased with what they are seeing.  that's good, but this admin (and truly any admin) is not likely to move quickly.  for example, we don't know whether admin thinks that doing things under otting and before Calabria is confirmed is a good idea

even if things go "right" and admin reform is really rolled out that seeks to release GSEs from conservatorship, it may take a whole lot longer than one would hope.

my next signpost is the collins en banc oral arg 1/23.

Agree. Favorable decision there provides the adequate protection I'm looking for.


Cox022

  • Newbie
  • *
  • Posts: 18
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11191 on: January 11, 2019, 10:50:30 AM »
Sorry for the long post, but I thinking through his has been helpful to me. 

Someone smartly asked about downside.  The following line of thought, which has bugged me for years, concerns what happens to legacy common and preferred shareholders.

Negative:

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

Therefore, as an issuer, if you felt like your legacy shareholders would limit the attractiveness or potential of your capital raise, it might seem like it would be in your interest to dispose of them.


Positive:

-As an owner of the business, like Treasury is with their warrants, it seems like if you were issuing equity to raise capital, it would be in your interest to have a pre-existing market for your shares, and you would additionally prefer that those shares have a healthy valuation to help you raise capital.  On the flip side, as the issuer, you may be at risk if the market for your securities was really depressed or too volatile-which could raise the preference for a clean slate.  [We havent discussed re-listing the securities on the NYSE but I’m curious if the timing of any re-listing implies what may come next.]

-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

[I sense these last two points which are pro shareholder are stronger than the points I made which are negative to legacy shareholders.  The reason is that Treasury has skin in the game with the warrants and I have a hard time thinking that the capitalists and bankers-turned-politicians just throw that away.  I think it’s fair to expect them to protect their position in the warrants just as it was in their interest to vigorously defend all the litigation.]

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.



A side note as food for thought…One has to wonder: is treasury worried about raising capital in institutions where the general perception is that these institutions ‘failed’ and how does that shape Treasury’s decision making?  It is also worth keeping in mind that to raise capital is essentially to ‘sell’ the companies to investors.

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.



blackcoffee

  • Jr. Member
  • **
  • Posts: 88
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11192 on: January 11, 2019, 11:56:11 AM »
Negative:

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

good post - this missed the point though - the point is - if legacy shareholders can be wiped out based on lies - whats to stop them from doing the same thing to new buyer? The gov't holds all the cards and could 0 you out the day after your check clears based on the history here - that's the point.

orthopa

  • Hero Member
  • *****
  • Posts: 586
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11193 on: January 11, 2019, 12:03:36 PM »
Sorry for the long post, but I thinking through his has been helpful to me. 

Someone smartly asked about downside.  The following line of thought, which has bugged me for years, concerns what happens to legacy common and preferred shareholders.

Negative:

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

Therefore, as an issuer, if you felt like your legacy shareholders would limit the attractiveness or potential of your capital raise, it might seem like it would be in your interest to dispose of them.


Positive:

-As an owner of the business, like Treasury is with their warrants, it seems like if you were issuing equity to raise capital, it would be in your interest to have a pre-existing market for your shares, and you would additionally prefer that those shares have a healthy valuation to help you raise capital.  On the flip side, as the issuer, you may be at risk if the market for your securities was really depressed or too volatile-which could raise the preference for a clean slate.  [We havent discussed re-listing the securities on the NYSE but I’m curious if the timing of any re-listing implies what may come next.]

-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

[I sense these last two points which are pro shareholder are stronger than the points I made which are negative to legacy shareholders.  The reason is that Treasury has skin in the game with the warrants and I have a hard time thinking that the capitalists and bankers-turned-politicians just throw that away.  I think it’s fair to expect them to protect their position in the warrants just as it was in their interest to vigorously defend all the litigation.]

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.



A side note as food for thought…One has to wonder: is treasury worried about raising capital in institutions where the general perception is that these institutions ‘failed’ and how does that shape Treasury’s decision making?  It is also worth keeping in mind that to raise capital is essentially to ‘sell’ the companies to investors.

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

Idk if the treasury has presented the GSEs in that fashion or anyone in the Trump administration has discussed the GSE's as failures etc. That was the Obama, Demarco, Stevens etc narrative. I don't think they have to distance themselves much from that as they never presented the GSE's that way. Mnuchin from day one has wanted out of conservatorship and no risk to tax payers.

Regarding capital raises I would look at the govt sales of AIG, Ally etc. The capital was there and those were assets that were heavily diluted by a govt stake and big stakes. The gov TARP warrants were easily sold too. I believe if the price is right and terms attractive the money will show up for secondary offerings.

In regards to new shareholders not caring about old this could certainly be the case in the common and with dilution. Different story with preferred and their treatment once out of conservatorship and retaining capital. How can legacy shareholders disappear? Maybe in receivership but its clear this is not going that way at this point. How can legacy common and preferred shareholders not be considered in capital rebuild? They will be the ground floor to build upon!

I think in regards to the preferred the treatment of dividends/back pay on dividends I think is highly up for debate and speculative but I think eventual par out of the conservatorship and retaining capital is not a stretch. Big unknown will be time.

Midas79

  • Sr. Member
  • ****
  • Posts: 386
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11194 on: January 11, 2019, 12:16:09 PM »
Good post.

What benefit do current common and preferred shareholders provide to these institutions which need to raise capital?  What value do they provide if they are not supplying incremental capital? Would an institution that needs to raise capital be better off if legacy shareholders disappeared?

None at all, and that's where a lot of the risk comes from. Much of the "value" in the legacy shares comes in the form of the lawsuits, giving FHFA and Treasury an incentive to at least carve out something for them. However, that power lies almost entirely with the preferred shareholders.

Also, I am skeptical the incremental purchaser of new securities really cares what happened to the old shareholders-in fact if the new buyer may prefer old shareholders get canned if it allows for a better deal.  After all, if you were the incremental purchaser, you would ask: why shouldn’t I just go out in the market and buy my shares there? 

Buying shares in the market won't be an alternative for the new buyers because buying the existing shares doesn't add to the companies' capital, while buying newly created shares does.

What the new buyers would push for, though, is the lowest possible secondary offering price because it gives them a larger proportion of the companies' shares for the same amount of capital raised. The new buyers' incentives are directly opposed to those who hold common shares now. The junior preferreds are mostly agnostic to this unless a conversion is offered.

A full wipeout of old shareholders is neither probable nor necessary. Dilution can accomplish nearly the same thing. Also, not only will the new buyers not care about the fate of the old shareholders, they will have an incentive to dilute them as much as possible. Any money that accrues to those holding commons now is less money that will be available to the new buyers.

-As an owner of the
-If you are issuing equity, as an owner like treasury is, or as a large institution that needs a large amount of capital, I feel like it is crucially in your interest to raise that equity at as high a valuation as a buyer would pay.  Logically, this valuation would either be near the then-current market for the shares or higher (an incremental purchaser would just go to the market for shares if they were priced lower).

I don't think this will apply to the FnF recap. Instead of raising as much money as possible, I think FHFA and Treasury will raise a set amount and let the market decide what total percentage of the common shares they would demand in return. Overcapitalizing the companies is actually a problem because it makes it harder for them to produce a decent return on equity.

- The government now is no longer acting under exigent circumstances where it felt like it could do anything and everything that circumstance required.  Now one would think Treasury has to play fair.  It was easy for them to steal all the candy, but now they have to play nice in order to sell the candy back because they can’t force anyone to buy it.  Weird analogy but I think it makes the point.

What do you believe is "fair"? Or "unfair", for that matter?

So, the more serious Treasury is about that, the more they will have to change their narrative that the GSE’s are faulty to the core, inept, dangerous institutions in need of being ‘conservatorship’ and a Net Worth Sweep because they don’t make enough money.  Perhaps that is what we have been witnessing lately.  Another bad analogy: Treasury said they took over a bowl of turds, but now they have to be re-branded as raisins in order to sell them.

Yes, Otting's words yesterday show that FHFA and the adminstration don't consider FnF to be failed business models. But the big money knows that FnF are extremely valuable outside of consevatorship. I don't think Treasury or FHFA needs to convince them of that.

Midas79

  • Sr. Member
  • ****
  • Posts: 386
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11195 on: January 11, 2019, 12:36:08 PM »
good post - this missed the point though - the point is - if legacy shareholders can be wiped out based on lies - whats to stop them from doing the same thing to new buyer? The gov't holds all the cards and could 0 you out the day after your check clears based on the history here - that's the point.

Not quite. If people had any idea that an NWS-like event was eventually going to happen, they would have challenged the conservatorship within the 30-day window provided for by HERA back in 2008. I'd bet anything that if FHFA tried that again they would be flooded with lawsuits, discovery requests, etc.

Now, the risk of another huge downturn and shares going to zero is still clear and present, but all that's going to do is lower the share price of the secondary offering, not keep everyone away entirely.

rros

  • Hero Member
  • *****
  • Posts: 859
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11196 on: January 11, 2019, 12:57:24 PM »
He should spend time taking care of his health and praying to god to forgive his sins. But he keeps committing more sins.. some never learn.
https://www.mortgagemedia.com/opinion/former-fha-commissioner-reform-before-recapitalization
So it's not really about reform anymore. Nor the housing market. Neither about the 30 Y mortgage, affordable housing or the Trust Funds. What it is really desperately about -as it is finally coming out for the world to see- is reviving Obama's old war against vulture capitalists.

Luke 5:32

  • Hero Member
  • *****
  • Posts: 2356
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11197 on: January 11, 2019, 04:34:50 PM »
The attached could prove interesting.  Can't wait to read their filing on Monday.  FHFA requested and was granted an extension to this upcoming Monday to file a supplemental en banc brief in the Fifth Circuit because "[t]his case raises significant issues of interest to FHFA's new leadership [and] FHFA’s new leadership requires additional time to review the issues presented in the case and to evaluate FHFA's positions."

Invest for retirement?  Sure.  But investing in eternity is infinitely more important.  Don't get it twisted.  "...but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal."  Matthew 6:20

ValueMaven

  • Sr. Member
  • ****
  • Posts: 272
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11198 on: January 11, 2019, 05:04:38 PM »
how so Luke?

Luke 5:32

  • Hero Member
  • *****
  • Posts: 2356
Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #11199 on: January 11, 2019, 05:24:56 PM »
how so Luke?

Otting evaluating FHFA's position makes it possible (I'd say highly probable) that FHFA's position will change in a meaningful way.
Invest for retirement?  Sure.  But investing in eternity is infinitely more important.  Don't get it twisted.  "...but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal."  Matthew 6:20