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

[cherzeca]

Some of the variable rate JPS have such a low dividend rate that it would make sense to just leave them outstanding and pay their dividend. One such example is FMCCL which has its dividend calculated as the 5-yr CMT rate, currently 1.54%. If dividends were reinstated this would trade below par. There are about 10 others across the GSEs that are like this.

I wonder if it's plausible for the gov't to convert some series of jr prefs to common, and simply turn on the dividends for other series of jr prefs?  In other words, treating various series of jr prefs different than others.

if there are any outstanding juniors that are cheaper than what would be issued by GSEs in today's rate environment then it would make some sense to leave them outstanding...unless for some reason the GSE financial advisors don't want any prefs outstanding (I wouldn't know why if they are cheap)

[Luke 5:32]

I wonder if it's plausible for the gov't to convert some series of jr prefs to common, and simply turn on the dividends for other series of jr prefs?  In other words, treating various series of jr prefs different than others.

if there are any outstanding juniors that are cheaper than what would be issued by GSEs in today's rate environment then it would make some sense to leave them outstanding...unless for some reason the GSE financial advisors don't want any prefs outstanding (I wouldn't know why if they are cheap)

That's a good point.  A possible counter-point, not that I necessarily agree with the strength of it, could be that if the gov't leaves them outstanding then they wouldn't count towards Tier 1 cap. They'd also have to pay out dividends, albeit just 1.54%, but that would be money leaving the company when they're trying to raise capital levels. Again, not saying I think the counter-points are necessarily a strong argument, just mentioning them.

[Seahug]

It's quite possible FMCCL even at a low interest rate of 5 year CMT will still need to be converted to equity or called together with the other prefs. (All the prefs have call features though like FNMAS it's every 5 years.)

Even if reinstated, it does not qualify as Tier 1 capital under Basel III (came out in 2010 whereas FMCCL was issued in 1999).

https://www.bis.org/publ/bcbs189.pdf

11. Instruments classified as liabilities for accounting purposes must have principal loss
absorption through either (i) conversion to common shares at an objective pre-specified
trigger point or (ii) a write-down mechanism which allocates losses to the instrument at
a pre-specified trigger point. The write-down will have the following effects:
a. Reduce the claim of the instrument in liquidation;
b. Reduce the amount re-paid when a call is exercised; and
c. Partially or fully reduce coupon/dividend payments on the instrument.

[cherzeca]

what is the relevance of Basel to what calabria will propose in final rule?

[Seahug]

As I understand it US fed supports Basel III.

US implementation
The US Federal Reserve announced in December 2011 that it would implement substantially all of the Basel III rules.[24] It summarized them as follows, and made clear they would apply not only to banks but also to all institutions with more than US$50 billion in assets:
"Risk-based capital and leverage requirements" including first annual capital plans, conduct stress tests, and capital adequacy "including a tier one common risk-based capital ratio greater than 5 percent, under both expected and stressed conditions" – see scenario analysis on this. A risk-based capital surcharge...

....As of January 2014, the United States has been on track to implement many of the Basel III rules, despite differences in ratio requirements and calculations.[26]

Source: https://en.wikipedia.org/wiki/Basel_III

If you are going to have sub debt/prefs in your capital structure, you may as well make it count towards Tier 1 capital.  They can decide not to call/convert the low coupon prefs, but if you are doing it for most of the prefs, you may as well clean up the whole thing.

[cherzeca]

what does the fed have to do with the fhfa director?

[cherzeca]

oral argument at scotus on the ACA reimbursement case:  https://www.scotusblog.com/2019/12/argument-analysis-justices-appear-sympathetic-to-insurers-in-dispute-over-risk-corridor-compensation/

not a direct comparison to GSE situation, but this involves govt financial "trickery" involving billions of dollars that congress failed to appropriate that a prior congress said it "shall pay" to insurers.

[emily]

“Government can take care of all lawsuits by giving as much money back as shareholders want and in fact come ahead just because of warrants as follows.

Assume current enterprise value is $100.00. Government owns $80.00 in warrants. Now assume government gives enterprises back $300.00 and releases and relist them. The value is now at least $800 at 2X, $2000 at 5X and $4000 at 10X. It will trade in multiples now as released and relisted. So now   government’s  80% stake is worth: $640 to $3200. Govt makes so much more money than what they gave simply because the value of enterprise rises due to recap/release/relist and due to fact that its owns  80% warrants, a special situation due to release and relisting them (AIG wasn’t on OTC and wasn’t in conservatorship)

So why they not give all of the money back, all lawsuits withdrawn and everyone lives happily after?  “

[Seahug]

what does the fed have to do with the fhfa director?

Nothing direct and I am no expert...but the Fed funded the GSE initial bailout immediately prior to FHFA, had a consultative regulatory role and after provided some financial support.

Basel III is voluntary but the member central banks (fed is a member) push compliance to what's practicable. I have seen many tenders for noncompliant prefs - leading to some capital gain for holders, and reissuance of T1 compliant ones.

So in short it's a guess 

[cherzeca]

@seahug

fhfa Director Calabria said that new proposed capital rule to be released early 2020Q1.  we shall see.  but as the regulator who is bound by his own organic statute (HERA) as opposed to Dodd/Frank, I dont think the fed or Basel or the OCC or anyone else other than fhfa is in the drivers seat. remember, GSEs are not a bank, but a monoline insurer.  now, there are rules that apply, such as only noncumulative preferred count towards capital, but I dont see these rules as Basel or fed/dodd frank based.  the new fhfa proposed capital rule should spell all this out