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"A fool and his money are soon parted."
It's just strange that the big drop happened today instead of yesterday. When Light's first piece about the new Corker/Warner bill came out last month the prefs immediately rallied hard.
The Benzinga piece is way overblown. A conversion of juniors to common has so many moving parts and variables that it is nearly impossible to know how those two classes will do based on numerical assumptions. I have only assumed that a conversion would favor juniors because they could convert at market rates right now and largely haven't, so to accept a conversion they would need a premium, along with a ton more certainty about the future of FnF.
Yeah they're shaking the tree......with a chainsaw.
I'm sure iHub will appreciate your $100.
I don't quite understand what you're asking.
Well put.
As I have said before, righteous indignation is a poor investment thesis.
None of this answered the question. What specific law is broken?
Remember that I am only talking about dilution of common shareholders, not specifically about exercising the warrants. My question applies to future equity raises for the purpose of recapitalization as well.
If the senior preferreds were somehow repayable, FnF could each pay their $3B in capital reserves to Treasury and come out exactly where they would have been without this capital reserve change: with $187B in senior preferred on the balance sheet and zero capital.
As it stands they each have $3B in capital and a total Treasury liquidation preference of $193B.
One thing I didn't think of before is that Treasury's IRR might have dipped back below 10% as a result of the increased liquidation preference. It almost certainly has for Fannie, maybe not Freddie.
The preferreds only have that cap if they are not offered a conversion to common. I anticipate that happening because it gets FnF out from under those dividend payments allowing for common dividends and an easier recap, along with not costing the government any money.
That's very low volume for FNMAS but pretty high for FMCCL. I think the lower dividend prefs are starting to get more love, perhaps in anticipation of a conversion offer than only takes stated value into account.
It's more of the toxic "us versus them" mentality. People start imbuing their stock positions with morality, crowding rationality out in the process.
Righteous indignation is, and always has been, a particularly poor investment thesis.
My point is that if only the NWS was stealing, then Treasury returning everything above the 10% rate in the original SPSPA only amounts to a few billion for each company, a long long way from a total recap.
Thank you for keeping us posted. While it seems that the date of the signing keeps going back and forth, it makes a pretty big difference if Trump signs it before January 1 or after.
Signing before January 1 means that the DTAs would be written down almost immediately (during Q4, i.e. by December 31) and the draw would happen March 31, 2018. That's not enough time for Fannie to build capital through profits even if Treasury allowed it: Fannie's Q4 2017 and Q1 2018 profits, along with the $600M of capital already held, are unlikely to be enough to cover a loss of $11.8B due to a DTA writedown (number courtesy of Tim Howard).
Freddie might be able to squeak out enough money due to its bigger profits and smaller writedown. Still, even one of the GSEs needing a draw is obviously something FHFA and Treasury wish to avoid given today's agreement.
The Dividend Amount is all net worth minus the capital reserve. The capital reserve is what changed, from $600M now and zero starting January 1 to a flat $3B from now on. The language about "minus $2.4B" means that the $3B per company capital reserve will be established with the next $2.4B of profit each company makes, which should already be on the balance sheets. The December 31 payment was already going to be Net Worth - $600M, now it will be Net Worth - $600M - $2.4B, or Net Worth - $3B, i.e. a capital reserve of $3B.
Technically I think $2.4B of the "draw" will happen on December 31 and the other $600M will happen on March 31, 2018, when that $600M would have otherwise gone to Treasury.
Ironically it would have been better for Watt to have taken the $10B draw that Corker taunted him with. At least FnF could have kept it.
This isn't shorting or market manipulation as much at the news not being nearly as good as the headlines make it seem. I highly encourage reading the actual letters with the amended agreements and not just the news stories.
FHFA Statement and links to Letters
Basically the companies get $3B in capital reserves each but if Watt tries to hold back more the reserves instantly drop to zero. The NWS otherwise will continue as before, just with different capital reserves. Under this agreement FnF will still pay all profits to Treasury starting in Q1 2018.
According to Fannie and Freddie's filings they must write down the DTAs by the entire applicable amount in the quarter that the tax cut is enacted. If Trump signs the bill before December 31 then FnF will report a Q4 2017 loss, leading to a draw on March 31, 2018.
Corner of B&F post about DTAs
It happened two weeks ago.
85% preferred, 15% common.
The more important detail about the tax bill possibly not being signed until after January 1 is that it would push FnF's DTA writedown into Q1 2018 and the draw from Treasury wouldn't happen until June 30. The zero capital point will still happen on March 31 assuming the full NWS payments are made on December 30, 2017 and March 31, 2018.
I'm not sure if this is good or bad. Zero capital and more NWS payments are bad (I don't think that money would ever come back to FnF), but the crisis that a draw would cause would give the actors incentive to act faster.
Probably good overall, then. Congress could actually get a bill passed using the draw as leverage and I don't want that to happen. I prefer administrative reform.
Before December 7 the commons were quite strong relative to the preferreds, at least looking over the last six months and over the last year. December 7 brought the preferreds to a position of moderate relative strength and the gap has been widening ever since.
Usually I would take opportunity to rebalance towards commons, but I'm holding for now (80% prefs, 20% common) for the same reasons only the prefs have run up recently: Congress keeping FnF around removes some uncertainty from the prefs but not from the commons (dilution risk).
Thanks for posting that. It's very informative as to Corker and Warner's direction.
This piece, unlike last week's, leaves out the juicy bits about the potential fate of existing shareholders. Keeping FnF around, and even releasing them from conservatorship once competitors enter the field, can only be good for junior preferred holders. Commons are much murkier, though if they keep their stake in FnF then they should do well also.
Warrant document
I can't copy and paste the text, but at the bottom of page 3: