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There is very little difference between a bankruptcy and conservstorship. Don't let the semantic difference confuse you. In bankruptcy, the court is even called "the conservator". They both involve being taken over and controlled by a 3rd party. The goal of chapter 11 and government conservstorship is the same; to preserve and protect the assets until they come to a conclusion on what to do.
P.S. like a government conservstorship, a bankruptcy can be forced, as well.
Preferreds have liquidation preference. Their value is directly tied to the equity of the business. As I showed the other day, after a 15% tax change, the tangible equity of Fannie Mae is $19b. Sr. Pfd's have first preference to $1b, Jr. Pfd's have second preference to the remaining up to $19b (because $19b equals par which is their contractual right). That leaves nothing left for commons, based on the current financial state of the company.
This is precisely why Berkowitz owns preferreds, hence he clarified in his last shareholders letter:
"We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators."
If your goal is to hit it out of the park, by all means, I wish you all the best of luck with your commons. But, I have a feeling there will be gnashing of the teeth after this is all done.
Sidenote for Ackman enthusiasts (I'm not one of them): as of December 31st 2016, he's been acquiring preferreds of the GSE's. After doing the math you'll see that his holdings is equal to an insurance policy. If his commons are wiped, the amount of preferreds he purchased will zero his losses if they make par. I find that interesting. It denotes a new uncertainty that he's recently acquired, to me at least.
I agree 100%. The wisest man I know often told me: prepare for the worst, pray for the best.
A lot safer than commons.
All the time? I disagree. IIRC GM and AIG were the only other bailed out firm whose equity was wiped out.
It's interesting to me that they don't own the new building like they do the current one, but instead are leasing it with the option to purchase. In any event, I'm not speculating that it will go down like in the case of GM. I'm only trying to encourage people not to be so close minded about all the various options that could take place. It's been my experience that it isn't the things you are certain about that kills your investment. It's the things you haven't even thought about that does.
Government can purchase FNMA/FMCC common stock at 0.000000001 per share. This warrant will expire 2028. If they issue IPO, I am not sure that the warrant terms will be grandfathered.
I believe the warrants will remain. The cost basis is de minimus compared to the overall bailout, so I think they're looking at it the same way I would as an investor: if it makes money, great. If it doesn't, I'm really not losing anything. I define that as a sure bet that I wouldn't entertain the thought of giving up.
But the profit is there. The shareholders are there. You can't bait and switch like this and expect ANYONE to show up for ANY proposed replacement.
Again it boils down to - look at what we did to the last group of equity investors - we screwed them. Who wants to get screwed next?
Who wants to sign up for that exactly?
The profit is generated through g-fees of assets they do not own. Not impossible at all.
You don't need an IPO for a company that already has shareholders.
The cash on hand IS an issue, especially when they earn over $4.00 per year, per share.
They have more than enough profits to pay debts (liabilities), out of earnings.
Why do you think investors continue to invest, not only in the stock, but in the MBS bonds (which are backed private insurance companies, with the premiums paid by borrowers (homeowners, financed through FNMA).?
Investors buy billions in MBS bonds because they feel they are safe and fannie is solvent, with plenty of cash to pay bills.
According to Yahoo fiance, Fannie has cash in the bank of $16.66 per share.
Are you afraid to buy a stock for $2.95 that has $16.66 cash in the bank?
I have, several times. Right now, there is enough tangible assets to cover the Sr. and Jr. Pfd's portions. Anything beyond that, nothing.
No doubt in my mind that the NWS will continue... until it doesn't.
Because it doesn't require an executive order. The treasurer can stop it by amending the SPSPA. As he said, any reform will happen after the tax plan is made legislation.
I agree. That doesn't change the fact that they're not a problem now, though.
All the answers are in the 10-k. The government believes their assets created large loan losses. I tend to agree. $2.9 trillion of consolidated trusts that they don't own but only guaranty through issuing MBS Bonds only require a loan loss reserve of roughly $600 million. The small asset portfolio they do own of $204b requires loan loss reserve of $22.8 billion. Clearly, owning the assets is where the risk is.
This is why the argument is: if they're going to operate like a bank and own the asset, they should carry a risk-weighted capital requirement of 4% on consolidated MBS portfolio's (banks are 10%). If they're just going to insure them, they don't require nearly the capital requirement. This is why I don't mind seeing that portfolio diminish.
The GSE's were created to provide liquidity through writing and issuing MBS's, not to own the assets like a bank. They should get back to their core business. That's what the government believes and why they've made requirements for them to do so.
No, to limit their involvement in purchasing mortgages and focus more on insuring them. Their loan portfolios consist of one's they own and those they don't own. Nearly all of their allowances for loan losses, which decrease value, come from the portfolio they own.
To decrease their mortgage loan portfolio (not consolidated trust portfolio) in order to decrease the allowance for loan losses which are primarily comprised of that portfolio, would be my best opinion. They want them out of the direct mortgage business and solely into insuring loans.
Whitney Tilson's Kase Capital Fund has produced an averaged annual return of 5.64%. Not the kind of impressive investment returns that garners serious attention. Putting that into perspective, the average long term rate of 30 Year T-Bills is 7.01%. He barely beats the S&P 500. Yet, I've rarely heard him state that his investments weren't worth at least 4 - 10x his purchase price. His only problem: none of them ever are. If he's highly regarded, it's only in regards to his average return being sub-par. He certainly isn't looked upon with such adulation by his peers.
Source: http://www.valuewalk.com/wp-content/uploads/2017/02/Kase-Fund-annual-letter-2016.pdf
That definitely played a part. There were so many factors that played a roll, but I can say this with absolute certainty: Greed, regardless of where it came from, was the central core. That is something that can never be regulated.
Trust me on this, when you find that you are in agreement with the majority, most often times you are wrong.
The plan is for all corporations to adopt 15%. Trump has never alluded that companies who were bailed out should be punished. That'd be an awkward statement from someone who's declared bankruptcy 5 times, don't you think? Matter of fact, I can't recall Trump ever mentioning anything about companies that were bailed out. I believe the plan is much simpler. It's classic Arthur Laffer economics that's been around since 1974.
Do a search within the bill for ""judicial review". 4 matches will show up producing the sections you're looking for.
In 2008, the government believed the GSE's wouldn't be profitable going forward. Based on that assumption, they wrote down the carrying value of the DTA's. In 2010, they found out they were wrong and marked the DTA's back up. Also in 2010, new recognition rules were adopted. The companies started to consolidate VIE Trusts that were previously off-balance sheet entities. Because Fannie "controls" these entities, they're allowed to include them. However, they do not own them which is why they should be unconsolidated during valuation analysis.
I've reached my posting limit for today. Have a good day everyone.
That'd be nice. It's what I'm crossing my fingers for. However, if NWS continues, commons better be paying attention because with $19b of tangible equity left after a DTA impairment ($1b to Sr. Pfd's & $18b to Jr. Pfd's), that would make me question whether the government is purposefully trying to shut out the commons.
Not while the companies are in conservatorship.
The DTA will decrease because of corporate tax law changes, not because of a decline in foreclosures. Delinquency Rates remain relatively constant, with the exception of the after affects of recessions. Prior to the recession, Fannie Mae's Delinquency Rate was around 0.70%. For the last several years it's been in excess of 1.2%. It's been declining, but very minute.
Do I read the balance sheet right? stockholder equity for preferred is about $34/share and about 50c/share for commons.
Where do I read guidance on which pfds to buy?
the lower the tax rate the lower the annual obligation and the LONGER the DTA lasts
I assume you mean a tax rate of 15% (not a change of 15% but a change to 15%)?
Readers here - due to your work - finding the right documents and doing the analysis -- can now see how important for F and F - for us long F and F - to not believe a 15% rate is coming
That is why I suggest for consideration the current move up in PPS may be "players" now disregarding such a low rate of taxation and plugging in 25% in their risk reward modeling
If and when 15% is likely - preferreds will stay level and common will drop 20-25% from says the PPS today
Does a DTA have a dollar value that is constant or can a DTA be thought of as an amount of profit - future profit - that will avoid future taxation?
Fannie Mae's Tangible unconsolidated Book Value is $37.45b. A tax rate change of 15% impairs that value by $18.18b which leaves $19.27b. This is the primary reason Pfd's are the best bet. With the way things are progressing with Treasury not stopping the NWS, common holders would be wise to think about a scenario in which preferreds recieve 80% of par and commons recieve nothing. It's very realistic at this point, in my opinion.
I opted not to include the true allowance for loan losses relating to the portfolio actually owned by Fannie Mae because it's de minimus and makes little difference in the outcome.
do you think the DTA of the size F and F have is related to paying too much (or accrual adjustments)
DTAs of that size are often from NOL carry forwards (not backwards)
It could be as a result of NOL's during the two year carry-back period. It could be due to under/overstating tax obligation (an accounting mechanism many companies use to understate or overstate earnings), it could be a combination of the both. It really doesn't matter by what means they were created. The fact that they are calculated using the effective tax rate, and that rate being able to change at any moment, is what is important.
Think we're talking about two different things. A NOL can be increased by future losses. The conversation is becoming more confusing than it needs to be.
My tax refund is an asset. Interesting to think of it that way.
DTAs are on losses on assets and I believe it taken of the profit to lower your tax liability and really doesn't have anything to do with the estimated payments.
Not rocket science
Deferred Tax Asset impairments can be carried forward like an operating loss, but that's the only similarity they share. DTA's can change, and often do on an annual basis. A NOL involves expenses being greater than revenue. DTA's are an entirely different matter. Also, NOL's can change as well. But they're not influenced by tax rate fluctuations in the sense that DTA's are.