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Where's it at? Did he stuff it in his sock?
Nobody knows, but $11b is half of what the current requirement is and everyone says that's too low. The most recent bill before congress is $75b. If earnings are $11b per year, that would take 7 years to save if the company decided to use 100% of their earnings. Obviously they can't do that as they need capital to retain for investment.
A capital raise by issuing new shares is the only way.
Congress has no say.
$11b isn't going to do it.
No. The way I suggested will produce the right answer. No need for all the unneeded detail you're suggesting.
Compare prices as a percentage of income pre-GSE. I bet the data doesn't substantiate your claim.
I believe you're right and I was in error. But, I'm not going to tell that other sob that I was wrong. Lol.
Good information!
I apologize, I didn't complete the statement. I meant the core capital requirement. $25.14b. Sorry about that.
Side note: accumulated deficit and retained earnings are the same thing with the exception that one is negative and the other is positive. When earnings are retained, they're catagorized as retained earnings. When more is paid out than retained, it's accumulated deficit. Obviously they've been a deficit since the NWS.
Core capital is listed in the 10-k as $25b in total, I completely agree with you.
I don't care what Citigroup's deal was, honestly. Any conversion or possibility of conversion of preferred shares does not increase the core capital. Therefore, it doesn't have an effect on the forthcoming recap requirements.
The basis of how this discussion even started was the idea that non-convertible shares could be converted to common which, in the posters mind, would satisfy the recap standard.
It didn't work out that way for Citigroup. For those that don't know, Fannie Mae's current capital requirement calls for the company to meet the obligation using Tier 1 Capital. Tier 1 capital consists of the market value of common AND preferred shares, among other things. If the value of preferred & common is already being accounted for, what's the purpose of converting preferreds into common to begin with?
Notice how it did not affect a change in Citigroup Tier 1 Capital Ratio.
"This transaction could increase the TCE of the company from the fourth quarter level of $29.7 billion to as much as $81 billion, which assumes the exchange of $27.5 billion of preferred securities, the maximum eligible under this transaction. Citi's Tier 1 capital ratio is 11.9 percent as of December 31, 2008, and is among the highest of major banks. This ratio is not impacted by this transaction."
From Fannie Mae 2015 10-K:
I've worked with hundreds of tender offers that involved cash. Lol. I can show you several that exist right now on the market place that involve CASH. M&A's that are transacted via a TO cash offer. lol
A tender offer covers several types of transactions. It's a general term. If you think Fannie Mae will do that, then place your bet accordingly. I highly doubt Fairholme Capital believes that could happen :)
A non-convertible preferred share cannot be converted to common. It can be converted to a different class of preferred shares upon agreement that happen to be convertible. That's an entirely different scenario. Nearly ALL of Citigroup preferred shares were convertible. Nearly NONE of Fannie Mae's are. Much different story.
I was a broker for Citigroup. I didn't work in the cafeteria.
After the conversion of the preferreds and warrants, their net income never changed. They were still worth the same as they were before the conversion took place. All that changed was the liquidity environment for the company. Although helpful, it still doesn't get you to $100 per share.
The majority of Citigroup preferreds were convertible. They converted the non-convertible shares to trust preferred securities. They were the only group that weren't converted into common. I worked for Citigroup for 7 years. I've got a good idea of how it played out.
I'm 100% sure they can't. The majority of Citigroup preferreds were convertible. These are not.
From Citigroup in 2009 regarding the non-convertible pfd's.
"The U.S. government will exchange the portion of its existing preferred securities that is not exchanged for common shares into new trust preferred securities. These securities will carry an annual coupon of 8 percent."
They were the only group that didn't participate in the conversion to common.
"Okay, so $75-100 is absolute best case unrealistic unicorns and rainbows scenario, because it assumes that Fannie will get its capital buffer from thin air and no warrants exercised."
you should write your question for Tim on his blog. I don't like answering for other people. He responds to several of the questions asked of him
"What I'm trying to do now is see exactly how much money Fannie actually received from the government and how much of it was advanced from Treasury for the sole purpose of sending it right back. According to TH717 (yeah, I know lol), FnF combined got $187B of bailout money but $55B of it was immediately sent back. This means the bailout money has been completely repaid plus $125B."
The GSE's received $187b and returned $250b counting dividends. After taking loans for a couple quarters of deficiencies, an investor I have great confidence in says the overpayment is approximately $32b. I haven't done the math on that yet.
"A settlement, then could either have the government give back the excess and keep the warrants"
The government didn't do that with AIG. They kept the $20b excess that was paid. I find it highly unlikely for that to occur so I don't include it in my thesis.
"I can't see both the recap AND warrants hurting shareholders, a settlement has to actually gain something for the plaintiffs."
It doesn't "have to" do anything of the sort for the plaintiffs. Although, I agree that the warrants will most likely be used as an incentive for the lawsuits to be dropped.
"By the way, I see that you tend to insist that dividends be deducted from earnings before doing a 10x P/E multiple"
I don't insist on that, I just happened to use that as an example today. The other day I did the same valuation without including the amount.
The secondary market which many of those companies no longer exist. Your CountryWide's of the world.
I appreciate your points. I'd like to address a couple of them.
"however, if the warrants are canceled or amended, lots of potential would possibly emerge to limit the share dilution to less than the 4bn of additional FNMA shares you expect. for one, there could be an optional / voluntary exchange of the ~20bn of combined junior preferred into common."
All of the Junior preferred shares of Fannie Mae are non-convertible except one, FNMFO. Currently it's priced for $25,750 per share. I can't remember the last time it traded.
"second, as ackman has suggested, there could be a grace period to make it to the required capital levels, as has been the case with banks in their regulatory stress tests."
Ackman's grace period is a matter of several years. Very unrealistic and would not stop the shareholder lawsuits. The government wants those issues to be over as quickly as the shareholders want their company back, I'm certain. Also, that certainly doesn't live up to a reasonable definition of "reasonably fast" as stated by Steven Mnuchin.
In 2015, 6% of their portfolio was represented by a FICO score under 660.
In 2006, 6% of their portfolio was represented by a FICO score under 660.
There's been no change to the sub-prime lending activity.
"$100B is not out of thin air. The $75B you are giving is assuming the loans that Fannie packages will be 'Hunky Dory' scenarios."
5% recap is three times the amount required by the banking and insurance industry. If the standard weighting is increased for FnF, it will be done so for all otherwise it breaks constitutional law regarding partiality. For the same reason you can't make black people not use the white man bathroom, you can't force one company to play by a different set of rules than the rest of the entire industry.
"If the Govt. still demands that Fannie & Freddie need to 'perform' their Mandated objective of making Housing affordable to a vast majority of low to middle-income americans, will the 5% cushion be sufficient?"
The recession took $186b which over half of it was paid back immediately because there was no NEED for it. The answer is simple mathematics. What's half of $186? Now recognize that the recession was the worst economic distaster the United States has had in the last 70 years. Now, calculate the probabilities based on a 200 year history. You tell me the answer :)
"You seem to be saying there won't be any 'Sub-prime' loans that Fannie/Freddie will accept anymore..."
The average weighted FICO score for Fannie Mae's MBS portfolio was 748 in 2015 (page 6 of 2015 10-k). That's nowhere close to sub-prime. Compare that to 2006 when the average weighted FICO score for their portfolio was 716. That's a huge difference. Clearly there focus has been to guarantee loans of less risk.
It's in his book "The Dhandho Investor"
I believe over time their operations will increase significantly. Interest rates are on the rise and their revenue stream will reflect that.
He was valuing the business without making adjustments for anything beyond earnings. Rather than valuing the business the simple route of 10x earnings, he went into detail. He's intelligent enough to know that after recap, dividends, and the possibility of warrants being excercised, that this company is worth nowhere close to $100 per share.
Indeed.
Much easier than you're under the impression.
They only used the backstop once. It wasn't needed or used for 70 years. The entire purpose for recapping the company is to require them to hold an amount very similar to the amount they took during the bailout; the amount they didn't need to begin with.
My thesis is pretty much exactly as you've just described. I believe warrants will be a bargaining chip to incentivize the release of the shareholder lawsuits. At least that's what I hope. I believe 3 - 4 billion shares issued is about right. $8 - $10 share price. Thank you for your kind words.
His post showed a complete lack of economic understanding. Zero growth equals CPI. Home prices are only 0.80% above zero growth. end of story.
In order to determine whether your argument is valid, you'd analyze the housing market. In the last 41 years that the Federal Reserve provides data for, housing prices have increased an average of 4.54% per year. If you think that is excessive, then your argument might carry water. However, it just isn't. During the same period, the consumer price index rose an average of 3.74% per year. That means unless you believe that a 0.80% annual return above zero growth is equivalent to excessive, it's quite the opposite.
Good post. The most interesting thing about it is this:
Merry Christmas.
Mohnish Pabrai, who did the best valuation in my opinion of DRYS, valued the business in excess of that two years before it happened. It wasn't a surprise to valuation experts. At the time, I held VNDA that went from $0.70 per share to $15 in one day. It happens. But, you usually know when it's going to happen based on logic and math rather than irrational exuberance.
The business of investing is conducted with math. That's why you have numbers on currency. If the math doesn't add up, the thesis doesn't.
I agree with you. I believe in most cases that government regulation does more harm than good. All one has to do is look at the difference between the way UPS, FED EX, & USPS conduct their business activities. The private sector greatly outperforms government in every way. That's why we're in a period of tremendous opportunity by having businessmen with proven track records running this country. It's an unprecedented time in history.