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Thanks Holden,
The follow up questions are then - can the reissue come before the SCOTUS decision? Seems like SCOTUS could have material upside to commons.
Could new JPS be sold before the SCOTUS decision?
Why not have a conversion ratio based off a multiple day trading period or something like 89% of the weighted average price to provide incentive to convert?
Thank you once again Ano!
Can you confirm that Vinson and Elkins will also be given time at the oral argument on behalf of the Amicus brief filed by Blackwells?
Hi Holden,
Thanks for all your updates.
What do you think comes first - conversion terms or relisting?
If FNMA is relisted - do you think more real money comes into the position like American Funds. Shouldnt FNMA be 50 to 60% institutionally owned since it will have a high cap weight component in S&P 500?
I guess I am thinking that shorting at $ 2.20 is starting to get dangerous if relisting is likely before the conversion ratio is set. Some index funds could start buying before new shares are issued and the short interest ratio could be a cause for short squeezes before new shares come to the market and before the conversion happens.
Thanks - I did not realize that was the case. I thought if the parties settled the whole issue would be moot. Of course a good settlement and an early settlement is better but for the best interest of the Rule of Law and shareholders generally it would be best to have the NWS ruled ultra virus and unconstitutional.
Hi Kthomp,
If the GSE's are released under consent decrees and the Conservatorship is ended prior to oral arguments doesnt Seila become a clear precedent since FNMA and FMCC are no longer government owned? Roberts made a reference to the government owned status in the Seila paragraph referencing FHFA/
Fair Point - I was referring to the facts that new Directors were appointed for FMCC and that Calabria mentioned in the CATO podcast that the components of the capital raise was up to the BOD. Hoping for the BOD to make a NYSE listing happen.
Thanks bcde
Vinson and Elkins gets to argue on behalf of Blackwells as Amicus. Will cite Calabria at Cato.
Personally I hope this doesnt settle - want to hear the oral arguments
No Back Door Nationalizations!
Earnings
Cap Rules
Big one is the election - if Trump wins - Trump upside and SCOTUS upside
Maybe a relisting since BODs are starting to operate normally
I dont think it is about the cases. SCOTUS has not ruled that the single director status of the FHFA is unconstitutional yet - it will decide that in the next term. How can Calabria be replaced until that ruling comes down?
I am holding. Expect a grind up as JPS go up. Really like that SCOTUS is going to be fully briefed about all the bad actors and bad actions under the BO Treasury Department. Cant wait for Thomas opinon on this. BO intentionally screwed us and we will finally get our day in court. Cant see where JB will go against SCOTUS and we know that Congress will not get anything done. In the meantime Calabria can just keep going forward and do whats right. It would be nice to see a NYSE listing to make it possible for real money buyers to get involved.
Calabria has until the ruling to manage the recap and release no matter who wins the election. We will know a lot when the case is argued and the parties could settle after arguments and before decision if Biden wins. Calabria could end the conservatorships prior to year end and enter in consent decree prior to year end.
No guarantee of October hearing - the October Term has hearings into Spring. Upside is that Calabria can not be replaced until Collins is decided. Probably good thing to have SCOTUS hear about how UST acted.
Looks like there already are about 40 cases on the docket - could be Spring hearing. On the upside Calabria cant be replaced until they rule but the open question is what this does to the settlement and recap timeline.
Mr Market is very, very, very, very tired. More sellers (including short sellers vs JPS) than buyers. I havent bought anything for a long time - just waiting. If you are a trader do you trade from the long side or short side. Navy seems to keep a core position and sells rallies - probably the way to go. THis is going to be a tough hold for another 2 to 4 years as the overhang of new shares works through the market - in the end the tax basis of many of us weary shareholders will be very close to the dividend we will receive each year.
It wasnt too long ago where there were research reports touting a $ 0.25 price. SCOTUS will have one or more opinion/order days in the near future. Collins and McNuchin are up for disposition. FMCC announced independent Directors. FMCC has JPM as Advisor. FNMA has MS as Advisor. FHFA has Houlihan as Advisor. American Funds continue to be major investor in common and preferred. Ackman continue to major investors in common and preferred. Its your call if you want to talk $1 now.
Thanks Canceled
I thought Nomura had the convert preferred at 3.5 but at 3.5 % - please issue away. This is basically a 28 priortized PE - common would benefit significantly if JPS could be issued at 3.5% since convertible preferred would be issued at a lower rate. Assuming a 10 PE on the common - anything issued at 7.5% or better is a no brainer. Just need enough Tier 1 equity and the rest at low coupons. Remember a 10 PE assumes a 10% return on shareholders equity which can be paid out as dividends or retained and reinvested in the portfolio on a leveraged basis.
Hi Com Cancel,
Arent you proposing this? Convert existing JPS to Common and then new issue of common, Convert preferred and new JPS? The new JPS will likely have a 4 to 5% dividend yield which is slightly lower than weighted average of current JPS.
I think what you are saying is that you want to have a favorable conversion ratio and then you will be ok with a market JPS dividend which is probaly around 4.5 to 5.5?
Doesnt this make sense since a 5% dividend for the JPS is better than a 10 PE for common?
Hi Kthomp,
Thoughts about this? Dont you think that they would be concerned about litigation if shareholder rights are not properly followed. Cant understand why they would come now rather than exit from Conservatorship if shareholders did not matter.
Ralph Nader protested to the BO Administration regarding GSE shareholder rights. The NWS was an intentional act done by BO and his Administration.
Here is Nader's letter
https://nader.org/wp-content/uploads/2013/05/lew-5-18-13-11.pdf
I agree with Nader. BO and JB are responsible for the actions of their Administration.
Thanks TRCPA - a lot is going to be decided in the next couple of weeks. THe big population centers of California like LA County and Orange County are starting to look a lot like Sweden with a spike in cases but lower hospitalizations and ICU rates and ultimately lower deaths. NYC is more like Europe generally which was a brutal way to get to wider immunitiy levels.
Here is LA County click the daily chart: -http://dashboard.publichealth.lacounty.gov/covid19_surveillance_dashboard/
Here is Sweden which is the closest thing to American openess and resistance
https://experience.arcgis.com/experience/09f821667ce64bf7be6f9f87457ed9aa
The problem with the big States like Texas, California and Florida is that it is now starting to spread in the smaller cities and the rural areas and it will take time to work its way through but the economic impact will be less because of the lower population and more risk takers
THank you again Ano
Have you seen the Amicus Brief by Blackwells filed in the Collins v McNuchin Case? It seems like SCOTUS should be well informed.
https://www.supremecourt.gov/DocketPDF/19/19-422/120707/20191030091202201_Final%20Blackwells%20amicus%20-%2019-422%20-%20PDFA.pdf
Personally, I am encouraged by the cite of the Cato Paper that Calabria wrote saying that the NWS was illegal because it goes beyond the authority of a Conservator and that a Conservator should follow FDIA precedent.
The Calabria on the Podcast sure seemed like the same guy who wrote this paper. Relies heavily on FDIA resolution principles akin to Bankruptcy.
https://www.cato.org/sites/cato.org/files/pubs/pdf/working-paper-26_1.pdf
He also seemed to give a lot of deference to the BOD of each GSE. Ano viewpoints may be the right ones regarding shareholder rights and the ultimate authority of BODs
Mr Michael - you are a real gentleman.
For what it is worth I made my first purchase in May 2008 including some FNMAT at $ 25 on the new issue. I believed Hank Paulson - how about that!!.
Bought and sold a lot more since then but now is not the time to second guess.
GLTA!! - even KThomp.
GLTA to everyone.
We do not know what kind of settlement will be made with common or how the NWS will be treated. Nomura has a $ 5 number as a starting point - ACG has $ 6 to low double digits as a starting point.
A lot will happen starting with Seila and final capital rules. MS and JPM have no incentive to screw existing shareholders and could face litigation from class action lawyers or possibly liability if they dont treat existing holders with reasonable care.
Hi Kthomp,
UST could potentially make the most money and settle the derivative claims if they agreed to make a large derivative settlement with FNF.
Step one:
Agree to a $ 100 bn settlement of derivate suit. This settles the derivative litigation and capitalizes FNF for risk based capital rules.
Step Two: Keep the SPS in place and require FNF to sell common, convertible preferred, new JPS and possible COCO debt to redeem SPS equal to $ 100 bn
Step Three: As sales proceeds come in and SPS redeemed pay off $ 100 bn settlement
Step Four: Exercise warrants and sell shares
Net effect - 0 cash outlay, Capital levels are reached with the SPS remaining in place until redeemed and UST makes money of its 80% warrant stake.
https://www.nytimes.com/2013/08/07/us/politics/obama-fannie-mae-freddie-mac.html
Here he is.
Maybe there is a better way to preserve the 30 year mortgage and monetizing the going concern value for the GSE's rather than Valerie Jarret's plan?
Maybe Mark Warner and Bob Corker would make more personal wealth from the Jarrett plan?
Hi Kthomp and Ano
Have either of you seen the SPS Agreement cited by Paris before?
Check out Paragraph 9
9. Additional Classes or Series of Stock
The Board of Directors shall have the right at any time in the future to authorize, create and issue, by resolution
or resolutions, one or more additional classes or series of stock of the Company, and to determine and fix the
distinguishing characteristics and the relative rights, preferences, privileges and other terms of the shares thereof;
provided that, any such class or series of stock may not rank prior to or on parity with the Senior Preferred Stock
without the prior written consent of the holders of at least two-thirds of all the shares of Senior Preferred Stock at the
time outstanding.
Could the BOD just leave the SPS in place and redeem the SPS over time as outside capital is raised?
Also - check out the items covered in Paragraph 10 including a reference to Delaware law except where the Federal law supercedes. Maybe all the corporate and shareholder rights of Delware are applicable since they are not covered by HERA?
Hi Paris,
Thanks for the cite - interesting read. Any thoughts or reason to share now?
Hi Kthomp,
The underwriters will paid a placement fee for any security they underwrite and distribute. This includes convertible preferred, COCO debt and new non cumulative preferred debt.
All of these securitis will have less of a dilutive effect or cause no dilution - as is the case with the non cumulative preferred.
According to Nomura we could see common, convertible preferred and non cumulative preffered to be issued.
The underwriters have no incentive to dilute common shareholders but just make money. The amount of dilution will be driven by financial and legal outcomes germane to the GSEs not a far fetched incentive to dilute common shareholders.
Interesting development. One thing to consider is that FNMA and FMCC are considered Exempt Issuers since they have implied full/faith and credit. You may remember that FMCC had to delay its capital raise in 2008 because it did not have a registration statement filed.
Do we know if Nomura included any possible settlement proceeds for common?
What is clear is that the common has a reasoned worth around $5 in the investment community rather than worthless or near worthless. If you start with $5 and add UST warrants at $.01 then you can make starting valuation scenarios in the $ 10 range.
Long term the stock will probably trade based off comparable market valuations
It will most likely be majority owned by large money managers and index funds because it will have a relatively higher market cap. Would you think FMCC or BAC should have a higher P/E?
Hi Kthomp
Is it possible for UST to convert the SPS to common and then relinquish the newly converted common capital back to the GSEs as a settlement of the derivative claims? FNMA and FMCC and then resale the newly issued shares to the public to replace the UST shares with cash proceeds.
This in effect would benefit the value of the UST warrants and the existing common on a pro-rata basis in the GSEs resale the UST settlement shares at a premium to book which seems plausible.
If the UST converts it SPS for 100 bn at 1 bn per share and then relinquishes ownership of these 100 shares - the proforma capital of the GSEs would be 100 bn plus the 20 bn of current net worth plus the 30 bn of JPS. If UST settlement shares could be resold at 2X book - existing shares and UST warrant BV would increase from 20bn to 2/7 of 120bn or 34.29 bn.
Of course the key is reselling UST settlement shares at a premium to book which seems very doable based off a reasonable P/E. If the GSEs need more cash equity more of the settlement shares could be sold over time. Any sale above BV would benefit the value of UST warrants and existing common
Hi Kthomp and Ano
Do you know if yesterday's SCOTUS decision regarding the Appointments Clause and the Puerto Rico Athority SCOTUS decision has any impact on the Appointment Clause issues for the FHFA? Maybe this case is foreshadowing part of the Seila decision?
Could it be because the $30 bn overpayment due to the NWS was higher for FMCC than FNMA. Since FMCC has much less shares outstanding any settlement amount for common could be much more impactful for FMCC common rather than FNMA common?
Hi Donot
Kthomp has made the point that the SPS to common conversion is within the power of the UST and would be highly dilutive. I believe he is thinking that common would be worth around $ 0.70 per share if this happened.
Assuming he is right - the UST would own almost all the existing common shares and 80 pct of the warrants. Theorectically the UST would make more from the SPS conversion than the warrants because of the massive dilution.
The goal of the capital rules is to get new investor cash on the balance sheet of FNMA with most of it being Tier 1 common. FNMA can issue new shares or resale outstanding common that was repurchased in year's past.
Also - the surviving litigation in Sweeney's court are derivative claims which mean that any recovery goes to FNMA itself after the lawyers are paid. If the derivative suit is successful then we as common shareholders would benefit pro-rata with the warrants because it is value received by the company we own. Ironically if the UST ultimately looses the derivative suit it also wins because it owns 80 pct of FNMA assuming the warrants are valid. Similiarly if the UST settles - the UST would also win because it owns 80 pct of FNMA.
I know the numbers are not exactly right but assume the SPS is 100 bn and is converted for new FNMA common worth 100bn. Also assume that UST settles the derivative lawsuit for 100bn and returns the newly issued shares back to FNMA. In this case the real economic status is the same as if the UST redeemed but FNMA would be deemed to have 100 bn of capital but with no additonal cash. My question is what if FNMA then resales the shares received from UST for new investor cash leaving it with 100 bn of new cash and 100 bn of capital. My question is if this is possible and is it a better scenario for existing common?
Hi Kthomp
Regarding your SPS to Common conversion scenario - doesnt this set up nicely for a possible settlement of the derivative liability suits currently in Sweeney's court?
UST could convert SPS to common and then sell common back to FNMA as a settlement for the derivative claim. This would remedy or mitigate the dilutive aspects and let FNMA sell the retired common shares back out in the market place to raise new capital without dilution.
For example if the SPS FNMA face is $75 billion - UST Treasury could convert to common - transfer the newly issued common back to FNMA as a $75 billion settlement and FNMA could resell $ 50 bn of the redeemed shares back out to private investors for new capital. All existing common share from the redeemed but not resold $ 25 bn. UST Treasury could also offer JPS and existing common some of their warrants as part of the settlement. UST would make additional returns to the extent they keep warrants. The SPS goes away - new capital is raised and UST warrants are partially distributed as part of a settlement with JPS and existing common.
Ackman's Hedge Fund is publicly listed in the UK. PSHZF The investor contact is
IR-PershingSquareHoldings@camarco.co.uk
Maybe everyone should encourage him to get on the FNMA board and make sure he has a seat at the table.
Perhaps FNMA common shareholders should make a small investment in The Growth Fund of America and ask them to advocate for the Average Joe FNMA investor. They own a lot more of JPS than common but they do own common and want to do well for both.
The symbol for The Growth Fund of America is AGTHX
Here is the contact info for American Funds which manages The Growth Fund of America
https://www.capitalgroup.com/individual/service-and-support/contact-us.html
Commons should get warrants also if there is a conversion. UST has 4 times as many shares as us under the warrant agreement so it would be easy to allocate warrants to common. We need representation at the settlement negotiations. Even if Nomura is correct and we start at $5 - one warrant would take us to $10 before stock starts trading up as index funds and institutions start making purchases. Institutions and index funds should end up owning majority of shares since it will be one of the largest financial instutions listed and become significant capitalization weighted components of various stock, ETF and sector indicies.
Hi Kthomp
I apologize if I have missed some of your post commmenting on the potential separate valuations of FNMA and FMCC but do you have any thoughts on why the spread between FNMA and FMCC might be narrowing?
Thanks!