Replies to post #589907 on Fannie Mae-No Politics (FNMA)

[kthomp19]

What I am trying to understand is what will make common holders like Ackman and The Growth Fund of America satisfied.

These two shareholders are heavily hedged with preferred shares. Ackman was 38% prefs as of his 2018 annual report (we should get the 2019 one in the next month or so), and the Growth Fund of America is currently 70% prefs.

To check that last fact, go to the quarterly holdings page and sort by security name. Their FnF holdings are #120-129, and show the following breakdown as of December 31 2019:

Common share reported market value: $672,480,537
Preferred share reported market value: $1,562,502,918

I would want to believe that these two have evaluated possible scenarios for resolution and they continue to hold or inclease their common holdings.

The Growth Fund of America bought around 21M shares of FNMA (none of FMCC) and 15M shares of FMCKJ and FNMAS combined in Q4 2019. We don't know the exact timing of their purchases, but it comes out to around 70% prefs on their purchases by dollar amount. While they have increased their common holdings in absolute terms, they have not recently done so relative to the prefs.

Ackman's pref allocation, as a percentage of his overall FnF investment, increased from 5% in 2016 to 21% in 2017 to 38% in 2018. When his 2019 annual report comes out we will see if that upward trend continued into 2019.

Ackman's 2017 annual report says that one reason he bought prefs was because "it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares" (see page 15). That shows that Ackman acknowledges his lack of control over the entire process. If he was capable of holding up the show on his own he would not have said this.

All in all, I wouldn't expect Ackman to go to the hilt for the commons. He might be able to stop them from getting crushed (and he might not), but he doesn't have enough pull to get anywhere close to his outdated and fallacious $23-47 valuation from his 2014 Ira Sohn presentation.

Obviously the UST can exercise their warrants and sell their holdings for a profit but how could large common shareholders be satisfied so not to continue to litigate and possibly bring enough legal uncertainty to stop or defer the GSE resolution process?

That very same presentation had Ackman encouraging Treasury to exercise the warrants. David Thompson also said in the recent Investors Unite call that no plaintiff (which includes Ackman) is seeking to have the warrants overturned. Treasury exercising the warrants would therefore not hinder the resolution of any existing court case.

Others have threatened to file new lawsuits should Treasury exercise the warrants, but since Treasury's liability is limited to what the shareholders lose plus interest (which will top out at maybe $8B), exercising the warrants still makes sense for them.

Treasury cancelling the warrants, or selling them back to FnF, is essentially the worst-case scenario for the commons anyway because it removes Treasury's incentive to prop up the common share price. Everyone else with any influence here either doesn't care about the common share price (FHFA) or wants it low (SPO buyers).

Regarding the preferred, will the resoluton be on a series by series basis?

I suppose it's possible, but that's also a messy approach and introduces unnecessary complications. Perhaps FNMAS and FMCKJ would have to be dealt with separately due to their call protections.

I know the GFA owns a lot of preferred also and possibly they already have controlling posisitons in certain series. Maybe they have a plan to use their common and preferred stakes as negotiating points?

They are not a party to any lawsuit, so the only negotiating pull they could have is to not accept an unfavorable conversion.

They are also not close to having a controlling position in any preferred series. FNMAS's circular shows 280M shares outstanding, of which the Growth Fund owns just under 45M (a 16% stake), and they own 53.4M of the 240M outstanding shares of FMCKJ, a 22% stake.

[Possum336]

They probably already have a good paper profit considering how long they have had it and they expect the GSE's to be money mints for years to come unless we see another 2008. After the new public listing they will likely shed some of their common position for new opportunities. I am sure that some of the preferred holders will sell their stakes and reinvest in commons but for right now the preferred have a more certain path recovery. It does not sound as exciting but a $50 preferred can still appreciate more than 150% to par and there may be some back dividend possibilities and it could happen overnight.