Replies to post #596438 on Fannie Mae-No Politics (FNMA)

[RumplePigSkin]

FOF - you use the terms pragmatic and practical. I’ll stick to “the business administrative experience” phrase, which I find lacking in the posts you’re replying to. Enjoy reading your contributions.

[Guido2]

FOFreddie - Great post. Just like to add that Tim Pagliara, who in the past only advocated for the preferreds, now owns 1.2 million FNMA shares in his fund as of 12/31/2019.

https://money.cnn.com/quote/shareholders/shareholders.html?symb=FNMA&subView=institutional

[kthomp19]

Regarding your other points why the UST may not care about the sanctity of public/private issuer debt - perhaps there are several pragmatic and philosophical reasons why.

There is a fundamental difference between equity and debt. All of Hamilton's stuff about paying full interest on debt, even to speculators that bought at distressed prices, doesn't apply to equity holders at all.

I would wonder if Moody's and Standard & Poors could justify rating public/private debt AAA if there was precendent for future politicans to screw debt investors by legislative action in time of a crisis.

They already do this now, even though the precedent exists. The precedent, by the way, is GM, not FnF. FnF debt investors, by the way, were never screwed. They got every single payment in full and on time, both before and during the conservatorships.

Pragmatically - Mcnuchin and Trump have been and probably will be in the mortgage and real estate business. Public/Private partnerships are a corner of mortgage and large real estate and infrastructure projects and why would they want to hurt the financing options for these type of projects with wider risk spreads caused by political and legal uncertainy from a GSE prececent that screwed investors? Just look at some the announcements by FNMA and FMCC where they are financing projects around the country on behalf of real estat big wigs.

This looks like another rehash of "the government has to make existing FnF equity holders whole because otherwise nobody will ever trust the government again" argument, which I think is nonsense. The only FnF shareholders who can say they got screwed were those who held shares on September 6 2008 (conservatorship) and on August 17 2012 (NWS). Everyone who bought shares after those events knew about them, and thus cannot be said to have been screwed by them.

If the government's mistreatment of shareholders of record as of those two dates will scare new investors away then compensating current shareholders will not make those new investors feel any better.

Pragmatically - I would suggest that the GSE equity is the fulcrum security in a restructuring and that the UST has the most to gain by maximizing the value of GSE common stock. Perhaps the value is more like $ 8 to $ 15 like AGC suggests but I dont see the upside in screwing common investors when the UST owns 80% of the common?

1) If Treasury is dead set on maximizing the value of the warrants, why would they give up the seniors without trying to monetize them? A court cannot order the seniors extinguished because the SPSPAs don't allow FnF to pay down the seniors any time they want.
2) Treasury has other ways of making money here, like monetizing some or all of the seniors, commitment fees, extra fees like the 20 bps TCCA-like fee suggested by the President's 2021 budget, etc. Treasury might try to maximize its overall value, but that doesn't necessarily mean maximizing just the warrants. If the commons get crushed but Treasury can still make money, they won't really mind.

Pragmatically - the UST needs to settle the derivative shareholder suits and Ackman's suits - dont they or am I wrong about this? Why not come to a resolution that is good for the common security litigants and the UST warrant valuation?

Lawsuits that hold FnF themselves liable need to be settled. The cases in Sweeney's court are only against Treasury for actions that already occurred and only for money damages, so whether or not those are resolved shouldn't matter to the SPO investors. This does represent a change of mind on my part; I used to think that all cases would have to be settled before the SPO. Now I think that Lamberth and Collins are the only real obstacles.

Practically - why does the GFA continue to purchase common? Why does Nomura have a buy on the common? Why does ACG have a valuation of $8 to $15

1) GFA has been buying commons and prefs in ratios so as to preserve their 70% pref weighting. They do obviously think the commons have upside, but less upside than the prefs or else they would be buying more commons. A generous enough conversion of the prefs, one that reduces the value of their common stake, could still be worth agreeing to for them. The same goes for Ackman, who listed "it hedges our risk of a restructuring that disproportionately benefits the preferred versus the common shares" as a reason for his buying prefs.
2) Nomura has a buy on the common because their price targets ($5 for FNMA, $4.50 for FMCC) are higher than the trading prices at the time of their report.
3) I don't know the details behind ACG's numbers. I'll have to dig through some bookmarks, but I seem to recall ACG also saying that if the seniors are converted to commons then the existing commons will be worth $0.30 or so.

Why would the UST go out if its way to screw the little guy when there is a golden win/win/win situation by a fair and expedient restructuring of the GSEs?

Screwing the little guy won't be an explicit goal of Treasury's, but the little guy could easily be collateral damage when all is said and done. That's why I prefer to own prefs with their extra safety (being above the commons in the capital structure) and de facto embedded call option on the commons (if the commons will have enough value to be worth converting to, the juniors will push for and get that conversion).