if there is hope for fnf, it is in the common, not the pfd.
fnf will never be able to earn their way out of the red ink of current burial. 20B profit was the max the machine could put out. very soon, the combined payments to the fed for sr pfd will be approaching 20B. so they can't get there from here. the new 105% loan program will further bury them with losses.
the feds are not going to be nice guys and give money to the stockholders.
leaves only two solutions that i can see, which is the great american solution to so many problems. SUE THEM or buy them.
i do not know how agressive Capital Research Global Investors is in suing the govt, but they have set themselves up as the guys to sue for violation of the c-ship covenant and the violation of shareholder value. Capital Research Global Investors holds over 100M shares of fnf common, and i think it was 13M shares of pfd. comes out to about 5%. Vangard group holds about 50M shares, which would make a suit worth while.
to buy them would be to buy enough support in congress to get the modifications necessary to get fnf back in the black.
i think the purchase plan is the most probable.
I think that was the original plan. Unfortunately, conservatorship is technically a default, so their status is affected by the conservatorship, thus forcing them to pay high interest for the debt they issue, and increasing interest rates on treasuries (GSE in default does not help yields on treasuries). That state of GSE's hurts housing market, it hurts credit considerations of the US government, and it damages other GSE debt. FED has to support agency debt, treasury debt, etc. That situation can't go on for years as they like to claim.
The additional issue that everyone is ignoring is what GSE pfds actually are. They are not equity in a full sense of the word. They were originally issued to cover holes in F&F equity resulting from F&F supporting housing market in 2003 smaller version of the subprime crisis. While regulators counter pfds as equity, they were given tier 1 capital status by the banking regulators, and banks were allowed to hold these as GSE debt and MBS to count towards the regulatory capital. That is the reson they are non-cum, cum pfds are considered higher risk, and can't be counted as assets. The non-cum feature was to boost confidence in the entities (who needs cum pfds in GSEs, when skipping the divvy was not an option according by the regulators). So technically pfds were GSE debt disguised as equity with no voting rights and no profit participation.
While the common is clear equity risk and moral hazard argument could be made about making the common whole, the pfds actually caused lending freeze, as many banks were affected. A lot of credit crunch issues we are facing now could be attributable to GSE pfds treatment. There is also a confidence in US government issue imbedded in the pfds. Those pfds were taxed at 15% rate, making them equivalent to muni bonds (that's why some have the interest rate set at 2 year CMT - spread).
Having said all that, nobody has vested interest in punishing GSE pfds. In fact, the pfds are the driver to clarify the status of the entities. US government never really default on its liabilities, and even though legally GSE pfds are not a US liability, the default on those is by association raised doubt on non UT treasury liabilities on US government.
Well, I dont know if they have to. The preferreds have no contractual right to receive anything. The dividends do not accumulate. Hence, they can just sit around, give the GSEs additional funds in the senior preferred line, wait until their businesses stabilize, which will hopefully happen at some point, and then cash in year over year on the dividends.
I would bet this goes on for many years. Eventually, they might try to reprivatize the GSEs. This is when the preferreds might pay off. It is a political issue.
One cannot seriously expect to get immediate payoffs at prices like those. But at least the prices ARE low...especially when compared to the hopeful common shares crowd.
There will be no bankruptcy here. The point is a different one. The treasury will inject as much capital as is needed here and in FRE. However, they receive SENIOR preferred for this, and I see NO WAY how FNM or FRE could EVER make enough money to pay the interest on the senior preferred AND in addition serve normal preferred, let alone common.
The hope here is that this agreement is changed somehow, with the treasury converting their senior preferred into something of lower ranking.
There is a long line of people waiting to get paid here. Government is before us in the line. Only common are behind us. Government needs to let us pass by. Thats all. :)
Pretty hard to go BK, if things turning around. Unless powers that be WANT country to roll downward.
It would seem like an opportune time to play nice with FnF. Given they need private capital to make their PPIP work.
C-type deal might do it. In no way, shape or form, have I considered r-ship as possible. Govt. can't throw in the towel on FnF... they'd have to make all the bondholders whole, then what, re-start with a new entity and ask them to pony up again? Without risk? Cutting out common and pfds. for benefit of BHs... again?
Wouldn't make sense, but then again, one never knows in the political world.