Re: Fannie/Freddie-Why You Should Care. I'm pulling together a "super-thread" of my key musings on the largest restructuring and governmental theft in history. It's meant to be 1) a primer to the uninitiated, 2) a reference for anyone involved over the last several yrs. Cont'd...
In September, 2019, I wrote a primer on the Fannie/Freddie saga and how to take a position in the JPS (junior preferred securities): kaoboymusings.com/example-post/
I have been involved in this situation since conservatorship back in 2008, but the first time I publicly presented about this was in May, 2011 — over 1 year before the NWS (Net Worth Sweep). That deck is here: kaoboymusings.com/wp-content/upl…
I like to look at the world often through an option lens. Here is a way to model the JPS as call spreads on the enterprise:
On 12/9/20, SCOTUS heard oral arguments on the Collins case, on which we are currently waiting for a decision. These were my thoughts after orals:
After SCOTUS, we all waited with bated breath to see whether SM (Steve Mnuchin) would write down the SPS prior to leaving office. The LA (Letter Agreement) that came out on 1/14/21 disappointed many, but I had a different take:
And even more thoughts on the LA. This thread caught Timothy Howard’s attention:
On 1/21/21, Susan Wachter released a white paper that showed how much the Overton Window has shifted in FAVOR of Recap/Release since her paper several years ago which contemplated a receivership scenario. Thoughts here:
Amidst a post-LA information vacuum, I thought it was apt to revisit the core thesis on 2/2/21:
On 2/5/21, Don Layton wrote a “Living Will” paper, which I thought was significant:
On 2/9/21, @timpagliara and I were hosted by @maxwiethe on @RealVision to present the GSE these as an “Anti-Bubble Trade.” That interview can be found here: realvision.com/shows/live/vid…
I had wanted to cover some analogs to past nationalizations and governmental restructurings but didn’t have time in the interview, the next day I posted:
I had the pleasure to receive an advance copy of @timpagliara’s excellent and timely new book and recommend it here:
And now we’re up to the present, with this thread I posted yesterday on 2/21/21:

I will try to append future key threads here as a reference for myself and others. Thanks for following.
In case you’re wondering about Sweeney’s replacement in the COFC, the Schwartz Is With Us.
Re: Fannie/Freddie-TINA Is A Hottie. Why is the TINA thesis so attractive? Because in a sea of froth and negative implied market risk premiums, GSE prefs represent uncorrelated “perpetuity options.” Opportunity cost becomes opportunity “gain” when the rest of the world unravels.
Re: Fannie/Freddie-Bracketing SCOTUS Outcomes. I see 3 potential paths, ALL of which just influence timing/relative leverage in settlement discussions, because TINA. Cont’d...
1) Bullish Sweep. Plaintiffs win on all counts with backward relief. While this would be great, imho, it complicates recap/release because it inflates the cap prior to Indy Switch. That said, leverage favors Ps in recap negotiations.
2) My Base Case: Ps win on APA, and “lose” on Constitutional (no backward relief), remand. This is actually optimal, imho, because it opens settlement window without disturbing cap stack as much as (1) with leverage to Ps.

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More from @UrbanKaoboy

2 Mar
Re: SPACS-Deep Dive. I’ve been doing a deep-dive on the current SPAC phenomenon. I’ll label the current wave “SPAC Mania 2.0” and compare it to “SPAC Mania 1.0” (roughly the period of 2005-2010). This thread encapsulates some of my findings/observations. Thoughts welcome.
First off, SPAC Mania 2.0 is much bigger. 2020 marked first year that SPAC IPOs meaningfully outpaced traditional IPOs, raising $83B. 2021 trends so far point to an even greater outpacing gap.
This represents a crowd-sourcing of the traditional underwriting function to several hundred sponsors, some of which are less qualified than others. Imho, this is going to lead to a lot more quality inconsistency of companies going public.
Read 18 tweets
2 Mar
Re: Fannie/Freddie-Thoughts On Brookings Paper. Last week, Brookings released a paper entitled, “GSEs At The Crossroads.” Not surprisingly, it manages to recast the circumstances of the 2008 conservatorship in political terms and panders heavily to politicos. Cont’d.
Yet, as if to highlight my TINA thesis, it admits that multiple “proposals to wind down the GSEs and replace them…failed to move forward due to concerns regarding the terms and feasibility…and the substantial transition risks that could disrupt the market.”
“Support has thereafter coalesced around continuing to operate the GSEs with utility-like regulation…the return paid to GSE private shareholders must be set at a level sufficient to attract investors, but not excessive…”
Read 6 tweets
22 Feb
Re: Crude Oil-Another Story of Supply Inelasticity. GS much more confident of near-term inelasticity than even I am. Today’s oil rip is even lifting Dec’23 materially.
I’m going out on a limb and predicting that we’ve seen the nadir in this chart in the short to medium-term, given this Admin’s shift in policies.
From the same JPM research piece: “…based on the current pace of electric vehicle sales, it would take 17 years to
offset the loss of the Keystone XL oil/gasoline supply. In the meantime, to power the ICE cars that remain, the
US will simply import oil and/or refined gasoline…”
Read 4 tweets
21 Feb
Re: Fannie/Freddie-“Indy Switch” Is Key. Got some color that while FHFA was indeed frustrated that SM didn't pull the trigger before leaving office, they were all indeed contending with the issue of not wanting to inflate the value of the cap stack prior to a cap raise. Cont’d…
In other words, this seems to corroborate my "Indy Switch" theory to a Fast Recap: because SM ran out of time and/or “wimped out,” he did the next best thing by wording the LA to 1) motivate settlement, 2) create the conditions for a cap raise SIMULTANEOUS with dealing with SPS.
I continue to think that this “Indy Switch”/Fast Recap path is the only way for the companies to raise the required capital to replace the SPS in a way that does not present a danger to MBS/housing market stability.
Read 4 tweets
16 Feb
Musing of the Day: I know the Lord of Cyber Hornets is a genius, but at some point I predict that someone is going BK by levering up to buy a hyper-beta risk asset. feedproxy.google.com/~r/zerohedge/f…
When I was a convertible arbitrageur, I would sometimes negotiate with companies who had ITM convertibles to exchange their convertibles for equity early before their non-call windows were up. This allowed companies to deleverage early. This is what MSTR should be doing.
Most balance sheet implosions and even financial crises stem from a very simple issue: asset / liability mismatch. Cont’d...
Read 8 tweets
10 Feb
Re: Fannie/Freddie-Unfinished Business. I have some unfinished business to discuss that I couldn’t cover in yesterday’s interview, but more importantly, the US has major unfinished business in undoing one of the largest nationalizations in US history. Some comparisons follow…
I gave a talk in 2010 at the Value Investing Congress where I did an in-depth analysis of the GM restructuring, entitled “Finding Relative Value in a Topsy-Turvy World: General Motors Case Study.” Except for the GM part, I believe this title also characterizes the GSE opportunity
Force majeure has happened numerous times in this country, usually during times of market stress or war, BUT in almost every circumstance these industries were ultimately re-privatized. We are NOT Venezuela.
Read 20 tweets

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