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General Category => General Discussion => Topic started by: twacowfca on January 15, 2011, 12:02:37 AM

Title: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 15, 2011, 12:02:37 AM
Most investors think that Fannie and Freddie are worthless as losses have continued to mount.  But are they?  

The US has continued to pump money into them.  The latest tab totals $151 billion in preferred stock currently paying a 10% dividend that comes ahead of the common and the preferred stock owned by the public. Dividends have been suspended on the public preferred. These public preferred issues have a total market cap of about $800 million, but a stated value of about $30 billion.  They are held by private investors, mostly banks.  The US has also bought and guaranteed large amounts of Fannie and Freddie's debt.  By conventional valuation both of these GSE's should have been liquidated long ago, with the public shareholders wiped out!

But a funny thing happened on the way to bankruptcy: the government thinks they are too big to fail.  Currently, These GSE's guarantee almost all the conventional mortages that are being written, while FHA guarantees the smaller amount of risky mortgages that continue to be written.

Fannie and Freddie are back in the business of guaranteeing high down payment conventional loans to creditworthy borrowers, a business that continues to be very profitable.  Were it not for their legacy costs and the high dividends the government receives on its preferred stock, Fannie and Freddie could do an IPO and perhaps raise enough capital to support a reduced role confined to their traditional, highly profitable business.

Will this happen?  Maybe it will, if not soon, perhaps sometime in the not too distant future.  Maybe it won't happen, and shareholders will lose the remaining 1%-2% or so of their former market cap.  If that happens the common and preferred in the public's hands will be a total loss.  But, if there is eventually a favorable outcome along the lines of the government's bailouts of AIG, Ally and the big banks, there will be something left for the stockholders, especially the holders of preferred stock, mostly small or regional banks that have been ignored in the effort to save the big banks.  They had been told by regulators that Fannie and Freddie preferred was the only high yielding security they could own because it was so safe with AAA ratings.  

If there is something left for stockholders, it is likely to be many times the current market cap for the preferred stock if the pattern of exchanging preferred for common that has taken place in unwinding the other bailouts holds.  Therefore, there may be an asymetric risk/reward profile in owning the preferred.

Let's assume that there is a probability of some sort of a successful outcome.  If we go by the pattern that has been set with the unwinding of other bailouts, that probability may be high, perhaps 90%.  However, in view of the much worse shape of Fannie and Freddie than the other institutions, lets discount the probability of some sort of successful outcome to only 50%.  Heads, you lose your investment.  Tails, you win.  But how much?  A little?  A lot?

Lets look at AIG. The common shareholders wound up with about 10 % of the equity.  The government gave up its preferred priority and high dividends in exchange for common stock and chose not to exercise its warrants.  If that pattern should hold in the event of a reorganization of Fannie and Freddie, the preferred shareholders might own 90% of the common, with perhaps 75% of the common in the hands of the government and 15% of the common in the hands of mostly banks that own the publically traded preferred.  The government might put the remaining bad loans in runoff.  Current common shareholders might retain 10% of the new common.  If there is then an IPO to raise more capital, the former shareholders of the publicly traded preferred might eventually own less, perhaps  7/12% to 10% of the new common with the holders of the old common having a lesser amount, perhaps 6.7% to 5% of the new common.  

How much might such a recapitalization be worth for a combined Fannie and Freddie with restrictions that was restricted to guarantees of solid, conforming mortgage loans  with their  bad loans behind them?  Then,  the new Fannie/Freddie wouldn't have to pay the crushing preferred dividends the US now receives.  If the new Fannie/Freddie were worth $80 to $120 billion in a few years, the public preferred that would be exchanged for common might be worth 10 to 15 times its current market cap of about $800 million.  However, the common with a current market cap of about $2.8 billion, might not fare so well in a recapitalization that is similar to the unwinding of other bailouts.


This is merely speculation.  But, thinking through possibile outcomes may help prepare for an important event that may help clarify Fannie and Freddie's future.  Under the terms of the financial bill passed last summer, the administration is supposed to present a plan for Fannie and Freddie's future by the end of January, 2011.


Is there a margin of safety in this speculative situation?  Perhaps.  Simply, wait a few days until the end of January, 2011 deadline.  Then, there could be a margin of safety if the administration's plan is well received and favorable for recouping significant value for the publically traded preferred that's owned mostly by the banks.  In the past, this preferred has often been overlooked by other investors because the common is much more liquid.  We've made good money in the last two and a half years arbitraging the spread between the common and the relatively cheap preferred, and we continue to trade in and out of them.  But, owning the preferred or common could be risky as the deadline for an announcement about their fate approaches by the end of this month.  It's possible that the administration's plan might not follow the pattern of the other bailouts of leaving something on the table for current shareholders.  

On the other hand, it's not out of the question that the plan might retain the full stated value of the public preferred issues, as was the case with Ally's recapitalization.  If so, the banks might be made whole on their investment in the preferred, just as the holders of Fannie and Freddie's debt have been made whole. If so, the public preferred could eventually be worth their stated values that are about 40 times the current market prices.  

Nevertheless, Fannie and Freddie's stockholders could fare worse than the stockholders of the private companies bailed out during the crisis.  This would be a big political stink, especially as these GSE's have not been run entirely for the benefit of their shareholders during their conservatorship.  Perhaps, the the plan the administration will announce soon will have important details about the future value of the common and preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Uccmal on January 15, 2011, 04:28:25 AM
You have thought alot about this.  A couple of questions and clarifications:

1) The preferreds you are discussing are FNMA series of 25 and 50 par value currently listed on the OTC market, comparable issues for FMCC?

2)  If the gov't announces something with a positive outcome for the preferreds will they have a sudden pop eliminating some of the risk premium?

3)  Could the preferreds be continued with no dividend or reduced dividend?  This is probably in the relevant legislation but you may know it off hand.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: alertmeipp on January 15, 2011, 06:03:48 AM
couple problems I see:
- those FRE and FNM gov's pfds have10% coupon on them, so they will suck up any possible profit from the portfolio.
- they will to run down their book somewhere down the road.
- This implicit-gov-private mortgage model may not be continued in the future.

Having said that - I have a less 0.5% position on them. Their spreads are wide now given they are all in the pinkie land.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 15, 2011, 06:42:15 AM
You have thought alot about this.  A couple of questions and clarifications:

1) The preferreds you are discussing are FNMA series of 25 and 50 par value currently listed on the OTC market, comparable issues for FMCC?

2)  If the gov't announces something with a positive outcome for the preferreds will they have a sudden pop eliminating some of the risk premium?

3)  Could the preferreds be continued with no dividend or reduced dividend?  This is probably in the relevant legislation but you may know it off hand.



Great questions.

1). Generally, yes. However, one of the issues has a huge stated value per share.  This one may be owned 100% by banks, and it never trades.  Another issue is scheduled for mandatory conversion to common in a few months, and shouldn't be held if one thinks as we do that the common is very overpriced in relation to the preferred.

2). Not necessarily.  The reason the common trades so high in relation to the preferreds is a liquidity premium.  In the past, when there has been a favorable developmnt for stockholders, it is generally the common that jumps up in price more than the preferreds.  This makes it difficult to profit immediately by shorting the common and buying the preferred.  It may not be possible to short the common now after it moved to the pink sheets a few months ago.

As interest in Fannie and Freddie has waned over the last two years, the liquidity premium has become generally less but still very high.  The spreads between the bid and ask have been very high for most preferred issues, except the FNMA T and S series.  This has presented an opportunity for retail customers to profit because potential market makers are scared to hold these issues.  Interestingly, S and T are traded with greater volume and generally have a significant liquidity premium compared to the other preferreds.  However, any favorable development that especially benefits the preferreds should eventually be reflected in the prices relative to the common as Mr. Market sometimes does put on his thinking cap.

3). I think the most likely outcome that might benefit the preferred holders would be a preferred to common exchange as happened with some banks and AIG. If so, it might take a few years before dividends might be resumed on the common.  If this happens, These GSE's won't be burdened with having to pay $15 billion in annual dividends to the government.  Without this burden, Fannie and Freddie may be on the verge of becoming cash flow positive if current trends continue. Please keep in mind the very real possibility that stockholders, including the preferred holders, could be wiped out.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Myth465 on January 15, 2011, 01:19:43 PM
This will likely work out but its too dicey for me (and I own a few over-levereaged doggy investments). The Republicans (perhaps rightfully so on this one) are quite anxious to end the support of the GSEs and put them into run off. Now may not be the right time due to the structure of the market but eventually I think there will be a fight over it.

Every other distressed banking entity has been a money maker for those that went in after the carnage had done its damage, but this one is a hairy one. I still dont see or understand why the government is allowing private investors to profit from these entities prior to the public recouping 100% of its support but they are. I will be watching.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 15, 2011, 02:39:28 PM
This will likely work out but its too dicey for me (and I own a few over-levereaged doggy investments). The Republicans (perhaps rightfully so on this one) are quite anxious to end the support of the GSEs and put them into run off. Now may not be the right time due to the structure of the market but eventually I think there will be a fight over it.

Every other distressed banking entity has been a money maker for those that went in after the carnage had done its damage, but this one is a hairy one. I still dont see or understand why the government is allowing private investors to profit from these entities prior to the public recouping 100% of its support but they are. I will be watching.

You're right.  It's hairy to jump in before a plan is presented and the reception to the plan is evaluated. However, the Republicans on the House Banking Committee have backtracked and no longer endorse the Republican position of last summer.  One of them used to be a banker and real estate developer.  Who knows, he may be buddies with some of the bankers that would like to see the value of the Fannie and Freddie preferred that their banks hold made good!  The chairman of that committee has cautioned that it would be unwise to withdraw the government's support anytime soon.  Times are 'a changing.  Who knows what will happen?  Time will tell. ???
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 24, 2011, 03:25:03 PM
Administration's plan delayed till after budget is presented week of Feb 13, 2011.  This should allow the stock another three weeks to run up before D day.

The preferreds have doubled since December and the common is now hopping to catch up.  FNMA is up 23%  and FMCC is up 28% today and up about 60% in the last week.   :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 25, 2011, 09:47:15 AM
Administration's plan delayed till after budget is presented week of Feb 13, 2011.  This should allow the stock another three weeks to run up before D day.

The preferreds have doubled since December and the common is now hopping to catch up.  FNMA is up 23%  and FMCC is up 28% today and up about 60% in the last week.   :)

Up another 24% today for both FNMA and FMCC.  This is almost a double from their January 19, 2011 prices.  The common has now almost caught up with the price increases for the more liquid preferred issues.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Myth465 on January 25, 2011, 11:30:21 AM
Too hard pile for me but sounds like you have 1x down, 9x more to go.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 25, 2011, 01:44:49 PM
Too hard pile for me but sounds like you have 1x down, 9x more to go.

This is in our "no brainer" pile because we have become so familiar trading it for almost 2 1/2 years.  This is what it always does in an up market when there is some credible catalyst that may remove uncertainty about their future.

Fannie and Freddie up 31% and 35% for the day.  Not nearly as much for the preferreds.  This price action is typical with these volatile issues.  Last summer, short sellers piled on and drove the price down to half tha previous close after the administration announced that they were delaying the announcement of their plan for F & F.  

The pricing on the less liquid preferreds is far from efficient.  We have reduced our net long position a little as the prices have risen.  However, if the past is a good guide, prices should continue to rise until D Day draws nigh.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 26, 2011, 02:05:18 PM
FYI - Here is a chart showing all of the FNMA and FMCC Preferred issues that are generally traded on the pink sheets.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: junto.investing on January 27, 2011, 09:22:09 AM
FYI - Here is a chart showing all of the FNMA and FMCC Preferred issues that are generally traded on the pink sheets.  :)

Did you buy a basket of these? Or are there particular ones that you're focusing on?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: netnet on January 27, 2011, 09:55:54 AM
Now that these have run up, what would be the best way to trade them now?  Wait till after D day see how it shakes out and then trade a few days later?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 27, 2011, 12:54:44 PM
FYI - Here is a chart showing all of the FNMA and FMCC Preferred issues that are generally traded on the pink sheets.  :)

Did you buy a basket of these? Or are there particular ones that you're focusing on?

Yes, we have purchased a basket of these.  As long as they were selling at attractive prices, we would make a purchase.

Occasionally, when the price of one or more of the issues gets ahead of the other issues, we will sell that issue and move into another.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 27, 2011, 01:19:05 PM
Now that these have run up, what would be the best way to trade them now?  Wait till after D day see how it shakes out and then trade a few days later?

D day will definitely be an inflection point.  The sensible prediction would be for the prices of the preferred to go up a lot or go down a lot after the administration's announcement, but maybe not.  WSJ says the administration will present more than one option for congress to consider.  One plan would be to put Fannie and Freddie into runoff and then start subsidizing bank cooperatives to start insuring mortgages.  However, such new organizations would create uncertainty that would dampen the market for mortgages and almost certainly require a greater government backstop than continuing with Fannie and Freddie.

Plan B would be to continue to support Fannie and Freddie for several years until they can stand on their own.  During that time Fannie and Freddie might let the private market handle some of the more expensive mortgages without government backstop when and if the private market is able to do this.  In either case, their regulators are said to intend to allow them to charge much higher rates for their guarantees and securitizations.  :)

Plan A looks like a nonstarter to me.  If plan B is the one that goes forward, it will be interesting to see if the plan has details about how the US will eventually exit.  In that event, it seems logical that the preferred in the public's hands should have much more upside than the common.  At the close yesterday, the market value of the common was about four times the market value of the public preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 27, 2011, 01:26:58 PM
FNMA and FMCC preferreds continued to increase in price today.  Attached is a spreadsheet showing today's increases.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on January 31, 2011, 07:43:23 PM
FNMA and FMCC preferreds continued to increase in price today.  Attached is a spreadsheet showing today's increases.


Way up again today.  Three times our Nov and Dec average price and two and one half times our average price including January purchases.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: alertmeipp on January 31, 2011, 08:02:58 PM
lottery ticket...  % position = ?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ericd1 on January 31, 2011, 08:26:18 PM
On your way to a ten-bagger - Congratulations!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 01, 2011, 07:48:46 AM
On your way to a ten-bagger - Congratulations!

Not necessarily.  "Tis many a slip, twixt cup and lip."   ???

Here's what's happening:  Ralph Nader, of all people, says the US should cut the dividend rate on their preferred and let Fannie and Freddie earn their way out of the hole as they are transitioning to cash flow and earnings positive except for the exorbitant rate they have to pay on the government owned preferreds.  The rate Fannie and Freddie pay is double the dividend rate the US required AIG, the big banks, et al. to pay.

Financial Times reports that Freddie is lobbying the administration to cut their dividend, and that the administration is sympathetic to that idea.  The administration is said to have decided to allow Fannie and Freddie to charge higher, appropriate rates for their guarantees and securitizations.  The administration's nominee to head their authority has withdrawn his name, apparently abandoning the plan to draw Fannie and Freddie into letting deadbeats off the hook, as HUD and FHA are doing.

Meanwhile, the short sellers, anticipating a possible buying frenzy when the Treasury's plan(s) is presented to congress, are scrambling to cover, a more difficult task with the often illiquid preferreds than with the common.

Times are 'a changing!   :o
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 01, 2011, 01:10:35 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pull back, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by congress before making a long term commitment.

:)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Myth465 on February 01, 2011, 01:28:50 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pull back, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by congress before making a long term commitment.

:)

You are proving to be quite the value trader  :). I am taking notes lol.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: junto.investing on February 01, 2011, 01:52:58 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pull back, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by congress before making a long term commitment.

:)

When's the admin's plan again? Feb 13th?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 01, 2011, 02:23:37 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pullback, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by Congress before making a long term commitment.

:)

When's the admin's plan again? Feb 13th?

No official date, but probably after the budget is presented the week after next.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: junto.investing on February 04, 2011, 05:27:09 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pullback, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by Congress before making a long term commitment.

:)

When's the admin's plan again? Feb 13th?

No official date, but probably after the budget is presented the week after next.

Thoughts on this latest piece of news?

http://www.bloomberg.com/news/2011-02-04/fannie-freddie-plan-to-cut-market-share-to-below-50-cnbc-says.html?cmpid=yhoo
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ericd1 on February 04, 2011, 07:20:21 PM
The market didn't like the news...The pfds started dropping at 2 PM...Down $0.43 for the day
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 04, 2011, 09:18:02 PM
The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pull back, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by congress before making a long term commitment.

:)

You are proving to be quite the value trader  :). I am taking notes lol.

If anyone wants to know more about when a certain kind of price action suggests a surge in price is about to pull back or a bubble is about to pop,  may I suggest Didier Sornette's book, Why Stock Markets Crash.  Don't let the advanced math scare you. Just read around any parts you don't understand. 

His ideas work especially well in markets or stocks where there is a lot of short selling and short covering without potential regulatory action interfering with price adjustments.    :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: alertmeipp on February 04, 2011, 09:34:26 PM
let us know when you see the market about to...  ;D

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 04, 2011, 09:47:16 PM
let us know when you see the market about to...  ;D



Are you wanting a prediction about the future or the past?  The former is "especially difficult", as the man said.   ;)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 07, 2011, 08:43:24 PM
There is a story about an oil driller who died and found himself standing at the pearly gates of heaven in front of Saint Peter.

     "May I go in," asked the oil driller?

     "Look at all those other drillers ahead of you, just inside the gates," answered Saint Peter.  "You'll have to wait till we process them.  Some big deepwater event."

     The oil driller fidgited for a minute, and then yelled: "Oil discovered in Hell!"  When they heard this, all the other drillers jumped up and ran back through the pearly gates straight down to Hell.

     Saint Peter turned to the oil driller standing before him and said, "Well, there's no line ahead of you now.   I guess you can go in."

     But, the oil driller turned away and started to follow the other oil drillers down to Hell.  "Why are you going that way," asked Saint Peter?

     "I can't take a chance," replied the oil driller.  "There might be some truth in that rumor!"

This is an appropriate prelude to letting the board know that we took about one third of our Fannie and Freddie profits and bought their preferred stock once again on the recent pullback.   :o
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: S2S on February 09, 2011, 12:36:09 PM
^ Love it.

This is probably old news by now, but here's an interesting exchange between Bill Ackman and Clayton Rose  on FMCC:

Mr. Ackman: So you can make decisions that are adverse to shareholders?
Mr. Rose: Correct.
Mr. Ackman: And there’s no liability to you?
Mr. Rose: Correct.

Link: http://www.cnbc.com/id/15840232?video=1786618239&play=1

The pertinent part starts around 7:30. There's another short Q&A near the end of the clip.

Thoughts, twacowcfa?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 09, 2011, 08:26:39 PM
It's good to hear them tell it like it is.  The speculation is that the Treasury Dept may be about to make a big change in the way these GSE"s are managed.  If Fannie and Freddie transitioned to charging anything close to market clearing rates for their guarantees, they would soon be profitable.  If the Treasury also cut the dividend rate on their preferred from 10% to 5%, they would soon be on their way to begin paying down the government's preferred stock.  

Clayton Rose is on the Board of Directors of FMCC.  Recent news reports say that  FMCC and FNMA have been lobbying the administration to cut the 10% dividends the US receives to 5%.  If these reports are true, it is likely that the board members of these GSE's are behind the lobbying.  Keep in mind that it was Hank Paulson, Bush's Secretary of the Treasury, who slapped them with such a high dividend rate, much higher than the rate that GS et al. had to pay on the preferreds the Treasury demanded in their bailouts.  The severe treatment of Fannie and Freddie could be interpreted as payback for all the shabby dealings between their former officers and the Democrat Party.

Geithner's recent statements indicate that the first of the two big ifs that could restore Fannie and Freddie's financial health will very likely happen with a progression of fee increases, to begin soon.  The second big if about lowering the dividend rate they pay the Treasury is much more iffy.  That may be too much of a political hot potato for now.  However, if the Treasury did cut their dividend rate, these GSE's should soon be on their way to becoming profitable, steady Freddies, so to speak.  Who knows, it's possible that they could once again become the fattest cash cow ever for the Democrat party.  Fannie and Freddie used to be Barney Frank's biggest source of funds, and Franklin Raines, the former Chairman of Fannie Mae, was Chairman of Obama's campaign financial committee.

Congress almost certainly will not be able to pass any legislation changing the structure of these GSE's, given the divided control of the house and senate.  The initiative is entirely with the administration, and it looks like Geithner's plan has prevailed.  Geithner says the Treasury intends to "crowd private capital into the mortgage market."  The only sensible way for this to happen is for the US to charge much more for Fannie and Freddie's guarantees.  We should know very soon if this will happen.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ericd1 on February 10, 2011, 08:38:50 AM
Wow - 'market rates' - What a novel concept. 

I agree Congress would find it difficult, if not impossible to pay any legislation to clean up the mess and Geithner’s ‘market rate’ plan is a viable solution.

Presuming the GSE’s become financially stable, the PFDs would increase in value. It might take ten years or longer, but even with that a return to par over ten years it would be huge return…There could be some bumps along the way, perhaps a change in direction if the plan doesn’t work, etc.

Yet the market seems to be reacting unfavorably to the news…
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Myth465 on February 11, 2011, 08:29:28 AM
Interesting comments.

http://www.bloomberg.com/news/2011-02-11/obama-administration-calls-for-ultimately-winding-down-fannie-freddie.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Aberhound on February 11, 2011, 10:33:22 AM
1. I wonder if there is enough juice in doubling the insurance rates and cutting the government preferred dividend in half to increase the value of the commons as well.

2. Considering the massive amounts of agencies, these are at risk without continued government and Fed support unless the government can create some value in the common shares. Presumably the government and the Fed want to stop providing that support so this is a way to do it.

3. Creating value in the common shares might give the government an exit path. They can convert the preferred shares to common and double the insurance rates. This will further dilute the existing common shares but will create the exit strategy if the common shares start to rise since the government could then sell the converted common shares at a profit. Earning capital gains on the common may be more profitable than getting a 10% dividend on the preferred. The government could create the profit on the common by simplifying regulation and taxation to make US more competitive and increasing immigration or granting amnesty for illegal immigrants. There are 14 million empty homes to fill. These policies would be good for the big banks too so I am surprised that bank friendly Obama hasn't already adopted these policies. And how else are you going to fix social security and medicare unless US brings in millions of young employable people to pay for the growing number of old retirees.

4. This is a better path than simply letting banks take over the business as doing so would concentrate even more risk in the big banks where there is enough risk already. Better to split the risk of mortgage defaults like in Canada and soon Australia as well although I would prefer the risk born by the Canadian government to be born by private publicly traded companies instead. Obviously whoever starts writing market rate mortgage insurance at low real estate prices is going to make a lot of money. It could be argued whether prices have further to fall or not but that depends on government policy on competitiveness and immigration. Buffett and Munger have written previously what a wonderful business it is so the government has a good game plan to follow.

5. My bet is the best way to play it is to buy the preferred for now and then switch to the common shares if the government swaps the preferred shares for common shares. Hopefully the dilution will cause the commons to fall in price but that depends on the terms so can't be predicted. I think the desire to get the agencies self-supporting gives the government and the Fed no choice but to follow this path. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on February 15, 2011, 06:01:09 AM
1. I wonder if there is enough juice in doubling the insurance rates and cutting the government preferred dividend in half to increase the value of the commons as well.

2. Considering the massive amounts of agencies, these are at risk without continued government and Fed support unless the government can create some value in the common shares. Presumably the government and the Fed want to stop providing that support so this is a way to do it.

3. Creating value in the common shares might give the government an exit path. They can convert the preferred shares to common and double the insurance rates. This will further dilute the existing common shares but will create the exit strategy if the common shares start to rise since the government could then sell the converted common shares at a profit. Earning capital gains on the common may be more profitable than getting a 10% dividend on the preferred. The government could create the profit on the common by simplifying regulation and taxation to make US more competitive and increasing immigration or granting amnesty for illegal immigrants. There are 14 million empty homes to fill. These policies would be good for the big banks too so I am surprised that bank friendly Obama hasn't already adopted these policies. And how else are you going to fix social security and medicare unless US brings in millions of young employable people to pay for the growing number of old retirees.

4. This is a better path than simply letting banks take over the business as doing so would concentrate even more risk in the big banks where there is enough risk already. Better to split the risk of mortgage defaults like in Canada and soon Australia as well although I would prefer the risk born by the Canadian government to be born by private publicly traded companies instead. Obviously whoever starts writing market rate mortgage insurance at low real estate prices is going to make a lot of money. It could be argued whether prices have further to fall or not but that depends on government policy on competitiveness and immigration. Buffett and Munger have written previously what a wonderful business it is so the government has a good game plan to follow.

5. My bet is the best way to play it is to buy the preferred for now and then switch to the common shares if the government swaps the preferred shares for common shares. Hopefully the dilution will cause the commons to fall in price but that depends on the terms so can't be predicted. I think the desire to get the agencies self-supporting gives the government and the Fed no choice but to follow this path.  


We closed out our remaining relatively small position in the preferreds a few days ago, keeping only a token
amount to remind us to look at them periodically and assess developments.  

Comparing the market caps of the commons and preferreds, I don't see any way that purchase of the commons could be worth more than buying the preferreds if there is ultimately some value for the equity.

  The new plans all raise the fees they charge for their securitizations, but it may take more than that to get them out of the hole.  Cutting the dividend on the Treasury's preferreds may be necessary to turn them around.  If this happens, things could get interesting.  Exchanging the Treasury's preferred for common would be even better, but that may be a long shot in the current political climate.  Meanwhile, I still haven't figured out how to multiply by zero!   ::)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: kasi on May 06, 2011, 07:49:47 AM
Freddie reported 1q2011 earnings. Official release, financial supplement, and an article from Wsj attached below.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on August 09, 2011, 02:45:33 PM
Fed keeping rates stapled to the floor through 2013 and the downgrade of Fannie and Freddie...

Any updates on how one may take advantage of this new information with regards to the preferreds?

http://www.insidestocks.com/quote.asp?sym=FNMAT

http://www.insidestocks.com/quote.asp?sym=FMCKM&code=BSTK
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 09, 2011, 04:23:14 PM
Freddie is leading Fannie on the way to eventual profitability but they haven’t been able to get over the huge 10% Govt preferred coupon hurdle.  Like last quarter, they are like a dog eating its own tail.  They were forced to borrow $1.5bln from the Treasury, so they can turn right around and pay the Treasury a quarterly coupon of $1.6bln.  Crazy.  At some point, the politicians will see the GSEs as a money pot and will allow them to cut the preferred dividend and raise guarantee fees.  Cash will poor in, the allowance for tax deferred assets will be eliminated, and the taxpayer will get their money back in full with an IPO like GM/AIG.  Everyone wins, and the holders of the private preferred make a fortune!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on August 11, 2011, 02:15:45 PM
Freddie is leading Fannie on the way to eventual profitability but they haven’t been able to get over the huge 10% Govt preferred coupon hurdle.  Like last quarter, they are like a dog eating its own tail.  They were forced to borrow $1.5bln from the Treasury, so they can turn right around and pay the Treasury a quarterly coupon of $1.6bln.  Crazy.  At some point, the politicians will see the GSEs as a money pot and will allow them to cut the preferred dividend and raise guarantee fees.  Cash will poor in, the allowance for tax deferred assets will be eliminated, and the taxpayer will get their money back in full with an IPO like GM/AIG.  Everyone wins, and the holders of the private preferred make a fortune!

I agree.  This seems to be the most likely outcome, eventually.  But it may not happen while there is a stalemate in Congress.  The probability goes up dramatically if the Democrats win the White House and both houses of Congress in 2012.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: CONeal on September 02, 2011, 08:57:12 PM
Wondering with the news today regarding the Fannie and Freddie lawsuit if this is a big step for pfds and better yet getting them back on their own feet.

http://news.yahoo.com/feds-sue-big-banks-over-sales-risky-investments-000212787.html


NEW YORK (AP) — The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.
Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.
The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.
The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.
The government didn't say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.
The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.
It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.
After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.
Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.
In a statement Friday, Bank of America rejected the claims in the government's lawsuits.
Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses," it said.
Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 percent, JP Morgan Chase fell 4.6 percent, Citigroup lost 5.3 percent, Goldman shed off 4.5 percent and Morgan Stanley's ended down 5.7 percent.
Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.
The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."
The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.
Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.
JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement said the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.
Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.
"This will be nothing but a distraction to them and the quicker you settle something like this the better," he said.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on September 03, 2011, 04:02:48 AM
Wondering with the news today regarding the Fannie and Freddie lawsuit if this is a big step for pfds and better yet getting them back on their own feet.

http://news.yahoo.com/feds-sue-big-banks-over-sales-risky-investments-000212787.html


NEW YORK (AP) — The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.
Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.
The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.
The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.
The government didn't say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.
The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.
It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.
After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.
Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.
In a statement Friday, Bank of America rejected the claims in the government's lawsuits.
Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses," it said.
Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 percent, JP Morgan Chase fell 4.6 percent, Citigroup lost 5.3 percent, Goldman shed off 4.5 percent and Morgan Stanley's ended down 5.7 percent.
Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.
The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."
The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.
Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.
JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement said the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.
Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.
"This will be nothing but a distraction to them and the quicker you settle something like this the better," he said.

This has curb appeal for bank bears, but the economic impact may be little more than a rounding error for F&F if the amounts they got from settlements of similar lawsuits a few months ago is any guide.

What is interesting though from a political angle is that the banks are being sued not by F&F but by F&F's regulator.  During the financial crisis, the Obama administration, and Paulson during the Bush administration, used F&F as a CPR machine to help keep the big banks alive. 

I think this development is most interesting, especially because the Democrat party historically has greatly favored F&F.  F&F used to be ATM machines for  Democrat Party fund raising until F&F sparked the financial crisis by buying and guaranteeing enormous quantities of bad paper, leading nearly to systemic collapse after the Bush administration facilitated the erection of a house of cards by repealing Glass-Stegal.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on September 08, 2011, 07:50:29 AM
For those interested:

http://gatorcapitalblog.com/tag/freddie-mac-preferred-stock/

Quote
If you or your organization own common or preferred stock of Fannie Mae or Freddie Mac and would like to join with other shareholders in preserving value for the Fannie Mae and Freddie Mac, please contact me at derek.pilecki@gatorcapital.com or call me at (813) 282-7870. We are organizing and are going to help policymakers in Washington understand the importance of the GSEs to the nation’s housing market. We hope to maximize value for GSE preferred shareholders and common shareholders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on October 21, 2011, 04:16:30 PM
Interesting discussion about a series of Freddie preferreds on Y! Boards (I was shocked too...)

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_F/threadview?m=tm&bn=62603&tid=2197&mid=2197&tof=2&frt=2

Quote
Converting would be "easy" if it were to go to bankruptcy court and a judge mandates a restructuring arrangement. I doubt this goes to bankruptcy. Usually in a voluntary reorganization, all "classes" of debt, preferred and common as well as vendors owed money, etc. all file motions, fight for their rights and get the most of what they deserve under bankruptcy law. Thus it isn't the easiest scenario, but it is one scenario that could force a conversion.

 The other scenario is where the shareholders of the company (in this case, it would become the US Government) instruct the Board to negotiate to restructure the capital structure with all parties involved. In this case, they would have to offer terms that are better than what preferred shareholders have today without amending the terms of the security. If the offer is good enough to get 2/3 of the vote, then all things are possible. Usually in this scenario, the offer is "You can get nothing in bankruptcy, or you can help this company survive by taking the deal presented (cash, common shares, lower dividend...any number of creative ideas) even if it means less money than is contractually obligated to you.

 There is no rush to do this because all of the redemptions that I am aware of are at Freddie's option (I think Fannie had/has some mandatory redemption dates) and the dividends are not cumulative, so it costs Freddie nothing to sit on the jr. preferred angst and do nothing. However, if common shareholders ever want a dividend again, that is when preferreds will have to be addressed. Jr. Preferreds must be paid the full contractual dividend before common shareholders see their first penny.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on October 22, 2011, 11:13:03 AM
Interesting discussion about a series of Freddie preferreds on Y! Boards (I was shocked too...)

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_F/threadview?m=tm&bn=62603&tid=2197&mid=2197&tof=2&frt=2

Quote
Converting would be "easy" if it were to go to bankruptcy court and a judge mandates a restructuring arrangement. I doubt this goes to bankruptcy. Usually in a voluntary reorganization, all "classes" of debt, preferred and common as well as vendors owed money, etc. all file motions, fight for their rights and get the most of what they deserve under bankruptcy law. Thus it isn't the easiest scenario, but it is one scenario that could force a conversion.

 The other scenario is where the shareholders of the company (in this case, it would become the US Government) instruct the Board to negotiate to restructure the capital structure with all parties involved. In this case, they would have to offer terms that are better than what preferred shareholders have today without amending the terms of the security. If the offer is good enough to get 2/3 of the vote, then all things are possible. Usually in this scenario, the offer is "You can get nothing in bankruptcy, or you can help this company survive by taking the deal presented (cash, common shares, lower dividend...any number of creative ideas) even if it means less money than is contractually obligated to you.

 There is no rush to do this because all of the redemptions that I am aware of are at Freddie's option (I think Fannie had/has some mandatory redemption dates) and the dividends are not cumulative, so it costs Freddie nothing to sit on the jr. preferred angst and do nothing. However, if common shareholders ever want a dividend again, that is when preferreds will have to be addressed. Jr. Preferreds must be paid the full contractual dividend before common shareholders see their first penny.

Lots of wishful thinking there.  In a liquidation, the US government's preferred comes ahead of the common and the preferred held by the public.  There's no margin of safety in a liquidation, but in a restructuring politics and fairness come into play.  At this stage, that's what it's about.  Don't expect big news till after the 2012 election.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on August 07, 2012, 08:09:55 AM
http://www.businessweek.com/ap/2012-08-07/freddie-mac-posts-1-dot-2b-net-income-for-2q

Quote
WASHINGTON (AP) — Government-controlled mortgage giant Freddie Mac posted net income of $1.2 billion for the second quarter and isn't requesting any additional federal aid for the period.

The government rescued Freddie and larger sibling Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them.

Taxpayers have spent about $170 billion to rescue Fannie and Freddie, the costliest bailout of the 2008 financial crisis. It could cost about $200 billion more to support the companies through 2014 after subtracting dividend payments, according to the government.

This is the fifth quarter in which Freddie hasn't requested new federal aid since it was taken over in September 2008.

Freddie Mac requested $19 million in federal aid in the first quarter. The company received $7.6 billion for all of 2011 and $13 billion for all of 2010.

McLean, Va.-based Freddie Mac said Tuesday that its net income attributable to common shareholders amounted to 37 cents per share in the April-June period. That compares with a loss of $3.76 billion, or $1.16 per share, in the same period a year ago.

It was Freddie's first profitable quarter since the first quarter of 2011.

Freddie's latest results take into account $1.8 billion in dividend payments that Freddie made to the government, its primary shareholder. The company said the gain reflected a decrease in the amounts that it had to set aside to cover potential losses on mortgages as the housing market has improved.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 19, 2013, 03:52:35 PM
We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sampr01 on March 19, 2013, 04:07:03 PM
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT. if you don't mind can you share your entry price because they are up more than $1

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 19, 2013, 04:27:14 PM
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on March 19, 2013, 05:50:32 PM
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

 
Congress guaranteed the survival of the GSEs at the end of 2011 when they raised guarantee fees for ten years to pay for a six-month extension of the paroll tax cut.  Today, the GSEs are gushing cash as the housing market recovers and no doubt the politicians will find a way to tap this honey pot to repay taxpayers and fill DC coffers.   When word that the White House was considering the sale of the Gov't preferred to the private market, Senators reacted by proposing a bi-partisan bill that would require congressional approval prior to any sale.  Everyone wants a piece of this action.   
 
The often overlooked asset on the books of the GSEs is the DTAs which have up to now been written down to zero.  But that too may change soon as FNMA is looking to reclaim their DTA to the tune of $62mm which would be 70% of the net amount owed to the US Govt.  I expect FMCC to follow soon with a similar request.
 
http://online.wsj.com/article/SB10001424127887323639604578368443773821834.html (http://online.wsj.com/article/SB10001424127887323639604578368443773821834.html)
 
There is political risk here, but with the private preferreds trading at 9-12 cents on the dollar it is a very convex risk/return profile.
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 19, 2013, 07:09:55 PM
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

 
Congress guaranteed the survival of the GSEs at the end of 2011 when they raised guarantee fees for ten years to pay for a six-month extension of the paroll tax cut.  Today, the GSEs are gushing cash as the housing market recovers and no doubt the politicians will find a way to tap this honey pot to repay taxpayers and fill DC coffers.   When word that the White House was considering the sale of the Gov't preferred to the private market, Senators reacted by proposing a bi-partisan bill that would require congressional approval prior to any sale.  Everyone wants a piece of this action.   
 
The often overlooked asset on the books of the GSEs is the DTAs which have up to now been written down to zero.  But that too may change soon as FNMA is looking to reclaim their DTA to the tune of $62mm which would be 70% of the net amount owed to the US Govt.  I expect FMCC to follow soon with a similar request.
 
http://online.wsj.com/article/SB10001424127887323639604578368443773821834.html (http://online.wsj.com/article/SB10001424127887323639604578368443773821834.html)
 
There is political risk here, but with the private preferreds trading at 9-12 cents on the dollar it is a very convex risk/return profile.

That's an excellent summary, Wayne.  Also today, Freddy has sued 15 big banks over LIBOR manipulation, asking triple damages be awarded under the Sherman Antitrust Act. Actual damages are estimated to be about $3B.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sampr01 on March 19, 2013, 07:17:03 PM
thanks. how much upside u r looking at?
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: hyten1 on March 19, 2013, 08:04:35 PM
twacowfca,

how do you guys value these, there are tons of prefers, many with low vol, all dividend are non-cumulative

- you think they will ever get back to $25/$50? will fmcc or fnma ever pay dividend on these?
- considering they still have over 180bil to pay the treasury combine (fnma 88bil, fmcc 42bil)?
- i guess you guys are just playing the fact as housing improve prospect fo fnma/fmcc improve their prefers will move closer to $25/$50?
- i assume if fnma/fmcc do ever decide to redeem some of these they will start with the higher dividend ones

sorry for so many question, all newbie

i guess at end of day as long as prospect for fnma/fmcc are improving (housing improving) these prefers will move up, but i have no gage if $3 is a good price or $5, how do you value these?

hy
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 19, 2013, 09:04:12 PM
thanks. how much upside u r looking at?
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)   If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sampr01 on March 19, 2013, 09:26:36 PM
Thanks tw
do you have timeframe?
thanks. how much upside u r looking at?
hi twacowfca

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

Thanks

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.


We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

That's not the way we look at these.  The margin of safety lies in the assumption that the UST won't wipe out their own investment in their F&F preferreds by a bankruptcy or similar reorganization.  Therefore, it would be unfair to wipe out the rest of the capital structure and unnecessary because the UST's preferred is senior to the rest of the equity claims. 

Eventually, F&F should be able to earn their way out of the hole in the sense of returning more to the UST than the UST put into them.  ( this is more or less the way our government spins accounting to prove they haven 't lost money on organizations they bailed out.)   If that 's the case, then something good may happen to the holders of the public preferred.  And possibly something less for the common.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on March 20, 2013, 03:01:54 PM
The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valueorama on March 20, 2013, 07:21:56 PM
The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 21, 2013, 01:21:06 AM
The common squeaks out another 50% gain today but the danger is that with one swipe of its collective hand Congress can just wipe you out.

Even the mere mention of an "overhaul" sliced the preferreds in half not too long ago.

Be careful.

I feel Congress's hands are tied. Fannie and freddie are the mortgage market as we speak. Private business is negligible. If you  say no more fannie or freddie, private mortgage lenders would demand a much higher rate and will kill housing market.

I see very little risk of Congress killing Fannie or freddie for the near term (1-3yrs). But given that all profits are to be paid as dividends to govt held preferreds., essentially the public preferred+common gets nothing. it needs to be treated as a call option on a future action by congress to retain profits.

That's right.  There is always the possibility that the preferred and common could be wiped out because governmental decisions may be arbitrary.  That's why the public preferred is selling for pennies on the dollar.  This is not something one should put a big chunk of life savings into,

Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on March 21, 2013, 06:43:23 AM
Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 21, 2013, 07:06:12 AM
Interestingly, for those who like arbitrage, the recent run up in prices has taken the market value of the F&F common way ahead of the market cap of the F&F preferreds.  Yet the stated value of the preferreds is a lot more than the common should be worth in all but a pipe dream.  What is the cost to borrow the F&F common?

+1.  Tweeted same sentiments yesterday.  It is a great time to trade up the capital structure or engage in outright capital structure arbitrage.

Incidentally, the same common/preferred disparity existed in 2009-2010, but it was even more glaring - the common traded not just at a higher market cap, but if memory serves me correctly, a higher nominal price as well.  So save some dry powder for the trade, once fast money gets into something they can blow prices from merely irrational to insane.

I was offered a borrow of 5.5%.  But I'm afraid of a squeeze, and I don't have enough experience doing risk management for short-selling in situations like these in order to enter the trade with confidence.  (Tips?)  Unfortunately, there are no options.


You're right.  The arbitrage is virtually a sure thing in the long run, but the long run could be very long indeed.  One reason the common is so pricey relative to the preferred is an extreme liquidity premium.  Another reason is a little short squeeze.  The squeeze may not extreme because the cost to borrow is "only" 5%.

The pricing differential was indeed extreme in 2009 2010 because the preferred was completely off the radar.  It took us quite a few weeks to accumulate a meaningful position in the preferred that was mostly owned by small banks that had been allowed by their regulator to own it because it was the only high yield security deemed to be "safe".   We were the first to point out the differential between the common and the preferred, on this board.  Then the idea got picked up on VIC , SA and other sites.  Since then the differential has been smaller.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: LC on March 21, 2013, 07:09:33 AM
Can you sell short something related? Not sure what that something would be given the special position Freddie/Fannie are in...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: compoundinglife on March 21, 2013, 07:18:20 AM
I remember reading Ori Eyal's thesis on the prefs way back when, it seemed really enticing but I put it in the too hard pile, would have made some money. He had a list a of the issues and suggested a basket approach.

Anyone know of any CEFs that hold decent amount of prefs or common? Could be an interesting way to play either side.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: value-is-what-you-get on March 21, 2013, 08:19:44 AM

Be careful.

Indeed!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on March 21, 2013, 08:34:22 AM
Can you sell short something related? Not sure what that something would be given the special position Freddie/Fannie are in...

Usually that would work but here I am not sure that would help since half of the trade would be buying something related - the preferred stock.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on March 21, 2013, 09:43:48 AM
The spikey price action today of the common suggests lots of shorting and short covering.  We took some profits on some of the more liquid preferreds and continue to hold most of the others.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: mrvlad0 on April 10, 2013, 04:17:08 PM
In the Markets, at Least, Fannie and Freddie Still Astound

http://dealbook.nytimes.com/2013/04/09/in-the-markets-at-least-fannie-and-freddie-still-astound/

Quote
The federal government even has agreements with both Fannie Mae and Freddie Mac that say that through 2017 they will turn over a set measure of profits to the government. After that, they will give all of their profits to the government.

Let’s face it, what value is there in a stock where you have no vote, right to dividends or profits? Let alone the fact that each company is in debt to the government by over $160 billion. Then there is the government plan to shrink them, perhaps into nothing. The recent profits are rather meaningless in this light.

Yet the trading continues.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: LC on April 10, 2013, 04:27:35 PM
Wish I had put some more money into these....any idea how to value the preferreds going forward?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on April 10, 2013, 08:37:34 PM
FHFA’s Conservatorship Priorities for 2013
http://www.fhfa.gov/webfiles/25024/EJDNABESpeech.pdf
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on April 10, 2013, 08:47:50 PM
As part of the backdrop to issuing the Strategic Plan, there seems to be broad consensus that
Fannie Mae and Freddie Mac will not return to their previous corporate forms. The
Administration has made clear that their preferred course of action is to wind down the
Enterprises. Of the various legislative proposals that have been introduced in Congress, none of
them envision the Enterprises exiting conservatorship in their current corporate form. In
addition, the recent changes to the PSPAs, replacing the 10 percent dividend with a net income
sweep, reinforces that the Enterprises will not be building capital as a potential step to regaining
their former corporate status.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on April 11, 2013, 09:33:07 AM
Analysis of the 2012 Amendments to the Senior Preferred Stock Purchase Agreements
http://fhfaoig.gov/Content/Files/WPR-2013-002_2.pdf

Key discussion

In the end, in 2012, Treasury settled on the “positive net worth” model, in which Treasury would simply take, as dividends, the entire positive net worth of each Enterprise each quarter. Treasury is phasing in this change by establishing a net worth “buffer” such that net worth above the level of the buffer will be paid to Treasury. The buffer was set at $3 billion for each Enterprise initially, to be incrementally reduced to zero over five years.

...

The PSPAs also prohibited the Enterprises, without the consent of Treasury, from making any changes to their capital structures, issuing capital stock, increasing their debt significantly, paying any dividends (other than those to Treasury), engaging in certain transactions with affiliates, or disposing of any assets unless they are for “fair market value” in “the ordinary course of business.”

...

Thus, Treasury has liquidation preferences ahead of other stockholders to receive $189.5 billion if the Enterprises are liquidated. This liquidation preference does not decrease by the amount of dividends paid.

...

Absent express consent from Treasury and FHFA, an Enterprise cannot redeem the senior preferred stock until the termination of Treasury’s funding commitment. Treasury’s funding commitment to an Enterprise will terminate if: (i) the Enterprise’s assets are completely liquidated; (ii) the Enterprise pays its liabilities and obligations (including MBS) in full; or (iii) the Enterprise reaches the funding cap.

...

The PSPAs originally required that each Enterprise reduce its mortgage assets by 10% per year down to $250 billion. The 2012 Amendments accelerate the reduction to 15% per year.

...

The 2012 Amendments make it impossible for the Enterprises to build up any capital because their net worths, except for the temporary buffer amount, will be zero after they make each quarterly dividend payment to Treasury. Treasury’s press release announcing the amendments stated that with this change, the Enterprises “will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.”
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on May 24, 2013, 01:34:37 PM
Freddie common up 40% today! :o
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 28, 2013, 02:50:16 PM
There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valueInv on May 28, 2013, 02:57:14 PM
What caused the jump?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on May 28, 2013, 02:59:58 PM
Indeed. I passed on the third ride, it was not as simple as the first two.

Market madness from 2009.
http://variantperceptions.wordpress.com/2009/09/07/market-madness-freddie-mac-edition/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on May 28, 2013, 03:44:35 PM
There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa! 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sswan11 on May 28, 2013, 04:02:17 PM
which preferreds are recommended?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on May 28, 2013, 04:04:25 PM
http://www.cnbc.com/id/100765505

Quote
In a Wall Street Journal op-ed, Nader argues that the government treated shareholders of the government-sponsored enterprises or GSEs unfairly when it placed the agencies in conservatorship in 2008. Nader made a similar case in the newspaper in 2011.

Shareholders, including Nader himself, had purchased Fannie Mae and Freddie Mac shares believing them to be safe investments, he said. They had held on to their investments even as the financial crisis loomed larger, encouraged by statements from the companies' executives and high-ranking government officials that the agencies were "adequately capitalized."
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on May 28, 2013, 04:12:12 PM
Great call on this one.

I remember initially considering the idea from the original post, i thought it it would make a good 2% position for me. For some reason, i never gave it more time to look into.

C'est la vie

Congrats on this one!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 28, 2013, 04:29:18 PM
There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa!

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

Having said all that, the outcome is entirely dependent on politics inside the beltway.   :o

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on May 28, 2013, 05:44:19 PM
There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa!

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

Having said all that, the outcome is entirely dependent on politics inside the beltway.   :o

Indeed, politics makes this an impossible forecast.   I bought two years ago and the position has almost tripled.  But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed.
 
I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader.  The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000).  Politicians are spiteful and have long memories!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on May 28, 2013, 06:07:48 PM
Having said all that, the outcome is entirely dependent on politics inside the beltway.   :o

True that.

The longer it takes the better but I was hoping for a more supportive Obama administration. The GSEs should have had an end similar to AIG's.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77842/#msg77842
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 28, 2013, 06:54:49 PM
Having said all that, the outcome is entirely dependent on politics inside the beltway.   :o

True that.

The longer it takes the better but I was hoping for a more supportive Obama administration. The GSEs should have had an end similar to AIG's.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77842/#msg77842

What happened to AIG and the TBTF  banks is the most powerful argument for the eventual return of substantial value to F&F, especially the preferred holders. 

Imagine sometime in the not too distant future when F&F have returned in some way more than the government put into them.  Here are those GSE securities that the US advised the small commercial banks were the only high yield preferred that it was safe enough for them to hold as capital.  And then all the TBTF banks plus AIG shareholders have had a substantial recovery, while the small commercial banks that have had to bear a disproportional burden to replenish the FDIC deposit insurance fund, have got zippo from the very GSE security that their regulator told them was safe to hold. 

What kind of justice is that?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 28, 2013, 07:40:04 PM
There it goes again. This is the third grand slam home run we've had on these. Rational expectations or frothy market?  One thing is different now. Most of these preferred issues are rationally priced in relation to each other except one that was about 35% percent ahead of the herd. We took some profits on that one (about 7% of the total ) on its liquidity premium, but were unable to replace it with another relative bargain.

The preferreds continue to be a huge relative bargain, compared to the common that's been more than a ten bagger this year on its extreme liquidity premium.  I hate to short, but the arbitrage is compelling for those who do.  :)

Great timimg on your third purchase, looks to me like you bought just weeks before the price doubled...way to go Twa!

Last summer, I had a very different take than Mr. Market when the US government decided to hog all their profits instead of merely receiving their 10% dividend.  By GAAP that new regime wasn't good for the private common and preferred holders, and the common and preferred sold off. 

However, by Washington's score keeping to show how they "got even" or " "made a profit" on a bail out, I thought that new regime was a way that, measured by  funny money accounting, F&F could eventually get out of the hole relatively quickly. If they had had to continue paying that exorbitant dividend, it might take a decade or two before inflation would eventually enable them to pay off the principal of the US preferred.

My mistake was to anticipate waiting until the end of the year before building up our position once again.  By then, the preferred had already rebounded and recovered most of the selloff loss.  I was very happy that the market had become liquid enough for us to rebuild our position quickly in Q1  before the recent surge. We got back in before I posted, so it's a good bit more than a two bagger. :)

Having said all that, the outcome is entirely dependent on politics inside the beltway.   :o

Indeed, politics makes this an impossible forecast.   I bought two years ago and the position has almost tripled.  But it's been a bumpy ride as I was down 75% at one point right after the 2012 amendments when Kyle Bass and others bailed.
 
I'm always glad to have someone make a public case for the thesis, but I wish it was anyone but Ralph Nader.  The only group that loathes Nader more than the Republicans is the Democrats (they blame him for Bush vs. Gore in 2000).  Politicians are spiteful and have long memories!

I'm so glad to hear that you held on to them then. I thought you had sold out.  That was one reason I didn't flog my bull case then; I didn't want to rub salt into an open wound. 

Also happily, I checked our records and found that we had in fact bought a substantial mount of F&F preferred last summer after the big blowup, contrary to what I said, although not nearly as much as we should have bought.  :)

Some of these are up as much as 600%.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on May 28, 2013, 08:09:18 PM
What kind of justice is that?

Well said.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on May 28, 2013, 08:18:00 PM
It looks like the incentives are set up for these pfd to reach par with the opposing opinion based upon a "get even" government.  I was one of the folks that bought at the high then sold after the crash based upon my view at the time that the gov't was going to hose the hedge funds holding the pfds.  I ignored the incentives of the other players to my shagrin.  Does there have to be giant recovery assumptions going forward for these pfd to reach par?  TIA

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on May 28, 2013, 09:03:30 PM
Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 29, 2013, 01:41:18 AM
Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

Nevertheless, these are not something to bet the farm on. :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on May 29, 2013, 05:39:22 AM
Does there have to be giant recovery assumptions going forward for these pfd to reach par?  TIA

Packer,  here is a copy of text I posted from a similar thread a few weeks ago, FYI:
 
"The 2012 Amendments, as written, do allow the Treasury to take every last dollar from the GSEs over the next 20 years if they want to.  But just because they can, doesn't mean they will.  This is Washington after all and anything can happen when it comes to contracts especially when a political victory is possible for both sides.  Add in a large one-time cash infusion to the government coffers and there is lots more to grease any wheels that appear stuck.   
 
It looks to me like the Private Preferred shareholders are counting on the Treasury and lawmakers desire to have a lump sum today rather than a stream of income over decades.  Without this desire, nothing happens.   In order to receive this lump sum, an IPO is required.  But an IPO cannot happen with the Senior Preferred dividend and liquidation preference as currently written, so the Treasury would need to forgive the Senior Preferred.  What?  Forgive?  Why would they do that, its taxpayers money!  The key here is that at some point in the near future taxpayers will have received back much or all the $189.5B extended to the GSEs.   The GSEs have returned $55B as of 12/31/2012.  Add over $90B of valuation allowances against DTA's that are about to be reversed and they are 75% repaid.   With IPO proceeds from the warrant position enough to cover any remaining amounts due, politicians don't even need to lie with a straight face to claim triumphantly that taxpayers have been paid back in full plus a big return on their investment, and the GSEs are now capitalized with private dollars.  Pats on the back and congratulatory handshakes for all!!  How does this help the Private Preferred?  Since the new common shareholders can't receive dividends until the Private Preferreds coupons are reinstated, IPO participants are likely to balk unless the Private Preferred issues are addressed.  Maybe the Privates get their coupons reinstated, or even better paid in full.   Either way the Private Preferreds emerge a winner.
 
This scenario seems plausible, reasonable, logical, rational, and a winner for everyone.   Of course this combination may just doom it for failure since it's Washington after all.  But that's why the Private Preferreds are getting such longs odds."
 
 
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on May 29, 2013, 05:50:50 AM
Well I may regret this but I sold most of my Freddie holdings today.  I'll sell the rest over the next few days if I can get a good price.  I still think the case for them to be made whole is intact, but it is still a probabilities game with significant probability density at 0.

Why did I sell today?  F&F price appreciation just seems driven by speculative traders.  My evidence is the massive liquidity premium in the common shares, and to some extent the more-liquid preferred series.  Fundamental-oriented investors, wisely considering all outcomes, would not pile into common shares just because they can.  Not when the preferred and common are signalling widely disparate outcomes.  When risk-addled gamblers are driving valuation, it is time for me to sell and wait on the sidelines for a better entry. 

My plan is to wait for the blowoff I think is coming and re-enter at a lower price.  If I'm wrong and these prices aren't seen again, that's okay.  Freddie preferreds have been good to me, but at $.25, and with a long road still ahead for F&F, I think I can find better risk-rewards elsewhere.

Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

Nevertheless, these are not something to bet the farm on. :)

Twa - you were the first to the party indeed, but that's not a big surprise!!  :)   And I generally agree with you and Olmsted.  The attraction of this trade is the positive convexity in price outcomes combined with lots of uncertainty and no time to expiry.  The convexity part is still positive, but not as attractive anymore.
 
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on May 29, 2013, 06:37:03 AM
Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

.02 - nice!  My buys averaged .035.

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

I agree.  The (dramatic) return to financial health was condition 1 of 2 for these to see an actual return. Condition 2 is a restructuring that recognizes that fact and recognizes the legal position of the preferred holders.  Since we now have one of these two conditions in place, it is perfectly rational that the price has rallied.  And the incentives should be aligned for condition 2.  The froth just tells me that the rally may have overshot a bit - for now...

Nevertheless, I decided I will hang on to the the ~1/3 of my shares that weren't bought yesterday, and still hope to buy more if the price is right.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: CorpRaider on May 29, 2013, 09:43:49 AM
They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on May 29, 2013, 10:12:39 AM
They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

http://video.cnbc.com/gallery/?video=3000171775&play=1 (http://video.cnbc.com/gallery/?video=3000171775&play=1)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on May 29, 2013, 10:19:07 AM
They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

http://video.cnbc.com/gallery/?video=3000171775&play=1 (http://video.cnbc.com/gallery/?video=3000171775&play=1)

Oh boy
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: hyten1 on May 29, 2013, 10:20:23 AM
so many prefers ... which one
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on May 29, 2013, 10:31:20 AM
so many prefers ... which one

He put $500mm into the prefs. It looks and smells like a speculation, but there's no way he puts that much money in there without knowing something else.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on May 29, 2013, 10:35:00 AM
They're talking about this on CNBC now.  Berkowitz was talking to David Faber about restructuring them.

Well I didn't see that one coming!

(http://s.wsj.net/public/resources/images/MI-AU350_Fairho_D_20090102152555.jpg)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 29, 2013, 11:35:17 AM
Kind of agree.  We have pared down a little as these have run up, and our cost basis on the recent run up is almost zero, allowing for the gains on what we sold.  At $0.20 on the dollar, they are definitely more expensive than they were at $0.02 on the dollar when we first started buying them a few years ago when everyone else who is now interested in them didn't have a clue.  The preferreds were so illiquid then that it took us a couple of months to build a significant position.

.02 - nice!  My buys averaged .035.

The big thing that has changed now is the financial health of their business.  Houses are no longer overpriced, except for perhaps isolated markets with geographical constraints. These GSEs  have latent pricing power, and the Obama administration is starting to see their profits as a cash cow that helps them delay raising the national debt ceiling and other "austerity" measures.  Therefore, they may not be as inclined to squeeze them to help the shrinking number of deadbeats stay in their houses a little longer as they were a few years ago.

I agree.  The (dramatic) return to financial health was condition 1 of 2 for these to see an actual return. Condition 2 is a restructuring that recognizes that fact and recognizes the legal position of the preferred holders.  Since we now have one of these two conditions in place, it is perfectly rational that the price has rallied.  And the incentives should be aligned for condition 2.  The froth just tells me that the rally may have overshot a bit - for now...

Nevertheless, I decided I will hang on to the the ~1/3 of my shares that weren't bought yesterday, and still hope to buy more if the price is right.

Back then the pricing of the F&F prefs was all over the place.  Some traded at 1% of stated value, others at 2% or more.  The more liquid prefs often were twice as pricey as the least liquid. 

When a holder was selling a particular issue, the price could drop 20% or more.  We had to creep into them by waiting until some significant holder was selling because market makers had stopped making markets in those illiquid issues that Mr. Market thought were almost certainly worthless.  No funds were accumulating any of the prefs. 

We were buying 1/3 to 1/2 the shares that erratically traded, usually the issues that seemed to be greater bargains and sometimes others when big blocks were offered (measured by number of shares). We could usually buy blocks at a large discount to the recent price range of that issue. 

It was a buyers dream like when we were buying a large percentage of The shares of USG that traded in 2001 after they went into Cpt 11.  :)

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on May 29, 2013, 08:20:21 PM
Bruce being premature once again?  ;)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on May 30, 2013, 06:39:41 AM
Bruce being premature once again?  ;)

Haha.  Maybe that means I will have a chance to buy back in 50% lower.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on May 30, 2013, 07:14:26 AM
Bruce being premature once again?  ;)

Haha.  Maybe that means I will have a chance to buy back in 50% lower.

50% lower AND with more clarity.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 30, 2013, 11:03:40 AM
Like Chanticleer, I must conclude that Mr. Market has taken my advice to sell the F&F common to arbitrage the difference in prospective value of the F&F preferred.  The common has lost half its market value in the last couple of days while the preferred has been flattish.

Should I try for making the sun rise?   :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sswan11 on May 30, 2013, 03:44:00 PM
http://www.reuters.com/article/2013/05/29/usa-fannie-freddie-idUSL2N0EA1TB20130529?feedType=RSS&feedName=marketsNews&rpc=43

UPDATE 1-U.S. senators aim for bill to replace Fannie Mae, Freddie Mac
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: berkshiremystery on May 30, 2013, 06:17:22 PM
Fannie Mae’s 2,000% Year, Briefly

http://blogs.wsj.com/moneybeat/2013/05/29/fannie-maes-2000-year-briefly/?mod=yahoo_hs

On Wednesday, mutual fund investor Bruce Berkowitz of Fairholme Capital Management told CNBC he had invested $500 million in the preferred shares. Volume in the shares exceeded 230 million shares, the highest in three years and nearly six times the average daily trading.

A representative of the Fairholme Funds’ shareholder services confirmed that the firm bought roughly $500 million in preferred equity of Fannie Mae and Freddie Mac FMCC -38.70%. He declined to elaborate further.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: berkshiremystery on May 30, 2013, 06:25:07 PM
Fairholme makes $500 mln bet on Fannie, Freddie preferred

Fund manager Bruce Berkowitz's Fairholme Capital Management is making a big bet on Fannie Mae and Freddie Mac preferred shares

http://in.reuters.com/article/2013/05/29/usa-fannie-freddie-idINL2N0EA1JY20130529

------

Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."




Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on May 30, 2013, 08:40:28 PM
Like Chanticleer, I must conclude that Mr. Market has taken my advice to sell the F&F common to arbitrage the difference in prospective value of the F&F preferred.  The common has lost half its market value in the last couple of days while the preferred has been flattish.

Should I try for making the sun rise?   :)

Haha nice.  Please do!

I think I bounced around the short common-long preferred trade on twitter a few weeks ago when the common had a (at the time) "crazy" rally up to $1.20.  The tricky part is, for good risk management you need some way to make the trade last until there is resolution in the GSE's status - because only then can an anchoring event force rationality on the prices.  Either that or fully hedge with some way out-of-the-money options, but I'm not aware of any that trade.  The common prices were almost as nuts at $1.20 as they are at $4, but I would have gotten destroyed shorting it.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Olmsted on May 30, 2013, 08:41:49 PM
Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."


Go Bruce Berkowitz! Making the case very eloquently. I hope he gains traction.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: berkshiremystery on May 30, 2013, 08:49:52 PM
Paulson leads hedge funds lobbying to privatize Fannie Mae

http://www.delawareonline.com/article/20130502/BUSINESS05/305020039/Paulson-leads-hedge-funds-lobbying-privatize-Fannie-Mae

Paulson & Co. is among funds that met with members of the Senate Banking Committee and with staff members in the House of Representatives, said two of the people briefed on the matter. Claren Road Asset Management LLC and Perry Capital LLC also have lobbied, said those people and a third person. They spoke on condition of anonymity because the meetings weren’t public.

The funds’ proposal is similar to one being circulated by James Millstein, the former Treasury official who oversaw the restructuring of bailed-out insurer American International Group. Millstein’s multiple-step blueprint calls for recapitalizing the two mortgage companies, eliminating their implicit government backing and selling off the Treasury stake. He would also create a new U.S. agency to reinsure loans. Millstein said his plan could leave taxpayers with $100 billion to $190 billion in profit.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on May 30, 2013, 08:55:44 PM
Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."


Go Bruce Berkowitz! Making the case very eloquently. I hope he gains traction.

Yes, welcome to the party, Bruce.  Sorry, you declined my invitation to join USG's coming back party ten years ago, but this could make up for that lost opportunity. :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: berkshiremystery on May 30, 2013, 09:11:12 PM
Hedge Funds Wagering on Fannie Reincarnation: Mortgages

http://www.businessweek.com/news/2013-04-08/hedge-funds-wagering-on-fannie-reincarnation-mortgages





Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on May 31, 2013, 08:56:22 AM
I don't mind honest speculation on these, but Berkowitz irritates me. The Federal Government doesn't need any of his "help" to recapitalize, or capitalize new companies. He's really just asking for a handout.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on May 31, 2013, 08:57:32 AM
And of course, I feel sorry for the thousands of retail investors who will surely lose money on these, no matter what the outcome.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on June 03, 2013, 07:29:33 AM
Fairholme releases statement, says they own $2.4bln par amount of GSE preferred.
 
http://www.fairholmefunds.com/show_ie_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Fannie-and-Freddie-v6_0.pdf (http://www.fairholmefunds.com/show_ie_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Fannie-and-Freddie-v6_0.pdf)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on June 03, 2013, 07:49:42 AM
I'm lost - how did Fairholme help "rebuild" BAC, AIG and MBI? I understand GGP, but the others?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: mankap on June 03, 2013, 08:42:45 AM
Berkowitz is betting that dividend on Common preferred will be restored and Preferred will trade at Par.
The questions if that will  Treasury after getting their money back still punish common preferred?
We know Fannie will be earning lot of money even in run off mode.
Will govt's exit in Fannie take AIG route or some other form.
Even if the Govt. does not get out of Fannie, govt. will face pressure to restore dividend to common preferred after they have got their money back.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ScottHall on June 03, 2013, 09:09:31 AM
Fairholme releases statement, says they own $2.4bln par amount of GSE preferred.
 
http://www.fairholmefunds.com/show_ie_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Fannie-and-Freddie-v6_0.pdf (http://www.fairholmefunds.com/show_ie_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/Fannie-and-Freddie-v6_0.pdf)

Berkowitz has put me back in these against my will after I sold them because I entrusted him with some of my 401(k). Very funny.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on June 03, 2013, 10:49:20 AM
Berkowitz is betting that dividend on Common preferred will be restored and Preferred will trade at Par.
The questions if that will  Treasury after getting their money back still punish common preferred?
We know Fannie will be earning lot of money even in run off mode.
Will govt's exit in Fannie take AIG route or some other form.
Even if the Govt. does not get out of Fannie, govt. will face pressure to restore dividend to common preferred after they have got their money back.

No, obviously the situation is nothing like AIG or BAC. Fannie and Freddie are in conservatorship and are winding down. The government owns senior preferred shares in Fannie and Freddie, which currently hold 100% of economic value.

It's possible that they will decide to recapitalize, and Treasury will give up the senior preferred for cash. But how would that happen? Treasury and FHFA agreed on the current approach which gives all profits to Treasury, and no value left for public shareholders.  Do you think Treasury will change their mind and give money away to hedge funds, just because they asked for it?  If not, do you think both houses of Congress can agree on that?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on June 03, 2013, 12:27:39 PM
Correct, this is different from AIG/BAC.

Treasury changed from getting dividend to getting anything above "A-L-buffer" to prevent the circular flow of funds (ie borrowing from treasury to pay them).

Once the loan is paid out in full, what legal/moral argument would they have to continue to get (usurp) all income of a private enterprise?

In 10-K, the covenant says
Covenants
The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is repaid or
redeemed in full, we may not, without the prior written consent of Treasury:
---
--Terminate the conservatorship
- Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

Also
Termination Provisions
The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the
following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding
commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not
contingent, including mortgage guaranty obligations),


The treasury's stranglehold may loosen once they are paid in full

[/quote]

No, obviously the situation is nothing like AIG or BAC. Fannie and Freddie are in conservatorship and are winding down. The government owns senior preferred shares in Fannie and Freddie, which currently hold 100% of economic value.

It's possible that they will decide to recapitalize, and Treasury will give up the senior preferred for cash. But how would that happen? Treasury and FHFA agreed on the current approach which gives all profits to Treasury, and no value left for public shareholders.  Do you think Treasury will change their mind and give money away to hedge funds, just because they asked for it?  If not, do you think both houses of Congress can agree on that?
[/quote]
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on June 03, 2013, 12:41:54 PM
Correct, this is different from AIG/BAC.

Treasury changed from getting dividend to getting anything above "A-L-buffer" to prevent the circular flow of funds (ie borrowing from treasury to pay them).

Once the loan is paid out in full, what legal/moral argument would they have to continue to get (usurp) all income of a private enterprise?

In 10-K, the covenant says
Covenants
The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is repaid or
redeemed in full, we may not, without the prior written consent of Treasury:
---
--Terminate the conservatorship
- Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

Also
Termination Provisions
The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the
following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding
commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not
contingent, including mortgage guaranty obligations),


The treasury's stranglehold may loosen once they are paid in full


Morality is not an investable thesis.

"Payment in full of all of our liabilities" means liquidation of the company and paying off $3.2 trillion in liabilities. It doesn't mean that anything happens once they pay dividends equal to the face value of the preferred stake.

Their is currently no mechanism for Fannie and Freddie to repay the preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: mankap on June 03, 2013, 07:47:07 PM
Clearly FNMA not being recapitalized is the biggest risk for common preferred.
But Fed has more to gain with recapitalization than liquidation.Fed can probably get $100B with recapitalization in 2014 than $50B in dividends over 10 years or may be more.
Berkowitz thinks recapitalization will happen, that is why he has risked $500m in the common preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on June 04, 2013, 11:48:28 AM
Maximizing ROI is probably not Treasury's primary goal here. They aren't capital or time constrained so there is no rush to do anything. Judging by the preferred share agreement, their primary goal is to radically reduce the size of the GSEs. Recapitalizing and turning the companies back to the public markets doesn't support that.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 04, 2013, 01:10:57 PM
“The tough work is over,” Berkowitz said. “I don’t understand the politics involved but it seems obvious to me what needs to take place.”

Despite the tremendous, self-interested investor support for the dividend’s restoration, legislators seem unlikely to grant Wall Street’s wishes. Changing the current arrangement at Fannie and Freddie has been non-starter in Washington, and a bipartisan group of senators is working on a bill to replace the two companies, leaving no room for private shareholders. ""


mmm … nothing new here.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ERICOPOLY on June 04, 2013, 01:26:34 PM
Just a newbie question, but doesn't killing off Fannie/Freddie mean that 30 year fixed rate mortgages would disappear?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on June 04, 2013, 01:29:21 PM
Just a newbie question, but doesn't killing off Fannie/Freddie mean that 30 year fixed rate mortgages would disappear?

No,  Private Label securitizations are competitive with GSE's in some cases already.  Also banks retain some mortgages.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 04, 2013, 01:45:29 PM
Just a newbie question, but doesn't killing off Fannie/Freddie mean that 30 year fixed rate mortgages would disappear?

No, but the alternatives are not very competitive at the current g-fee. (pages 5,6,7,8,…)

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77844/#msg77844
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: value-is-what-you-get on June 04, 2013, 01:50:32 PM
“The tough work is over,” Berkowitz said. “I don’t understand the politics involved but it seems obvious to me what needs to take place.”

Despite the tremendous, self-interested investor support for the dividend’s restoration, legislators seem unlikely to grant Wall Street’s wishes. Changing the current arrangement at Fannie and Freddie has been non-starter in Washington, and a bipartisan group of senators is working on a bill to replace the two companies, leaving no room for private shareholders. ""


mmm … nothing new here.

I think Kyle Bass stated that the house never agrees on anything except now they both want Fannie and Freddie gone.  So what do you think might happen?  It sounds like a much more realistic synopsis of the politics surrounding this than Berkowitz just shrugging it off.  I m big time leery of this one working out for any shareholders except the hourly traders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 04, 2013, 02:09:24 PM
Senators Draft Plan to Abolish Fannie Mae, Shrink Backstop.
http://www.bloomberg.com/news/2013-06-03/senators-near-plan-to-abolish-fannie-mae-shrink-government-role.html

U.S. Could Profit From Fannie Mae Bailout, CEO Says
http://www.bloomberg.com/video/u-s-could-profit-from-fannie-mae-bailout-ceo-says-jUx5JpRQTkyK5YwAlBLDlQ.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on June 04, 2013, 04:34:35 PM
Just a newbie question, but doesn't killing off Fannie/Freddie mean that 30 year fixed rate mortgages would disappear?

No, but the alternatives are not very competitive at the current g-fee. (pages 5,6,7,8,…)

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/millstein's-plan-for-fannie-and-freddie/msg77844/#msg77844

http://www.dsnews.com/articles/barclays-non-agency-rmbs-market-to-make-small-comeback-2013-05-22
http://www.housingwire.com/fastnews/2013/05/21/g-fee-hikes-will-lead-private-label-market-comeback-barclays

"On the securitization option, the economics of nonagency securitization are much closer than Fannie Mae and Freddie Mac securitizations today than they were two years ago.

"In fact, for the cleanest collateral, nonagency execution could be slightly better than government-sponsored enterprises."

As a result, even for moderately high quality loans — forming the bulk of GSE issuance — private-label execution is likely to be within 10 to 15 basis points of GSE execution. "


I'll try to track done the more detailed analysis I saw earlier in the year tomorrow.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 04, 2013, 04:57:45 PM
Thanks Jay, looking forward to it.

A lot will depend on how the privatization is structured. If there is one. Peter Lynch on the GSEs moat:

* It occurred to me that Fannie Mae was like a bank, but also had major advantages over a bank. Banks had 2-3 percent overhead. Fannie Mae could pay its expenses on a .2 percent overhead.

* Thanks to its status a quasigovernmental agency, Fannie Mae could borrow money more cheaply than any bank, more cheaply than IBM or GM or thousands of other companies.

* No bank, S&L, or other financial company in America could make a profit on a 1 percent spread.

* As long as people were paying on their mortgages, Fannie Mae would be the most lucrative business left on the planet


http://variantperceptions.wordpress.com/2009/09/10/voice-from-the-past-lynch-on-fannie-and-freddie-fre-fnm/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: mankap on June 04, 2013, 05:43:49 PM
I think realistic scenario is that Congress wants to shrink Fannie and Freddie over time.Fannie have $3.5T in assets. You cannot liquidate 3.5T in one day.I think Congress will set a timetable say 10 years to shrink it.
The question is whether Fannie will stay in current form for 10 years.Or will govt privatize it and then shrink it?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on June 04, 2013, 06:52:26 PM
What is the government's incentive to not wipe out the preferred upon restructuring Fannie & Freddie? (Other than to please the lobbyists that are advocating a beneficial restructuring to pref holders)

why not just do a fresh start clean of these liabilities?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: txlaw on June 04, 2013, 07:32:27 PM
“The tough work is over,” Berkowitz said. “I don’t understand the politics involved but it seems obvious to me what needs to take place.”

???

Surely, he is being coy, no?

I guess we know why he reduced his MBI position in the Allocation fund.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Kiltacular on June 05, 2013, 12:04:05 AM
Quote
Surely, he is being coy, no?

I guess we know why he reduced his MBI position in the Allocation fund.

I thought the same thing -- well, both things -- too.

Can anyone name a large position that didn't work out well that Berkowitz pounded the table on?  I can only think of CNQ -- though he probably made a lot of money there too.

He sold others before they worked out -- Pfizer and the health insurers.  But, you made good money, I think, if you held.

Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

Perhaps it makes sense to wait a few months, or more, given his self-described propensity for "premature accumulation" -- great phrase.  But, his ideas are pretty solid from what I've seen.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: hardincap on June 05, 2013, 05:22:42 AM
shld has been absolutely terrible. its far below his cost and he's been waiting 5+ years for it to work out. i doubt he'd get into it if he could do it over again... i think he overestimated lampert. i did too.. as buffett says turnarounds seldom turn around

Quote
Surely, he is being coy, no?

I guess we know why he reduced his MBI position in the Allocation fund.

I thought the same thing -- well, both things -- too.

Can anyone name a large position that didn't work out well that Berkowitz pounded the table on?  I can only think of CNQ -- though he probably made a lot of money there too.

He sold others before they worked out -- Pfizer and the health insurers.  But, you made good money, I think, if you held.

Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

Perhaps it makes sense to wait a few months, or more, given his self-described propensity for "premature accumulation" -- great phrase.  But, his ideas are pretty solid from what I've seen.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: sswan11 on June 05, 2013, 06:40:26 AM
Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

What about St Joe?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on June 05, 2013, 06:58:23 AM
Are there any material cost savings associated with keeping Freddie and Fannie alive versus transferring thier functions to new entities which can raise equity capital to act as a buffer for gov't support?

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on June 05, 2013, 06:58:30 AM
BB was way early on CNQ and made tons of money; he also got out at the right time.


Quote
Surely, he is being coy, no?

I guess we know why he reduced his MBI position in the Allocation fund.

I thought the same thing -- well, both things -- too.

Can anyone name a large position that didn't work out well that Berkowitz pounded the table on?  I can only think of CNQ -- though he probably made a lot of money there too.

He sold others before they worked out -- Pfizer and the health insurers.  But, you made good money, I think, if you held.

Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

Perhaps it makes sense to wait a few months, or more, given his self-described propensity for "premature accumulation" -- great phrase.  But, his ideas are pretty solid from what I've seen.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on June 05, 2013, 08:31:52 AM
Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

What about St Joe?

Trading into AIG and BAC for the health insurers and defense companies worked out eventually but it cost him billions in capital (redemptions).
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on June 05, 2013, 08:54:18 AM
http://www.bloomberg.com/news/2013-06-05/fannie-shares-seen-as-worthless-surging-in-disconnect.html (http://www.bloomberg.com/news/2013-06-05/fannie-shares-seen-as-worthless-surging-in-disconnect.html)


.Fannie Shares Seen as Worthless Surging in Disconnect

Fannie Mae and Freddie Mac shares surged to five-year highs last week, giving them a combined market value of $48 billion, about the same as BlackRock Inc., the world’s largest money manager, and Starbucks Corp., the biggest coffee-shop operator.

...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ERICOPOLY on June 05, 2013, 09:57:01 AM
Anything else that someone can name where he made a large investment and it didn't work well?  I guess we could argue AIG and SHLD haven't hit yet.  I'm not sure of his average price on either.

Perhaps it makes sense to wait a few months, or more, given his self-described propensity for "premature accumulation" -- great phrase.  But, his ideas are pretty solid from what I've seen.

BAC was purchased around $14 a little over 2 years ago. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on June 05, 2013, 10:52:51 AM
I suppose the argument is who else can step in to support the housing market with scale and pricing impact to the level the the GSE's have had.

With record profits coming out of the GSE's, perhaps the politicians will decide to simply let the GSEs continue to pay back treasury over time, while eventually reinstating the preferred stock dividend.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on June 05, 2013, 11:23:43 AM
Are there any material cost savings associated with keeping Freddie and Fannie alive versus transferring thier functions to new entities which can raise equity capital to act as a buffer for gov't support?

Packer

Yes, I think Fannie and Freddie's scale, established business, financial structures, relationships etc. give them a large cost advantage over any current or new entrant.

But no matter how much financial sense it makes to recapitalize the GSEs and return them to business as usual (instead of winding them down), it doesn't matter if Treasury, FHFA and Congress have opposing political priorities.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 05, 2013, 12:17:47 PM
http://blogs.wsj.com/moneybeat/2013/06/05/fannie-freddie-bill-leaves-little-for-shareholders/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on June 05, 2013, 12:28:20 PM
Corker saying that the bill would "ensure that taxpayers get all of the upside that comes with the risks they were asked to assume in 2008" seems unexpectedly strong, even compared to recent articles on the same legislation. Bad news for common and preferred in my opinion.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on June 07, 2013, 10:55:47 AM
I seem to recall that Mohnish was invested in the preferred shares a while back and exited. Does anyone remember why?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Parsad on June 11, 2013, 12:00:27 AM
I seem to recall that Mohnish was invested in the preferred shares a while back and exited. Does anyone remember why?

Probably because it's a frickin' 9-foot hurdle! 

What margin of safety is there in something that may not exist because the government deems it so?  Balance sheet and operating risk is somewhat estimable, but business/industry risk is much harder to do with congressmen and senators involved.

Contrary to popular belief, Mohnish prefers easier ways to make money...so do I.  You can make money trading it like Twacowfca has, but you better be right about the bet within 5-7 years.  You can't wait this one out like Berkowitz did with Sears, since the U.S. government isn't worried about investors getting their money back, only the U.S. government.  Cheers! 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ScottHall on June 11, 2013, 03:44:01 PM
I seem to recall that Mohnish was invested in the preferred shares a while back and exited. Does anyone remember why?

Probably because it's a frickin' 9-foot hurdle! 

What margin of safety is there in something that may not exist because the government deems it so?  Balance sheet and operating risk is somewhat estimable, but business/industry risk is much harder to do with congressmen and senators involved.

Contrary to popular belief, Mohnish prefers easier ways to make money...so do I.  You can make money trading it like Twacowfca has, but you better be right about the bet within 5-7 years.  You can't wait this one out like Berkowitz did with Sears, since the U.S. government isn't worried about investors getting their money back, only the U.S. government.  Cheers!

I'll be interested to see how this plays out. I briefly owned a small amount of Freddie Mac preferreds before the government decided it was going to take all of the profits as a dividend. The GSEs are pretty good businesses, overall, and if they are ever taken out of conservatorship they could become good investments.

Until that happens, though, I have little interest in these securities. I do own some indirectly through Fairholme, but that's in my 401.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 12, 2013, 10:02:31 AM
http://mobile.nytimes.com/blogs/dealbook/2013/06/12/reform-efforts-in-washington-reflect-few-lessons-of-housing-crisis/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 13, 2013, 10:18:34 AM
In new suit, Fannie, Freddie shareholders channel Hank Greenberg.

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=80001&terms=@ReutersTopicCodes+CONTAINS+%27ANV%27
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 17, 2013, 06:44:50 PM
http://www.bloomberg.com/news/2013-06-10/fannie-freddie-shareholder-suit-challenges-u-s-takeover.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 21, 2013, 11:08:37 AM
(http://farm4.staticflickr.com/3821/9100654207_5c438e2950.jpg)

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/21/heres-how-fast-fannie-and-freddie-are-paying-pack-the-treasury/

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/20/its-been-five-years-since-we-took-over-fannie-and-freddie-heres-what-to-do-next/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on June 21, 2013, 01:09:23 PM
(http://farm4.staticflickr.com/3821/9100654207_5c438e2950.jpg)

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/21/heres-how-fast-fannie-and-freddie-are-paying-pack-the-treasury/

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/20/its-been-five-years-since-we-took-over-fannie-and-freddie-heres-what-to-do-next/


I think this is why the politicians are so desperate to take the GSEs out of the public shareholder's hands.

The cash flows for them to play with (spend) will be enormous going forward.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on June 21, 2013, 03:20:29 PM
(http://farm4.staticflickr.com/3821/9100654207_5c438e2950.jpg)

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/21/heres-how-fast-fannie-and-freddie-are-paying-pack-the-treasury/

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/06/20/its-been-five-years-since-we-took-over-fannie-and-freddie-heres-what-to-do-next/


I think this is why the politicians are so desperate to take the GSEs out of the public shareholder's hands.

The cash flows for them to play with (spend) will be enormous going forward.

I think the UST is boxed in on this. Taking over F&F would inflate the government's balance sheet like a hot air balloon.  Ultimately, they will have to face the unpleasant fact that they have hogged all the profits to a degree far beyond what it cost to bail them out. 

Here are government sponsored enterprises where the preferred shareholders included many pension funds and small banks that were allowed to own the preferred by their government regulators only because the government deemed the preferred to be super safe.  Once the government is made whole on their bailout funds, are the small banks and others who relied on the assurances of their government going to be wiped out while shareholders in private companies like TBTF banks and insurance companies like AIG continue to make a substantial recovery in their losses!?

That would be the unkindest cut of all: recovery of shareholders of the TBTF banks that almost brought the country to its knees with their greed and bloated bonuses for their managers while the pension funds and regulated small banks have all their equity taken by the government as a consequence of the excesses of the managers of the GSE's.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dcollon on June 25, 2013, 06:25:57 AM
Senators to Introduce Bill to End Fannie Mae, Freddie Mac (bloomberg)

http://www.bloomberg.com/news/2013-06-24/senators-to-introduce-bill-to-end-fannie-mae-freddie-mac.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on June 26, 2013, 08:12:12 PM
Joe Nocera.
http://mobile.nytimes.com/2013/06/27/opinion/nocera-the-end-of-fannie-and-freddie.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on June 27, 2013, 02:43:09 AM
The never ending story continues.  The arbitrage on this worked very well for those willing and able  to borrow and short the common because the recent bill does adhere more or less to the absolute priority rule with the preferred having priority over the common.

Time will tell, meanwhile this Bill like many other proposals is between a rock and a hard place.  Nonplussed again.  The interesting thing about this situation is like having stock in a company in Cpt 11 in the old days when the reorganization could be strung out indefinitely.  In that event, if the creditors didn't want to liquidate the company and if the business could get a decent Return on its capital, the longer the company was in Cpt 11, the better that was as the company was able month by month and year by year to earn itself out of tho hole.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on July 07, 2013, 08:01:50 PM
Perry Capital sues US Treasury over Fannie and Freddie dividends
http://www.ft.com/intl/cms/s/0/476cbeae-e772-11e2-8a57-00144feabdc0.html#axzz2YJmR83XT

Fannie, Freddie Sued by Hedge Fund
http://online.wsj.com/article/SB10001424127887323368704578592520403708326.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on July 08, 2013, 07:22:59 AM
Perry Capital sues US Treasury over Fannie and Freddie dividends
http://www.ft.com/intl/cms/s/0/476cbeae-e772-11e2-8a57-00144feabdc0.html#axzz2YJmR83XT (http://www.ft.com/intl/cms/s/0/476cbeae-e772-11e2-8a57-00144feabdc0.html#axzz2YJmR83XT)

Fannie, Freddie Sued by Hedge Fund
http://online.wsj.com/article/SB10001424127887323368704578592520403708326.html (http://online.wsj.com/article/SB10001424127887323368704578592520403708326.html)

Complaint attached
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 08, 2013, 10:30:19 AM
You should edit the thread title in search for the elusive 100 bagger!

It will be very interesting to see how the chips fall for the preferreds. A rational argument can be made in favor of the prefs.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 08, 2013, 06:11:42 PM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 09, 2013, 06:53:08 AM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.

valuecfa, what do you think about the recently filed litigation by Perry Capital?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 09, 2013, 01:30:53 PM
Breaking from CNBC Twitter Feed:

BREAKING: Fairholme Fund says will sue this week to receive Fannie, Freddie dividends; suit appears similar to Perry Capital suit filed Sun.

(More) Fairholme Fund argues that the amendment to government ownership of Fannie and Freddie is unlawful, @KateKellyCNBC reports.


https://twitter.com/CNBC
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on July 09, 2013, 01:40:41 PM
Bruce Berkowitz's Fairholme Sues U.S. Over Fannie And Freddie
http://www.forbes.com/sites/steveschaefer/2013/07/09/fairholme-fund-sues-uncle-sam-over-fannie-and-freddie/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 09, 2013, 03:58:57 PM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.

valuecfa, what do you think about the recently filed litigation by Perry Capital?

I think it has merit. With the prefs currently at 17 cents on the dollar, i think the market is mispricing the probability of success.

I doubt the courts will end up being the deciding factor in the investment, but if they are, then this could take some time (recall mbia)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 09, 2013, 07:16:29 PM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.

valuecfa, what do you think about the recently filed litigation by Perry Capital?

I think it has merit. With the prefs currently at 17 cents on the dollar, i think the market is mispricing the probability of success.

I doubt the courts will end up being the deciding factor in the investment, but if they are, then this could take some time (recall mbia)

I'm on the sidelines but becoming more interested every day. I've often wondered over the last two days or so where the free-market conservatives are -- shouldn't they be shouting bloody murder with the de facto nationalization of Fannie & Freddie? It's an interesting story if only from a political angle.

If you don't mind me asking, did you buy a particular series or just a basket?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 09, 2013, 07:26:53 PM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.

valuecfa, what do you think about the recently filed litigation by Perry Capital?

I think it has merit. With the prefs currently at 17 cents on the dollar, i think the market is mispricing the probability of success.

I doubt the courts will end up being the deciding factor in the investment, but if they are, then this could take some time (recall mbia)

I'm on the sidelines but becoming more interested every day. I've often wondered over the last two days or so where the free-market conservatives are -- shouldn't they be shouting bloody murder with the de facto nationalization of Fannie & Freddie? It's an interesting story if only from a political angle.

If you don't mind me asking, did you buy a particular series or just a basket?

I purchased 3 different series. The more illiquid ones with largest discount to par, ignoring the coupons for the most part. I've been purchasing over the past few weeks, but made what may be my final purchase yesterday. Currently about a 6% position.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on July 10, 2013, 11:51:08 AM
Hopefully only fashionably late, i took a bite of the Fannie Prefs today. Risk/rewards seem favorable despite recent legislative action and general market commentary.

valuecfa, what do you think about the recently filed litigation by Perry Capital?

I think it has merit. With the prefs currently at 17 cents on the dollar, i think the market is mispricing the probability of success.

I doubt the courts will end up being the deciding factor in the investment, but if they are, then this could take some time (recall mbia)

I'm on the sidelines but becoming more interested every day. I've often wondered over the last two days or so where the free-market conservatives are -- shouldn't they be shouting bloody murder with the de facto nationalization of Fannie & Freddie? It's an interesting story if only from a political angle.

If you don't mind me asking, did you buy a particular series or just a basket?

I purchased 3 different series. The more illiquid ones with largest discount to par, ignoring the coupons for the most part. I've been purchasing over the past few weeks, but made what may be my final purchase yesterday. Currently about a 6% position.

That's what we've done over the years.  Bid on the most illiquid with the greatest disount from stated value first, and then go up fom there. Sometimes, when the prefs are getting bid up, we'll sell a relatively overpriced issue even while we are generally buying other issues.  We sold a substantial amount of the more liquid ones a few weeks ago for as much as 30%+ of stated value while continuing to hold or even increasing our holdings of the less liquid series.

Unhappily, these are usually more rationally priced in recent months as Bruce and other managers of large funds have taken notice of the uncertain potential of value for the preferreds.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on July 11, 2013, 05:17:31 PM
Fairholme complaint attached.   Notably, W.R. Berkley is a party to the lawsuit as they held a significant position of FMCC Series S and FNMA Series O prior to conservatorship declaration.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 11, 2013, 05:32:38 PM
Frankel covering the lawsuits, which i suspect will only pile up much, much more...
http://blogs.reuters.com/alison-frankel/2013/07/10/fannie-freddie-shareholders-demand-lost-dividends-from-u-s-in-new-class-action/

with Fairholme link: http://blogs.reuters.com/alison-frankel/files/2013/07/fairholmevus-complaint.pdf
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PlanMaestro on July 11, 2013, 06:24:52 PM
House Republicans Plan to Wind Down Fannie, Freddie
http://online.wsj.com/article/SB10001424127887324425204578599732524463590.html

Hensarling's GSE bill
http://online.wsj.com/public/resources/documents/Timiraos.pdf

WSJ endorses it: Housing Reform Breakout
http://online.wsj.com/article/SB10001424127887324425204578597883614289330.html?mod=WSJ_Opinion_AboveLEFTTop

Maxine Waters' reaction.
http://democrats.financialservices.house.gov/press/PRArticle.aspx?NewsID=1567
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 11, 2013, 06:30:54 PM
Frankel covering the lawsuits, which i suspect will only pile up much, much more...
http://blogs.reuters.com/alison-frankel/2013/07/10/fannie-freddie-shareholders-demand-lost-dividends-from-u-s-in-new-class-action/

with Fairholme link: http://blogs.reuters.com/alison-frankel/files/2013/07/fairholmevus-complaint.pdf

Glad to see them going with the Takings Clause. It's what I would've done.

Also, I have to say that, on a personal note, I'm really quite happy that my legal education wasn't completely useless in my new life as an investor. :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 12, 2013, 07:06:48 AM
I have a question for the other lawyers on the board.

As I understand it, Berkowitz bought the preferred shares after the sweep amendment. Does he have standing?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 12, 2013, 09:05:57 AM
I have a question for the other lawyers on the board.

As I understand it, Berkowitz bought the preferred shares after the sweep amendment. Does he have standing?

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged.

Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on July 12, 2013, 09:35:34 AM
I have a question for the other lawyers on the board.

As I understand it, Berkowitz bought the preferred shares after the sweep amendment. Does he have standing?

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged.

Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games.

Agree.

Also not a lawyer, but have been told by a top securities attorney that the current owner of a security stands in the stead of all who previously owned it.  Practically, that attorney advises that judges often are less sympathetic to speculators who scoop up a security at a low price after the damage has been done.

Is there a named plaintiff who owned the prefs before the US takeover? That would be a big moral plus.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on July 12, 2013, 09:38:25 AM
I have a question for the other lawyers on the board.

As I understand it, Berkowitz bought the preferred shares after the sweep amendment. Does he have standing?

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged.

Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games.

If Fairholme doesn't have standing because of post-third amendment purchase timing, it's safe to assume that WR Berkley & Co. won't have the same problem since they bought before conservatorship. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on July 12, 2013, 09:44:03 AM
I have a question for the other lawyers on the board.

As I understand it, Berkowitz bought the preferred shares after the sweep amendment. Does he have standing?

The security's claim still has standing. If the sweep amendment was illegal, it still is. It doesn't matter who now owns the security, but rather that the security itself was wronged.

Caution: I am not a lawyer. I know nothing about law so the above could be complete BS. I did take the LSAT though. I hate logic games.

If Fairholme doesn't have standing because of post-third amendment purchase timing, it's safe to assume that WR Berkley & Co. won't have the same problem since they bought before conservatorship.

Good, that gives the plaintiffs the moral high road.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 12, 2013, 03:37:44 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 12, 2013, 03:46:31 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?

FNMAK and FNMAP are even much cheaper than the above today.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: gokou3 on July 12, 2013, 04:15:39 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?

FNMAK and FNMAP are even much cheaper than the above today.

Are they (the preferred issues) all ranked pari passu?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 12, 2013, 04:34:48 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?

FNMAK and FNMAP are even much cheaper than the above today.

Are they (the preferred issues) all ranked pari passu?

yes, excluding treasury's senior prefs
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on July 12, 2013, 06:08:27 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?

FNMAK and FNMAP are even much cheaper than the above today.

Are they (the preferred issues) all ranked pari passu?

yes, excluding treasury's senior prefs


Yes. . . . But in the rare event that the dividends on these are restored, those with a higher dividend rate would be worth more.  In a reorganization, they should be worth the same.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 12, 2013, 06:18:25 PM
FNMAS: $5.10 today. Preferred Series S Fixed to Floating Rate
FNMAI: $4.37 today.  Preferred Series Q. 6.75%
FNMAJ: $4.50 today. Preferred Series R 7.625%

Is the difference purely due to the int rate or do you all think FNMAS is just the most noted one in the media?

FNMAK and FNMAP are even much cheaper than the above today.

Are they (the preferred issues) all ranked pari passu?

yes, excluding treasury's senior prefs


Yes. . . . But in the rare event that the dividends on these are restored, those with a higher dividend rate would be worth more.  In a reorganization, they should be worth the same.

Exactly. I think a restructuring is far more likely.

Though, if these were cumulative it would obviously be a no brainer which ones to choose. Sadly they are not.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Sunrider on July 14, 2013, 05:39:29 AM
FYI - Here is a chart showing all of the FNMA and FMCC Preferred issues that are generally traded on the pink sheets.  :)

Hi there - for some reason it says "attachment not found" when I try to download it.

Could you please re-attach or point me to a site/other source where I can find a list of all the issues? I'm having trouble with their Investor Relation's website (not sure if it really lists all issues) and Quantumonline.com also doesn't seem to have all information.

Second question - at least for Freddie Mac, a lot of the series seem to be non-cumulative. Doesn't the case rest primarily on receiving what is being owed for the cumulative series? Are you buying the non-cumulative ones in the hope that they'll appreciate in price as soon as any payments to non-government preferred stock starts?

Thank you very much!

C.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: LC on July 14, 2013, 11:22:32 AM
Freddie's prefs are on their investor page. Fannies list of prefs is on this page http://www.fanniemae.com/portal/about-us/investor-relations/stock-information.html

No tickers though
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Sunrider on July 14, 2013, 12:27:45 PM
Freddie's prefs are on their investor page. Fannies list of prefs is on this page http://www.fanniemae.com/portal/about-us/investor-relations/stock-information.html

No tickers though

I went to Freddie's investor page - Quantum lists more issues, hence my statement that I'm not sure whether their page is complete. Thus, I thought I'd go to a better source (here). I wouldn't have asked if I didn't think what was in the thread previously would be better than what I can find on their homepage :)

C.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 16, 2013, 09:51:34 AM
Been buying for a couple days. I can't imagine any major funds buying these in quantity unless they approach major holders (regions banks, other funds, etc) directly.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Sunrider on July 16, 2013, 12:45:18 PM
Been buying for a couple days. I can't imagine any major funds buying these in quantity unless they approach major holders (regions banks, other funds, etc) directly.

Hiya

Which series have you been buying? I saw a reference earlier in the thread about 17c/$1 but I can't tie this back to the quotes or price appreciation I can see over the last 1.5 months?

Thank you - C.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: LC on July 16, 2013, 05:55:19 PM
Been buying for a couple days. I can't imagine any major funds buying these in quantity unless they approach major holders (regions banks, other funds, etc) directly.

Hiya

Which series have you been buying? I saw a reference earlier in the thread about 17c/$1 but I can't tie this back to the quotes or price appreciation I can see over the last 1.5 months?

Thank you - C.

FNMAS and FNMAJ trade at about 20% of par

For Freddie: FMCKJ, FMCKL-M-N all trade in the $4-$5 dollar range.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 16, 2013, 06:23:23 PM
Been buying for a couple days. I can't imagine any major funds buying these in quantity unless they approach major holders (regions banks, other funds, etc) directly.

Hiya

Which series have you been buying? I saw a reference earlier in the thread about 17c/$1 but I can't tie this back to the quotes or price appreciation I can see over the last 1.5 months?

Thank you - C.

FNMAP traded at .154c/$1 today.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Sunrider on July 17, 2013, 12:40:19 AM
Doh!

Clearly I can't calculate right. Sorry guys & thanks for the response.

What's your thesis though - most of these are non cumulative so are you speculating that they will appreciate substantially to par if that law isn't passed or Perry & Berkowitz win their case?

Thanks - C.


Been buying for a couple days. I can't imagine any major funds buying these in quantity unless they approach major holders (regions banks, other funds, etc) directly.

Hiya

Which series have you been buying? I saw a reference earlier in the thread about 17c/$1 but I can't tie this back to the quotes or price appreciation I can see over the last 1.5 months?

Thank you - C.

FNMAP traded at .154c/$1 today.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 23, 2013, 04:59:26 PM
Counsel for Perry Capital: http://online.wsj.com/article/SB10001424127887323309404578617451897504308.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on July 27, 2013, 10:13:40 AM
http://www.investingdaily.com/17960/the-case-for-investing-in-fannie-and-freddie/

Quote
The Supreme Court has recently sided with claimants against the federal government in a couple of prominent takings cases. In December, it rejected an appeals court ruling against the Arkansas Game and Fish Commission. The state agency had claimed that periodic flooding of its land by the Army Corps of Engineers amounted to a taking, and the Supreme Court ruled that the temporary nature of the flooding didn’t preclude this claim. And just last month the Supreme Court backed a Florida developer who argued that an agency’s refusal to issue a permit amounted to a taking as well.

The following quote from the majority opinion in the Arkansas case ought to be of particular interest in regards to Fannie and Freddie claims, as well as arguments that the government did what it had to do to save the financial system and that’s that:

“Time and again in Takings Clause cases, the Court has heard the prophecy that recognizing a just compensation claim would unduly impede the government’s ability to act in the public interest. We have rejected this argument when deployed to urge blanket exemptions from the Fifth Amendment’s instruction.”

It’s hard to fathom how a court could see a taking in temporary flooding or a permit dispute but not in government plans to dispossess preferred share owners by regularly stripping the companies under its conservatorship of their net worth, under terms cooked up long after the crisis has passed. And even allowing for the vagaries of constitutional jurisprudence, the odds of a ruling against the government seem a lot better than 4:1 against.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dcollon on July 27, 2013, 11:31:12 AM
From Barron's
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: berkshiremystery on July 29, 2013, 10:59:16 AM

Bernanke AIG Testimony Should Cheer Fannie, Freddie Plaintiffs
2013-07-13 TheStreet

http://www.thestreet.com/story/11992156/1/bernanke-aig-testimony-should-cheer-fannie-freddie-plaintiffs.html?puc=yahoo&cm_ven=YAHOO
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 11:09:03 AM
It seems to me that the government's case is pretty easy to prove.

Have people really forgotten that Fannie and Freddie were placed in conservatorship because they were insolvent? If the intrinsic value of the securities was $0 in 2008, there was nothing to "take". It's only now, as a result of an accounting mirage, that they appear to be valuable.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 29, 2013, 11:21:55 AM
It seems to me that the government's case is pretty easy to prove.

Have people really forgotten that Fannie and Freddie were placed in conservatorship because they were insolvent? If the intrinsic value of the securities was $0 in 2008, there was nothing to "take". It's only now, as a result of an accounting mirage, that they appear to be valuable.

That's not a legal argument though.

It was placed in conservatorship, not receivership.  Government received preferred security with 10% dividend and effectively 79.99% of the common.

Then in 2012 things went haywire. The takings issue.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 11:34:02 AM
Well I'm not a lawyer but I think it's a perfectly good legal argument.

Conservatorship is more of an ad hoc framework. Some people think it implies a return for shareholders, but it doesn't say that anywhere.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 29, 2013, 11:53:07 AM
constructive,

The argument isn't that The Takings Clause was implicated when the government placed the companies into conservatorship -- the argument is that The Takings Clause was implicated when the government amended the agreement to sweep the entire amount of the preferred stock's value.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 12:21:26 PM
constructive,

The argument isn't that The Takings Clause was implicated when the government placed the companies into conservatorship -- the argument is that The Takings Clause was implicated when the government amended the agreement to sweep the entire amount of the preferred stock's value.

I suspect the shareholder lawsuits will claim both events were unlawful takings.

But if anything, public shares were worth less in 2012 than in 2008. (Hard to be worth less than $0 though.) The government had to shovel in billions of equity to make up for losses in those years.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 29, 2013, 12:34:21 PM
constructive,

I've read both pleadings (posted here) and if memory serves me correctly, they are only arguing as to the legality of the amendment for the sweep.  Perry is arguing lack of exceeding administrative legal powers and Berkowitz is arguing Takings.  Those two are different.

I don't understand why you think that the [preferred] shares are worth less in 2012 than in 2008. The company is much more profitable now than in 2008. Can you clarify?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 01:18:29 PM
constructive,

I've read both pleadings (posted here) and if memory serves me correctly, they are only arguing as to the legality of the amendment for the sweep.  Perry is arguing lack of exceeding administrative legal powers and Berkowitz is arguing Takings.  Those two are different.

I don't understand why you think that the [preferred] shares are worth less in 2012 than in 2008. The company is much more profitable now than in 2008. Can you clarify?

Well, they certainly appear profitable now. But that's only in the context of the Treasury's enormous financial support over the last 5 years, in exchange for the preferred shares. Take the Treasury's support away at any point between 2008 and 2012 and the companies would have immediately imploded.

What do you think public shares were worth in 2012 before the preferred share amendment? I don't think the math ever worked out to a positive value, with the 10% dividend.

I haven't read all the shareholder lawsuits, but here's one that claims placing the companies in conservatorship in 2008 was an unlawful taking.
http://dealbook.nytimes.com/2013/06/17/lawsuit-tries-creative-approach-against-fannie-and-freddie-bailout/?_r=0
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 29, 2013, 02:25:09 PM

Well, they certainly appear profitable now. But that's only in the context of the Treasury's enormous financial support over the last 5 years, in exchange for the preferred shares. Take the Treasury's support away at any point between 2008 and 2012 and the companies would have immediately imploded.


The government was issued Government Preferred Shares. Perry Capital and Fairholme Fund own Private Sector Preferred Stock.

You and I don't disagree that the government provided aid to the companies in 2008 -- the point is that they were provided with compensation for that aid via the Government Preferred Shares and Government Warrants (amounting to 79.9% of the company's common stock).


What do you think public shares were worth in 2012 before the preferred share amendment? I don't think the math ever worked out to a positive value, with the 10% dividend.


In 2012, Fannie & Freddie were both solvent & had a combined net income of $27 billion -- that amount being more than enough to pay the 10% dividend on the liquidation preference of the Government Preferred Stock. (Correct me if I'm wrong, but I think the liquidation preference is something like $188 billion.) Based on the capital structure, it would seem like the residual would cause the Private Sector Preferred Stock to be worth a positive number that I'm going to say might even approach par.


I haven't read all the shareholder lawsuits, but here's one that claims placing the companies in conservatorship in 2008 was an unlawful taking.
http://dealbook.nytimes.com/2013/06/17/lawsuit-tries-creative-approach-against-fannie-and-freddie-bailout/?_r=0


I think that particular lawsuit has very little substance to it -- read the complaints for Perry Capital and Fairholme Fund -- those have to do with the amendment to sweep 100% of profits.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 03:43:21 PM

Well, they certainly appear profitable now. But that's only in the context of the Treasury's enormous financial support over the last 5 years, in exchange for the preferred shares. Take the Treasury's support away at any point between 2008 and 2012 and the companies would have immediately imploded.


The government was issued Government Preferred Shares. Perry Capital and Fairholme Fund own Private Sector Preferred Stock.

You and I don't disagree that the government provided aid to the companies in 2008 -- the point is that they were provided with compensation for that aid via the Government Preferred Shares and Government Warrants (amounting to 79.9% of the company's common stock).

Yes, sorry if I wasn't clear but I'm aware of the capital structure. I meant that the government poured billions into the companies in exchange for the Senior Preferred Shares.

But they did not just provide aid in 2008, they provided $188B over 13 quarters.

Of course if you pour enough money into a dead business it will eventually be solvent and profitable. But the fact that it's solvent and profitable now certainly doesn't prove that it was solvent and profitable before pouring money in.


What do you think public shares were worth in 2012 before the preferred share amendment? I don't think the math ever worked out to a positive value, with the 10% dividend.


In 2012, Fannie & Freddie were both solvent & had a combined net income of $27 billion -- that amount being more than enough to pay the 10% dividend on the liquidation preference of the Government Preferred Stock. (Correct me if I'm wrong, but I think the liquidation preference is something like $188 billion.) Based on the capital structure, it would seem like the residual would cause the Private Sector Preferred Stock to be worth a positive number that I'm going to say might even approach par.

Yes, that's correct. When the senior preferred stock was amended in Q2 2012, FNMA and FMCC had a combined equity of $5.1B, of which $189B was senior preferred (3700%).

Together they made $6.9B in Q2 ($27B for the whole year). Now subtract $4.75B quarterly for dividends, shrink the balance sheet by 10% per year (required by the original terms), and subtract the liquidation preference of $189B. How is that a positive number?

In order for public preferred and common to have any residual value, income would have to be a lot higher than $6.9B per quarter. More like $13B per quarter.


I haven't read all the shareholder lawsuits, but here's one that claims placing the companies in conservatorship in 2008 was an unlawful taking.
http://dealbook.nytimes.com/2013/06/17/lawsuit-tries-creative-approach-against-fannie-and-freddie-bailout/?_r=0


I think that particular lawsuit has very little substance to it -- read the complaints for Perry Capital and Fairholme Fund -- those have to do with the amendment to sweep 100% of profits.

I can tell this is not the right investment for me, so I'll leave those complaints to the lawyers.

But as a taxpayer, I have to admit I'm rooting for the economic interests of US taxpayers over private shareholders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on July 29, 2013, 03:49:29 PM
I think what we have here is a case of commonsense perception vs. the technical rule of law.


Nearly all of America will agree with constructive, no doubt.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on July 29, 2013, 03:59:38 PM
I think what we have here is a case of commonsense perception vs. the technical rule of law.


Nearly all of America will agree with constructive, no doubt.

Well, I certainly don't agree with them!  :)

Really, I don't think common sense has much to do with this investment at all.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 29, 2013, 05:16:25 PM
Without getting into each of them in any detail, i think that there are several logical legal paths that can and will be taken (some stronger than others). Aside from the very relevant legal aspects of the investment, i think the implied price of certain of these securities is underestimating the probability of success. At a much higher price the asymmetry in risk/reward is not there. At current prices, i like the payoff relative to the implied probabilities.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 29, 2013, 05:20:36 PM

Of course if you pour enough money into a dead business it will eventually be solvent and profitable. But the fact that it's solvent and profitable now certainly doesn't prove that it was solvent and profitable before pouring money in.


Don't disagree -- the complaint you referenced is nonsense, and I think the court will probably rule that way. My sense is that the Perry Capital & Fairholme Fund complaints, however, are not nonsense.


Yes, that's correct. When the senior preferred stock was amended in Q2 2012, FNMA and FMCC had a combined equity of $5.1B, of which $189B was senior preferred (3700%).

Together they made $6.9B in Q2 ($27B for the whole year). Now subtract $4.75B quarterly for dividends, shrink the balance sheet by 10% per year (required by the original terms), and subtract the liquidation preference of $189B. How is that a positive number?

In order for public preferred and common to have any residual value, income would have to be a lot higher than $6.9B per quarter. More like $13B per quarter.


And, in fact, they have made a good amount of money per quarter in the quarters following.

Think of it this way -- let's say you plant some orange trees in a grove. The trees have been planted but have not borne fruit. The government takes your land -- should they pay you the timber value of your trees? or should they pay you for the loss of your yearly crop? I would say that common sense indicates the latter. Same concept here.


I can tell this is not the right investment for me, so I'll leave those complaints to the lawyers.

But as a taxpayer, I have to admit I'm rooting for the economic interests of US taxpayers over private shareholders.


The legal aspect makes things complicated for sure -- and provides a bit of a competitive advantage for some of us. As a taxpayer and an American, I would root for Fannie & Freddie to pay back the borrowed capital as quickly as possible but without granting the government too much of a right to get away with exercising eminent domain w/o providing just payment.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 01, 2013, 03:59:33 PM
Fairholme holding report out.

Fairx :
0.4% in Fannie and freddie common
6.5% in the prefs.

FAAFX:
0.7% in Fannie/freddie common
11.6% in the prefs

FOCIX:
nada, but it is interesting to see some JCP debt in there along with all that cash.

11.6% in FAAFX is quite the show of confidence
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on August 01, 2013, 04:20:42 PM
ValueCFA,

It looks like he's got them in FOCIX as well, just not at May 31st. See below:

Quote
Our focused income strategy is proving successful.
Today, 62% of the Fund’s net assets are in cash and cash equivalents. Sears bonds maturing in 2018 are the Fund’s largest non-cash holding, at 23% of net assets, followed by the preferred stock of Fannie Mae and Freddie Mac, at 6% of net assets, and J.C. Penney bonds maturing between 2015 and 2017, at 4% of net assets. MBIA bonds were sold in the period, resulting in an above average return.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 01, 2013, 04:40:00 PM
ValueCFA,

It looks like he's got them in FOCIX as well, just not at May 31st. See below:

Quote
Our focused income strategy is proving successful.
Today, 62% of the Fund’s net assets are in cash and cash equivalents. Sears bonds maturing in 2018 are the Fund’s largest non-cash holding, at 23% of net assets, followed by the preferred stock of Fannie Mae and Freddie Mac, at 6% of net assets, and J.C. Penney bonds maturing between 2015 and 2017, at 4% of net assets. MBIA bonds were sold in the period, resulting in an above average return.

Just noticed that... continued:

The Fund’s latest investments in the recovery of homeownership are in the preferred stocks of Fannie Mae and Freddie Mac. Your current
mortgage may be backed by Fannie or Freddie – about 60% of new mortgages are. Millions of families depend on them to lower the costs and
increase the availability of homeownership. In times of stress, Fannie and Freddie stand to ensure the continued functioning of our housing
market. Their twelve thousand employees do yeoman’s work helping to preserve a cornerstone of the American dream.
The Fund was able to purchase the preferred stocks of Fannie and Freddie near one-fifth of liquidation values – a significant bargain thanks to
market predictions of U.S. Government agencies expropriating their assets.
w
e see them differently. Fannie and Freddie are successful, publicly
traded, shareholder-owned companies just like AIG and Bank of America. Shifting political winds can change their futures, but not alter their
pasts.
The Fund has filed complaints in the court of Federal claims and the U.S. District court in washington. In our suits, we seek nothing more
than the enforcement of existing contractual rights, which require the payment of dividends to Fannie and Freddie preferred shareholders.
Our arguments are based on fundamental principles. In America, property ownership is a sacrosanct freedom,
guaranteed by our Constitution. In America, we follow the rule of law, not the rule of the crowd. In America, profitable companies honor contracts.

Preferred stocks of Fannie and Freddie are a growing opportunity in credit arbitrage. Millions of families depend on Fannie and Freddie to lower
the costs and increase the availability of homeownership. In times of stress, Fannie and Freddie stand to ensure the continued functioning of our
housing market. Their twelve thousand employees do yeoman’s work helping to preserve a cornerstone of the American dream
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: rpadebet on August 01, 2013, 08:16:50 PM
I must admit, I never once thought about the employees and jobs angle here. That is a potential political counterweight to the political argument about the bail out.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on August 08, 2013, 10:00:56 AM
Check out the attached snapshot of repayments.

If Freddie reverses the writedown of tax assets, things will get very interesting very quickly.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: indythinker85 on August 15, 2013, 03:50:13 PM


Bruce Berkowitz, a mutual-fund manager with a history of bold bets, is doubling down on a risky wager that the U.S. government ultimately will sell mortgage giants Fannie Mae FNMA +7.32% and Freddie Mac FMCC +9.65% back to private investors.

Mr. Berkowitz is reopening his $8 billion Fairholme Fund to look for new investment opportunities, including potentially increasing his stake in Fannie and Freddie, Mr. Berkowitz said in an interview with The Wall Street Journal.

Mr. Berkowitz said he continues to believe Fannie and Freddie are a "very important element of the U.S. economy" and undervalued. "We haven't found a way to disprove our thesis about Fannie and Freddie," he said.
http://online.wsj.com/article/SB10001424127887324139404579015032274244954.html (http://online.wsj.com/article/SB10001424127887324139404579015032274244954.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on August 15, 2013, 03:53:36 PM


Bruce Berkowitz, a mutual-fund manager with a history of bold bets, is doubling down on a risky wager that the U.S. government ultimately will sell mortgage giants Fannie Mae FNMA +7.32% and Freddie Mac FMCC +9.65% back to private investors.

Mr. Berkowitz is reopening his $8 billion Fairholme Fund to look for new investment opportunities, including potentially increasing his stake in Fannie and Freddie, Mr. Berkowitz said in an interview with The Wall Street Journal.

Mr. Berkowitz said he continues to believe Fannie and Freddie are a "very important element of the U.S. economy" and undervalued. "We haven't found a way to disprove our thesis about Fannie and Freddie," he said.
http://online.wsj.com/article/SB10001424127887324139404579015032274244954.html (http://online.wsj.com/article/SB10001424127887324139404579015032274244954.html)

classic Bruce
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on August 15, 2013, 03:59:38 PM
BB normally uses some of the best attorneys on the planet. I bet he's getting some good advice.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on August 16, 2013, 05:19:11 AM
http://online.wsj.com/article/SB10001424127887324139404579015032274244954.html

Quote
Under mutual-fund regulations, Mr. Berkowitz could invest up to 25% of Fairholme's portfolio each in Fannie and Freddie, although he has no plans to reach that maximum amount as it would require him to reduce his other positions, he said. A more realistic scenario would see him increasing his position to about 5% each of the portfolio, or a total of $800 million based on the value of the shares today, he said.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on August 19, 2013, 09:10:14 AM
http://online.wsj.com/article/SB10001424127887324823804579015100418242862.html#articleTabs%3Darticle

Fannie Mae's New Fans:

Quote
President Obama said last week that he wants Congress to close down Fannie Mae FNMA +0.74% and Freddie Mac FMCC -0.79% . But that doesn't faze Bruce Berkowitz, the manager of the $8 billion Fairholme mutual fund, who says he's bullish on the government-run mortgage bailout twins and wants to increase his investment.

Our Journal colleagues report that Mr. Berkowitz thinks the mortgage giants are "a very important element of the U.S. economy" and that Congress will choose not to shut them down and will eventually spin them off to private investors.

This is not good news, but it is predictable. As the housing market recovers, Fan and Fred are making money again, and private investors smell an easy political mark. Like Mr. Berkowitz, they figure Congress will find it impossible to resist the attraction of some kind of Fan and Fred cashout, which would give the politicians more money to spend. These private investors, in turn, will become another political force against winding down the toxic twins.

This is one reason among many that we urged Hank Paulson, the Treasury Secretary in 2008, to put the companies in receivership. He chose conservatorship instead, which means the companies can return from the dead to haunt the capital markets again. The combination of private profit and public risk is what made Fan and Fred so politically powerful, and so economically destructive, and here we go again.

A version of this article appeared August 16, 2013, on page A12 in the U.S. edition of The Wall Street Journal, with the headline: Fannie Mae's New Fans.

And an interesting comment on the WSJ online comment board for the article by "Fred Fraenkel"

Fred Fraenkel Wrote:
 
Quote

Analysis weak on two counts:

1. This editor is wiling to "throw away" a system that has over a 70 year period of time created more housing units per capita, larger housing units per capita, and higher quality housing units than any on the face of the earth. One of the few government private collaborations with this type of track record. Contrary to the partisan hype this HAS NOT COST TAXPAYERS ONE PENNY. The loan from taxpayers has already been repaid 75% and will be fully 100% repaid by next year. Pretty darn impressive for a once every 70 year bailout of institutions that the GOVERNMENT MANDATED to become the lender of last resort during the emergency of 2008 and 2009. A depression would have been locked if Fannie and Freddie didn't continue to provide liquidity to the housing market through the great recession. Even the most ardent F&F opponents acknowledge that government loses one of its major abilities to fight recession without the GSE's.

2. Fiscal conservatives get up on their high horse about government involvement in the housing market but jump over the confiscation of private property that the government unilaterally imposed in August of 2012 when Treasury simply decided, with no explanation or legal rationale, to take 100% of the profits forever of companies that were and are privately owned with publicly traded securities.

There is nothing wrong with reforming GSE's back to their original insurance purpose. But throwing away the baby with the bathwater would be a mistake of epic proportions.

Most likely this Fred Fraenkel: http://en.wikipedia.org/wiki/Fred_Fraenkel
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on August 20, 2013, 09:31:41 AM
Has anyone initiated a long position?
I am wondering if Obama closes these two twins, he will wipe out the common and repaid the preferred, or will he wipe out the preferred as well?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 28, 2013, 05:16:21 PM
We should be seeing a response in the litigation within the next two weeks or so. I've been waiting with baited breath...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on August 28, 2013, 07:49:56 PM
We should be seeing a response in the litigation within the next two weeks or so. I've been waiting with baited breath...

Hi merkhet,

Where can I follow this? Is there a court website that I can tack the progress of the case?

Thanks!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: thecynic on August 29, 2013, 02:31:18 AM
Where can I follow this? Is there a court website that I can tack the progress of the case?

Not a lawyer, but you can track the case Perry Capital filed online at http://www.pacer.gov/ (http://www.pacer.gov/). The case number is 1:13-cv-01025-RLW. The site requires a credit card to register but it won't charge you unless the charges exceed $15 per quarter.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on August 29, 2013, 11:09:45 AM
Where can I follow this? Is there a court website that I can tack the progress of the case?

Not a lawyer, but you can track the case Perry Capital filed online at http://www.pacer.gov/ (http://www.pacer.gov/). The case number is 1:13-cv-01025-RLW. The site requires a credit card to register but it won't charge you unless the charges exceed $15 per quarter.

Awesome! Thank you.

I see the respond by date for the government. I'm still looking for any scheduled date for responses. Is there a good way to know when new items have been posted or will be posted?

I appreciate the heads up on the cost info.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on August 29, 2013, 10:52:41 PM
www.pacer.gov --> A very useful site! Thanks again for the info!

Some information I found:

1) Fairholme has two complaints in the courts: Fairholme vs USA (US Court of Federal Claims) & Fairholme vs FHFA (District Court of DC, Similar to Perry)

2) There are three cases moving in parallel in the District Court of DC
--> Allege violations of Administrative Procedure Act
a. Perry vs Lew
b. Fairholme v FHFA
c. Liao v Lew (consolidation of 4 plaintiffs)

3) There are five cases moving through the US Court of Federal Claims against the US including Fairholme
--> These allege an uncompensated taking under the Fifth Amendment

I've found the both complaints for Fairholme and Perry Capital online. I have attached the initial complaint of Liao (not the consolidation). I haven't read the complaint from Liao or Fairholme, but I've read the Perry Capital one and it reads well.  Let me know if we aren't allowed to post these complaints.

I'm no legal expert so I might have my description of things off, I used the motion to stay in the Fairholme v USA case to summarize the two different courts.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 04, 2013, 06:03:30 AM
Great article in the FT about F+F.

http://www.ft.com/intl/cms/s/2/b6f87b18-0f14-11e3-8e58-00144feabdc0.html#axzz2dvYgLRDA
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on September 04, 2013, 08:40:04 AM
http://video.cnbc.com/gallery/?play=1&video=3000196230 (http://video.cnbc.com/gallery/?play=1&video=3000196230)

Bruce Berkowitz on CNBC.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on September 04, 2013, 02:17:14 PM
Great article in the FT about F+F.

http://www.ft.com/intl/cms/s/2/b6f87b18-0f14-11e3-8e58-00144feabdc0.html#axzz2dvYgLRDA

Agreed. Enjoyed the comments from the politicians.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on September 05, 2013, 04:04:37 PM
Life Without Fannie Mae and Freddie Mac

http://www.nytimes.com/2013/09/08/realestate/life-without-fannie-mae-and-freddie-mac.html (http://www.nytimes.com/2013/09/08/realestate/life-without-fannie-mae-and-freddie-mac.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on September 07, 2013, 09:51:36 AM
Nice short interview with Henry Paulson on the Fannie Mae bailout


"Henry Paulson Defends Fannie Mae Bailout"
http://blogs.wsj.com/economics/2013/09/06/henry-paulson-defends-fannie-mae-bailout/ (http://blogs.wsj.com/economics/2013/09/06/henry-paulson-defends-fannie-mae-bailout/)

Quote
Originally, we leaned toward receivership. As we got into it, I realized receivership had other complications. For instance, because we were working under a tight time schedule and weren’t cooperating with management, receivership had too many risks, including that it was more difficult to explain to the market and there was the real possibility that Fannie and Freddie would lose their hedging contracts, which would cost taxpayers billions of dollars.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 11, 2013, 03:59:39 PM
The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 11, 2013, 04:23:37 PM
The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.

Mr. Market is there to serve you, not to guide you.

Welcome onboard! Nice comments.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 11, 2013, 04:31:58 PM
The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.

Mr. Market is there to serve you, not to guide you.

Welcome onboard! Nice comments.

I've been onboard for around 3 or 4 months now. Just made this a much more meaningful position then my original 6% size. I'm really looking forward to following the litigation in these cases.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 11, 2013, 06:59:14 PM
Why not wait to see the response from the government first?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 11, 2013, 07:13:54 PM
Why not wait to see the response from the government first?

I can't wait to read the response.

I don't know how closely correlated the response will be to the share price, but the share price "should" react to a light defense of their actions.

I suspect the response will be heavy on historical facts and a walk through of the crisis, but light on legal bounds for actions that occurred well after the crisis.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 11, 2013, 08:16:17 PM

I can't wait to read the response.

I don't know how closely correlated the response will be to the share price, but the share price "should" react to a light defense of their actions.

I suspect the response will be heavy on historical facts and a walk through of the crisis, but light on legal bounds for actions that occurred well after the crisis.


That's my guess as well. I figured I would wait to see the response before I pick up a position -- might shake loose some weaker hands.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 11, 2013, 08:22:47 PM
What are the ticker symbols for these prefs? :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 11, 2013, 08:30:26 PM
What are the ticker symbols for these prefs? :)

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 11, 2013, 08:42:46 PM
What are the ticker symbols for these prefs? :)

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

Interesting, thanks a lot
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: claphands22 on September 12, 2013, 01:19:09 AM
What are the ticker symbols for these prefs? :)

http://walrusvalue.blogspot.tw/2013/08/google-spreadsheet-of-fannie-mae.html

http://walrusvalue.blogspot.tw/2013/08/google-spreadsheet-of-freddie-mac.html

Not perfect since some of the preferreds listed no longer trade, but they have current prices and their respective call price.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 12, 2013, 05:23:47 AM



Does anyone want to a shot at what they think will happen?

Coversion of the prefs to equity along side the government? New equity (government)... Prefs remain...

Any comments would be appreciated.

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 12, 2013, 07:40:29 AM


Does anyone know off hand what the debt outstanding is at Fannie and Freddie?

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 12, 2013, 07:47:12 AM


A better question is...what effect does Fannie and Freddie have on U.S  national debt? That is why Fannie and Freddie were put in private hands in 1968 (vietnam war) to move the debt off the governments balance sheet....interesting with all the debt ceiling talks about to happen...
We know that their payments have allowed the government to not run out of money...

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 12, 2013, 08:00:33 AM

$5 trillion at sept 2008...national debt was $9.5 trillion..

Impossible for the government to absorb F&F...imagine that talk at debt ceiling time! 

"they are an independent corporation for debt purposes" so how can the government go in and grab? This very interesting.

Sorry I am rambling....with a lot of posts...

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on September 12, 2013, 08:14:03 AM



Does anyone want to a shot at what they think will happen?

Coversion of the prefs to equity along side the government? New equity (government)... Prefs remain...

Any comments would be appreciated.

Dazel.

My guess is they either redeem the prefs, start paying the pref div or the treasury dividend sweep gets reversed and capital is allowed to build on the balance sheet.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 12, 2013, 08:15:58 AM
The risk is they do nothing and wind it down (status quo results in wind down). Political gridlock is a common event...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on September 12, 2013, 08:41:27 AM
Does anyone want to a shot at what they think will happen?

It has to be treated as a decision tree, in my opinion.  Guessing which "branch" gets taken involves some speculation.

The single biggest necessary assumption is that the 2012 "third amendment" gets reversed.  Otherwise the value of the capital structure above the gov't stake would appear to be zero (gov't just sweeps all profits as a dividend on their stake indefinitely).

It's also possible (but doesn't seem likely) that the lawsuits surrounding the 2008 bailout result in some return of value.

Key remaining questions:
- Are they wound down, scaled down to some degree, or go forward as-is?
- What are the terms of repayment of the gov't stake if the 2012 amendment is reversed? (i.e. interest rate from 2008 bailout date until repayment)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: hyten1 on September 12, 2013, 09:15:41 AM
What are the ticker symbols for these prefs? :)

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

valuecfa why FNMAK & FNMAM? just curious there are many issue.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 12, 2013, 04:41:05 PM
What are the ticker symbols for these prefs? :)

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

valuecfa why FNMAK & FNMAM? just curious there are many issue.

They were the best value at the time of purchase. FNMAS and some others are trading at a higher price relative to par, but have a higher coupon so they deserve a higher price. I don't know if that coupon will get paid for very long, since they are redeemable at the issuer's option at any time. In case they do pay the coupons i want some decent yield, which the before mentioned series provide. I also own FNMAH & FNMAP, since at the time of purchase i got them at the bid, which was a discount to others. I'm reluctant to pay up for the highest yielding ones since i don't know how long they will pay the coupons.....assuming the courts rule in favor of the plaintiffs.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on September 12, 2013, 06:59:51 PM

$5 trillion at sept 2008...national debt was $9.5 trillion..

Impossible for the government to absorb F&F...imagine that talk at debt ceiling time! 

"they are an independent corporation for debt purposes" so how can the government go in and grab? This very interesting.

Sorry I am rambling....with a lot of posts...

Dazel.

This is a key point, Dazel. Taking F&F onto the US balance sheet would blow any sensible debt limit.  They can't be wound down very much for lots of reasons. Therefore, they will continue to do what they do until something happens.  The biggest downside has been more or less eliminated.  Therefore it's like a Cpt11 with an increasingly solvent Debtor in Possession repairing its balance sheet while the creditors can't force a POR that would have them own all the the equity in the reorganized debtor. :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: no_free_lunch on September 12, 2013, 07:34:55 PM
To me the risk is not that the government swoops in and shuts them down, they have better things to worry about.  It's that they've started the wind-down, with 15% reductions per year.  So couldn't they just do nothing and in 5 years time there is really just not much of a business here and private markets have taken over?

This has probably been discussed on this thread before but could you play this one by buying both fannie/freddie and then hedging by buying private mortgage insurers (radian?).  Someone has to eat the pie right?  It seems that if they are shut down it will be a windfall for the private guys.  In bruce's slides, the GSEs are insuring something like 97% of mortgages if I read it right.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Parsad on September 12, 2013, 07:51:56 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 12, 2013, 07:58:25 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

Time value of money will come into play when the 5% coupons turn into 33% coupons, not including the 6x principal gain....

if the plaintiffs win.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 12, 2013, 08:16:24 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 13, 2013, 08:10:31 PM
since Pacer doesn't link: Fairholme will keep track of its case here: http://fairholmefunds.com/news


Though since Pacer is practically free so might as well follow it there.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 16, 2013, 08:55:30 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.
Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.
I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 17, 2013, 08:33:26 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.
Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.
I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 17, 2013, 09:49:12 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.
Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.
I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

I see. I just don't like the votality of what Kelly formula suggests. I think it all depends on how confident you are.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 18, 2013, 04:44:57 AM
I don't use the Kelly formula either. This is the first time i have ever used it out of curiosity, and only used it after i made the investment, not prior. It will certainly be an extremely volatile investment.

I get the impression that the market is valuing the company more on whether the politicians will change their minds, as opposed to the legal aspect. At least from talking to colleagues, that is their focal point, and it was my original focal point.  I just don't see how they can argue what they did was legal, but we shall see when the government responds to the complaint.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on September 18, 2013, 05:25:15 AM
I don't use the Kelly formula either. This is the first time i have ever used it out of curiosity, and only used it after i made the investment, not prior. It will certainly be an extremely volatile investment.

I get the impression that the market is valuing the company more on whether the politicians will change their minds, as opposed to the legal aspect. At least from talking to colleagues, that is their focal point, and it was my original focal point.  I just don't see how they can argue what they did was legal, but we shall see when the government responds to the complaint.

One other benefit of this idea and another reason why Kelly is more applicable than in other investment cases is that the outcome should largely be uncorrelated to the market/economy/etc.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 18, 2013, 05:48:29 AM


Valuecfa,


I know that The the Fairholme response date is supposed to be nov 7th...when are the Paulson, Perry deadlines?
Do you know?

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on September 18, 2013, 06:03:46 AM


As we know the Kelly formula or anything that suggests it will produce any out come to F&F is like having the tooth fairy put shares under your pillow.

I have one question ValueCFA...you are betting on the lawsuit succeeding...correct?

Dazel
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 18, 2013, 08:00:03 AM


As we know the Kelly formula or anything that suggests it will produce any out come to F&F is like having the tooth fairy put shares under your pillow.

I have one question ValueCFA...you are betting on the lawsuit succeeding...correct?

Dazel

Yes. But I suspect that the price will rally significantly more long before the conclusion of the litigation because they are priced so incredibly incorrectly in my view.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 18, 2013, 08:06:49 AM
That's interesting, valuecfa.

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 18, 2013, 08:33:44 AM
That's interesting, valuecfa.

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.

I hope you're right. I would love to buy more at a much cheaper price even though I already bought a significant position.

Who knows if it'll get cheaper.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on September 18, 2013, 08:55:26 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 18, 2013, 09:05:15 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?

I went through the whole list and picked the cheapest ones. Illiquidity isn't a concern for me. The most liquid traded at a 20% premium when I bought the prefs.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: tombgrt on September 18, 2013, 09:06:44 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?

Read the last few pages for the answer. ;D

Buy the cheapest ones regardless of yield.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on September 18, 2013, 09:24:24 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?

Read the last few pages for the answer. ;D

Buy the cheapest ones regardless of yield.

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

- Coupon: dividend reinstated
- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 18, 2013, 09:48:50 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?

Read the last few pages for the answer. ;D

Buy the cheapest ones regardless of yield.

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

- Coupon: dividend reinstated
- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.

I was reluctant to pay up for ones like FNMAT and FNMAS b/c the price differential relative to others is so significant. However, I paid a slight premium for FNMAK and FNMAM with relatively high coupons. All depends on the price. Those coupons have the potential to be a massive part of the return, if they don't get redeemed at par.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 18, 2013, 11:18:37 AM
Quick question: how do you guys decide as to what series of the preferreds to purchase?

Read the last few pages for the answer. ;D

Buy the cheapest ones regardless of yield.

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

- Coupon: dividend reinstated
- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.

I was reluctant to pay up for ones like FNMAT and FNMAS b/c the price differential relative to others is so significant. However, I paid a slight premium for FNMAK and FNMAM with relatively high coupons. All depends on the price. Those coupons have the potential to be a massive part of the return, if they don't get redeemed at par.

I thought about your Kelly formula suggestion, and increased my holdings in the 401k to 17%. I think that is the max I can afford to lose. Since I add money to my 401k every half month, I can withstand a higher volatility than my main taxable account, which has barely any new money to add to. I have a 7% position in my taxable account.

Regarding the series, I have FNMAK for its discount to par, and I also have the most liquid ones(FNMAS, FMCKJ), which have higher yields if divident is resumed.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: value-is-what-you-get on September 18, 2013, 11:55:46 AM
That's interesting, valuecfa.

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.

Very sensible, and likely to occur.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: no_free_lunch on September 18, 2013, 06:36:19 PM
I have been trying to find a legal precedent case for this.  I mostly just see cases regarding govennment seizure/acquisition of people's properties, nothing that really fits with this situation.  It would be nice to see that someone has taken this type of case up before, and won.  Has anyone come across any good precedent's?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: deadspace on September 18, 2013, 08:35:46 PM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.
Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.
I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

I'm new to the board and dont know the history but what does it mean to "pull an Ericopoly"?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 19, 2013, 05:41:08 AM
It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

How about this.

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

B) Tails you lose your $1,000.

I don't think Vegas would stay in business very long with those payoffs/probabilities.
And I think the odds are better than 50/50 they win the litigation.

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.
Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.
I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

I'm new to the board and dont know the history but what does it mean to "pull an Ericopoly"?

 Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on September 19, 2013, 06:49:35 AM
Judge Sweeney yesterday ruled against USA's motion to stay the 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.
 
1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.   These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.
 
2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 19, 2013, 07:01:17 AM

 Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.


+1
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 19, 2013, 07:33:34 AM
Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.
 
1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.   These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.
 
2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

Thank you!
Just to clarify, what do you mean by "Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims."?
I think Fairholme sued USA for violation of the 5th amendment, but if this is a favorable ruling, it should be that the judge ruled against USA's motion to stay away from 5th amendment?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on September 19, 2013, 07:50:36 AM
Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.
 
1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.   These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.
 
2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

Thank you!
Just to clarify, what do you mean by "Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims."?
I think Fairholme sued USA for violation of the 5th amendment, but if this is a favorable ruling, it should be that the judge ruled against USA's motion to stay away from 5th amendment?

"Stay" is legal parlance for putting something on hold.  The US wanted all the Court of Claims cases (those claiming an illegal taking under the 5th Amendment) to be put on hold until the completion of the District Court cases (those cases that question the validity of the Sweep).  This could have resulted in years of delay.  The judge correctly ruled (IMO) that the 5th Amdendment cases are not path dependent on the DC cases.  In other words,  the judge implicitly agreed that even if the Sweep is ruled to be valid (the USA wins in DC court), the plaintiffs can still successfully claim an uncompensated taking under the 5th Amendment in the Court of Claims.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 19, 2013, 08:00:49 AM
Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.
 
1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.   These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.
 
2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

Thank you!
Just to clarify, what do you mean by "Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims."?
I think Fairholme sued USA for violation of the 5th amendment, but if this is a favorable ruling, it should be that the judge ruled against USA's motion to stay away from 5th amendment?

"Stay" is legal parlance for putting something on hold.  The US wanted all the Court of Claims cases (those claiming an illegal taking under the 5th Amendment) to be put on hold until the completion of the District Court cases (those cases that question the validity of the Sweep).  This could have resulted in years of delay.  The judge correctly ruled (IMO) that the 5th Amdendment cases are not path dependent on the DC cases.  In other words,  the judge implicitly agreed that even if the Sweep is ruled to be valid (the USA wins in DC court), the plaintiffs can still successfully claim an uncompensated taking under the 5th Amendment in the Court of Claims.


Got it! Thank you! I think this is great.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 19, 2013, 08:01:43 AM

 Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.

I really envy him and would like to be the same if possible, but I know that is not easy.

Well, on the second thought, if you have 6% position in this, and it becomes a 6 begger, your total portfolio return is 30%. So are you just 30% away from pulling an Ericopoly right now?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 19, 2013, 11:17:45 AM
Hi valuecfa, a couple questions for you.

You are saying that there is less of a likelihood of them paying the dividends then there is of the ruling to be in the investors favor, in which case the shares should jump up to par, correct? I have no experience investing in preferred stock, so I am wondering why would the stock go up that much without them paying a dividend? Are they convertible shares?

Also, since the dividends are non-cumulative, is there an interest rate risk with this investment? Let's say the litigation takes several years, the Fed's money printing takes into affect, and rates jump substantially. Aside from the variable rate preferreds, wouldn't this put a damper on the price?

Thanks
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 19, 2013, 11:32:49 AM
Hi valuecfa, a couple questions for you.

You are saying that there is less of a likelihood of them paying the dividends then there is of the ruling to be in the investors favor, in which case the shares should jump up to par, correct? I have no experience investing in preferred stock, so I am wondering why would the stock go up that much without them paying a dividend? Are they convertible shares?

Also, since the dividends are non-cumulative, is there an interest rate risk with this investment? Let's say the litigation takes several years, the Fed's money printing takes into affect, and rates jump substantially. Aside from the variable rate preferreds, wouldn't this put a damper on the price?

Thanks

I think there is the interest rate risk, but that is not big enough to be a concern here. If your upside is 20% less, so what? Do you care about that, or do you care more about winning the case?

You can think of preferred stocks as bonds, but at the lowest rank. The par value is $25. If the government wants to shutdown the companies, they have to pay at least the par to buy out the preferred holders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: CorpRaider on September 19, 2013, 01:02:47 PM
I might have to get some exposure to this through Fairholme.  This seems like the kind of thing where I want someone in the room for me.  Cooper and Kirk?  I'm not familiar with them, but I suppose Perry has Ted Olson.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 19, 2013, 04:45:57 PM

 Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.

I really envy him and would like to be the same if possible, but I know that is not easy.

Well, on the second thought, if you have 6% position in this, and it becomes a 6 begger, your total portfolio return is 30%. So are you just 30% away from pulling an Ericopoly right now?

Reread the thread. I initially took a 6% position, that has changed.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 19, 2013, 04:50:21 PM
Hi valuecfa, a couple questions for you.

You are saying that there is less of a likelihood of them paying the dividends then there is of the ruling to be in the investors favor, in which case the shares should jump up to par, correct? I have no experience investing in preferred stock, so I am wondering why would the stock go up that much without them paying a dividend? Are they convertible shares?

Also, since the dividends are non-cumulative, is there an interest rate risk with this investment? Let's say the litigation takes several years, the Fed's money printing takes into affect, and rates jump substantially. Aside from the variable rate preferreds, wouldn't this put a damper on the price?

Thanks

Interest rate risk is the last thing i would worry about in this investment.

The higher coupons could go well above par if the dividends are paid. It is up to the issuer whether or not they redeem them for par (at any time, in which case they are all worth par), or continue to pay the dividends in which case the majority are worth more than par.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dowfin1 on September 19, 2013, 06:50:26 PM
valuecfa,

Shrinking mortgage assets to $250B over time will reduce earnings for capital build, even if some of the illegal sweep is applied to principal on the senior preferred upon successful litigation.  With a prolonged litigation, I worry that a liquidation at the end is insufficient to pay the preferreds at par or even close.  How do you think about this?  Thanks.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 19, 2013, 07:34:13 PM
valuecfa,

Shrinking mortgage assets to $250B over time will reduce earnings for capital build, even if some of the illegal sweep is applied to principal on the senior preferred upon successful litigation.  With a prolonged litigation, I worry that a liquidation at the end is insufficient to pay the preferreds at par or even close.  How do you think about this?  Thanks.

They are on track to repay by 2014.

I don't see the argument that the government will pull back so far (or private capital will step in so much) that Fannie runs unprofitably or at a level that is insufficient to pay the dividends.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 19, 2013, 08:26:13 PM
Hi valuecfa, a couple questions for you.

You are saying that there is less of a likelihood of them paying the dividends then there is of the ruling to be in the investors favor, in which case the shares should jump up to par, correct? I have no experience investing in preferred stock, so I am wondering why would the stock go up that much without them paying a dividend? Are they convertible shares?

Also, since the dividends are non-cumulative, is there an interest rate risk with this investment? Let's say the litigation takes several years, the Fed's money printing takes into affect, and rates jump substantially. Aside from the variable rate preferreds, wouldn't this put a damper on the price?

Thanks

Interest rate risk is the last thing i would worry about in this investment.

The higher coupons could go well above par if the dividends are paid. It is up to the issuer whether or not they redeem them for par (at any time, in which case they are all worth par), or continue to pay the dividends in which case the majority are worth more than par.

What if they don't redeem them, and they don't pay the dividends either? Since the dividends are non-cumulative, why would they trade anywhere near par in that case? I guess my question is a general one for perpetual non-cumulative preferreds.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 19, 2013, 09:28:15 PM

 Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.

I really envy him and would like to be the same if possible, but I know that is not easy.

Well, on the second thought, if you have 6% position in this, and it becomes a 6 begger, your total portfolio return is 30%. So are you just 30% away from pulling an Ericopoly right now?

Reread the thread. I initially took a 6% position, that has changed.

I apologize! You said in page 23 that you built a much larger position than the initial 6% purchase. I misread that and thought you increased your position to a meaningful 6%. :)
I truly admire you! You and Ericopoly run such a concentrated portfolio!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on September 20, 2013, 05:55:01 AM
What if they don't redeem them, and they don't pay the dividends either? Since the dividends are non-cumulative, why would they trade anywhere near par in that case? I guess my question is a general one for perpetual non-cumulative preferreds.

Suspension of the dividends is only allowed when there isn't profit to pay them - it isn't optional (although I need to see how the terms enforce that exactly).

To address a concern stated earlier, I would suggest that successful litigation, combined with run-off of the entities, yes, could result in less than full repayment on the preferreds (and nothing for common), although on that "branch" of the tree you then have to start asking questions like, what does the economy do, what is the nature and speed of the run off, etc...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 20, 2013, 07:26:08 AM
I like to think it's all about incentives and that with a growing pie, all sides can win.

Even if the government "loses" and the entities continue to exist, guess who owns 79.99% of the common of an incredibly valuable enterprise?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 20, 2013, 07:54:24 AM
I like to think it's all about incentives and that with a growing pie, all sides can win.

Even if the government "loses" and the entities continue to exist, guess who owns 79.99% of the common of an incredibly valuable enterprise?

That is right. It is either a win-win situation if they keep the GSEs, or it is a lose-lose situation.
Their reason to close these GSEs isn't rational either. If they completely give the mortgage market to the private sector, do they think they don't need to bailout them when these private companies fail? I think they always have to prepare for a bailout in a bad time no matter what they do.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 22, 2013, 03:59:31 PM
http://online.wsj.com/article/SB10001424127887324807704579087072063293460.html?mod=WSJ_hp_LEFTWhatsNewsCollection
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: colinwalt on September 26, 2013, 01:08:29 AM
Do not know enough about this to comment - leaving that to those more knowledgeable than me...

http://www.bloomberg.com/news/2013-09-26/fannie-woos-investors-as-regulators-embrace-risk-sharing.html

...

"The risk-sharing transactions resemble provisions included in legislation introduced this year by Republican Senator Bob Corker of Tennessee and Democratic Senator Mark Warner of Virginia, and endorsed by President Barack Obama. The proposal would create an agency to replace Fannie Mae (FNMA) and Freddie Mac that would bear catastrophic mortgage losses, after private firms take the first 10 percent."

....

"Fannie Mae and Freddie Mac may not want to do too well at luring bond investors to their risk-sharing deals, according to Sanders, the former bond analyst and professor.
“I think that they’re nervous about succeeding, because if they succeed that gives a lot of people in Congress the ability to say, ‘Well, we don’t need them after all do we?’” he said."
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on October 02, 2013, 09:55:53 AM
Video on Fannie/Freddie: http://www.law.nyu.edu/news/Fannie-Freddie-conference-CLI
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 02, 2013, 10:17:20 AM
Video on Fannie/Freddie: http://www.law.nyu.edu/news/Fannie-Freddie-conference-CLI

Thanks! Will be interesting to watch.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on October 02, 2013, 03:48:09 PM
Plaintiffs for the prefs ought to hire professor Richard Epstein. The guy is an intriguing and convincing orator. Supposedly, he is advising several hedge funds on the matter.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on October 05, 2013, 07:55:18 AM
Here's my two cents worth about the future value of the public's preferreds.

The margin of safety continues to be the same as outlined in the original post and subsequent posts.  There are powerful reasons why F&F will not be completely taken over by the US or replaced with a new scheme, not the least being the bad appearance of taking their liabilities onto the official balance sheet.  Therefore, they should eventually be able to earn their way out of the hole using the strength of their franchise.   Recent results suggest that this may happen sooner than later.

I agree with the consensus that the original takeover and conservator ship very likely will not be deemed a "taking" by the US Court of Claims.  But, It's hard to imagine that the recent expropriation of all these GSE's profits would not eventually be ruled an impermissible  "taking" by the courts.

Those who are interested in investigating the strength of the claim may want to study the various US Court rulings involving litigation tracking warrants issued to S&L shareholders in the 90's and 00's for the purpose of  spinning off claims against the US that were valued at zero by Mr. Market. (Disregard Chapter11 rulings, bankruptcy courts are inferior courts that make all sorts of strange rulings that are ignored by higher courts).

In the 1980's the US wanted solvent S&L's and other regulated Thrifts to take over insolvent Thrifts.  Therefore, their regulators allowed goodwill to be counted toward regulatory capital, contrary to previous practice.  About 1989, Congress passed a law that goodwill would no longer be allowed to count as regulatory capital. 

This caused no end of distress among institutions that had taken over the insolvent thrifts at their regulator's urging. They suffered balance sheet losses, had to raise very expensive capital and lost out on M&A deals that would have helped their shareholders.  The loss of economic value was deep for these savings institutions.  The marketplace gave no allowance for the possible value of these claims, and this affected the economic value of these businesses as well as their stock prices.

Some of these claims worked their way through the US courts, eventually being judged by the US Court of Claims with the logic of those rulings affirmed by the US Court of Appeals.    The final rulings were liberal to the claimants. In a particular case, the appeals court suggested to the US Court of Claims that it should go even farther and award even more damages to the claimant than it had.  This is a big plus for the value of the claims F&F preferred shareholders have as a consequence of last year's taking.  However, the earlier Thrifts'  claims, that originated with the US's reneging on their pledge about how regulatory capital would be determined, took more than a decade to work their way through the courts.

In short, there seems to be light at the end of the tunnel, but the tunnel may be a long one.  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on October 05, 2013, 08:09:14 AM
However, the claims that originated with the reneging on the pledge about how regulatory capital would be determined took more than a decade to work their way through the courts.

The good news for us as investors in the private preferred is that with greater than 4:1 odds, we will have lots of entry and exit opportunities over the long time period it takes to work through the court system.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on October 07, 2013, 12:55:11 AM
However, the claims that originated with the reneging on the pledge about how regulatory capital would be determined took more than a decade to work their way through the courts.

The good news for us as investors in the private preferred is that with greater than 4:1 odds, we will have lots of entry and exit opportunities over the long time period it takes to work through the court system.

Yes, as mentioned, we have had three multibagger round trips in these since the US takeover, plus numerous trades arbitraging the differences in prices of the various issues. :)

Interestingly, our most highly successful type of investment over the years has been buying the common of increasingly solvent businesses in Cpt 11.  F&F  are not unlike those companies. Simply think of "conservatorship" as being like "Chapter 11 protection".  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on October 07, 2013, 10:29:12 AM
Interestingly, our most highly successful type of investment over the years has been buying the common of increasingly solvent businesses in Cpt 11.

Could you please give some examples? Does that include American airline?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 15, 2013, 04:01:04 AM
Tone changing?

http://mobile.businessweek.com/news/2013-10-15/fannie-mae-survival-back-on-table-as-lawmakers-sketch-new-system
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on October 15, 2013, 07:25:38 AM

Laidlaw, USG.

Were big winners...

But GGP was the biggest.

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 16, 2013, 01:21:20 PM
In / around DC? This sounds very informative to attend (free):

https://zillow-bpc-housing-forum.eventbrite.com
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: twacowfca on October 16, 2013, 04:04:33 PM
Interestingly, our most highly successful type of investment over the years has been buying the common of increasingly solvent businesses in Cpt 11.

Could you please give some examples? Does that include American airline?


USG , Nextwave M.Maddux & (very similar legal situation) F&F Preferreds . In all these, the value of the equity was increasing in Cpt 11.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on October 16, 2013, 04:49:36 PM
Interestingly, our most highly successful type of investment over the years has been buying the common of increasingly solvent businesses in Cpt 11.

Could you please give some examples? Does that include American airline?


USG , Nextwave M.Maddux & (very similar legal situation) F&F Preferreds . In all these, the value of the equity was increasing in Cpt 11.

Thank you! I am hoping to learn more from these situations! :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on October 16, 2013, 04:54:19 PM
In / around DC? This sounds very informative to attend (free):

https://zillow-bpc-housing-forum.eventbrite.com

I'd like to catch the replay or transcript of that event.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 16, 2013, 05:12:04 PM
Just booked my flight!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on October 16, 2013, 05:39:43 PM
Just booked my flight!

I'd go as well if it were on a Friday or Saturday. Just checked my calendar and unfortunately it's a no go for me.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 16, 2013, 05:50:35 PM
Just booked my flight!

I'd go as well if it were on a Friday or Saturday. Just checked my calendar and unfortunately it's a no go for me.

I'll take notes and post them here. Zillow said there is a webcast as well.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 18, 2013, 02:25:33 PM
Panel 2: Fannie Mae, Freddie Mac, and Admiistrative Law

http://www.youtube.com/watch?v=Jv2HG9jGX5I&feature=player_embedded&noredirect=1#t=0

This was hugely informative. Great analysis of the 2012 takings and whether a court could uphold it.

If you want to full education...: http://www.nyujlb.org/2013/08/1184/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 23, 2013, 09:49:03 AM
Is there news that's causing FNMA and FMCC to move so much this morning?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 23, 2013, 10:07:46 AM
Maybe this?:

http://seekingalpha.com/currents/post/1347762

Ranieri pulls plug on nonagency MBS offering
There's more evidence Fannie (FNMA +6.8%) and Freddie (FMCC +7.6%) aren't going anywhere anytime soon as Shellpoint Partners - led by mortgage kingpin Lew Ranieri - pulls a planned MBS offering for the 2nd time this month, citing soft demand. The company had restructured the bond issue - backed by jumbo residential mortgages - by removing some of the riskier loans in exchange for better agency ratings, but it still wasn't able to get the prices it wanted.Issuance of nonagency paper had flown earlier this year, but has ground to a halt since interest rates began rising this spring. Additionally, Frannie has begun offering a new security more tied to credit than rates, thus sapping some demand for nonagency bonds.Trying to break into the nonagency issuance market, PennyMac Mortgage Investment Trust (PMT +0.2%) last month had to cut prices at least twice on its debut offering. Redwood Trust (RWT -0.6%) - which pretty much had the nonagency field to itself not long ago - has struggled mightily since the spring.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 23, 2013, 10:27:38 AM
Just booked my flight!

I'd go as well if it were on a Friday or Saturday. Just checked my calendar and unfortunately it's a no go for me.

I'll take notes and post them here. Zillow said there is a webcast as well.

Thanks for the heads up on this. Do you know where we can find the link to the webcast?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 23, 2013, 10:29:20 AM
Live-stream: The full-day forum will be live-streamed here:
http://www.zillow.com/education/HousingForum/


http://online.wsj.com/article/PR-CO-20131022-906411.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 23, 2013, 10:33:57 AM
Live-stream: The full-day forum will be live-streamed here:
http://www.zillow.com/education/HousingForum/


http://online.wsj.com/article/PR-CO-20131022-906411.html

Awesome! Thanks.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on October 23, 2013, 11:05:02 AM
Has anyone discussed the new risk sharing tranches issued by the GSEs?  I would think those would be a bullish point for the thesis, right?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on October 23, 2013, 12:54:47 PM
Ugh. I only have 1% in the common...I'm surprised the common has outperformed the prefs so much lately
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on October 23, 2013, 01:52:32 PM
Quote
Countrywide found guilty in U.S. mortgage suit • 4:00 PM

 A federal jury has found Bank of America's (BAC -2.1%) Countrywide unit liable for defrauding Fannie Mae (FNMA +22%) and Freddie Mac (FMCC +19.4%) by selling them thousands of defective mortgages.
   
The judge will determine the amount of the penalty - the U.S. has requested $848M, the gross loss to the GSEs as calculated by its expert witness.
   
The suit centered on Countrywide's HSSL - High Speed Swim Lane - program instituted in August 2007, says the government, to keep the music playing as the property market was falling apart.

???
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on October 23, 2013, 03:15:10 PM
The way the GSE's are winning lawsuits and attaining profitability through their core business, they'll have fully pay back that bailout money in no time..
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 24, 2013, 12:03:02 PM
Really enjoyed Jim Millstein's ideas for housing reform just now.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on October 25, 2013, 02:33:21 PM
My rough notes from the Zillow conference. I took scattered notes at interesting points...not all encompassing...or precise by any means

Video at http://www.zillow.com/education/HousingForum/
-Bob Ryan at 115:00
-Millstein at 350:40


[Thanks to Zillow / BPC for putting on this great, free event with tons of food / drinks / good people]

The first panel discussion was fantastic (especially Bob Ryan). If you watch anything, it should be this panel and the Millstein panel.

Panel 1

-Probability of a vote on housing reform in Congress in the next year?...Senate Banking committee making great strides, but very unlikely. Senate and House are very far apart

-Putting emphasis on private capital will eventually mean increased borrowing costs. When is a good time to increase borrowing costs? Real estate industry will say never. [Later on, Warner of Corker Warner says he estimates his plan will increase costs by 60bps, seems like a deal killer right there considering that's probably a lowball estimate]

-The strength of U.S. housing is yet to occur

Bob Ryan, Wells Fargo, brilliant moment. Top two comment in the conference [this and Millstein's]. Bob says, here's how you fix housing:
-Let's start from the premise that there are a lot of parts of the current system that work very well.
-Put 4-5% capital requirement on F+F, have regulator, not legislature, make the rules. Make guarantee explicit, get rid of government guaranteed investment portfolios, have one securitization platform (no need to have both F + F)
-The essence of the crisis, across the board, was bad underwriting. The crux of success is good underwriting.

-So guys, what happens in the next downturn when private capital flees? Securitization will not replace F+F demand.

-The need to eliminate is a political need, not a practical need. The public in 2008 demanded something different. Today, maybe you should just change the names [because the public really wants the 30-year mortgage]

-Bob Ryan, Wells Fargo: It's difficult to give mortgages without capital relief. It will be very tough if banks have to keep all the exposure to the mortgage loans we underwrite.

-When you most need it, private capital will abandon you

-Skin in the game will limit lenders...increase costs.

-The 30-year mortgage is foundational to the American experience. It is institutionalized. Changing it has dire consequences. This is even though only 50.8% of people stay in homes after 10 years, only 26% after 20 years

Senator Warner

Let me take an aside here. Senator Warner means well. He really does. He saw what happened in 2008 and saw that the pendulum of risk swung too drastically on the side of the taxpayer. The taxpayer was exposed to risk that he should have never been exposed to and Warner wants to prevent that from happening again by moving pendulum back to the middle (sharing risk with private capital). Unfortunately, my opinion is that he is far outmatched. Moving materially to private capital will significantly increase expenses and the vested interests (realtors, home builders, mortgage lenders...homeowners) will annihilate his plan


-Warner: lots of voices went into Corker Warner. We are interested in getting things down right.

-Warner: 10% capital buffer even though 5% or 6% was all that is necessary for 2008. I'd rather err on the side of caution and have Wall Street "tranche it out" [what?].

-Warner: All-in, 40 to 60  basis points increase in interest rates because of our bill [this is the moment the Corker-Warner bill died in my mind]

-5 to 10 year transition

-[Throughout Warner's talk, it was obvious that he was very uncertain how much the private market would step up. He supports the concept wholeheartedly, but I think he's out of his element in terms of execution of an entirely new mortgage plan given the most important implications are unknown]

-Warner: predictability once bill is put into place will attract more private capital

-Warner after angry Q+A with audience: I worked in investing before. If I was the government in 2008, I would have at least demanded a 2 times return on my investment

Jim Millstein

-[OK boys, all this theoretical stuff is fun and all but let me tell you what is, and how we should fix it elegantly so that we capitalize on what is good and change the big things that are bad]

-Everything I've heard today starts with the premise of winding down F+F

-Today, F+F is 3/5 of new mortgages.

-You're telling me there's a $10 trillion of appetite without a government guarantee? (half a trillion with Corker Warner plan)

-Ed Demarco (director FHFA) singlehandedly kept the private mortgage insurers alive by feeding them business. All but one is non-investment grade.

-F+F produce $25B in FCF. Let them RECAPITALIZE themselves with future cash flow.

-"Let's take reality as we find it, not as we wish it to be"

Just watch Millstein in the video. I was too focused to take many notes.

My takeaways:

-An interesting dynamic emerged throughout the conference. One of theory vs. reality. A lot of very smart people are trying to create a new housing system that limits the government role and hopes the private market steps in (which undoubtedly they will to some extent). However, the theory approach has a lot of unknowns that I don't think most people will be OK with given that you're talking about reforming a multi-trillion dollar market

I view it akin to trying to build an airplane at cruising altitude

Those rooted in hoping for a significantly different system have some thorough plans, but it all comes back to how much the private sector will step up. This is where I think all their new plans fall apart (versus just adjusting what exists) because you cannot have that as a variable. The housing industry (entrenched interests) will not accept that

Forgot who said this, "Tell Congress this is what the housing market will look like in the next downturn...and they won't be reelected" https://twitter.com/crowdturtle/status/393397907711619072/photo/1

-Congress as a whole sees very little urgency to act on this at the moment considering F+F can continue to operate close to normal

-The endgame is very unclear. I say, though, with a high-probability view, that we aren't going to create a new system / eliminate the existing one. There was a narrow window to do so in 2008 by putting F+F into receivership. And even then, in that time of crisis, it couldn't be done. The entrenched interests have come roaring back.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on October 25, 2013, 03:35:24 PM
http://www.businessweek.com/news/2013-10-25/jpmorgan-to-pay-5-dot-1-billion-to-settle-fhfa-mortgage-claims

Quote
JPMorgan Chase & Co. (JPM:US) agreed to pay $5.1 billion to settle Federal Housing Finance Agency claims related to home loans and mortgage-backed securities the bank sold to Fannie Mae (FNMA:US) and Freddie Mac (FMCC:US), resolving part of a $13 billion accord the company has been negotiating.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on October 26, 2013, 09:39:26 AM
My rough notes from the Zillow conference. I took scattered notes at interesting points...not all encompassing...or precise by any means

Great work, thanks nkp007!!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 31, 2013, 05:33:31 PM
Remarks Adapted From Comments Delivered by Timothy J. Mayopoulos, President and Chief Executive Officer, Fannie Mae
http://www.fanniemae.com/portal/about-us/media/speeches/2013/speech-mayopoulos-2013mba.html?p=Media&s=News+Releases&from=RSS (http://www.fanniemae.com/portal/about-us/media/speeches/2013/speech-mayopoulos-2013mba.html?p=Media&s=News+Releases&from=RSS)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 06, 2013, 10:06:34 AM
http://dealbook.nytimes.com/2013/11/06/simple-fix-to-debate-over-governments-role-in-housing/?ref=business (http://dealbook.nytimes.com/2013/11/06/simple-fix-to-debate-over-governments-role-in-housing/?ref=business)

Simple Fix to Debate Over Government’s Role in Housing
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 07, 2013, 05:56:17 AM
I guess nothing is going on... ;D

F+F both reported earnings today. Literally on the cusp of payback. One more quarter should do it, not that it matters now because that's obvious to everyone so functionally it is assumed.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on November 07, 2013, 05:57:52 AM
I guess nothing is going on... ;D

F+F both reported earnings today. Literally on the cusp of payback. One more quarter should do it, not that it matters now because that's obvious to everyone so functionally it is assumed.

Preferreds have been on quite the ride lately with all the legal victories... is there any news on the Bruce B/Perry Capital litigation?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 07, 2013, 06:00:20 AM
I guess nothing is going on... ;D

F+F both reported earnings today. Literally on the cusp of payback. One more quarter should do it, not that it matters now because that's obvious to everyone so functionally it is assumed.

Preferreds have been on quite the ride lately with all the legal victories... is there any news on the Bruce B/Perry Capital litigation?

No update on that yet.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 07, 2013, 07:20:40 AM


Freddie Mac to Pay Treasury $30.4 Billion on Quarterly Profit


http://www.bloomberg.com/news/2013-11-07/freddie-mac-to-pay-treasury-30-4-billion-on-quarterly-profit.html (http://www.bloomberg.com/news/2013-11-07/freddie-mac-to-pay-treasury-30-4-billion-on-quarterly-profit.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 07, 2013, 07:26:44 AM
Been halted this morning
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 07, 2013, 08:04:16 AM
Been halted this morning

Yeah. When is the US government response coming?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on November 07, 2013, 09:21:12 AM
Does anyone know why trading has been halted?

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 07, 2013, 09:23:11 AM
IB says all pink sheet trading is down.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 07, 2013, 09:48:20 AM
http://www.bloomberg.com/news/2013-11-07/over-the-counter-equities-trading-halted-in-u-s-on-data-issue.html (http://www.bloomberg.com/news/2013-11-07/over-the-counter-equities-trading-halted-in-u-s-on-data-issue.html)

Over-the-Counter Equities Trading Halted in U.S. on Data Issue
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 07, 2013, 10:10:56 AM
Been halted this morning

Yeah. When is the US government response coming?

Here is what I know about the current timing:
 
All junior preferred Federal Claims cases (5th amendment takings) have been consolidated and the US response is now due 12/9/2013.
 
All junior preferred District Court cases (suits alleging violation of administrative procedures) are awaiting a status hearing scheduled for November 12, 2013 to determine consolidation, timing and deadlines.
 
Washington Federal, which is suing on behalf of both the common and the junior preferred shareholders and thus is on a different path as the two above is moving forward.  US government respond will be submitted via a motion to dismiss by end of business today, 11/7/2013.  Expect 50 pages of very interesting reading!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on November 07, 2013, 12:02:09 PM
http://www.bloomberg.com/news/2013-11-07/over-the-counter-equities-trading-halted-in-u-s-on-data-issue.html (http://www.bloomberg.com/news/2013-11-07/over-the-counter-equities-trading-halted-in-u-s-on-data-issue.html)

Over-the-Counter Equities Trading Halted in U.S. on Data Issue

OTC trading resumed
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 07, 2013, 12:04:55 PM
Fannie Mae Fixed-to-Fltg Rate Non Cum. Pfd. Series S
OBB: FNMAS GO
Countdown to close
$8.29
Change
+8.29 +Infinity
Volume
450,000
Nov 7, 2013 9:20 a.m.
Quotes are delayed by 20 min
Previous close
Day low
Day high
$7.98
$8.50
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 07, 2013, 02:07:55 PM
Washington Federal vs. USA
Government motion to dismiss, attached. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on November 07, 2013, 02:18:54 PM
Washington Federal vs. USA
Government motion to dismiss, attached.

Thanks for posting.

Here is the Joint Status Report filed by Perry Capital on 11/6/13. Still reading it, but it does outline a new coordinated schedule.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 07, 2013, 08:55:09 PM
Washington Federal vs. USA
Government motion to dismiss, attached.

I skimmed through it and didn't find many valid points. But I am no lawyer, so I hope someone more experienced could share some input. :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 08, 2013, 05:05:40 AM
Washington Federal vs. USA
Government motion to dismiss, attached.

I skimmed through it and didn't find many valid points. But I am no lawyer, so I hope someone more experienced could share some input. :)

Despite my large concentration in these prefs, i haven't had the time to review it yet. I'll look it over the weekend, and would be happy to post some thoughts then.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 08, 2013, 12:07:05 PM
http://online.wsj.com/news/articles/SB10001424052702303309504579185691612432528?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/news/articles/SB10001424052702303309504579185691612432528?mod=WSJ_hp_LEFTWhatsNewsCollection)


Fannie, Freddie Venture Has CEO Shortlist
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 09, 2013, 08:30:37 PM


Washington Federal vs. USA
Government motion to dismiss, attached.


I skimmed through it and didn't find many valid points. But I am no lawyer, so I hope someone more experienced could share some input. :)


I found parts of the response to be fairly compelling.

For instance, a quick read through the underlying case law seems to show that there have been similar cases before with respect to whether plaintiffs have standing to bring this case. This may seem to be counterintuitive but many arcane parts of the law just happen to be like that...

I'll have to go through the response a few more times before I can give further analysis.

Btw, for those of you who were previously involved in the MBIA situation, it might behoove you to know that we are now on the flip side of the standard of review in that case. In MBIA, the standard of review under the APA was whether the administrative agency acted in an "arbitrary or capricious manner" when it split up MBIA. That's a difficult hurdle for a plaintiff to leap over. It is much the same here...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: qanary on November 09, 2013, 10:30:46 PM
Thanks for your initial comments Merkhet.  Here's where I pretend to be a lawyer and say foolish things that I hope I'll be corrected on.

It seemed to me that the motion to dismiss contained a bunch of technicalities that might or might not receive a favorable ruling.  However, it also seems to me that this shouldn't be concerning because the plaintiffs will simply refile through the correct party, with the correctly named defendant, in the correct jurisdiction, etc.  Because of the duties of the conservator and/or the companies, there is a fiduciary obligation to protect the assets of the company as the direct plaintiffs, especially if called upon by their stakeholders, I would presume.

When you strip this out, however, the argument concerning the heart of the matter, the sweep amendment, I felt, was extremely poor.  That the amendment was designed to strengthen the Enterprises seems extremely disingenuous since the amendment was effected at a time when the Enterprises were out of the woods.  The government saw profitability and used the general dissatisfaction of the public towards financial institutions as a cover to steal.  And I hate to use a word as strong as “steal” because it sounds a little impassioned (an emotion we don’t want creeping into the analytical process), but the weakness of their argument really supports this position.

How many pages were dedicated to technicalities, history and flowery language and how many were dedicated to a substantial explanation of why, in 2012, they decided to add this amendment?

My takeaway was that Team Berkowitz/Perry now have a starting point to tighten up their method of attack and that the main thesis is still very much intact. 




Washington Federal vs. USA
Government motion to dismiss, attached.


I skimmed through it and didn't find many valid points. But I am no lawyer, so I hope someone more experienced could share some input. :)


I found parts of the response to be fairly compelling.

For instance, a quick read through the underlying case law seems to show that there have been similar cases before with respect to whether plaintiffs have standing to bring this case. This may seem to be counterintuitive but many arcane parts of the law just happen to be like that...

I'll have to go through the response a few more times before I can give further analysis.

Btw, for those of you who were previously involved in the MBIA situation, it might behoove you to know that we are now on the flip side of the standard of review in that case. In MBIA, the standard of review under the APA was whether the administrative agency acted in an "arbitrary or capricious manner" when it split up MBIA. That's a difficult hurdle for a plaintiff to leap over. It is much the same here...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: qanary on November 09, 2013, 10:44:36 PM
And please let me add that unlike the MBIA case, which I followed very closely, the decisions of the NYSDF being capricious and arbitrary had to be taken in the context of protecting policyholders.  The NYSDF had numerical analyses supporting that the split should have been workable for all the policyholders.  Would any analysis in 2012 of the Enterprises’ financial positions and the vastly improved state of the mortgage market support such a permanent amendment in the context of conservatorship and protecting the stakeholders?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: colinwalt on November 10, 2013, 05:34:05 AM
Thanks for your initial comments Merkhet.  Here's where I pretend to be a lawyer and say foolish things that I hope I'll be corrected on.

It seemed to me that the motion to dismiss contained a bunch of technicalities that might or might not receive a favorable ruling.  However, it also seems to me that this shouldn't be concerning because the plaintiffs will simply refile through the correct party, with the correctly named defendant, in the correct jurisdiction, etc.  Because of the duties of the conservator and/or the companies, there is a fiduciary obligation to protect the assets of the company as the direct plaintiffs, especially if called upon by their stakeholders, I would presume.

When you strip this out, however, the argument concerning the heart of the matter, the sweep amendment, I felt, was extremely poor.  That the amendment was designed to strengthen the Enterprises seems extremely disingenuous since the amendment was effected at a time when the Enterprises were out of the woods.  The government saw profitability and used the general dissatisfaction of the public towards financial institutions as a cover to steal.  And I hate to use a word as strong as “steal” because it sounds a little impassioned (an emotion we don’t want creeping into the analytical process), but the weakness of their argument really supports this position.

How many pages were dedicated to technicalities, history and flowery language and how many were dedicated to a substantial explanation of why, in 2012, they decided to add this amendment?

My takeaway was that Team Berkowitz/Perry now have a starting point to tighten up their method of attack and that the main thesis is still very much intact. 


I'm no lawyer either, but this was pretty much my take on the motion
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 10, 2013, 05:46:12 AM
A big part of the law is about technicalities. These technicalities can kill a case.

I would not be so quick to dismiss the fact that there's a hard stop of 30 days in which to bring a case to challenge the FHFA's appointment as conservator.  That part of the plaintiff's case will likely fall since there's little to no ambiguity involved.

Quote

Because of the duties of the conservator and/or the companies, there is a fiduciary obligation to protect the assets of the company as the direct plaintiffs, especially if called upon by their stakeholders, I would presume.


I would also not be so quick to dismiss the standing issue. If the court holds that the FHFA stands in the position of all the stockholders, per 12 USC 4617(b)(2)(A)(i), then this case will have to be dismissed. The plaintiffs then cannot file the case... ever. Only the FHFA can bring the case... against itself. How likely is that to happen?

The only odd wrinkle I can see to the case is the existence of some residual value in the preferred shares and common stock of the companies. Does the FHFA hold any fiduciary duty towards those holders given that the HERA Act has transferred "all rights, titles, powers, and privileges of the regulated entity" to the FHFA? And if not, then does the FHFA owe a fiduciary duty to itself?

Again, I'll have to do a few more read-throughs, but in my opinion, this is not as quick a throw away as when Bank of America et. al. challenged the NYSID's actions in the MBIA case.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: qanary on November 10, 2013, 08:05:27 AM
I'm afraid I don't see how that stops the wheels turning here.  If the FHFA didn't bring the case in some fashion, you can bet the current plaintiffs would attack the FHFA for being derelict in its duties.  The "wrinkle" you point out is essential.

All rights, titles, etc. are in the context of being named a conservator.  The argument that the broad powers of a conservator allows them to benefit themselves or related parties at the expense of stakeholders would violate this.

Are you arguing that if I were named a conservator of a company with other stockholders and given broad powers to effect my duties that I could siphon off assets without concern because I wouldn't bring myself to court?  I'm pretty certain the stockholders would have recourse.

The 30 day hard stop doesn't concern me, it's that the conservator didn't execute in protecting value in the preferred shares that clearly had significant value at the time the amendment was effected. 

A big part of the law is about technicalities. These technicalities can kill a case.

I would not be so quick to dismiss the fact that there's a hard stop of 30 days in which to bring a case to challenge the FHFA's appointment as conservator.  That part of the plaintiff's case will likely fall since there's little to no ambiguity involved.

Quote

Because of the duties of the conservator and/or the companies, there is a fiduciary obligation to protect the assets of the company as the direct plaintiffs, especially if called upon by their stakeholders, I would presume.


I would also not be so quick to dismiss the standing issue. If the court holds that the FHFA stands in the position of all the stockholders, per 12 USC 4617(b)(2)(A)(i), then this case will have to be dismissed. The plaintiffs then cannot file the case... ever. Only the FHFA can bring the case... against itself. How likely is that to happen?

The only odd wrinkle I can see to the case is the existence of some residual value in the preferred shares and common stock of the companies. Does the FHFA hold any fiduciary duty towards those holders given that the HERA Act has transferred "all rights, titles, powers, and privileges of the regulated entity" to the FHFA? And if not, then does the FHFA owe a fiduciary duty to itself?

Again, I'll have to do a few more read-throughs, but in my opinion, this is not as quick a throw away as when Bank of America et. al. challenged the NYSID's actions in the MBIA case.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 10, 2013, 02:41:25 PM
The problem is that the case law is not terribly supportive on the standing issue.

Multiple cases cite that the conservator is, generally, the only entity that may bring suit on behalf of the corporation. (Read all three cases cited by the government and that will become clear.) There is an exception for situations where this would cause a conflict of interest, but that has been construed fairly narrowly. (Read First Hartford Corp. Pension Plan & Trust v. United States and Delta Savings Bank v. United States)

In regards to the Third Amendment:

Its not altogether clear that FHFA is the beneficiary and/or perpetrator of the improper conduct, so it's not clear that there is a direct conflict of interest via First Hartford. Additionally, it's not clear that the FHFA & the Treasury are "closely-related, sister agencies" in the manner described via Delta Savings Bank.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on November 10, 2013, 02:46:49 PM
Is there a way to check Congressional stock holdings? I looked on Opensecrets.org but can't find anything. I am wondering if members of Congress are invested in either the common or the preferreds. That might be a good indicator of how things might play out.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 12, 2013, 05:33:49 AM
Richard Epstein Op Ed:

http://www.restorefanniemae.us/bonanza
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on November 12, 2013, 07:51:59 AM
Richard Epstein Op Ed:

http://www.restorefanniemae.us/bonanza

Good read. Thanks for posting!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 12, 2013, 08:47:20 AM
Richard Epstein Op Ed:

http://www.restorefanniemae.us/bonanza (http://www.restorefanniemae.us/bonanza)

Nice site full of important links, thanks for posting.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on November 12, 2013, 09:08:35 AM
"Armed with these extensive powers, FHFA promptly entered into a sweetheart deal with Treasury whereby Treasury purchased a new issue of senior preferred stock from Fannie and Freddie for about $188 billion, which carried with it a 10 percent dividend, and an option that allowed Treasury to acquire some 79.9 percent of the common stock for the nominal price of $0.00001 per share."

It was the opposite of a sweetheart deal. Besides the US Treasury, no other entity in the world was willing and able to provide financing to Freddie and Fannie on any terms. Buffett got a 10% coupon from relatively healthy GE and GS - the going rate for insolvent Fannie and Freddie might have been 20%.

"A conservatorship requires the conservator to act in the best interest of its beneficiaries—here the shareholders of Fannie and Freddie at the time the conservatorship was imposed."

Based on what? Nothing in HERA or FHEFSSA or the PSPA or public statements by FHFA. The beneficiary of the conservatorship is the US Treasury, not public shareholders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: qanary on November 12, 2013, 10:34:05 AM
Thanks for posting ValueCFA.  Per my comments, the response was a bunch of procedural silliness and an otherwise toothless argument.

Richard Epstein Op Ed:

http://www.restorefanniemae.us/bonanza
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: qanary on November 12, 2013, 10:39:42 AM
Buffett did not receive 79.9% of GE or GS in warrants.

The obligations of conservatorship do not require external positive assertion of their duties in any acts or statements in addition to what is already encoded in law.

It was the opposite of a sweetheart deal. Besides the US Treasury, no other entity in the world was willing and able to provide financing to Freddie and Fannie on any terms. Buffett got a 10% coupon from relatively healthy GE and GS - the going rate for insolvent Fannie and Freddie might have been 20%.

"A conservatorship requires the conservator to act in the best interest of its beneficiaries—here the shareholders of Fannie and Freddie at the time the conservatorship was imposed."

Based on what? Nothing in HERA or FHEFSSA or the PSPA or public statements by FHFA. The beneficiary of the conservatorship is the US Treasury, not public shareholders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on November 12, 2013, 10:45:07 AM
Buffett did not receive 79.9% of GE or GS in warrants.

The obligations of conservatorship do not require external positive assertion of their duties in any acts or statements in addition to what is already encoded in law.

Right, which law was that?

The best analysis at the time suggested that the 80% warrants were worthless since the equity was most likely worthless.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 12, 2013, 02:22:39 PM
I'm curious to hear the analysis of some of the other lawyers on the board.  I feel like a lot of people are glossing over the government's response, and it's driven by a feeling of inequity as opposed to a legal analysis of the case.  I agree that what was done to Fannie & Freddie was wrong, but it does not necessarily follow that there will be a legal remedy for it.

Issues:

(1) Jurisdiction - I agree that this procedural aspect is at worst a nuisance. A refiling elsewhere with the correct jurisdiction will take care of these issues. This is "procedural silliness" as qanary has pointed out...

(2) Standing - This actually worries me. It's possible that none of the currently filed cases can go forward because the plaintiffs might lack standing to bring a case (directly and/or derivatively) against the U.S. government / FHFA / Treasury.  Professor Epstein's response to this is not compelling to me.  When you have to step back and rely on "general legal maxims" and/or "the broad unconstitutionality" of a legal statute, you are probably in trouble. Notice that he does not cite case law for any of this stuff...

The developed case law on this matter, which directly points to the statute in question, says that HERA transfers all rights to the FHFA. Here's the relevant quote from Kellmer v. Raines:

Quote

HERA provides that FHFA “shall, as conservator or receiver, and by operation of law, immediately succeed to . . . all rights, titles, powers, and privileges . . . of any stockholder.” 12 U.S.C. § 4617(b)(2)(A). This language plainly transfers shareholders’ ability to bring derivative suits—a “right[], title[], power[], [or] privilege[]”—to FHFA. The Fourth Circuit has reached the same conclusion, La. Mun. Police Emps. Ret. Sys. v. FHFA, 434 F. App’x 188, 191 (4th Cir. 2011) (per curiam), as have all three circuits to have interpreted HERA’s predecessor, the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), which contains virtually identical language, see 12 U.S.C. § 1821(d)(2)(A) (FDIC “shall, as conservator or receiver, and by operation of law, succeed to . . . all rights, titles, powers, and privileges . . . of any stockholder”). All of these courts have found that, absent a manifest conflict of interest by the conservator not at issue here, the statutory language bars shareholder derivative actions. See Lubin v. Skow, 382 F. App’x 866, 871 (11th Cir. 2010) (per curiam); Pareto v. FDIC, 139 F.3d 696, 700–01 (9th Cir. 1998); see also First Hartford Corp. Pension Plan & Trust v. United States, 194 F.3d 1279, 1295 (Fed. Cir. 1999) (“as a general proposition, the FDIC’s statutory receivership authority [under FIRREA] includes the right to control the prosecution of legal claims on behalf of the insured depository institution now in its receivership”).


There is an exception for situations where there is a manifest conflict of interest.  In First Hartford Corp. Pension Plan & Trust v. United States, the FDIC made a regulatory change in how it counts capital for solvency purposes, and as a result of that regulatory change, they had to seize Dollar Dry Dock Bank of New York (of which First Hartford was a shareholder).  First Hartford:

Quote

Our conclusion that circumstances here warrant standing is premised not only upon the FDIC's de facto refusal to sue, but also, and most significantly, upon the conflict of interest faced by the FDIC in determining whether to bring suit.   Indeed, in the circumstances presented in this case, the FDIC was asked to decide on behalf of the depository institution in receivership whether it should sue the federal government based upon a breach of contract, which, if proven, was caused by the FDIC itself.  


Notably, the exception has nothing to do with the idea that the "[government institution] has acted in violation of the duty of loyalty to [shareholders]" as espoused by Professor Epstein. Instead, the exception has to do with whether FHFA can be expected to sue itself for a wrong it committed. It is not entirely clear that the wrong that was committed here comes from the FHFA rather than from Treasury -- mostly because I'm not sure you can impute to FHFA a duty to stockholders during conservatorship. 

The analysis would then shift to whether shareholders can have derivative standing because the two institutions are closely related based off Delta Savings Bank v. United States:

Quote

The government responds that the FDIC is independent from the OTS and cites statutes and cases that supposedly attest to their independence from one another. We disagree. These are not two disengaged bodies on the opposite ends of an organizational chart; these are closely related entities. The Director of the OTS is, by statute, a member of the Board of Directors of the FDIC. 12 U.S.C. § 1812(a)(1)(B). Until the RTC ceased to exist, the Director of the OTS was also a member of the Thrift Depositor Protection Oversight Board, which had oversight over the RTC. 12 U.S.C. § 1441a(a)(3)(A). An employee of the OTS can simultaneously serve as a deputy or assistant to a member of the Board of Directors of the FDIC, and in such cases, he or she is considered an "employee of the FDIC" under Title 12. 12 U.S.C. § 1812(f)(2). The FDIC and OTS jointly publish regulations, issue reports, and conduct cooperative investigations. The OTS and RTC even share a common genesis, both having been created in FIRREA.


I don't believe that FHFA & Treasury would fall under this test the way that FDIC & OTS did.  Then the analysis is whether the FDIC then has a duty to sue Treasury on its own -- not necessarily due to damage to holders of private securities but rather whether they must sue Treasury because of damage done to FHFA.  Again, I don't believe that's clear cut.

(3) Takings Claim: The case law seems to directly engage with this as well.  In California Housing Securities, Inc. v. United States stated:

Quote

The RTC's occupation and seizure of Saratoga, and its subsequent liquidation of Saratoga's assets, cannot constitute a physical fifth amendment taking because neither Saratoga nor CHS could have developed a historically rooted expectation of compensation for such a seizure. Saratoga did not possess the most valued property right in the bundle of property rights, the right to exclusive possession, or stated conversely the right to exclude others, at the time of the alleged taking in this case. The power to exclude is an essential element of property ownership. It "has traditionally been considered one of the most treasured strands in an owner's bundle of property rights." Loretto, 458 U.S. at 435-36, 102 S.Ct. at 3175-76 (citing Kaiser Aetna v. United States, 444 U.S. 164, 179-80, 100 S.Ct. 383, 392-93, 62 L.Ed.2d 332 (1979) and Restatement of Property § 7 (1936)). See also Nollan v. California Coastal Comm'n, 483 U.S. 825, 831, 107 S.Ct. 3141, 3145, 97 L.Ed.2d 677 (1987), quoting Loretto, 458 U.S. at 433, 102 S.Ct. at 3175, quoting Kaiser Aetna, 444 U.S. at 176, 100 S.Ct. at 391 ("We have repeatedly held that, as to property reserved by its owner for private use, 'the right to exclude [others is] "one of the most essential sticks in the bundle of rights that are commonly characterized as property." ' "); Kaiser Aetna, 444 U.S. at 179-80, 100 S.Ct. at 392-93 ("In this case, we hold that the 'right to exclude,' so universally held to be a fundamental element of the property right, falls within this category of interests that the Government cannot take without compensation.") Hendler v. United States, 952 F.2d 1364, 1377 (Fed.Cir.1991). Saratoga lacked the fundamental right to exclude the government from its property at those times when the government could legally impose a conservatorship or receivership on Saratoga.


Again, I'd note that Professor Epstein's response does not engage any case law in his response.  There is a question as to whether the government could legally impose a conservatorship on Fannie & Freddie, and that would be an area of attack -- though I think that it would fall under a Chevron analysis of whether they had a rational basis for such a move.

(4) Exaction Claim: I feel like this was a throwaway claim from the plaintiffs, and I agree with the government response to this.  I believe that the "money in its pocket" thing is actually a requirement of exaction claims, but I'm not 100% sure.

As a side note, the fact that the HERA statute says "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or receiver" also bothers me.

Anyway, those are my immediate thoughts after having read the response a few times.

Are there other lawyers and/or former lawyers who want to weigh in here?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: globalfinancepartners on November 13, 2013, 05:51:06 AM
http://www.cnbc.com/id/101193820
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 06:21:32 AM
Endless debate for months on end about the legal side of F&F, yet zero discussion thus far regarding one of the largest potential restructurings ever!!!

FT said there are various documents floating around regarding the investor group's proposal. Anyone come across anything?

This whole situation makes far more sense IMO if in fact this is what Berkowitz had in mind the whole time - i.e. private capital coming in to restructure F&F. Why else would he take such a large stake in something that has a legitimate possibility of going to zero?

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 13, 2013, 06:34:20 AM

Endless debate for months on end about the legal side of F&F, yet zero discussion thus far regarding one of the largest potential restructurings ever!!!

FT said there are various documents floating around regarding the investor group's proposal. Anyone come across anything?

This whole situation makes far more sense IMO if in fact this is what Berkowitz had in mind the whole time - i.e. private capital coming in to restructure F&F. Why else would he take such a large stake in something that has a legitimate possibility of going to zero?


That's probably because the legal side is happening whereas the restructuring side might happen.

Treasury owns 79.9% of the equity of the company through warrants. Why would they agree to forego that ownership and turn over ownership to the private preferred shares?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 13, 2013, 07:08:50 AM
https://www.moodys.com:443/research/Moodys-GSEs-profitability-continues-to-improve-but-long-term-reform--PR_286526?WT.mc_id=NLTITLE_YYYYMMDD_PR_286526
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 13, 2013, 07:14:32 AM
http://www.ft.com/intl/cms/s/0/b6ff63c6-4bb7-11e3-8203-00144feabdc0.html#axzz2kXTJzRmT
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 07:19:29 AM

Endless debate for months on end about the legal side of F&F, yet zero discussion thus far regarding one of the largest potential restructurings ever!!!

FT said there are various documents floating around regarding the investor group's proposal. Anyone come across anything?

This whole situation makes far more sense IMO if in fact this is what Berkowitz had in mind the whole time - i.e. private capital coming in to restructure F&F. Why else would he take such a large stake in something that has a legitimate possibility of going to zero?


That's probably because the legal side is happening whereas the restructuring side might happen.

Treasury owns 79.9% of the equity of the company through warrants. Why would they agree to forego that ownership and turn over ownership to the private preferred shares?

My point was that when I woke up this morning to this news I came on here expecting 5 new pages of analysis. I understand why the legal analysis is happening  ;D
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 07:34:18 AM
Quote
The deal would see the investor group take control of Fannie and Freddie’s core businesses of guaranteeing mortgage-backed securities, in two newly-capitalised insurance companies.

This could potentially be massive, along the lines of what BB has talked about AIG moving into. I wonder if BB doesn't have plans for AIG to become part of this in some way shape or form....

Quote
The group proposes to capitalise the new insurers by converting their preferred securities into common equity and then carrying out a $17.3bn rights issue, according to a presentation document seen by the Financial Times.

Quote
Fannie and Freddie’s portfolio of previously-written guarantees and mortgage holdings would stay in government hands to be wound down, potentially at considerable profit to taxpayers. A common securitisation platform, used to standardise mortgage-backed securities, would also stay in public hands.

So the Treasury's cash cow would remain in place.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 13, 2013, 08:07:55 AM
"Hedge funds take over F+F at massive profits...American voters go ballistic"

Not politically palatable, but it shows the investors are at least putting some pressure on the process. Not that Congress is capable of reacting.

The underlying note in this news: par is a thing of the past. The biggest holders are fighting for a MULTIPLE of par.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 13, 2013, 08:11:06 AM

It's a bluff.
To get the government to try to take the equity and make the prefs whole.

Who is on the line for $5trillion in debt?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 13, 2013, 08:18:43 AM


There is no incentive for the government to do anything but rake in the profits from the most profitable company in history....and they have the tax payers behind them.

The best scenario for everyone in the world is for the status quo except for the pref holders and the common holders who own 20%. These r flees....

The bond holders dwarf everyone and they do not want anything to happen at all...

I expect a recap after another year or two...to the same company...however it is very possible that the prefs are made whole because of the massive profits that will occur in this time.

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 08:57:26 AM
How is this not the best of both worlds? 

1. The status quo remains the same for the current business (i.e. current bond holders have the backing of the USG) while Treasury gets to keep its cash cow

2. Private capital comes in to take over future MBS guarantees

The group is simply buying the future guarantee business with an instant 85% mkt share of all new mortgage issuance. Is it not?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on November 13, 2013, 09:12:26 AM
"Hedge funds take over F+F at massive profits...American voters go ballistic"

Not politically palatable, but it shows the investors are at least putting some pressure on the process. Not that Congress is capable of reacting.

The underlying note in this news: par is a thing of the past. The biggest holders are fighting for a MULTIPLE of par.

american voters don't go ballistic as long as their internet connection works. vast majority don't even know what this is about, won't understand it, and won't care.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 13, 2013, 09:41:29 AM
"Hedge funds take over F+F at massive profits...American voters go ballistic"

Not politically palatable, but it shows the investors are at least putting some pressure on the process. Not that Congress is capable of reacting.

The underlying note in this news: par is a thing of the past. The biggest holders are fighting for a MULTIPLE of par.

american voters don't go ballistic as long as their internet connection works. vast majority don't even know what this is about, won't understand it, and won't care.

F+F create visceral reactions in voters, but maybe you're right.

They can hate them all they want, but as soon as you tell them the 30 year mortgage is at risk, you'll have a true revolt. Americans will wonder, why is everyone bailed out except the everyday American who has a 30 year mortgage.

The real estate industry has the American populace in its palm at virtually all times.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on November 13, 2013, 09:44:55 AM
F+F create visceral reactions in voters, but maybe you're right.

They can hate them all they want, but as soon as you tell them the 30 year mortgage is at risk, you'll have a true revolt. Americans will wonder, why is everyone bailed out except the everyday American who has a 30 year mortgage.

The real estate industry has the American populace in its palm at virtually all times.

voters don't know what f&f are. they go to a bank they sign some papers and they get a check. they get their money from the bank not f&f.

what's in it for US GOV? There has to be something. I think the hedgies are going to be nuisance to US Gov. There is strength in numbers. Like really annoying dissident shareholders. They may not get everything they are asking for, but they may get something. US GOV wants to create wealth. That's their only plan. If they can create wealth they are interested. US GOV figured out they can't run anything. They want out of owning companies that should be private.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 13, 2013, 10:27:10 AM
Incentives matter.

I agree w/ wellmont... sort of.

What's the U.S. government's incentive to just turn over new issuances to the private preferred holders? If they can't win a legal battle, they have no leverage. Why doesn't FHFA split the company into two, run down the "old" F&F (while attaching the private preferrers to the old F&F) while spinning out the new F&F via a rights issue?

I don't think nuisance value cuts it...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 13, 2013, 12:46:46 PM
Investors pitch to take over much of Fannie and Freddie

http://www.cnbc.com/id/101193820 (http://www.cnbc.com/id/101193820)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 01:32:39 PM
I am curious how the prefs would convert into the new insurance cos. Say the $34.6B outstanding is trading at 36% of par, that's a market value of $12.5B. Under the investor group's plan, there would be a $17.3B rights offering.

Would the prefs convert at market value for total common equity post-rights offering of $29.8B? Or would the prefs convert at par....?

Assuming 20X leverage on $29.8B of starting capital, allowable assets would be $893B. Assuming a NIM of 3.5% and an expense ratio of 55%, PTPP would be $14.1B. If the investor group requires a 15% ROE, pre-tax income would have to $7.45B at a 40% tax rate, which implies an annual allowable loss rate of $6.65B. Also - I am not even including the guarantee fees....

What would a mid-cycle loss rate be for a guarantee business? 50bps? 100bps? At 100bps, this pro forma insurance co could support a $665B guarantee book, and at 50bps it would be $1.33T.

2012 FNMA/FMCC MBS issuance was $1.3T according to their 10Ks. I assume this is a decent proxy for the annual market NewCo would begin to guarantee.

The existing F&F guarantee book run off provides what I assume would be a huge growth runway. So what should NewCo be valued at? 20X earnings? 25X?

At 20X the required 15% ROE-derived net income of $4.47B, the NewCo fair value would be $89.4B. The current estimated market value of F&F prefs, or $12.5B, represents 42% of contributed capital....and 42% of the $89.4B fair value is $37.55B.


All that to say - the margin of safety part of this story is finally starting to shine through. Without a restructuring as outlined above or a legal victory, there is no margin of safety against the gov't pilfering 100% of F&F profits.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on November 13, 2013, 01:35:27 PM
i would go in if and when they put conversion terms in place. convert pref to equity and participate in rights offering.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 13, 2013, 01:48:19 PM
http://online.wsj.com/news/articles/SB10001424052702303460004579194333144295904?mod=WSJ_WSJ_US_News_5 (http://online.wsj.com/news/articles/SB10001424052702303460004579194333144295904?mod=WSJ_WSJ_US_News_5)

Freddie Taps Reinsurer to Offset Loan Risks

Mortgage-Finance Firm Expands on Effort With Private Investors
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 13, 2013, 04:58:28 PM
Fairholme GSE proposal attached
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 05:00:02 PM
Investor group pitch book:

http://ftalphaville.ft.com/2013/11/13/1694232/private-capital-now-say-hedge-funds-with-frannie-preferreds/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: vinod1 on November 13, 2013, 05:29:14 PM
Fairholme funds has case study on Fannie and Freddie. They have quite a few litigation documents also here. Apologies if this has already been referenced.

http://fairholmefunds.com/case-studies

Vinod
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 13, 2013, 05:30:40 PM
This seems like an extremely serious proposal by Fairholme and not the "bluff" Dazel was referring too. Perhaps I'm misreading the situation....
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 13, 2013, 06:13:45 PM
Attached a copy of the investor group pitch book that has been rotated so it reads the right way...

[EDIT: I guess this is just a first draft of the Fairholme proposal...]
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 13, 2013, 06:30:08 PM
Still reading the proposal, but I'm already a little confused.

When they're saying $52 billion of private capital, isn't that a bit of a head fake? They've classified this as the following:

(1) $34.6 billion of restricted capital from conversion of the private preferred stock
(2) $17.3 billion in new cash raised in a rights offering

However, what they really seem to mean is the following:

(1) $34.6 billion of restricted capital paid from Fannie & Freddie's coffers (AKA government money)
(2) $17.3 billion in new cash raised in a rights offering

I'm still not entirely clear on what leverage the private preferrers have to force the government to make them whole...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 13, 2013, 06:51:37 PM
fairholme letter to , FHFA head, Ed DeMarco
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on November 13, 2013, 07:23:54 PM
Still reading the proposal, but I'm already a little confused.

When they're saying $52 billion of private capital, isn't that a bit of a head fake? They've classified this as the following:

(1) $34.6 billion of restricted capital from conversion of the private preferred stock
(2) $17.3 billion in new cash raised in a rights offering

However, what they really seem to mean is the following:

(1) $34.6 billion of restricted capital paid from Fannie & Freddie's coffers (AKA government money)
(2) $17.3 billion in new cash raised in a rights offering

I'm still not entirely clear on what leverage the private preferrers have to force the government to make them whole...

A brilliant proposal by Fairholme, et al!
 
I read it as the private preferred would be made whole at par plus accrued dividends from the date of the Third Amendment Sweep, Aug 2012.  What is not clear to me is whether the UST writes a check for the par + accrued on the private preferred, or whether it is credited toward capital by the new state insurance regulators.  I suspect a check.
 
The leverage comes from the litigation threat and the deterioration of the infrastructure assets while waiting for a legal conclusion.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: mankap on November 13, 2013, 07:39:22 PM
I agree, it is a brilliant proposal.It raises the stature of Fairholme fund and Berkowitz as a top tier fund in trying to pull a 52 B recap.
What i understood is that preferred shareholders get the equity in the new company and will not be paid by UST.
I am still reading and trying to understand the proposal.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 13, 2013, 07:51:33 PM

A brilliant proposal by Fairholme, et al!
 
I read it as the private preferred would be made whole at par plus accrued dividends from the date of the Third Amendment Sweep, Aug 2012.  What is not clear to me is whether the UST writes a check for the par + accrued on the private preferred, or whether it is credited toward capital by the new state insurance regulators.  I suspect a check.
 
The leverage comes from the litigation threat and the deterioration of the infrastructure assets while waiting for a legal conclusion.


I agree that it's a brilliant proposal. I'm just not sure whether it'll happen.

My sense is that Fannie & Freddie would have to provide $34.6 billion in cash to the NewCo. I'm not sure what you mean by "credited toward capital"...

In any case, I think we've covered the legal aspect of the case, and I think that there are significant hurdles for the private preferred holders. The leverage is not terribly strong IMHO...


What i understood is that preferred shareholders get the equity in the new company and will not be paid by UST.


Yes but someone has to provide the paid-in capital for the equity in the first place... it's not like they can just raise $17.4 billion in new equity and then split it as if they had $52 billion of paid in capital.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 13, 2013, 07:56:48 PM


I sold my speculative position today in FNMAS 35% in a month. Thank you BB et all.  I Think this will have ups and downs as we head into the debt talks....

Good luck all.

Dazel.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on November 13, 2013, 08:49:55 PM

Yes but someone has to provide the paid-in capital for the equity in the first place... it's not like they can just raise $17.4 billion in new equity and then split it as if they had $52 billion of paid in capital.

Precisely... Fannie/Freddie contribute $34.6 billion in "corresponding assets" in exchange for the cancellation of the preferred shares. I assume that these assets would not be in cash but in securities, and would also include whatever operational assets the NewCo investors need for their planned business model. I think there are many challenges to implementing a plan like this, but it's an interesting idea.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 13, 2013, 11:16:14 PM

A brilliant proposal by Fairholme, et al!
 
I read it as the private preferred would be made whole at par plus accrued dividends from the date of the Third Amendment Sweep, Aug 2012.  What is not clear to me is whether the UST writes a check for the par + accrued on the private preferred, or whether it is credited toward capital by the new state insurance regulators.  I suspect a check.
 
The leverage comes from the litigation threat and the deterioration of the infrastructure assets while waiting for a legal conclusion.


I agree that it's a brilliant proposal. I'm just not sure whether it'll happen.

My sense is that Fannie & Freddie would have to provide $34.6 billion in cash to the NewCo. I'm not sure what you mean by "credited toward capital"...

In any case, I think we've covered the legal aspect of the case, and I think that there are significant hurdles for the private preferred holders. The leverage is not terribly strong IMHO...


What i understood is that preferred shareholders get the equity in the new company and will not be paid by UST.


Yes but someone has to provide the paid-in capital for the equity in the first place... it's not like they can just raise $17.4 billion in new equity and then split it as if they had $52 billion of paid in capital.

Yeah. This is what's confusing to me as well. Why should the government implement this proposal? Why not just keep the current Fannie and Freddie running and keep making $30 bn a quarter for the US government forever?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 03:12:15 AM
That's the brilliance of this plan - the govt keeps the cash cow while the future mortgage business is placed into private hands!!

Another interesting piece is the run off value that would accrue to the common. I assume that would not actually happen, but why not throw it in there!?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 03:50:02 AM
What are everyone's thoughts on the leverage that this company could handle to be AAA? Would 20x be too high?

What kind of a loss rate would guaranteeing 1-4 family mortgages have? 50bps? If the big banks are guiding to 100 mid cycle, I don't see why this would have to be more than 50.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 04:20:55 AM
Let's say it is levered 10x with debt costing 4%. Total assets are $520B, say with an average yield of 7%. So NIM on these assets would be 3%, or $15.6B in $ terms.

Say they guarantee $1T starting out at an annual premium of 50bps, exactly matching the estimated loss rate. So the guarantee fee and annual loss rate are a wash for income stmt purposes.

If the expense ratio is 40% (not sure off the top of my head what this looks like for AIG, but I would assume it would be lower than a bank that has an expansive physical footprint)  then Net income is $5.62B at a 40% tax rate. So ROE is just over 10%, a reasonable return for a utility-like business.

However, the incremental ROI on retained earnings is likely far higher than book roe as there is no need for incremental man power to manage an expanding base of float. And given the growth opportunity of this business, the FV PE on NewCo would be at least 15x I would think.

So NewCo FV at 15x 5.62 would be $84.3B. The prefs 66.5% share of this would be $56B versus the current market cap of around $13B.

Hopefully our brilliant Congressmen provide some attractive entry points over the next several months :)


Edit:

I miscalculated NIM by calculating it as if debt funded 100% of the assets. Required debt would be 468, and would cost 18.72 versus a 7% yield on 520 of assets, or 36.4. So NIM is 17.68 versus my 15.6 calc. Thus the estimated FV would be even higher....
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 14, 2013, 04:42:23 AM

That's the brilliance of this plan - the govt keeps the cash cow while the future mortgage business is placed into private hands!!

Another interesting piece is the run off value that would accrue to the common. I assume that would not actually happen, but why not throw it in there!?


I'm afraid that I'm starting to sound like a broken record, but it seems like the government has two choices at the moment:

(1) Keep the run-off piece, and
(2) Provide $34.6 billion in cash/assets in exchange for private preferred + raise $17.4 billion in private capital for the mortgage insurance NewCo

OR

(1) Keep the run-off piece,
(2) Keep the $34.6 billion in cash/assets, and
(3) Raise the full $52 billion in private capital for the mortgage insurance NewCo

I don't know why they would choose the former and basically gift $34.6 billion to Fairholme et. al. There's practically no reason for it if, as I believe, the legal argument is looking weak. They can still put the new business in private hands by just raising the $52 billion outright. (Especially since I think bmichaud's analysis is roughly right in that the company will be worth significantly more than the $52 billion.)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 04:42:59 AM
And again - Bruce is virtually gifting AIG with a massive new business opportunity here. He made a comment about AIG eventually stepping into FF's shoes awhile back, but I would have never guessed he would orchestrate the change himself. Very very cool stuff.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 14, 2013, 05:00:43 AM
It is a serious proposal that solves a lot of the hot button issues that other proposals fell short on. It will be interesting to see how much traction it gains.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on November 14, 2013, 05:10:41 AM
I think the real estate industry would be against this plan.

Lack of government guarantee will increase mortgage costs.

What's to say this entity doesn't MBIA itself and overextend while reducing underwriting standards at some point in its existence? If that's the case, we are back at square one.  Obviously this plan works well now that all new mortgages are pristine.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Dazel on November 14, 2013, 05:20:02 AM



BB is on CNBC at 9:40 eastern time....

No way this can go through but it will get people thinking.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 14, 2013, 05:29:21 AM
I think the real estate industry would be against this plan.

Lack of government guarantee will increase mortgage costs.

What's to say this entity doesn't MBIA itself and overextend while reducing underwriting standards at some point in its existence? If that's the case, we are back at square one.  Obviously this plan works well now that all new mortgages are pristine.

It's a bold step to do without a guarantee, and has been perceived as a far fetched goal of the politicians. A lack of guarantee will have large ramifications, but will please those (especially the politicians)  that prefer the government to not be on the hook when things go bad. The interested parties have not even gone so far as to definitively conclude whether or not they need/want a guarantee, or what form it will need to take if one remains. We are still in early innings on proposals, but this is one that goes the extra step.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 05:44:18 AM

That's the brilliance of this plan - the govt keeps the cash cow while the future mortgage business is placed into private hands!!

Another interesting piece is the run off value that would accrue to the common. I assume that would not actually happen, but why not throw it in there!?


I'm afraid that I'm starting to sound like a broken record, but it seems like the government has two choices at the moment:

(1) Keep the run-off piece, and
(2) Provide $34.6 billion in cash/assets in exchange for private preferred + raise $17.4 billion in private capital for the mortgage insurance NewCo

OR

(1) Keep the run-off piece,
(2) Keep the $34.6 billion in cash/assets, and
(3) Raise the full $52 billion in private capital for the mortgage insurance NewCo

I don't know why they would choose the former and basically gift $34.6 billion to Fairholme et. al. There's practically no reason for it if, as I believe, the legal argument is looking weak. They can still put the new business in private hands by just raising the $52 billion outright. (Especially since I think bmichaud's analysis is roughly right in that the company will be worth significantly more than the $52 billion.)


Great points. Could it be as simple as...with this proposal there is an automatic $52B already lined up ready to go, versus the govt somehow pitching to the private sector on its own why it should invest $52B on what would likely to be far worse terms than the current investor group would be getting by purchasing the prefs at a large discount to FV?

As BB says in his proposal, there must be a margin of safety in everything. Not that I would expect somebody like Nancy Pelosi to grasp such a concept, but the investor group has a large embedded MOS with the current set up in order to guard against the risk of taking a long-term stake (with a 5y lock-up) in an entirely new business venture.

Or perhaps you're right Merket, and the govt could simply raise the capital via a consortium of insurance companies??
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on November 14, 2013, 05:45:46 AM
Can someone please send me a link to the plan/letter that Buffett sent around during the financial crisis?  I can't remember if that was for F&F or more of a TARP type plan.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dolce2think on November 14, 2013, 05:51:59 AM
I understood this proposal differently:
Essentially the Value of Fannie and Freddie is split between the runoff and the ongoing/future business.
The preferred holders contribute 17 bio USD cash and the preferred stock will be converted into
"restricted capital" - which could be allowed to be counted as capital. Then, over 5 years the business
originates profits, which cannot be dividended out, until the restricted capital is paid up.

Please share your thoughts.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 14, 2013, 05:55:46 AM

Great points. Could it be as simple as...with this proposal there is an automatic $52B already lined up ready to go, versus the govt somehow pitching to the private sector on its own why it should invest $52B on what would likely to be far worse terms than the current investor group would be getting by purchasing the prefs at a large discount to FV?

As BB says in his proposal, there must be a margin of safety in everything. Not that I would expect somebody like Nancy Pelosi to grasp such a concept, but the investor group has a large embedded MOS with the current set up in order to guard against the risk of taking a long-term stake (with a 5y lock-up) in an entirely new business venture.

Or perhaps you're right Merket, and the govt could simply raise the capital via a consortium of insurance companies??


I remember an old quote from somewhere that "[T]he infidels never think of themselves as infidels."

You're thinking about it from the point of view of the investors needing a margin of safety for a new venture. Why shell out $52 billion of private capital when you can shell out $6.9 billion (20% of private preferred par) + $17.4 billion and get $52 billion in return.

My guess is that the government (1) doesn't care about providing hedge funds and private equity firms with a margin of safety and/or good terms and (2) would view this as giving hedge funds and private equity firms a $27.7 billion windfall.

Also, if you're right (and I think you might be) and the new company is likely going to be worth $100 billion, I think they will not have a problem raising $52 billion for the NewCo.


I understood this proposal differently:

Essentially the Value of Fannie and Freddie is split between the runoff and the ongoing/future business.
The preferred holders contribute 17 bio USD cash and the preferred stock will be converted into
"restricted capital" - which could be allowed to be counted as capital. Then, over 5 years the business
originates profits, which cannot be dividended out, until the restricted capital is paid up.

Please share your thoughts.


dolce, I think we're all understanding this on the same lines.

Note that when you confer the preferred stock as "restricted capital," Fannie & Freddie still have to provide assets to the NewCo as paid-in capital of some sort...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dolce2think on November 14, 2013, 06:02:21 AM
Yes,

17 bio in "real" buffer capital seems too thin in light of what happened.
What was the combined value of the common and preferred pre-crisis for both entities?
Around 200 Bio ?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on November 14, 2013, 06:09:05 AM
Yes,

17 bio in "real" buffer capital seems too thin in light of what happened.
What was the combined value of the common and preferred pre-crisis for both entities?
Around 200 Bio ?

About 66 for Fannie and 51 for Freddie (market value); 42 and 27 book value ... Bloomberg #s for FY 2006.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 14, 2013, 06:58:02 AM
Hopefully someone can post the CNBC video clip on here later.

I watched the interview on TV, and it struck me that Bruce just kept saying "Let's just do this." over and over again -- but there was no real response to when Faber and Cramer asked them "Why would the government do this?"
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 07:20:35 AM
So I guess it all goes back to the legal argument. If the govt never views the prefs as legitimate claims on the business, then it could go straight to the $52B rights offering and keep the money itself. Whereas if the prefs are viewed as legitimate claims, then the govt could so a $52B rights offering, pay off the prefs in full and keep the extra ~$17B for itself.

Under the proposed plan, and assuming the prefs are viewed as a legal claim on the business, then the govt extinguishes the $35B of prefs for a simple exchange of assets but without the profit a rights offering would bring. I guess one could argue that if it did a rights offering, it might be difficult to raise $52B due to the uncertainty surrounding a new business (I mean look at the discount the market applied to AIG for the govt overhang with an highly profitable existing business in place!!), and thus this plan would be superior due to significant capital already in place ready to go.

I still think there has got to be some margin I safety in all of this that we r not seeing (if it is not in fact this plan) because I just so not see how one exists outside of this plan. If the legal argument fails, there is no MOS. The prefs are zero. Yet BB says there is a MOS and has sized his position accordingly. Who knows....
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on November 14, 2013, 07:36:20 AM

So I guess it all goes back to the legal argument. If the govt never views the prefs as legitimate claims on the business, then it could go straight to the $52B rights offering and keep the money itself. Whereas if the prefs are viewed as legitimate claims, then the govt could so a $52B rights offering, pay off the prefs in full and keep the extra ~$17B for itself.

Under the proposed plan, and assuming the prefs are viewed as a legal claim on the business, then the govt extinguishes the $35B of prefs for a simple exchange of assets but without the profit a rights offering would bring. I guess one could argue that if it did a rights offering, it might be difficult to raise $52B due to the uncertainty surrounding a new business (I mean look at the discount the market applied to AIG for the govt overhang with an highly profitable existing business in place!!), and thus this plan would be superior due to significant capital already in place ready to go.

I still think there has got to be some margin I safety in all of this that we r not seeing (if it is not in fact this plan) because I just so not see how one exists outside of this plan. If the legal argument fails, there is no MOS. The prefs are zero. Yet BB says there is a MOS and has sized his position accordingly. Who knows....


I don't understand why the AIG example would matter. There wouldn't be an overhang with a $52 billion rights offering for a NewCo mortgage insurer. The government wouldn't own any piece of it.

Also, if there was not a perceived margin of safety, Bruce wouldn't own it in the first place. It does not follow that because of the ownership, there is an actual margin of safety. As I've stated before, I think we're on the wrong side of the Chevron doctrine. (link: http://en.wikipedia.org/wiki/Chevron_U.S.A.,_Inc._v._Natural_Resources_Defense_Council,_Inc.)

This will be interesting to watch develop. Right now it's a bit too risky for me to sell parts of SHLD and GM to buy private preferreds in Fannie & Freddie -- especially since, in light of what seems to me to be no new and/or negative news, the bet is now only paying 3 to 1. Like wellmont, I think I'd be interested if and when there is a restructuring on the table to see whether there are inefficiencies (banks that have their preferreds changed to equity and must dump, etc.)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 08:01:31 AM
Quote
I don't understand why the AIG example would matter. There wouldn't be an overhang with a $52 billion rights offering for a NewCo mortgage insurer. The government wouldn't own any piece of it.

I'm just using AIG as an example. The huge discount to BV for AIG was created by the govt overhang. In the case of the F&F NewCo, the overhang would likely be created by the mere fact you'd be buying into a brand new entity.

But main point was that the AIG overhang was assigned by the market DESPITE a highly profitable business already in place. With the F&F NewCo, not only are you investing in a brand new entity, but there is not really a business already in place (essentially the plan would give birth to a new industry over night), thus I would guess the overhang created by the market would be that much more punitive.

But yes I would agree taking a stake now would likely be premature. Given rampant insider information finding its way into stocks, I imagine the recent run-up in the prefs was due in part to this plan. As with most event-driven situations, there is a lot of volatility, and any hint of a delay or dismissal of the plan would send the prefs back down.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 14, 2013, 08:39:52 AM
Hopefully someone can post the CNBC video clip on here later.

I watched the interview on TV, and it struck me that Bruce just kept saying "Let's just do this." over and over again -- but there was no real response to when Faber and Cramer asked them "Why would the government do this?"


I can't find a good clip to attach, but was able to see a quick 3 minute clip. Berkowitz sounds like a f$cking moron talking to Faber - wouldn't answer a single question, doing nothing to make his case. I've never been able to stand listening to him anyway, particularly in that ridiculous interview with Moynihan in 2011, and now this....doesn't instill much confidence in what he's doing....
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on November 14, 2013, 08:58:06 AM
this presentation isn't for the government. it's for guys like you and me. :) Bruce's "second level thinking".
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on November 14, 2013, 08:59:54 AM
Can someone please send me a link to the plan/letter that Buffett sent around during the financial crisis?  I can't remember if that was for F&F or more of a TARP type plan.

Found it:  http://www.valuewalk.com/2012/01/warren-buffetts-letter-to-hank-paulson/

While not pertinent to the discussion, I find it amazing that he was trying to basically structure an ABS CDO.  Profits would have been pretty fat on this.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on November 14, 2013, 09:30:02 AM
Berkowitz trying to take credit for "helping" AIG by buying their stock on the secondary market is self-righteous nonsense.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 14, 2013, 06:01:27 PM
From Fairholme's report.
http://www.fairholmefunds.com/show_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/FAIRX%20July%202013.pdf (http://www.fairholmefunds.com/show_pdf.php?file=http://www.fairholmefunds.com/sites/default/files/FAIRX%20July%202013.pdf)

Quote
The Fund’s latest investments in the recovery of homeownership are in the preferred stocks of Fannie Mae and Freddie Mac. Your current mortgage may be backed by Fannie or Freddie – about 60% of new mortgages are. Millions of families depend on them to lower the costs and
increase the availability of homeownership. In times of stress, Fannie and Freddie stand to ensure the continued functioning of our housing market. Their twelve thousand employees do yeoman’s work helping to preserve a cornerstone of the American dream.

The Fund was able to purchase the preferred stocks of Fannie and Freddie near one-fifth of liquidation values – a significant bargain thanks to market predictions of U.S. Government agencies expropriating their assets. We see them differently. Fannie and Freddie are successful, publicly
traded, shareholder-owned companies just like AIG and Bank of America. Shifting political winds can change their futures, but not alter their pasts.

The Fund has filed complaints in the Court of Federal Claims and the U.S. District Court in Washington. In our suits, we seek nothing more than the enforcement of existing contractual rights, which require the payment of dividends to Fannie and Freddie preferred shareholders. Our
arguments are based on fundamental principles. In America, property ownership is a sacrosanct freedom, guaranteed by our Constitution. In America, we follow the rule of law, not the rule of the crowd. In America, profitable companies honor contracts.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: LC on November 14, 2013, 08:20:52 PM
Sounds like a way to shift old assets into the gov'ts hands while privatizing the ability to write new mortgage insurance...probably to AIG as has been mentioned as they're one of the few companies with the scale to do so.

IMHO not a serious proposal: if the gov't takes them up on this I will be pretty upset as a taxpayer over such a fleecing.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 14, 2013, 10:17:22 PM
http://online.wsj.com/news/articles/SB10001424052702303559504579198312328068096?mod=WSJ_business_MoreArticles (http://online.wsj.com/news/articles/SB10001424052702303559504579198312328068096?mod=WSJ_business_MoreArticles)

Fairholme Seeks to Profit From Growing Interest in Fannie, Freddie
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: vinod1 on November 15, 2013, 04:18:11 AM
To me it looks like the deal is really all about getting full 100 cents on the dollar for the preferreds for Fairholme. If this deal passes they would have made 5x on the preferreds. Even if it means locking that capital for 5 years, it represents a pretty good return.

Vinod
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: txlaw on November 15, 2013, 07:04:06 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: tng on November 15, 2013, 07:17:40 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Seems like Ackman is getting in as a common shareholder instead of a preferred. Very interesting.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on November 15, 2013, 08:05:38 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie.

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm)
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on November 15, 2013, 08:18:05 AM
Remember this from a few years ago? Ackman seemed to think these securities had a high risk of permanent loss of capital when they were priced much lower.

http://video.cnbc.com/gallery/?video=1786618239&play=1

Bill Ackman (Pershing Square): Who are you a fiduciary for? The shareholders?
Clayton Rose (Freddie Mac boardmember): Our fiduciary duties run strictly to the conservator.
Ackman: So you can make decisions that are adverse to shareholders?
Rose: Correct.
Ackman: Yet there is no liability to you?
Rose: Correct.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on November 15, 2013, 08:21:51 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie.

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm)
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm)

The article says 10% stake, not 10% position. :)

I'm confused though because a 10% stake in FNMA would be nearly $2 billion, and in FMCC would be $1 billion.

According to Fannie's 10-Q, there are 5.8 billion shares outstanding. http://www.sec.gov/Archives/edgar/data/310522/000031052213000205/fanniemaeq30930201310q.htm#sBE5B9CCD847B2587CC9B7E4F6CD88837

But according to Pershing's 13D, there are 1.2 billion shares outstanding, which if so would make the 115 million share stake a 10% position.
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dsc13d.htm

Am I missing something here?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: txlaw on November 15, 2013, 08:23:57 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie.

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm)
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm)

To me, it seems pretty risky to be going into the common.  The preferred clearly has risks as well, but the common . . .

I mean, do people really expect that there will be full payoff on the preferred?  I can see a preferred asset swap occurring, but I don't see why the government would actually capitalize the new companies with cash.  Maybe it's just a starting point bid, where the hedgies don't really expect cash to be contributed?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on November 15, 2013, 08:27:32 AM
Also a couple of beginner questions:

1. I asked this before but didn't get replies so I'll just ask again. How can we check Congressional stock holdings? I am wondering if members of Congress own either the common or the preferred.

2. The risk for both the common and the preferred is that the government will take all the money and they will go to $0, correct? But if shareholders win the lawsuits, then the money will flow through. So in that case wouldn't the common offer a much higher return at nearly the same risk?

EDIT: Just saw your reply txlaw.

This seems like a binary sort of event in which if the judge rules in the shareholders favor, there would be plenty of money for all shareholders, and in which case the common would offer far greater returns than the preferred. On the other hand, they can all go to zero.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on November 15, 2013, 08:33:05 AM
2. The risk for both the common and the preferred is that the government will take all the money and they will go to $0, correct? But if shareholders win the lawsuits, then the money will flow through. So in that case wouldn't the common offer a much higher return at nearly the same risk?

I would agree with this line of thinking. The preferreds have preference in any sort of liquidation/transformation event, but given that the company is probably worth either zero or bucketfuls to the stockholders (depending on the legal outcome), the fact that the preferreds have a bounded upper payout and the common does not may make the bet better, probabilistically.

It sounds like this isn't a big holding for Ackman, and is probably best compared to his purchase of GGP in bankruptcy that had a chance for a very high potential payout (that just happened to occur, in that case), and probably a very real risk of being worthless.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: txlaw on November 15, 2013, 08:42:08 AM
2. The risk for both the common and the preferred is that the government will take all the money and they will go to $0, correct? But if shareholders win the lawsuits, then the money will flow through. So in that case wouldn't the common offer a much higher return at nearly the same risk?

I would agree with this line of thinking. The preferreds have preference in any sort of liquidation/transformation event, but given that the company is probably worth either zero or bucketfuls to the stockholders (depending on the legal outcome), the fact that the preferreds have a bounded upper payout and the common does not may make the bet better, probabilistically.

It sounds like this isn't a big holding for Ackman, and is probably best compared to his purchase of GGP in bankruptcy that had a chance for a very high potential payout (that just happened to occur, in that case), and probably a very real risk of being worthless.

Well, one thing to consider is that when there are legal battles like this, with sophisticated parties on each side, there tends to be an outcome that is not binary in nature (i.e., win or loss).  Instead, there usually are ongoing negotiations where some deal is reached.  Take the MBI/BAC ordeal, for example.

So, to the extent you believe the government has some reason to negotiate rather than see this out, then it's a question of how much the private owners will benefit from the deal.  Has anyone run the numbers on how the common would benefit from the run-off ops profit sharing option?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on November 15, 2013, 09:11:34 AM
I think there are several possible outcomes , each offering a different upside to common.

Option1: Privatize F&F after paying off UST;
  pros: pref goes to par, may also get accrued dividends, common gets all the upside
  cons: the new entity will be without implicit guarantee, will be a monopoly controlling >60% market.   
           New competitors may emerge, but will be slow to catch up. A potential anti-trust action can 
           ensue

Option 2: berkowitz plan
          run off (govt + common benefit) + newco (mostly pref and some common)
          pros: pref gets more upside (no wonder berkowitz is proposing it)
                  common: limited upside compared to Option 1

Option 3: Govt does nothing in near term (1-3 yrs)
          pros: pressure grows to reinstate div on pref, pref goes up
                  common languishes in uncertainty

Option 4: Govt puts f&f in run off, gets paid with principal & interest, pays off pref with div (buys back all pref) and rest accrues to common.

              Govt lets private companies underwrite guarantee. Companies like brk, aig, ..etc start setting up shop and competes for biz.
         pros: pref gets paid fully
         cons: limited upside to common, milks the run off. How do we deal with existing f&f employees, patents, infrastructure once runoff is complete? there could be lots of opposition from this stakeholder.

I think 3 & 4 are likely options.

disclaimer: long pref.

2. The risk for both the common and the preferred is that the government will take all the money and they will go to $0, correct? But if shareholders win the lawsuits, then the money will flow through. So in that case wouldn't the common offer a much higher return at nearly the same risk?

I would agree with this line of thinking. The preferreds have preference in any sort of liquidation/transformation event, but given that the company is probably worth either zero or bucketfuls to the stockholders (depending on the legal outcome), the fact that the preferreds have a bounded upper payout and the common does not may make the bet better, probabilistically.

It sounds like this isn't a big holding for Ackman, and is probably best compared to his purchase of GGP in bankruptcy that had a chance for a very high potential payout (that just happened to occur, in that case), and probably a very real risk of being worthless.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on November 15, 2013, 09:46:48 AM
Bill Ackman getting in the mix:
http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie.

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm)
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm (http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm)

The article says 10% stake, not 10% position. :)

I'm confused though because a 10% stake in FNMA would be nearly $2 billion, and in FMCC would be $1 billion.

According to Fannie's 10-Q, there are 5.8 billion shares outstanding. http://www.sec.gov/Archives/edgar/data/310522/000031052213000205/fanniemaeq30930201310q.htm#sBE5B9CCD847B2587CC9B7E4F6CD88837

But according to Pershing's 13D, there are 1.2 billion shares outstanding, which if so would make the 115 million share stake a 10% position.
http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dsc13d.htm

Am I missing something here?

Just realized that the 5.8 billion outstanding includes the Treasury warrants.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 15, 2013, 09:51:35 AM
Ackman Takes Fannie Mae Stake as Berkowitz Plans Revamp


http://www.bloomberg.com/news/2013-11-15/ackman-s-pershing-buys-stakes-in-fannie-mae-freddie-mac.html (http://www.bloomberg.com/news/2013-11-15/ackman-s-pershing-buys-stakes-in-fannie-mae-freddie-mac.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: txlaw on November 15, 2013, 10:26:09 AM
Option 2: berkowitz plan
          run off (govt + common benefit) + newco (mostly pref and some common)
          pros: pref gets more upside (no wonder berkowitz is proposing it)
                  common: limited upside compared to Option 1

So for this option, there's also some variability in terms of upside for the prefs depending on how the Newcos are capitalized. 

What if the government says, we are not going to help recapitalize Newco with cash + secs at par value.  Instead, we'll give you $0.30 on the dollar in cash + secs, with the remaining $0.70 being exchanged for the operating assets.   That gets us to roughly $10.4 billion of cash and securities contributed by the government in order to resolve the litigation and set into play a restructuring of the entire mortgage market.  Newcos will also get additional capital from the proposed rights offering.  Because Newcos will definitely be smaller than as proposed, there will need to be a number of other MBS insurers that are lined up to ensure that all securitizations from the common securitization platform can be insured. 

The key is that the $10.4 billion cash outflow by the gov is really in exchange to resolve the restructuring of the mortgage market on an expedited basis.  And it's more than covered by the divs, cash sweep, and cash generated from the run-off portfolio.

Makes sense to me, but will the politics of all this work out?

----------

In addition to F&F secs, it seems to me there are a number of ways to play this changing market. 

AIG is one way, as they could have UGC participate as an MBS insurer.  And then spinoff, perhaps?

MBI is another.  MBIA Insurance stands for mortgage bond insurance (instead of municipal bond insurance) after being recapitalized as a JV between MBIA Corp and someone else (maybe Warburg Pincus).

ORI and other MI providers could be another way to go depending on how the PMI market evolves in the wake of F&F dismantling.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 15, 2013, 01:02:48 PM
Have you every thought about whether BB's plan is viable or not? The current bonds that F&F sells are attractive only because they are considered almost as risk free as the T bills.
But for BB's plan, the new co's products will not be as riskless, so why would the market continue to buy those products? Maybe they will, but the rate will be much higher than the T bills, and that would be bad for the real estate market.

I think the safest thing that the government would do is to continue to keep F&F running as it is, and let the courts decide if they need to pay off the preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on November 18, 2013, 06:31:54 AM
I would think that the govt will provide some catastrophic insurance (similar to the ones in terrorist attack).

The influence of F&F pref in recapitalization is also questionable. In traditional bankruptcy, the debt holders (senior ones) gain full/more control during recapitalization. Here F&F are healthy profitable companies, albeit with govt support. In a year or two, they may have enough money to redeem prefs, negating their influence.

Have you every thought about whether BB's plan is viable or not? The current bonds that F&F sells are attractive only because they are considered almost as risk free as the T bills.
But for BB's plan, the new co's products will not be as riskless, so why would the market continue to buy those products? Maybe they will, but the rate will be much higher than the T bills, and that would be bad for the real estate market.

I think the safest thing that the government would do is to continue to keep F&F running as it is, and let the courts decide if they need to pay off the preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 18, 2013, 08:10:07 AM
http://www.bloomberg.com/news/2013-11-18/ackman-joins-fray-to-pry-once-worthless-fannie-from-u-s-.html (http://www.bloomberg.com/news/2013-11-18/ackman-joins-fray-to-pry-once-worthless-fannie-from-u-s-.html)

Ackman Joins Fray to Pry Once-Worthless Fannie From U.S.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on November 19, 2013, 09:50:19 AM
Quick question....

FNMA's fully diluted share count is 5,893 million taking into account Treasury's warrant. At the recent PPS of $2.61, the implied market cap is $15.4 billion.

The FNMAS preferred series is trading at $8.26, or ~33% of its $25 par value. Applying the 33% to the $19.13B face value of FNMA's private preferreds, the implied market cap is $6.3B.

Am I looking at this right? Is there really a high enough probability of a favorable restructuring for the common to warrant a market cap over 2 times the value of the preferreds?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 19, 2013, 10:49:18 AM
Quick question....

FNMA's fully diluted share count is 5,893 million taking into account Treasury's warrant. At the recent PPS of $2.61, the implied market cap is $15.4 billion.

The FNMAS preferred series is trading at $8.26, or ~33% of its $25 par value. Applying the 33% to the $19.13B face value of FNMA's private preferreds, the implied market cap is $6.3B.

Am I looking at this right? Is there really a high enough probability of a favorable restructuring for the common to warrant a market cap over 2 times the value of the preferreds?

If everything goes back to normal, preferred will be paid in par, and common will be worth $150 bn market cap, if Fannie mae makes $15 bn a year.
So common has more upside in this scenario.
In BB's plan, common may have no value after run off, but I think that plan is not viable.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dcollon on November 20, 2013, 01:06:32 PM
Sperling: WH not interested in GSE recap plan from SeekingAlpha

"I want to make clear our administration believes the risks are simply too great, that this would re-create the problems of the past," says the president's chief economic adviser Gene Sperling of any recapitalization plan for Fannie Mae (FNMA +7.5%) and Freddie Mac (FMCC +6.4%).Speaking at an industry conference in D.C., Sperling says the administration is interested in rebuilding a stronger mortgage market not dominated by two mammoth institutions, and Frannie - even if restructured - would retain a large advantage over newer entrants.Needless to say, Sperling's remarks come in wake of Bruce Berkowitz's buyout and recap proposal for the GSEs from last week.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 20, 2013, 04:46:09 PM
White House Rejects Fannie-Freddie Recapitalization Plans


http://online.wsj.com/news/articles/SB10001424052702304607104579210092350929498?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/news/articles/SB10001424052702304607104579210092350929498?mod=WSJ_hp_LEFTWhatsNewsCollection)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 20, 2013, 06:43:41 PM

What's the alternative? If they wind them down and dissolve them, instead of sell them, then who has the capability to step in and take their place...let alone take their place with minimal disruption to the mortgage market. The only possible viable alternative is an FDIC like entity, but that keeps the government on the hook. The Fairholme proposal really is the most logical one yet.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on November 20, 2013, 09:08:10 PM

What's the alternative? If they wind them down and dissolve them, instead of sell them, then who has the capability to step in and take their place...let alone take their place with minimal disruption to the mortgage market. The only possible viable alternative is an FDIC like entity, but that keeps the government on the hook. The Fairholme proposal really is the most logical one yet.

I think the most logical plan is to do nothing and keep F&F in its current state. Only in this way will these two companies' package bonds trade like T bills, and have high demand.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on November 22, 2013, 10:21:33 AM
http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html (http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html)


Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dcollon on November 22, 2013, 12:05:35 PM
From SeekingAlpha

Fannie bets a puzzle to many

"When you talk to anybody in Washington, there is an almost universal view that Fannie (FNMA -3.1%) and Freddie (FMCC -1.5%) should be a part of the past, that it is a broken model, and also that private investors in Fannie and Freddie shouldn’t realize any returns from those investments," says PIne River's Colin Teiccholtz, scratching his head over anyone owning stock in the two as a play on them being privatized.

"We've looked at it," says Avenue Capital's Marc Lasry. "I think you’re making a bet that you’re going to be able to force the government to do something.

”It's "a puzzle to me," says an investor in Bill Ackman's Pershing Square. "If you think the Target board is hard to convince of a policy change, you have got to believe you’re really taking on a tall job to try and influence the government.

"Taking a break from talking Herbalife, Ackman - who recently disclosed near-10% stakes in the common of both Fannie and Freddie - says he's not supportive of Bruce Berkowitz's recap plan (which would be of benefit to preferred owners like Berokowitz, but not so much for owners of the common)

MBS trader Deepak Narula calls the common stock of Frannie an option which should rise any time chatter about privatization picks up. "Whether the option is worth anything in the short run is immaterial.”
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on November 26, 2013, 05:45:44 PM
http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html (http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html)


Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity

I'm interested to see what Ackman's proposal will be, whereby he expects the common to do so well even more so than the prefs. He is obviously expecting more than a 3x from the common given that is where most of the prefs are relative to par
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on December 01, 2013, 12:30:47 PM
http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html (http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html)


Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity

I'm interested to see what Ackman's proposal will be, whereby he expects the common to do so well even more so than the prefs. He is obviously expecting more than a 3x from the common given that is where most of the prefs are relative to par

After reading the court documents and posts in this forum, I kinda feel like the common shares the same risk as the preferred, but the upside for common seems higher. What do you think? If the current taking clause suits are deemed eligible to go to trial, then both common and preferred should recover.
Is there a scenario where common is wiped out but preferred is fully recovered?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: CorpRaider on December 02, 2013, 06:14:32 AM
Barron's had an article on this situation this weekend.  Nothing really substantitve imop (it was really just a political opinion article to my mind) but thought I would note it for you.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on December 02, 2013, 06:39:40 AM
New article by Dick Bove:

http://www.valuewalk.com/2013/12/fannie-mae-freddie-mac-500-price-appreciation-bove/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on December 02, 2013, 07:11:29 AM
Freddie mac investor presentation
http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on December 04, 2013, 08:36:31 AM
Does anyone know if the consolidated class action complaint was submitted?

The date on the joint status report had the document due 12/3/13. I checked the Perry Capital case Docket Report on Pacer and didn't see a filing.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on December 10, 2013, 07:45:21 AM
US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on December 10, 2013, 12:43:39 PM
US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.

Looks pretty solid to me. I wouldn't be surprised if the motion succeeds.

The weak point is the claim that the intent of the Third Amendment was to strengthen the enterprises and reduce their cost of debt. But if the rest of their arguments are solid, that doesn't matter because the lawsuits will be thrown out.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on December 10, 2013, 03:55:18 PM
US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.

Looks pretty solid to me. I wouldn't be surprised if the motion succeeds.

The weak point is the claim that the intent of the Third Amendment was to strengthen the enterprises and reduce their cost of debt. But if the rest of their arguments are solid, that doesn't matter because the lawsuits will be thrown out.

Lot of straw-man arguments in the motion. I don't know what the judge will do, but there are many holes.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on December 11, 2013, 03:41:23 AM
I had not read Perry Capital's complaint until yesterday (not yet finished), but I think they make more compelling "taking" case given they purchased their preferred position in 2010 before the net worth sweep was implemented. This appears to assume, however, that the FHFA should legally be held to its word that its job was to rehabilitate F&F until they were stabilized, and that the F&F securities should remain outstanding due to the potential for this rehabilitation, which the net worth sweep entirely negates.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on December 11, 2013, 09:51:22 AM
I am not at all expecting a response of any kind, as I am extremely late to this party and it is likely highly annoying to have someone asking such basic questions this late in the game....but I am going to ask anyway.....

On page 27 of the Perry Complaint, paragraph 71 states the following:

"Before Treasury exercises its temporary authority to purchase the Companies' securities, HERA requires Treasury to determine that the financial support is necessary to "provide stability to the financial markets," "prevent disruptions in the availability of mortgage finance," and "protect the taxpayer." In making these determinations, HERA further requires Treasury to "take into consideration" several factors, including the "plan for the orderly resumption of private market funding or capital market access," and the "need to maintain [the] status [of Fannie and Freddie] as...private shareholder-owned compan[ies]."


At first glance, the last bolded point appears quite compelling from a government agency responsibility perspective. However, here is what the HERA actually says:

From H. R. 3221--30 of the HERA:

"(C) CONSIDERATIONS.--To protect the taxpayers, the Secretary of the Treasury shall take into consideration the following in connection with exercising the authority contained in this paragraph: ....... "(v) The need to maintain the corporation's status as a private shareholder-owned company.


I interpret the Perry section as: no matter what Treasury does with respect to its temporary authority to purchase F&F obligations, it NEEDS to maintain the private shareholder status of F&F (public securities trading as penny stocks with no apparent future do not count as maintaining private shareholder status).

I interpret the HERA section as: in order to protect the taxpayer, the Treasury can reevaluate the "need" to maintain the private shareholder status and deem it unnecessary in the spirit of "protecting the taxpayer" - in other words, the govt has extreme latitude to impose the net worth sweep in order to "protect the taxpayer".


If there is no response, I will deem my confusion between the two interpretations moot. But, if anyone else has considered how one should interpret this HERA passage, I'd love to hear your thoughts.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on December 16, 2013, 12:23:12 PM
A lot of it has to do with the actions after December 2009 and the 3rd amendment that was undertaken in August 2012.

Under 12 U.S.C. §§ 1455(l)(4) -  Termination of authority The authority under this subsection (l), with the exception of paragraphs (2) and (3) of this subsection, shall expire December 31, 2009.

Paragraphs 2 and 3 basically say that the treasury can sell the securities it owns and where it can get the funding from.

Now had 12 U.S.C. §§ 1455(l)(4) included paragraph (1)....then yes they could modify the agreement after December 31st. 2009.

I think you need to take 12 U.S.C. §§ 1455(l) in its whole....yes they could have unilaterally "Considered" the shareholders[ie 12 U.S.C. §§ 1455(l)(1)(C)(iii), (v)] and tossed them out but they had no authoity after Dec. 31st.

So Perry claims that not only did they not have the authority to do so but they provided no "documentation" that they had considered the shareholders...in fact the takings happens after it is abundantly clear that they will be profitable again.



 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on December 19, 2013, 02:00:14 PM
Washington Federal's Response 12/16/13 - Attached.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on December 20, 2013, 10:04:03 AM
Favorite part of the reading so far:

Quote
Bizarrely, the Government chides Plaintiffs both for waiting to file suit and for filing too soon.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on December 20, 2013, 12:38:29 PM
First paragraph

Quote
“conservator,” it was such in name only. In reality, it has been a shill for using the Companies to

accomplish whatever the Government wanted.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on December 25, 2013, 08:55:47 AM
From Fairholme's website - transcript of a discussion with Richard Epstein regarding the Fannie/Freddie cases:

http://fairholmefunds.com/pdf.js-master/web/viewer.php?file=http://fairholmefunds.com/sites/default/files/Richard%20Epstein%20-%20Transcript.pdf (http://fairholmefunds.com/pdf.js-master/web/viewer.php?file=http://fairholmefunds.com/sites/default/files/Richard%20Epstein%20-%20Transcript.pdf)

Highlights:
- Not impressed with the Government's briefs for the Washington Federal or Fairholme cases:
"And frankly, they’re very bad briefs... They’re sloppy.  They don’t give you particular statutory language.  They cherry-pick facts.  They argue questions of fact that are highly refuted on a motion to dismiss where those things are not to be allowed.  They are, in effect, briefs which communicate the following message: We don’t take this case very seriously because we’re not really trying to sit down and figure out strong and coherent theories."

- Maybe not quite as confident as Berkowitz? ;)
"When you get to the Supreme Court, frankly my dear, it is an open crapshoot."

Tons more good stuff in there, too.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on December 25, 2013, 10:31:42 AM
JRH, do you happen to have a copy? The link seems to be broken.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on December 25, 2013, 11:17:44 AM
I tried everything I could to get it out of my browser cache, but the content was rendered in such a way that trying to save or print it gave me only the first four pages (probably less than 10% of the whole thing). Couldn't even figure out how to view the page source in Safari to figure out where/what form the content was really in.

Bizarre that they took it back down. Maybe a little Christmas present. Hopefully it surfaces again before long.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on December 25, 2013, 12:11:46 PM
It's back up again -- attached in case anyone else ran into the same problem I did...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on December 25, 2013, 01:27:28 PM
It's back up again -- attached in case anyone else ran into the same problem I did...

Thanks for uploading. I just tried to view it off the Fairholme site and it didn't work for me.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on December 26, 2013, 09:01:16 AM
I just started reading the transcript, and I realized what bothers me slightly about Epstein.

When it comes to law professors (especially at the top schools) there is a strong sense of "The World According to (insert professor name here)" -- where they've spent their entire academic life "branding" themselves with a particular framework approach to [Con Law/Property/IP/etc.] -- and they are flabbergasted that others cannot see their brilliance.  This then leads them to also be flabbergasted if and when certain court rulings go against them.  I have a sense that Epstein falls in this category.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on December 26, 2013, 12:15:28 PM
I just started reading the transcript, and I realized what bothers me slightly about Epstein.

When it comes to law professors (especially at the top schools) there is a strong sense of "The World According to (insert professor name here)" -- where they've spent their entire academic life "branding" themselves with a particular framework approach to [Con Law/Property/IP/etc.] -- and they are flabbergasted that others cannot see their brilliance.  This then leads them to also be flabbergasted if and when certain court rulings go against them.  I have a sense that Epstein falls in this category.

This in particular:

"And [the potential Fairholme judges] do not have the kind of muscular judicial review strategy that has characterized my view for the last thirty odd years, ever since the mid-80s I declared the New Deal unconstitutional as a matter of first principal in my takings book."

So he is a fair distance from mainstream political/judicial philosophy. I wonder what his analytical performance record looks like.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: JRH on December 26, 2013, 12:20:45 PM
So he is a fair distance from mainstream political/judicial philosophy. I wonder what his analytical performance record looks like.


Early in the transcript he makes it sound like the cases against the 2008 bailout have a rocky path, while the 2012 third amendment should be more straightforward.


Having said that, I had a hard time following which of the two (if not both) he was referring to at certain points throughout the rest of the transcript, including but not limited to his comments regarding the likelihood of them going to the Supreme Court.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on December 28, 2013, 08:29:44 PM
Now that I've read this a few times, I think that Professor Epstein's view of the case is extremely colored by normative beliefs as opposed to the actual legal positioning.  It's clear that he finds the entire 2008 situation and the 2012 Amendment reprehensible on a basic level (as do many of our posters here), but it looks as if even he's softening a little in respect to his position on the cases.

There's a perfect example of what I mean on page 6:

Quote
So where does it leave you?  On the normative side, this case with respect to the amendment should be toast and it’s difficult with respect to the 2008 reorganization.  Given the current law, what one has to remember is that there is always a strong government finger on the scale.

And what that does is it means that basically whenever you litigate against the government, the stronger your case may be, the more powerful you may think it to be, getting yourself over better than even money on winning that thing is extremely difficult.  It is hard for people to realize what the extent of the deference is that is given to government.  And if you don’t get yourself within the contract or the regulatory or the occupational sides that I’ve talked about, then the case is over.

Notably, this seems to be a bit of an about face in what he was saying at the earlier conference at NYU where he said that these were "winning cases" or something to that effect.  If memory serves me correctly, one of the panelists says "You have a pretty good case on [whatever]." and Epstein replies "A winning case." to some laughter in the audience.

Quote
And ultimately, let’s put it this way.  If the government win down below, I think there’s still, since the case is so big, a chance that the Supreme Court will take it.  But I can guarantee you, if the Solicitor General shows up and says, you know, there’s just been a government judgment entered into against us for about $120 billion, cert granted.  That's all they have to say.  They don’t have to write up a petition.  They don't even have to send a live body into the Supreme Court in order to get it.

The Solicitor General has an enormous advantage in big cases in essentially commanding the attention of the Supreme Court, at least with the courtesy of a hearing.  So I think in the end, this thing is likely to be resolved by the Supreme Court.  And on that particular point, it’s actually not as clear as one might think.  Remember, Winship was done six or so years ago.  And there were several liberal Democrats, I think it was Souter in particular, who sided with the bank.

This was fairly interesting to me given that the balance of the court has shifted slightly to the right in the last few years (though I can't seem to find the Winship case that he's referencing to figure out which remaining Justices voted which way...)

It's also notable to me that basically if the government loses in the lower courts, it's likely not going to be resolved until it gets all the way to the Supreme Court -- which is a good way to gauge a timeline for this stuff...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on January 06, 2014, 12:14:21 PM
Fannie/Freddie: price and principle

http://www.ft.com/intl/cms/s/3/91562730-73d6-11e3-a0c0-00144feabdc0.html#axzz2peR8ivRx (http://www.ft.com/intl/cms/s/3/91562730-73d6-11e3-a0c0-00144feabdc0.html#axzz2peR8ivRx)



Quote
It is easy to have principles in the abstract. The test comes when those principles have unpleasant repercussions. One widely held principle since the financial crisis is that the US mortgage market needs more “private” capital.


 
Fannie Mae and Freddie Mac, the mortgage guarantors that are now wards of the US government, announced plans in December to increase fees for some of the mortgages they back, hoping to replicate what private insurers would charge. These increases will flow through to mortgage rates, just on the heels of already rising interest rates. A more rational and stable housing sector will, inevitably, be a smaller one. But housing has also led the US economic recovery, making solid principles painful to honour.
 
The Federal Housing Finance Agency said in December that it would raise the guarantee fees it assesses on home loans and, additionally, raise fees for borrowers making smaller downpayments or those with lower credit scores. It is estimated that the increase in those fees could raise mortgage rates by 0.4 per cent. Current rates are about 4.5 per cent – historically low, but up about 1 per cent in the past year. The new FHFA head, Mel Watt, installed just after the rules were announced, however delayed their implementation for further study (and further lobbying by the property industry). In the meantime, the housing recovery continues but at a more measured pace.
 
The privatisation debate has been focused on the mechanics. Regardless of form, the crucial outcome is that private capital is more expensive capital and, thus, borrowing rates will be higher. And with an unsubsidised housing finance market investment will ostensibly flow to other worthy sectors. Either with the introduction of private capital or its tenets we will find out soon enough.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on January 08, 2014, 09:45:28 AM
US senators push for Fannie and Freddie wind-down
 


http://www.ft.com/intl/cms/s/0/a6f86c3e-7876-11e3-831c-00144feabdc0.html?siteedition=intl#axzz2peR8ivRx (http://www.ft.com/intl/cms/s/0/a6f86c3e-7876-11e3-831c-00144feabdc0.html?siteedition=intl#axzz2peR8ivRx)


Quote
US senators Bob Corker and Mark Warner on Wednesday made another push for their legislation to wind down Fannie Mae and Freddie Mac, saying the opportunity to resolve the ownership of the mortgage finance giants bailed out during the financial crisis should not be squandered.

Their statements at a Financial Services Roundtable discussion on housing finance reform comes as the Senate gears up in the coming weeks to present a revised plan on Fannie and Freddie, which is aimed at pleasing both Republicans and Democrats.

 
The Senate Banking Committee’s top Democrat and Republican, Senators Tim Johnson and Mike Crapo, are in the advanced stages of putting together a compromise bill that borrows some aspects of the Corker-Warner legislation.

The debate over what to do with Fannie and Freddie had a new twist after Bruce Berkowitz’s Fairholme Funds in November proposed taking over operations of the bulk of the mortgage finance companies.
 
Mr Corker, a Republican, on Wednesday reiterated that the Fairholme plan proves there is an appetite for risk from the private sector, an issue that drew scepticism from critics of the Corker-Warner bill. White House officials have rejected the hedge fund proposal.

Mr Warner, a Democrat, said a strong bipartisan bill that garners the most support was the best path toward success, hinting that the final outcome could be a combination of proposals. He added that those advocating for the status quo for Fannie and Freddie, which are under government conservatorship, were pushing for the wrong outcome.
 
There has been a growing chorus, particularly among some hedge funds, to leave Fannie and Freddie as they are since they are performing well amid rising home prices and improving loan quality.
 
By the end of 2013, the mortgage finance companies were on track to pay a total of $185.3bn in dividends to the US government, which injected $188bn into Fannie and Freddie in 2008. But Fannie and Freddie cannot technically repay the government because that option was not in their agreement.

Mr Corker has said profits from Fannie and Freddie are due to the government guarantee for mortgages, and that taxpayers could still be on the hook for another bailout if there is a crisis.

The Corker-Warner bill envisions a limited government role that would maintain a government guarantee and wind down Fannie and Freddie over five years. Critics say that timeframe is too hasty to plug the hole that Fannie and Freddie would leave.
 
The legislation would also create the Federal Mortgage Insurance Corporation, which is partly modelled on the Federal Deposit Insurance Corporation for banks, while private capital would have to take the first 10 per cent loss on credit risk.

While there has been renewed urgency to tackle one of the last remnants of the financial crisis, it is unclear whether the Senate can come up with a bill that can draw wide support.

Lawmakers especially want to ensure that any changes to Fannie and Freddie preserve affordable mortgages, including the 30-year fixed-rate housing loan. Politicians are also gearing up for the midterm elections in November, which could also stall legislation.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 08, 2014, 12:47:35 PM
US senators push for Fannie and Freddie wind-down
 
http://www.ft.com/intl/cms/s/0/a6f86c3e-7876-11e3-831c-00144feabdc0.html?siteedition=intl#axzz2peR8ivRx (http://www.ft.com/intl/cms/s/0/a6f86c3e-7876-11e3-831c-00144feabdc0.html?siteedition=intl#axzz2peR8ivRx)


Thanks! I was wondering what was driving the prefs today.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on January 08, 2014, 01:03:53 PM
Letter from Ralph Nader.

https://docs.google.com/viewer?a=v&pid=forums&srcid=MDUxNDQwNjExMTIwMzQzNjc3NDIBMTM4NDkwNDg5NzQ1NzQwNTI5MjgBb0xrYVFvbk5ZaDRKATQBAXYy
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 08, 2014, 04:06:27 PM
This was also released today:

"FHFA Directs Fannie Mae and Freddie Mac To Delay Guarantee Fee Changes"
http://www.fhfa.gov/webfiles/25937/GFeeDelay010814.pdf (http://www.fhfa.gov/webfiles/25937/GFeeDelay010814.pdf)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valueInv on January 13, 2014, 12:57:15 PM
Now, thats something:

http://www.bloomberg.com/news/2014-01-13/u-s-posts-record-december-budget-surplus-on-fannie-mae-payments.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 16, 2014, 01:31:11 PM
Via Twitter:
Bob Pisani ‏@BobPisani 1h
Fannie Mae $FNMA, Freddie Mac $FMCC spiking on reports House Democratic leaders unveiling plan for both to be sold as independent companies
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 16, 2014, 02:04:51 PM
Via Twitter:
Bob Pisani ‏@BobPisani 1h
Fannie Mae $FNMA, Freddie Mac $FMCC spiking on reports House Democratic leaders unveiling plan for both to be sold as independent companies

Not sure if this story is true, haven't been able to find any verification.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: brker_guy on January 16, 2014, 02:06:46 PM
http://www.ft.com/intl/cms/s/0/7f0588f2-7eec-11e3-8642-00144feabdc0.html#axzz2qbMB5bZP
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 16, 2014, 02:17:15 PM
Thanks Brker_guy!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on January 16, 2014, 03:12:05 PM
Here are the details of the plan:

Delaney, Carney, and Himes Announce Housing Finance Reform Proposal, Plan to Introduce Legislation this Spring
http://delaney.house.gov/media-center/press-releases/delaney-carney-and-himes-announce-housing-finance-reform-proposal-plan (http://delaney.house.gov/media-center/press-releases/delaney-carney-and-himes-announce-housing-finance-reform-proposal-plan)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on January 17, 2014, 08:55:51 AM
This is starting to remind me about how ggp went down back in the day. First theres no deal that can possibly be made, no way anything but utter failure is possible. Then someone throws out a shitty plan that just ruins everyone. Then the plans get progressively better and better. By no means is common and prefs out of the woods yet but it is looking better. Honestly and everyone knows this but it does rest on the court cases.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on January 24, 2014, 12:03:16 PM
Senators Urge Fannie, Freddie to Aid Lower-Income Households

http://www.nytimes.com/reuters/2014/01/24/business/24reuters-usa-housing.html?src=busln (http://www.nytimes.com/reuters/2014/01/24/business/24reuters-usa-housing.html?src=busln)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 11, 2014, 01:07:50 AM
Fannie-Freddie Fate Rests in Courts
Shareholder Suits Challenge U.S.'s Profit-Taking Structure
http://online.wsj.com/news/articles/SB10001424052702304450904579369293616973188?mod=WSJ_hps_sections_news (http://online.wsj.com/news/articles/SB10001424052702304450904579369293616973188?mod=WSJ_hps_sections_news)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 11, 2014, 03:24:09 PM
Its probably a Nick Timiraos right? Mind posting the content?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 11, 2014, 03:59:17 PM
Its probably a Nick Timiraos right? Mind posting the content?
]

It is.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 12, 2014, 02:27:02 PM
Thanks Far East
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 15, 2014, 04:43:13 PM
The Untouchable Profits of Fannie May and Freddie Mac

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 16, 2014, 06:36:05 AM
The Untouchable Profits of Fannie May and Freddie Mac

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1 (http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1)

The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on February 16, 2014, 11:18:05 AM
It will be interesting to see if the government will just re-instate the preferred and common shareholders and sell there warrants to prevent more of this coming out.  It appears if they do not they may lose the takings case and be penalized for misleading disclosures which may cost them more than re-instating the shareholders.  It nice to have Ralph Nader on your side.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 16, 2014, 11:36:48 AM
The Untouchable Profits of Fannie May and Freddie Mac

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1 (http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1)

The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.

This was an internal document in Treasury, so Fannie and Freddie may not have known about the policy until later.

The full income sweep policy was certainly disclosed in the 2012 PSPA revisions.

http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 16, 2014, 03:29:58 PM
The Untouchable Profits of Fannie May and Freddie Mac

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1 (http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?_r=1)

The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.

This was an internal document in Treasury, so Fannie and Freddie may not have known about the policy until later.


Yet in their 12/9/13 Motion to Dismiss, the government claims the FHFA, acting as conservator, acted alone in entering into the Third Amendment.  They claim the FHFA acted without any coercion from the Treasury and entered into an agreement where the Treasury gets all earnings from the GSEs forever.  They would have us believe that it's all one crazy coincidence that in 2012, the FHFA formalized an undisclosed internal Treasury policy that had been in place since 2010!   I am not gullible enough to believe it, and I don't think Judge Sweeney will either.  Discovery will get to the truth.
 
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 16, 2014, 03:44:59 PM
There's no coercion required, since FHFA and the Fannie and Freddie boards think that their duty in conservatorship is to deliver value to Treasury.

Private shareholders think that the conservatorship is for their benefit, but they need to prove that in court.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 16, 2014, 04:23:00 PM
There's no coercion required, since FHFA and the Fannie and Freddie boards think that their duty in conservatorship is to deliver value to Treasury.


Fasinating!  Could you provide a source for your claim?   Plaintiff attorneys would love to have a smoking gun like that.  Or maybe it's just another of their "undisclosed" policies?   Either way, don't waste your time, there is no such "duty" to Treasury. 
 
The goal of the conservatorship is "to perserve and conserve the Company's assets and property and put the Company in a sound and solvent condition".   Source: FHFA, page 1
 
http://www.treasury.gov/press-center/press-releases/Documents/fhfa_consrv_faq_090708hp1128.pdf (http://www.treasury.gov/press-center/press-releases/Documents/fhfa_consrv_faq_090708hp1128.pdf)
 
Nothing is mentioned about a "duty" to Treasury.  Rather, on page 3, discussing rights during the conservatorship:  "Stockholders will continue to retain all rights in the stock's financial worth;".   
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on February 16, 2014, 04:29:23 PM
Funny how the increasing prices of the preferred and common shares give holders of those shares even more incentive to fight harder. What a virtuous cycle.

And it's not like the rewards (cash flow) are shrinking as time passes. Every day, the pie gets bigger and the stakes get a little bit higher.

It's like a bully stole your pet rabbit and put it in his pocket.  He's going to look a little foolish when it turns out it was pregnant and ten end up scurrying out of his pants.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 16, 2014, 05:02:25 PM
Nothing is mentioned about a "duty" to Treasury.

The point of the preferred stock agreements is that FNMA and FMCC have a duty to pay interest and principal on the senior preferred. They have a higher priority to company value than public shareholders do.

What a lot of people don't understand is that public shareholder equity has been deeply negative since 2008, and it still is. The balance sheet and income statement are deceptive if you ignore the role preferred equity plays.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 16, 2014, 05:15:51 PM
FNMA and FMCC's lack of fiduciary duty to shareholders has been disclosed. From the latest FNMA 10K:

"Our directors do not have any fiduciary duties to any person or entity except to the conservator"
"we are no longer managed with a strategy to maximize shareholder returns"
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 16, 2014, 05:23:12 PM
By the way, do you really think Treasury had to coerce FHFA to sign the PSPAs? Isn't it more plausible that FHFA believes they are doing what they're supposed to do?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 16, 2014, 05:39:22 PM
FNMA and FMCC's lack of fiduciary duty to shareholders has been disclosed. From the latest FNMA 10K:

"Our directors do not have any fiduciary duties to any person or entity except to the conservator"
"we are no longer managed with a strategy to maximize shareholder returns"

This has no bearing on shareholder rights.  The conservator is appointed to conserve and perserve the asset of the institutions, which are owned by all shareholders.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 16, 2014, 05:45:08 PM
By the way, do you really think Treasury had to coerce FHFA to sign the PSPAs? Isn't it more plausible that FHFA believes they are doing what they're supposed to do?

I do think Treasury coerced the FHFA into violating its charter as conservator.  The FHFA director has no incentive to hand the keys to Treasury.  The Treasury, on the other hand,  has billions and billions of reasons to enter the Third Amendment.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: yadayada on February 17, 2014, 01:10:23 PM
can someone boil down for me why this would be a good investment? And not be thrown on the too hard pile. At first sight it looks pretty complex
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 18, 2014, 10:36:29 PM
Nader firing more shots


http://www.scribd.com/mobile/doc/207797531#fullscreen



Yada, I'll try and take a crack at summing it up in the next few days.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nodnub on February 19, 2014, 12:20:24 AM
By the way, do you really think Treasury had to coerce FHFA to sign the PSPAs? Isn't it more plausible that FHFA believes they are doing what they're supposed to do?

I do think Treasury coerced the FHFA into violating its charter as conservator.  The FHFA director has no incentive to hand the keys to Treasury.  The Treasury, on the other hand,  has billions and billions of reasons to enter the Third Amendment.

The problem is when you have to go to court to exercise shareholder rights.  That makes it hard to estimate the time required for payoff. Even if the courts agree with the shareholders then it can be a long time before all avenues of appeal are exhausted and you see any money from it. For a good example, look at several of the lawsuits against the US Govt for their actions during the Savings and Loan crisis.  Some of those cases dragged on for over 10-15 years.  I think some are still ongoing.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on February 19, 2014, 03:29:08 AM
Part of the appeal here to me is this is a wager in the Administration's over reach and reflective of an approach to law enforcement of do what I think is right in spite of the law/rules.  You see this in most of the issues the administration has had with courts and Congress.  What is even more incredible is that they see what they are doing is "correct" and those who disagree are political enemies.  I think folks have had enough of this way of combative government and whoever is the next President will have a less my way or the highway approach to governing.  In fact they have used the tea party as a scapegoat/rationale for there own very similar approach for dealing with issues.  With this in mind, I think the Freddie/Fannie issue will probably be resolved post 2017 unless the courts rule earlier on the over reach.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 19, 2014, 08:44:50 AM
can someone boil down for me why this would be a good investment? And not be thrown on the too hard pile. At first sight it looks pretty complex

I can summarize the bear case.

FNMA and FMCC were put into conservatorship because they were insolvent.  The book value of public shares (equity value minus senior preferred) has been deeply negative since 2008. Equity and profits in the last few years are an illusion - they belong entirely to the government according to the terms of the senior preferred shares.

The status quo is negative because they are currently shrinking and paying billions of dollars to Treasury. FNMA and FMCC shareholders need political action, or more likely court action, to recover any value.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on February 19, 2014, 10:29:02 AM
I feel like a lot of people are investing in this based on analysis that is compromised by emotion. (i.e. This is wrong, and I will be vindicated.)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on February 19, 2014, 10:54:11 AM
I feel like a lot of people are investing in this based on analysis that is compromised by emotion. (i.e. This is wrong, and I will be vindicated.)

If you look at all the incentives involved, they all heavily line up on one side.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on February 19, 2014, 11:01:56 AM
I feel like a lot of people are investing in this based on analysis that is compromised by emotion. (i.e. This is wrong, and I will be vindicated.)

If you look at all the incentives involved, they all heavily line up on one side.

You are correct and in investing in these types of situations in the past if you have somebody on your side willing to fight and has resources my experience has been good.  If these were not present I would not invest in these securities.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on February 19, 2014, 11:29:58 AM
I feel like a lot of people are investing in this based on analysis that is compromised by emotion. (i.e. This is wrong, and I will be vindicated.)

If you look at all the incentives involved, they all heavily line up on one side.

You are correct and in investing in these types of situations in the past if you have somebody on your side willing to fight and has resources my experience has been good.  If these were not present I would not invest in these securities.

Packer

Agreed.  This is a very complicated case and will require years of legal wrangling.  Small players, like me, wouldn't stand a chance against the government even with the merits on our side.  Fortunately, we have on our side willingness, resources, and some of the highest quality legal teams available.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 19, 2014, 02:25:08 PM
I feel like a lot of people are investing in this based on analysis that is compromised by emotion. (i.e. This is wrong, and I will be vindicated.)

If you look at all the incentives involved, they all heavily line up on one side.


Its not a matter of "analysis compromised by emotion." The truth is that the Treasury and FHFA have overstepped their mandate from congress. If the government did what it did as a private investor there would be no question as the value of the common and preferred being higher than where they are today.

The facts here are simple. Much has been accomplished
since the financial crisis:
• Both companies have been stabilized so that investors
and nations would continue to lend to them.
• Management has been replaced.
• Management has returned to the prudent
underwriting standards that guided both companies to
stability for decades.
• Both companies provide affordable financing for tens
of millions of Americans and enables them to buy a
home to raise their families.
• Both companies produce significant cash flow and
stable profits.
But, of course, in our opinion, much still needs to be done:
• The Government’s senior preferred investment must
be repaid in full, including a 10% annual return per
the terms of the original capital infusion (possible in
2014).
• Earnings must be allowed to stay within the companies
(not paid out to stakeholders) to build up the capital
base.
• The companies should start paying the coupons on the
pre-crisis preferred shares (reflecting the profitability of
both companies).
• The warrants to acquire 80% of the stock held by our
Government should be sold off to new investors (who
can contribute more capital if needed) generating a
significant profit that can be used to pay down our
national debt.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on February 21, 2014, 07:41:03 AM
Your move US government... I'm anticipating much more screaming and shouting reported in the media now

http://www.bloomberg.com/news/2014-02-21/fannie-mae-to-pay-u-s-7-2-bln-after-quarterly-profit.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 21, 2014, 08:23:34 AM
Heres the 10k

http://archive.fast-edgar.com//20140221/AA2ZA222H222L2S2222322328L4CZ2225862/


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 21, 2014, 10:04:26 AM
With Fannie and Freddie Debt Repaid to Taxpayers, Will Uncle Sam Turn Shareholders Into Zombie Investors?





http://www.forbes.com/sites/jonentine/2014/02/21/with-fannie-and-freddie-debt-repaid-to-taxpayers-will-uncle-sam-turn-shareholders-into-zombie-investors/ (http://www.forbes.com/sites/jonentine/2014/02/21/with-fannie-and-freddie-debt-repaid-to-taxpayers-will-uncle-sam-turn-shareholders-into-zombie-investors/)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Matson125 on February 21, 2014, 10:56:52 AM
Is there a reason why the Freddie mac common is slightly lower than the Fannie Mae common, looking at a chart there always seems to be a slight discount.  Is there a better credit profile at Fannie?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on February 21, 2014, 11:22:23 AM
Is there a reason why the Freddie mac common is slightly lower than the Fannie Mae common, looking at a chart there always seems to be a slight discount.  Is there a better credit profile at Fannie?

They are different companies. You can't compare share prices and expect it to be meaningful.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 24, 2014, 12:29:53 PM
Fannie's Fake Victory Lap

The mortgage giant's profits don't offset the cost of the financial crisis.



http://online.wsj.com/news/articles/SB10001424052702304275304579397452646208162?mod=WSJ_business_MoreArticles (http://online.wsj.com/news/articles/SB10001424052702304275304579397452646208162?mod=WSJ_business_MoreArticles)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on February 25, 2014, 05:37:57 AM
Nothing new, but Ackman sees 10 to 15X upside in the common in a legal victory:

http://blogs.wsj.com/moneybeat/2014/02/23/ackman-sees-big-upside-to-fannie-freddie-bet/

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 25, 2014, 10:30:29 AM
Fannie Mae Appoints New Chairman

Egbert Perry to Replace Philip A. Laskawy, Who Will Retire on March 31


http://online.wsj.com/news/articles/SB10001424052702303880604579405152787239682?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/news/articles/SB10001424052702303880604579405152787239682?mod=WSJ_hp_LEFTWhatsNewsCollection)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on February 26, 2014, 03:24:43 PM
Court grants Fairholme discovery motion.

http://blogs.wsj.com/moneybeat/2014/02/26/court-grants-fairholmes-discovery-motion-in-fannie-freddie-suit/


Hypothetical discovery:

Bruce: Can I see any documents you have related to the 2012 sweep?
Government: REDACTED

Bruce: Can I see your profitability forecasts for F+F?
Government: REDACTED

Bruce: Is there anything you're actually willing to show me?
Government: REDACTED you! And REDACTED that mother-REDACTED Ackman guy too.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on February 26, 2014, 08:33:01 PM
This is huge, nkp
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on February 27, 2014, 08:34:38 AM
Freddie Mac profit moves U.S. housing bailout further into black



http://in.reuters.com/article/2014/02/27/usa-housing-freddiemac-idINL1N0LW10X20140227 (http://in.reuters.com/article/2014/02/27/usa-housing-freddiemac-idINL1N0LW10X20140227)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on February 27, 2014, 09:08:07 AM
This is huge, nkp

That's what REDACTED said!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dowfin1 on February 27, 2014, 09:13:55 AM
Attached is a copy of the discovery order.  We'll see document demands, frivolous objections, multiple motions to compel/sanctions, and ultimately depositions of DeMarco, Geithner, Lockhart, and Paulson even before any hearing on the dismissal motion.  Promises to be a great sideshow.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on February 27, 2014, 10:20:02 AM
It's nice to have Ackman/Berkowitz on the "right" side of the trade, hopefully it turns out to be GGP v2.0
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: tiddman on February 28, 2014, 08:32:26 AM
can someone boil down for me why this would be a good investment? And not be thrown on the too hard pile. At first sight it looks pretty complex

For me the very simple explanation is that, when the government bails out a company, it is reasonable for them to be repaid the funds required for the bailout plus some reasonable return.  But it is not reasonable for them to simply take all future profits forever.

There is plenty of precedent for bailouts even before this crisis, both in the US and in other countries.  In the US the goal has been to bail the company out but then get it back on its feet, extract a pound of flesh, change management, and then return it to non-government investors.

With the Fannie/Freddie bailout the US government changed the script and went from charging a 10% rate on the funds to simply taking all of the profits forever.  This is clearly violates the spirit of capitalism that drives our economy.

It is even more interesting when you consider that for a long time, banks were actually required to hold preferred stock in Fannie/Freddie on their balance sheets if they wished to do business with Fannie and Freddie.  So the government required banks to hold these securities but then stepped in and made them worthless.

There will be much debate and wailing and gnashing of teeth over what to do with the companies, but I don't think it's tenable to leave them in this quasi-shareholder-owned state and funnel all profits to the government forever.  Whether or not the ultimate resolution provides value to shareholders or not is certainly speculative but if those profits don't go to the government, they have to go somewhere...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on March 02, 2014, 06:27:45 PM
Investor Fires Salvo Against Fannie, Freddie

http://online.wsj.com/news/articles/SB10001424052702304585004579415490523879118?mod=rss_economy&mg=reno64-wsj


Quote
Mr. Berkowitz said last week's letters followed a series of unsuccessful attempts to meet with the chief executives of both companies. "It's easy to see we're not welcome," he said, adding he was still waiting for a response. "If the directors have a pulse and five dollars in a bank account, I think they should be concerned because not responding to me would be bordering on gross negligence," he said.




Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on March 02, 2014, 08:12:19 PM
Pour it on them boys!

http://online.wsj.com/public/resources/documents/fanfredletter2030214.pdf


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: doughishere on March 02, 2014, 08:23:45 PM
berkowitz is not afraid of taking on.....everyone. He has got to be supremely confident of this to be now taking on the board.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 03, 2014, 11:20:01 AM
Fannie's Profits May Be Fleeting


http://online.wsj.com/news/articles/SB10001424052702304071004579411510434148896
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 05, 2014, 04:34:01 PM
Quote
Here’s one thing the funds buying stakes in Fannie MaeFNMA +3.40% and Freddie MacFMCC +3.70% have right: the two companies aren’t ever likely to run out of customers for their mortgage guarantees.
 
Part of the reason demand for securities backed by Fannie and Freddie isn’t going anywhere is that U.S. financial regulators all but require the largest banks to hold billions of dollars of them.
 
Under the liquidity coverage ratio rules proposed last year, banks with over $50 billion of assets are required to hold a portfolio of “high-quality liquid assets.” They are permitted to fill up to 40% of their liquidity portfolio with securities issued or guaranteed by the very safest foreign sovereigns, the World Bank and its regional clones, and the U.S. mortgage finance giants.
 
The Federal Reserve estimates that banks will need to hold $2 trillion of liquidity assets to meet the requirement.  Since Fannie and Freddie paper offers higher yields than most other approved securities, banks are likely to max out their 40% allowance with it. That implies an appetite for around $800 billion. Throw in a 15% haircut to the paper’s value imposed by regulators, and that grows to almost $950 billion.
 
Gives a whole new meaning to the phrase “Government Sponsored Entities.”


http://blogs.wsj.com/moneybeat/2014/03/05/wall-street-captivated-by-fannie-and-freddie/?mod=WSJBlog&mod=overheard
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: alertmeipp on March 05, 2014, 04:46:49 PM
I sold my remaining pfds (tiny position anyways) - I think the risk outweigh max 2x potential here
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on March 06, 2014, 02:28:14 AM
I bet 'ole Bruce disagrees :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 10, 2014, 10:30:37 AM
U.S. Projects $179 Billion Profit From Fannie Mae, Freddie Mac




http://www.bloomberg.com/news/2014-03-10/u-s-projects-179-billion-profit-from-fannie-mae-freddie-mac.html (http://www.bloomberg.com/news/2014-03-10/u-s-projects-179-billion-profit-from-fannie-mae-freddie-mac.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 10, 2014, 10:32:59 AM
Westhus Reaping Fannie Windfall to Rival Big Short




Quote
The 38-year-old hedge fund partner was the mastermind of Perry Capital LLC’s 2010 purchase of Fannie Mae (FNMA) and Freddie Mac preferred shares at 2 cents on the dollar.

Perry, which manages $10 billion, now has about $500 million riding on the preferred shares, even after several rounds of sales, according to a person familiar with the investments.




http://www.bloomberg.com/news/2014-03-10/westhus-reaping-fannie-windfall-to-rival-big-short-mortgages.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: globalfinancepartners on March 11, 2014, 11:41:02 AM
what's the story with the price move in the common shares today?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: xtreeq on March 11, 2014, 11:43:44 AM
what's the story with the price move in the common shares today?

I believe it's this http://www.bloomberg.com/news/2014-03-11/senators-release-details-of-new-bill-eliminating-fannie-mae.html
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on March 11, 2014, 12:07:18 PM
So the bill is to kill off the two companies, setup a new entity that would serve as a reinsurer of 90% of the losses and ask private entities (banks??) to assume the first 10% of the loss..

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: brker_guy on March 11, 2014, 11:07:38 PM
http://www.marketplace.org/topics/economy/plan-wind-down-fannie-and-freddie

Good story to listen to.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 12, 2014, 09:40:08 AM

U.S. Wind-Down Bill Clips Fannie Mae, Freddie Mac Shares


http://www.bloomberg.com/news/2014-03-12/u-s-wind-down-bill-clips-fannie-mae-freddie-mac-shares.html (http://www.bloomberg.com/news/2014-03-12/u-s-wind-down-bill-clips-fannie-mae-freddie-mac-shares.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on March 12, 2014, 10:11:23 AM
None of this is concerning or unexpected...yet.


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on March 12, 2014, 10:53:13 AM
This decline is phenomenal - I've been wanting to add more.

Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: peter buffet on March 12, 2014, 03:04:09 PM
Still up 33.3% not 50 %
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on March 12, 2014, 03:15:31 PM
This decline is phenomenal - I've been wanting to add more.

Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.

What evidence is there that preferred are in much better position than common? Yes they are senior, but in a downside legal scenario they are worth $0 and in an upside legal scenario they are both worth a lot more. What is the middle scenario (and the likelihood of it) where they don't live and die together?

Fairholme's preferred spinoff idea was a middle scenario, but it was dead on arrival, no real legislative interest.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on March 12, 2014, 05:33:06 PM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on March 12, 2014, 05:42:10 PM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

it's rule of law. these are public companies. there are rights associated with that. Ordinarily in usa, gov can't just confiscate shareholder wealth. this would set a terrible precedent. the us gov are just people we elected or hired to make decisions for us--for the public good. the thing is, the us gov can win, and shareholders can win. it just requires politicians to step up and think clearly and act for the public good. if you read the Fairholme letters to the BODs, it lays it all out right there.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on March 12, 2014, 05:42:30 PM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

1) I don't think the (conservative) House will be caught dead voting for this bill. They want government out of housing completely.

2) This bill seems really similar to Corker-Warner, and that bill stalled, likely due to intense backroom lobbying from the BBR (builders-bankers-realtors) lobby

3) All the builders-bankers-realtors coalition really needs to do is start a marketing blitz to the American public saying that after bailing out the banks and Goldman and AIG, the government now wants to get rid of the 30-year mortgage via elimination of Fannie and Freddie

Any ill will towards these organizations from the general public will likely quickly dissipate once the (hyperbolic) real estate implications are painted in terms America understands.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on March 12, 2014, 05:43:14 PM
My bad on the math. 33% it is.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on March 12, 2014, 05:52:17 PM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on March 12, 2014, 06:01:50 PM
In terms of a new gov't insurer, how much stomach does the public have for a new gov't program after Obamacare.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on March 12, 2014, 08:29:23 PM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.

Fannie Mae and Freddie Mac also package the mortgages into securities and sell/service them. Unless private market issuance really steps up, the liquidity in this market would largely be removed. If banks can't sell mortgages to be securitized they'll be less likely to accept the interest rate risk of a 30Y mortgage. Even if private issuers step in, they can't access capital as cheaply and would still result in more expensive products (i.e. higher 30Y mortgage rates).

Also, tax payers could ensure their money wasn't at risk by refusing to elect politicians who support these mass bail outs or demand higher capital ratios with the government's implicit backstop. Neither of these options require getting rid of the 30 Y.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on March 13, 2014, 08:37:18 AM
I don't have a position in these but have been trying to follow the events:

1) Can anyone briefly describe why it's unlikely that the current proposal by the Senate Banking Committee won't be executed on or why shareholders would be left with anything if it is?

It certainly seems easier to use Fannie and Freddie as opposed to hoping that private capital will step up as they're already in existence and have established themselves within a mutli trillion dollar market; however, there certainly seems to be political will to kill them. Even the average Joe, who is most likely to be hurt by losing the 30 year mortgage, doesn't seem to understand this implication and is generally behind the idea of dismantling them. How do you discount idiocy?

To your question #1, the value to shareholders would still be dependent on some sort of unwind of the sweep amendment from 2012, without which it will be really hard to have any recovery. But assuming that happens, shareholders would probably still have plenty of value even if this reform is executed. If you unwind the sweep and revert to the 10% dividend, Fannie's got a total capital stack (remaining gov't prefs + market prefs + equity market cap) of something like 70bn, and is earning perhaps 20bn/year in NIM and fees on its existing portfolio (which would be in full runoff if this reform is implemented). Depending on the speed of runoff and on credit losses, you could have plenty of value in the common.

To your #2, it's not clear to me that this is so stupid for the average Joe. Yes, he will perhaps pay more for his mortgage (maybe marginally so... if the last 90% is government guaranteed, the private capital first 10% can be pretty expensive and still produce a cheap result overall). But he's also paying taxes, and those taxes were (in the end very visibly) subsidizing risk-taking on behalf of Fannie's private shareholders. I also doubt the 30-year mortgage will disappear; the primary risk Fannie and Freddie reduce is the credit risk in mortgages which is generally not too much higher in a 30-year fixed structure than in other structure. I'd expect it would be moderately more expensive, as would almost all other conforming mortgages.

So your argument suggests that common and preferred are probably on the same boat. Is there any scenario when common loses and preferred wins?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 13, 2014, 08:43:08 AM
Corker on ending ‘too big to fail’ Fannie, Freddie



http://www.cnbc.com/id/101490928 (http://www.cnbc.com/id/101490928)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on March 13, 2014, 02:18:05 PM

So your argument suggests that common and preferred are probably on the same boat. Is there any scenario when common loses and preferred wins?

One possibility is that by the time you get the sweep undone, the firms are in relentless winddown and have no prospect of future earnings growth. Right now say the preferred offers a ~135% return to whatever date it gets taken out at par, in its upside case. To offer a similar return FMNA common would need a $50 billion market cap at the time of resolution, assuming no new shares are issued - the actual value might be higher or lower than this figure. While I agree that the common shares offer more upside optionality, this isn't coming cheaply when you are buying Fannie at a $20bn market cap.

There's also the fact that if the sweep is undone, something needs to happen to maintain the strong credit ratings of the GSEs. Undo the sweep amendment and you have massive balance sheets, only limited Treasury support and no book equity... not a formula for Treasury-like credit ratings. The companies might need to raise very large amounts of capital, so you could see meaningful dilution of the stock.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: brker_guy on March 13, 2014, 05:17:02 PM
Not sure if guys have seen this:

http://www.bloomberg.com/news/2014-03-12/senate-s-fannie-mae-wind-down-plan-faces-high-political-hurdles.html

http://www.bloomberg.com/news/2014-03-13/fannie-mae-investors-fate-to-be-decided-by-courts-crapo-says.html


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 14, 2014, 10:15:11 AM
Fannie Mae Liquidation Seen Sparing Preferred Holders




http://www.bloomberg.com/news/2014-03-13/fannie-mae-liquidation-seen-sparing-preferred-holders-mortgages.html (http://www.bloomberg.com/news/2014-03-13/fannie-mae-liquidation-seen-sparing-preferred-holders-mortgages.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on March 14, 2014, 01:01:14 PM
If the bill passes and the firms are placed into wind down, but Fairholme and Perry still win the suit, can money that the government has taken up until the point of the conclusion of the case be reversed and given back to shareholders? If so then the preferreds can still be made whole with a wind down, right?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 16, 2014, 09:05:30 PM
http://www.breakingviews.com/fannie-investors-may-be-using-magic-calculators/21136004.article
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 17, 2014, 08:17:13 AM
http://www.bloomberg.com/news/2014-03-17/fannie-mae-wind-down-deemed-threat-to-home-recovery-mortgages.html (http://www.bloomberg.com/news/2014-03-17/fannie-mae-wind-down-deemed-threat-to-home-recovery-mortgages.html)


Fannie Mae Wind-Down Deemed Threat to Home Recovery
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on March 17, 2014, 09:11:43 AM
 
"The bill aims to establish the new system within five years of enactment, though it provides a series of possible extensions, raising the prospect that Fannie and Freddie could continue to operate for at least another decade while the new infrastructure is built."
 
http://online.wsj.com/news/articles/SB10001424052702303287804579443601120329542?mod=WSJ_hps_sections_markets&mg=reno64-wsj (http://online.wsj.com/news/articles/SB10001424052702303287804579443601120329542?mod=WSJ_hps_sections_markets&mg=reno64-wsj)
 
Its a long shot, but even if the bill does become law the GSEs will be around for years and years.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 17, 2014, 02:43:19 PM
More Trouble Ahead for Investors in Fannie Mae and Freddie Mac

Hedge funds took a gamble on the shares of the former mortgage giants—a gamble they're likely to lose. 


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: brker_guy on March 19, 2014, 04:44:24 PM
Here is another well written article by Richard Bove, whom along with Berkowitz I consider amongst the best analysts of financial companies.

http://www.valuewalk.com/2014/03/fannie-mae-freddie-mac-crapo/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on March 19, 2014, 06:11:14 PM
Maybe a lawyer can answer this, but what happens if shareholders win the case but the companies are put into wind down? Do shareholders still have a claim on past taken profits? Or only future ones?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on March 25, 2014, 09:24:43 AM
Fannie Mae and Freddie Mac must not die



http://www.cnbc.com/id/101522658 (http://www.cnbc.com/id/101522658)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on April 03, 2014, 11:02:26 AM
http://www.ritholtz.com/blog/2014/04/have-gses-fully-repaid-the-treasury/

Have GSEs Fully Repaid the Treasury?

(http://www.frbatlanta.org/assets/images/cenfis/pubscf/nftv_140324.jpg)

Quote
What we can observe in the chart is that the 10 percent rate set in the senior preferred stock agreement is rather favorable to the GSEs over this period. The bond rate was over 15 percent at the time the GSEs were being put into conservatorship and the rate was being set on the senior preferred stock. The rate subsequently spiked at around 40 percent, and dropped below 10 percent only for brief periods prior to the latter part of 2013. [Author's note: Epstein points out that the GSEs also granted a warrant for the purchase of 79.9 percent of their common shares for a minimal price to the Treasury. However, at the time these warrants were granted, the GSEs were in financial distress and could not have survived without assistance. Thus, it is not clear these warrants had much value when granted.]

Thus, looking at the value of Treasury’s contribution relative to the GSEs’ pre-conservatorship business, we find that Treasury’s $188 billion senior preferred stock holdings understate the value of its contribution by attributing no dividends to Treasury in 2012−14, by ignoring the value of Treasury’s promise to absorb all of the GSEs’ losses, and by using a senior preferred stock dividend rate that likely provided inadequate compensation for the risk Treasury bore as a creditor.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on April 08, 2014, 09:51:13 AM
Housing Bill Threatened by Rift on Help for Disadvantaged

http://www.bloomberg.com/news/2014-04-08/housing-bill-threatened-by-rift-on-help-for-disadvantaged.html (http://www.bloomberg.com/news/2014-04-08/housing-bill-threatened-by-rift-on-help-for-disadvantaged.html)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on April 14, 2014, 10:38:31 AM
Housing industry asks $5 trillion question: what does Watt want?


http://www.cnbc.com/id/101581037 (http://www.cnbc.com/id/101581037)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on April 16, 2014, 07:52:23 AM
http://www.valuewalk.com/2014/04/imco-joins-chorus-against-fannie-mae-freddie-mac/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: indythinker85 on April 22, 2014, 10:00:50 PM
Tilson had 'secret' position in Fannie Mae since November http://www.valuewalk.com/2014/04/tilson-hlf-call-soda-fannie-mae/ (http://www.valuewalk.com/2014/04/tilson-hlf-call-soda-fannie-mae/)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on April 25, 2014, 05:44:21 PM


Fannie, Freddie Say Overhaul Would Boost Mortgage Rates

Companies Outline Concerns on Senate Bill to Replace Them


http://online.wsj.com/news/articles/SB10001424052702304788404579524093755984248?mod=U.S._newsreel_3 (http://online.wsj.com/news/articles/SB10001424052702304788404579524093755984248?mod=U.S._newsreel_3)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on April 25, 2014, 09:50:41 PM


Fannie, Freddie Say Overhaul Would Boost Mortgage Rates

Companies Outline Concerns on Senate Bill to Replace Them



http://online.wsj.com/news/articles/SB10001424052702304788404579524093755984248?mod=U.S._newsreel_3 (http://online.wsj.com/news/articles/SB10001424052702304788404579524093755984248?mod=U.S._newsreel_3)

I totally forgot about the incentives of the employees of fannie and freedie. of course they don't want change. of course they want status quo. Of course they don't want to have to worry about a wind down and finding a position at a new company.  People don't like change. They want to stay in their comfort zone. I know I do. It makes total sense that they are saying that "disaster" will strike without fannie and freddie!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on April 30, 2014, 12:32:51 PM

$190 Billion in Losses at Fannie Mae, Freddie Mac in Severe Downturn

http://www.bloombergview.com/articles/2014-04-30/fannie-and-freddie-would-only-lose-190-billion-in-another-crisis (http://www.bloombergview.com/articles/2014-04-30/fannie-and-freddie-would-only-lose-190-billion-in-another-crisis)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on April 30, 2014, 12:42:14 PM
silly article. that's because they haven't been recapped to provide way more capital, or changed their business plan yet to mitigate losses in a downturn.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on May 05, 2014, 02:03:54 PM
http://www.valuewalk.com/2014/05/ackman-talks-fannie-mae-freddie-mac/

ackman said conservative value 23$

http://blogs.wsj.com/moneybeat/2014/05/05/live-blogging-the-sohn-investment-conference/?mod=WSJ_LatestHeadlines
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on May 05, 2014, 02:45:15 PM
http://www.valuewalk.com/2014/05/ackman-cnbc-alternative-fannie-freddie/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on May 06, 2014, 06:30:49 AM
http://www.valuewalk.com/2014/05/fannie-mae-freddie-mac-bill-ackman-ira-sohn-112-page-slides/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on May 07, 2014, 10:13:20 AM
Diagnosing Fannie and Freddie’s Condition

http://blogs.wsj.com/moneybeat/2014/05/05/diagnosing-fannie-and-freddies-condition/ (http://blogs.wsj.com/moneybeat/2014/05/05/diagnosing-fannie-and-freddies-condition/)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on May 07, 2014, 11:05:16 AM
Diagnosing Fannie and Freddie’s Condition

http://blogs.wsj.com/moneybeat/2014/05/05/diagnosing-fannie-and-freddies-condition/ (http://blogs.wsj.com/moneybeat/2014/05/05/diagnosing-fannie-and-freddies-condition/)

Speaking at a Milken Institute conference last week, Freddie Mac chief Donald Layton explained that after one-time and temporary items are excluded, “our core earnings are a mere fraction of what has been recently reported.”

he has an incentive to say that-  he wishes to maintain the status quo. and this is what a caretaker CEO who, along with his friends, is destined to replaced in any overhaul, is bound to say. I don't believe the earnings are one time. I believe he is referring to loss reserves coming off.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on May 08, 2014, 03:23:30 PM
It’s Time to Get Off Our Fannie
Pershing Square Capital Management, L.P.


Ira Sohn Conference
May 5, 2014





only 111 slides.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on May 08, 2014, 06:49:22 PM
I was reading the 1949 edition of the Intelligent Investor and Graham points to a Lazarus-type rising from the dead situation in the Cotton Belt railroad.  The railroad was in bankruptcy and the common shareholder protested the fact that they were not a part of the plan all the way to the Supreme Court.  This took 12 years after declaring bankruptcy and by then the railroad had accumulated enough cash to pay off all creditors and resume operations by exiting bankruptcy with the common shareholders in tact.  I know FRE/FNM have more politics surrounding them but this has happened before.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: stahleyp on May 08, 2014, 07:00:48 PM
I was reading the 1949 edition of the Intelligent Investor and Graham points to a Lazarus-type rising from the dead situation in the Cotton Belt railroad.  The railroad was in bankruptcy and the common shareholder protested the fact that they were not a part of the plan all the way to the Supreme Court.  This took 12 years after declaring bankruptcy and by then the railroad had accumulated enough cash to pay off all creditors and resume operations by exiting bankruptcy with the common shareholders in tact.  I know FRE/FNM have more politics surrounding them but this has happened before.

Packer


Yeah, I remember reading about Kao from  Akanthos talking a bit about the possible similarities there from the 2011 Value Investing Congress, I think.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on May 08, 2014, 07:52:30 PM
I was reading the 1949 edition of the Intelligent Investor and Graham points to a Lazarus-type rising from the dead situation in the Cotton Belt railroad.  The railroad was in bankruptcy and the common shareholder protested the fact that they were not a part of the plan all the way to the Supreme Court.  This took 12 years after declaring bankruptcy and by then the railroad had accumulated enough cash to pay off all creditors and resume operations by exiting bankruptcy with the common shareholders in tact.  I know FRE/FNM have more politics surrounding them but this has happened before.

Packer

Let's say the GSEs have a similar outcome, and it takes 12 years as well. It wouldn't be that great of a return for the preferreds. And the dividends I believe are non-cumulative so those wouldn't be paid either, right?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on May 08, 2014, 08:04:47 PM
I was reading the 1949 edition of the Intelligent Investor and Graham points to a Lazarus-type rising from the dead situation in the Cotton Belt railroad.  The railroad was in bankruptcy and the common shareholder protested the fact that they were not a part of the plan all the way to the Supreme Court.  This took 12 years after declaring bankruptcy and by then the railroad had accumulated enough cash to pay off all creditors and resume operations by exiting bankruptcy with the common shareholders in tact.  I know FRE/FNM have more politics surrounding them but this has happened before.

Packer

It wouldn't be that great of a return for the preferreds.

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on May 10, 2014, 12:35:39 PM

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on May 10, 2014, 04:00:40 PM
Seems like there are several ways the preferreds could wind up being exchanged for common... either something like the Fairholme plan where the preferreds wind up with fair value or better, or a coercive exchange stripping the dividend blockers for the benefit of the common.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on May 10, 2014, 04:49:19 PM

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.
you're right he isn't specific. But he does say there are "several" ways in which Fannie and Freddie could become fully capitalized "more quickly". On the same slide he says treasury could allow f&f to "raise more capital". I don't believe that Fairholme is holding so much preferred in the hopes it trades at 95% of par and starts paying it's dividends. I believe his plan is to create a large stake in the common equity of the company. Ackman has different incentives. I believe the hedge fund holders of the preferred will play a significant role in how to restructure f&f. btw I participated in a plan (post crisis) that allowed a holder of Citigroup preferred/trups to exchange into common stock at a discount to then prevailing prices. the preferred do not have to be convertible to be exchanged for common stock.

even if an exchange offer never materializes, the pref could be a great investment. If there is a favorable court ruling or a negotiated compromise in the next year or so, the preferred could double almost overnight. Depending on your holding period that's not a bad outcome.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on May 11, 2014, 03:22:37 AM

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.
you're right he isn't specific. But he does say there are "several" ways in which Fannie and Freddie could become fully capitalized "more quickly". On the same slide he says treasury could allow f&f to "raise more capital". I don't believe that Fairholme is holding so much preferred in the hopes it trades at 95% of par and starts paying it's dividends. I believe his plan is to create a large stake in the common equity of the company. Ackman has different incentives. I believe the hedge fund holders of the preferred will play a significant role in how to restructure f&f. btw I participated in a plan (post crisis) that allowed a holder of Citigroup preferred/trups to exchange into common stock at a discount to then prevailing prices. the preferred do not have to be convertible to be exchanged for common stock.

even if an exchange offer never materializes, the pref could be a great investment. If there is a favorable court ruling or a negotiated compromise in the next year or so, the preferred could double almost overnight. Depending on your holding period that's not a bad outcome.

wellmont would be nice to hear from you. ackman has almost only common stock. what is his incentive? what will happen to common in your opinion?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on May 11, 2014, 01:55:50 PM
I think it's about size of the bet. he will invest a little in the hopes of getting a lot, similar to his bet on the HK dollar. I think it's a bet which he believes strongly in but doesn't want to put up as much capital as he would do if he bet on the pref. The fairholme plan would dilute him, which is why he opposes it. just conjecture and guesswork and could be way off base. interested in other takes...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on May 11, 2014, 02:35:06 PM
I think it's about size of the bet. he will invest a little in the hopes of getting a lot, similar to his bet on the HK dollar. I think it's a bet which he believes strongly in but doesn't want to put up as much capital as he would do if he bet on the pref. The fairholme plan would dilute him, which is why he opposes it. just conjecture and guesswork and could be way off base. interested in other takes...

thanks wellmont very much for your answer  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on May 12, 2014, 09:57:05 AM
Fannie, Freddie: Can't Purge 'Em? Merge 'Em


http://online.wsj.com/articles/fannie-freddie-cant-purge-em-merge-em-heard-on-the-street-1399842482?mod=Markets_newsreel_2 (http://online.wsj.com/articles/fannie-freddie-cant-purge-em-merge-em-heard-on-the-street-1399842482?mod=Markets_newsreel_2)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on May 13, 2014, 01:54:03 PM
two good short videos from Mel Watt.

http://www.brookings.edu/blogs/brookings-now/posts/2014/05/fhfa-mel-watt-fannie-mae-freddie-mac-current-statutory-mandate (http://www.brookings.edu/blogs/brookings-now/posts/2014/05/fhfa-mel-watt-fannie-mae-freddie-mac-current-statutory-mandate)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on May 13, 2014, 06:28:51 PM

U.S. Backs Off Tight Mortgage Rules

In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery



http://online.wsj.com/news/articles/SB10001424052702303851804579559673037406670 (http://online.wsj.com/news/articles/SB10001424052702303851804579559673037406670)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: BargainValueHunter on May 25, 2014, 08:16:34 AM
Excellent discussion on the FNMA/FMCC litigation that makes it seem as if Berkowitz may lose this one...

http://media.bloomberg.com/bb/avfile/Politics/Law/v9l4rApHubQE.mp3
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on May 25, 2014, 09:03:55 AM
disagree. I thought it was good, albeit superficial, rehash of the background of the situation by bloomberg reporters, not lawyers. There is a recording of Ted Olson floating around that I think does a much better job of discussing the legal questions involved in the cases.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on May 25, 2014, 02:21:59 PM
Agree with wellmont. It's a pretty bad summary of the Fannie & Freddie issues. "Emily," who tries to describe takings law completely misses the fact that there's such a thing as regulatory taking that doesn't require physical taking.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on May 25, 2014, 03:34:19 PM
What I find interesting is there are multiple jurisdictions this is being tried at so the possibility of one ruling in the plantiff's favor is higher.  If this happens then this would be a catalyst for a higher stock price.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on June 03, 2014, 09:01:45 AM
Carl Icahn acquired Fannie, Freddie shares from Fairholme: Filing

Activist investor Carl Icahn acquired 6.8 million common shares of Fannie Mae and 5.7 million common shares of Freddie Mac from Fairholme Funds, a court filing showed Tuesday.


Icahn, a billionaire investor known for taking big stakes in companies and pushing for management change, bought the shares in the major mortgage financiers in March, the filing showed.



http://www.cnbc.com/id/101727329 (http://www.cnbc.com/id/101727329)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on June 03, 2014, 01:15:12 PM
Icahn Bought $50 Million in Fannie, Freddie Shares From Fairholme Fund

Icahn Bought 6.8 Million Fannie Shares and 5.7 Million Freddie Shares in March, Court Filing Says


http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection)


Quote


Mr. Icahn bought 6.8 million shares of Fannie and 5.7 million shares of Freddie from Mr. Berkowitz's Fairholme Capital Management LLC, the court document states.
 
He paid $4.03 a share for the Fannie stake for a total of $27.5 million, and $4.04 a share for the Freddie shares for a total of $23.2 million, the document says. Mr. Icahn's deals would give him about 0.6% of Fannie shares outstanding, and 0.9% of Freddie.
 
 ...
Both of Mr. Icahn's transactions took place on March 11, a day when Fannie's common stock fell 31% and Freddie's tumbled 27%.

As of March 31, Fairholme Capital Management held 17.2 million shares of Freddie Mac's common stock, or 2.4% of the company, according to Morningstar Inc. MORN -0.83% The company owned 19.2 million shares of Fannie Mae, or 1.7% of the company, according to Morningstar. Fairholme also has large positions in Fannie and Freddie preferred stock.



I wonder why Bruce sold on That day. Am I reading this right? He sold on a huge down day?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on June 03, 2014, 05:52:11 PM
Icahn Bought $50 Million in Fannie, Freddie Shares From Fairholme Fund

Icahn Bought 6.8 Million Fannie Shares and 5.7 Million Freddie Shares in March, Court Filing Says


http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection)


Quote


Mr. Icahn bought 6.8 million shares of Fannie and 5.7 million shares of Freddie from Mr. Berkowitz's Fairholme Capital Management LLC, the court document states.
 
He paid $4.03 a share for the Fannie stake for a total of $27.5 million, and $4.04 a share for the Freddie shares for a total of $23.2 million, the document says. Mr. Icahn's deals would give him about 0.6% of Fannie shares outstanding, and 0.9% of Freddie.
 
 ...
Both of Mr. Icahn's transactions took place on March 11, a day when Fannie's common stock fell 31% and Freddie's tumbled 27%.

As of March 31, Fairholme Capital Management held 17.2 million shares of Freddie Mac's common stock, or 2.4% of the company, according to Morningstar Inc. MORN -0.83% The company owned 19.2 million shares of Fannie Mae, or 1.7% of the company, according to Morningstar. Fairholme also has large positions in Fannie and Freddie preferred stock.



I wonder why Bruce sold on That day. Am I reading this right? He sold on a huge down day?

Is it possible he got lucky? With such large transactions I can sear the counterparties agreeing to terms and fixing dates etc in advance. Maybe it just happened to coincide with the major down day.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Eye4Valu on June 03, 2014, 09:59:48 PM
Doesn't the sale by Fairholme at approx. $4 still represent a large gain for Fairholme? I believe Uncle Bruce got in much lower, but correct me if I'm wrong.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on June 04, 2014, 12:47:11 PM

By the end of this month, FHFA, charged by statute with a mandate of conserving and
preserving the assets of Fannie Mae and Freddie Mac, will have sent $158 billion from the
Companies’ treasuries to the government’s Treasury pursuant to the Net Worth Sweep—$130
billion more than Treasury previously would have received under the 10 percent fixed dividend
provided in its stock agreements. Treasury and FHFA would have this Court believe that they
had no idea the Net Worth Sweep would give Treasury such a windfall. The Net Worth Sweep
was needed, the agencies say, to save the Companies from a “downward spiral” caused by
borrowing money from Treasury to pay Treasury a cash dividend that could have been paid inkind,
without any borrowing. In their view, the massive transfer of wealth to Treasury is just a
happy (for the government) coincidence.

Of course, FHFA and Treasury are desperate to prevent this Court from looking too
closely at this narrative. And for good reason, as the contemporaneous statements from the
agencies in 2012 reveal a very different rationale for the Sweep Amendment: to prevent the
Companies from “retain[ing] profits” or “rebuild[ing] capital,” to begin the “winding up” of the
Companies’ affairs, and to “ensure [that] existing common equity holders will not have access to
any positive earnings from the [Companies] in the future.”

The agencies had no authority to embark on that course in 2012. Accordingly, Plaintiffs
ask this Court to vacate the illegal Sweep Amendment.


From the cross-motion for summary judgement filed two days ago by Perry/Fairholme/others in the APA complaint currently being held in DC District court.  (Document attached)  Good reading.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on June 04, 2014, 01:45:12 PM
Doesn't the sale by Fairholme at approx. $4 still represent a large gain for Fairholme? I believe Uncle Bruce got in much lower, but correct me if I'm wrong.

sometimes these guys like to sell and buy in one big chunk. that was valuable to fairholme. in addition, the strategic value of having Icahn engaged is helpful to fairholme objectives.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on June 05, 2014, 03:46:21 AM
Meanwhile the noose tightens in the takings case in Federal Court.  It is coming to a head with the Govt's desperate attempt to avoid handing over discovery materials relevant to the background and current thinking of the sweep amendment by offering a Motion for Protective Order.   


http://timhoward717.com/2014/05/30/motion-for-protective-order-filed-53014/ (http://timhoward717.com/2014/05/30/motion-for-protective-order-filed-53014/)


http://timhoward717.com/2014/06/01/last-gasp/ (http://timhoward717.com/2014/06/01/last-gasp/)


What do they have to hide?  Apparently a lot as they claim disclosure will destabilize the world economy! The length and weakness of the govt's argument against supplying discovery materials is a strong indication the information is devastating to the govt's claim that sweep amendment was effected to "stabilize" the GSEs. 


Judge Sweeney has ordered a joint status conference for tomorrow.  A ruling against the govt here may force the end game to come much sooner than the market has estimated. 


Preferreds trading at 36-40 cents on the dollar.


Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on June 25, 2014, 03:29:58 AM
It will be interesting to see if the government will just re-instate the preferred and common shareholders and sell there warrants to prevent more of this coming out.  It appears if they do not they may lose the takings case and be penalized for misleading disclosures which may cost them more than re-instating the shareholders.  It nice to have Ralph Nader on your side.

Packer

With both cases at a critical juncture the spring is wound tight.  Informed speculation that either/both case(s) could be blow open any day can be found on this site:
 
http://timhoward717.com/2014/06/25/order-fairholme-case/#comments (http://timhoward717.com/2014/06/25/order-fairholme-case/#comments)
 
I am sure both teams of attorneys follow this site as is is the best source of commentary about case developments.
 
Preferreds are still trading at 35-40 cents on the dollar.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: phil_Buffett on June 25, 2014, 06:20:25 AM
It will be interesting to see if the government will just re-instate the preferred and common shareholders and sell there warrants to prevent more of this coming out.  It appears if they do not they may lose the takings case and be penalized for misleading disclosures which may cost them more than re-instating the shareholders.  It nice to have Ralph Nader on your side.

Packer

With both cases at a critical juncture the spring is wound tight.  Informed speculation that either/both case(s) could be blow open any day can be found on this site:
 
http://timhoward717.com/2014/06/25/order-fairholme-case/#comments (http://timhoward717.com/2014/06/25/order-fairholme-case/#comments)
 
I am sure both teams of attorneys follow this site as is is the best source of commentary about case developments.
 
Preferreds are still trading at 35-40 cents on the dollar.

thanks onyx1 for the site.  :) hopefully we will win
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on June 25, 2014, 07:05:37 AM
I have recently flipped from thinking that this case won't be won to thinking that the case can be won. About two months ago, I started thinking that the allowance of discovery would prove to be the downfall of the Sweep Amendment. Page 26 of the Perry Injunction seems to agree:

Quote
Separately, this Court cannot uphold the Sweep Amendment as within FHFA’s statutory authority because FHFA has not submitted an administrative record explaining its decisionmaking process. The APA’s requirement that review of agency action be on the “whole record,” 5 U.S.C. § 706, applies not only to arbitrary-and-capricious review, but also to whether an agency “acted within the scope of [its] authority.” Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971). FHFA has refused to compile or file an administrative record in this case, despite its tacit concession that it was required to do so by the Federal Records Act. Compare APA Br. 47-48, with FHFA Reply 52-53. It instead submitted a “Document Compilation” with cherry-picked documents and a declaration created for this litigation that FHFA self-servingly contends “reflect[] the considerations that FHFA as Conservator took into account in executing the [Sweep] Amendment.” FHFA Reply 52; see also Dkt. No. 27, at 2. This submission is not an administrative record. See APA Br. 46-51. When the APA says the “whole record,” that means, “neither more nor less than what was before the agency at the time it made its decision.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010).

FHFA tries to shift the burden to Plaintiffs, saying they have failed to overcome the “strong presumption of regularity” for FHFA’s Document Compilation. FHFA Reply 53. But “t is the agency’s responsibility to compile” an administrative record in the first instance. Marcum, 751 F. Supp. 2d at 78. Only after the agency submits an administrative record can the “presumption of regularity” apply. See id. Here, however, FHFA admits that it never created an administrative record. See Dkt. No. 27, at 2 (“Defendants FHFA and DeMarco are not required to—and have not—created or maintained an administrative record relating to the execution of the Third Amendment.” (emphasis added)). No presumption of agency “regularity” can make the Court pretend that a “document compilation” is an administrative record, when the Agency admits that no such record exists. See Safe Extensions, Inc. v. FAA, 509 F.3d 593, 600 (D.C. Cir. 2007) (“If the [agency’s] documents fail to demonstrate the reasonableness of its decision, it means that the agency either has chosen not to write down the reasons for its decision or is unable to do so. Neither possibility is acceptable under the [APA].”).

The interesting thing is that under the APA and the Chevron doctrine, administrative agencies can do almost whatever they want so long as they have a rational reason to do so -- except that they have to show that they had a rational reason, and here they cannot establish an evidentiary record showing that they have done that.

IMHO, that's pretty damning.

I suspect that a court would give them leeway had this happened in the middle of the crisis (circa 2008-2009) where speed was of the essence, but 2012 is a completely different story.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on June 25, 2014, 08:28:31 AM
I have recently flipped from thinking that this case won't be won to thinking that the case can be won. About two months ago, I started thinking that the allowance of discovery would prove to be the downfall of the Sweep Amendment. Page 26 of the Perry Injunction seems to agree:


     The cross motion for summary judgement (linked below) is one damning argument after another against the government's defense that basically amounts to "we are the government, we can do as we please". Choose your weapon:  exceeding authority, violations of the APA, failure to consider required alternatives, violations of fiduciary duties, to name just a few.  A judgement could happen anytime by Reagan-appointed Judge Lamberth that would have the dramatic effect of tossing out the entire 2012 sweep amendment.
 
     Apply a 20% discount to the preferred shares for appeal risk and the current holders would still enjoy a double from today's prices.


http://timhoward717.files.wordpress.com/2014/06/6214-perry-reply-in-support-of-summar-judgement.pdf (http://timhoward717.files.wordpress.com/2014/06/6214-perry-reply-in-support-of-summar-judgement.pdf)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on June 25, 2014, 08:47:38 AM
Well, briefs are written to be persuasive...

A ruling on most of the other things will seem to go a little further than is necessary. Most judges dislike making rulings that are too far beyond necessity because it opens them up to reverse on appeal, and judges, having egos like the rest of us, dislike being told that they are wrong.

My sense is that a ruling, if it comes to that, will come on the fact that the government has failed to satisfy the burden of proving that it had a rational reason for its decision given that there is no evidentiary trail. So the most likely outcome, IMO, is that they will rule on the lack of meeting this burden of proof without necessarily ruling on any of the other claims.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Vish_ram on June 25, 2014, 09:14:07 AM
Thanks for the links Onyx1.

I just found out that Tim Howard was the ex-CFO of Fannie Mae. I ordered his book on amazon now.

http://www.amazon.com/Mortgage-Wars-Big-Money-Politics-Collapse-ebook/dp/B00GJNTO4U/ref=sr_sp-atf_title_1_1?ie=UTF8&qid=1403712820&sr=8-1&keywords=tim+howard+fannie+mae

 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on June 25, 2014, 09:40:23 AM
Well, briefs are written to be persuasive...

A ruling on most of the other things will seem to go a little further than is necessary. Most judges dislike making rulings that are too far beyond necessity because it opens them up to reverse on appeal, and judges, having egos like the rest of us, dislike being told that they are wrong.

My sense is that a ruling, if it comes to that, will come on the fact that the government has failed to satisfy the burden of proving that it had a rational reason for its decision given that there is no evidentiary trail. So the most likely outcome, IMO, is that they will rule on the lack of meeting this burden of proof without necessarily ruling on any of the other claims.

That being said, it doesn't matter which one they win on. They only need one.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: jay21 on June 25, 2014, 11:49:46 AM
Thanks for the links Onyx1.

I just found out that Tim Howard was the ex-CFO of Fannie Mae. I ordered his book on amazon now.

http://www.amazon.com/Mortgage-Wars-Big-Money-Politics-Collapse-ebook/dp/B00GJNTO4U/ref=sr_sp-atf_title_1_1?ie=UTF8&qid=1403712820&sr=8-1&keywords=tim+howard+fannie+mae

I read someone's quick blurb on this book.  Basically he is arguing that the GSEs were better than private capital in terms:

Tim’s Turn
Last week, I asked Tim to describe the final draft sent to McGraw Hill.
One of the most bizarre aspects of the current debate on mortgage finance reform is that the consensus objective for reform-- getting rid of the GSEs and providing a greater role for the private sector-- was the goal of the anti-Fannie Mae cabal in the late 1990s and early 2000s, and pursuing it is what led to the 2008 mortgage crisis!  Why would anyone want to do the same thing again?   We shouldn't, but the major proponents of today’s ideas for mortgage reform are the large banks and their supporters, and they're the ones who control the narrative about what happened during the crisis.  The story they tell about the crisis is completely wrong, but before my book there has been no fact-based alternative view for anyone to consider instead.  That's what "The Mortgage Wars" will offer. It makes clear how and why the crisis evolved-- using actual events and developments in the correct sequence in which they occurred-- and it's told from the perspective of an insider who lived through the events he's relating.

As I've noted before, the mortgage crisis was the result of a fight between the supporters and the opponents of the GSEs over who would control the largest credit market in the world.  Fannie and Freddie always had been controversial, but the controversy got serious in the late 1990s, when two decades of banking deregulation produced giant financial services companies (mostly banks) with national ambitions who viewed Fannie and Freddie's dominant position in the mortgage market as a threat to those ambitions.  They came to Washington to try to convince policymakers and regulators to replace a mortgage finance system based on the GSE with one based on private-market mechanisms and incentives, with very little government involvement or regulation.  Fannie Mae fought back, and what I call "the mortgage wars" began.  The banks and their supporters succeeded in getting control of the mortgage standard-setting process in 2004-- when private label mortgage-backed securities accounted for over half of all new MBS issues for the first time ever-- and that got the bubble going.  Fannie Mae was pulled into it after OFHEO used allegations of accounting fraud-- subsequently shown by Federal District court judge Leon to have been completely invented-- to oust Fannie Mae's top leadership and force the company to change its risk management organization and practices.  But even with that, five years after crisis ended it is clear that Fannie Mae's mortgages performed twice as well as the banks' and four times better than those put into private-label securities.

The GSE-based system was the best and safest in the country's history.  The bank-based private-market system that replaced it in the mid-2000s-- with the support and assistance of the Treasury, the Fed and the Bush administration-- led to a catastrophic failure that ended up killing everybody, including the GSEs.  Anyone with an accurate understanding of what happened during the mortgage crisis, and why it happened, would be highly unlikely to ever again fall for the siren song of basing an $11 trillion market essential to the country's economic health on free-market principles with no government oversight or regulation.

http://www.restorefanniemae.us/mortgagewars

I find quite a bit of what he is saying to be troubling.  He compares GSE performance to private performance, except the credit quality is widely different.  If the private capital system held on to all the super prime products that the GSEs hold, the performance would not look so unequal.  If the performance of the PL RMBS products were so poor, why did the GSEs hold on to so many?  The expansion of their retained portfolio caused a huge increase in the demand for these products. 

I would suggest All the Devils Are Here as a counterweight to this book, which will probably be very pro-GSE.  All the Devils are Here came off as somewhat objective to me as I believe it praised the turnaround efforts of the GSEs in the 80s and 90s and cast them negatively in the late 90s and early 2000s.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on July 05, 2014, 03:38:52 PM
I just watched the first panel (The Reorganization of Fannie and Freddie) discussion of the NYU conference on the future of Fannie and Freddie. http://www.nyujlb.org/2013/08/1184/

The two panelists sitting on the right talked about some ways in which the shareholders could lose the case, or not make much money even if we win.

One of them talked about how the third amendment can be seen as the FHFA following their fiduciary duty by protecting the bond holders under the assumption that the equity holders would be wiped out with or without the third amendment. He said this idea would be based on the GSEs having to borrow money from Treasury to pay the dividend in all but the last quarter before the third amendment signed. This "borrowing to pay the dividend" would keep increasing the liquidation preference well into the future, putting the bond holders at risk, whom the FHFA does have an obligation to protect. This argument that the FHFA was acting to protect the capital structure and therefore was allowed to do this as a conservator, would work against us obviously.

The other one of the two panelists stated that the Court might reward the plaintiffs only the IV of the common and preferred shares on the day of the 3rd amendment. He demonstrated that a simple DCF projecting 2Q-2012 profits into the future wouldn't amount to much value after subtracting out the $189 billion liquidation preference. That DCF would be flawed because it wouldn't include the massive write downs of the valuation allowance and release of loan loss reserves that happened in 2013.

Would love to hear the board's opinion on these risks. The two panelists I am referring to start talking at 35:30.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 07, 2014, 02:15:25 PM
I'll take a crack at the response:

(1) Protecting the Bondholders

(I'm assuming by bondholders, you mean the government preferred shareholders.)

Assuming, arguendo, that the FHFA was just protecting the bondholders, that does not explain why the amendment should continue in effect now that the bondholders have received in excess of the amount that they initially put up in principal. The capital structure has been protected, and the government bondholder's cup runneth over.

(2) The Intrinsic Value Question

I think you answered your own question there. The intrinsic value of a security is the sum of all discounted cash flows that will accrue to the securityholder over the life of the security. Usually, this creates a problem because the future is unknowable. However, we have an additional two years of profitability that provides us with a better sense of the intrinsic value of the common and preferred shares -- so why would anyone create a DCF projecting the 2Q2012 profits in perpetuity when we already know that doesn't match reality?

---

As a side note, a great opinion piece released in the WSJ yesterday:

http://online.wsj.com/articles/william-isaac-playing-semantic-games-with-fannie-and-freddie-investors-1404683708?mod=yahoo_hs
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Eye4Valu on July 07, 2014, 02:47:46 PM
Do you think that the commentator providing the posts at http://timhoward717.com is Ralph Nader? If not,  any guesses at to who it is?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 17, 2014, 07:10:08 AM
I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 17, 2014, 07:11:53 AM
I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

How large is uncomfortably large? (If you're okay with sharing that.)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on July 17, 2014, 07:13:07 AM
I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

How large is uncomfortably large? (If you're okay with sharing that.)

Large enough to not want to share  :)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 17, 2014, 07:14:07 AM
I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

How large is uncomfortably large? (If you're okay with sharing that.)

Large enough to not want to share  :)

Haha, fair enough.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: ap1234 on July 17, 2014, 08:09:59 AM
Does anyone have thoughts on the Delaney, Carney and Himes reform legislation? This seems to be the best proposal to date (better than the Johnson-Crapo bill, etc.). I know nothing is likely to be resolved before mid-term elections but this proposal seems to be a potential long-term solution to housing reform.

http://delaney.house.gov/news/press-releases/delaney-carney-and-himes-introduce-housing-finance-reform-legislation

The Delaney bill attempts to preserve the 30 year fixed-rate, prepayable mortgage as well as keep home ownership affordable. These were both the arguments for why Fannie/Freddie can’t be replaced (i.e. previous private market solutions would be disruptive to the housing recovery by increasing the cost of home ownership).

I would love to hear anyone’s thoughts on what the Delaney bill and what this could mean for Fannie shareholders (i.e. is Fannie common worthless if the Delaney bill is passed)?
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on July 17, 2014, 08:26:39 AM
How does Delaney hope to bring in the immense amount of private capital that would be needed for his bill to succeed?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on July 17, 2014, 09:40:56 AM
The bill winds down Fannie Mae’s and Freddie Mac’s current activities and revokes their charter, but allows them to be sold and recapitalized as entities with different business plans without any of their current unique powers.

this of course is a confusing statement on it's face, that lacks specificity. However, one thing is clear. If they wipe out the rights and value of PRF and common shareholders, they could never recapitalize the new entities. They would never attract new capital. The most likely outcome still is a compromise between regulators and holders that will preserve value for stakeholders, and create a plan to continue and strengthen fannie and freddie structures. the regulating authorities are now figuring out how to extract themselves from this terrible mistake.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on July 17, 2014, 11:01:26 AM
In this environment it would probably be easy enough to find investors for the equity tranches. Look at the absolute thirst for CLO paper of all seniorities. MBS structured in the way proposed here would need less equity than a CLO and offer much better cash arbitrage - the senior paper would likely be very, very cheap as the credit risk is pretty benign and the funding would be better than under the current system (e.g. for banks, Ginnie Mae's actual guarantees are meaningfully more useful than Fannie/Freddie quasi-guarantees). It's probably easy to get a modelled IRR of 15% for the equity - seems like it would be possible to eventually get to the $500bn market size you'd need for that.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on August 07, 2014, 11:59:44 AM
Fannie, Freddie Settle Into Post-Crisis Norm

Earnings Fall as One-Time Events Fade; Treasury to Get $5.6 Billion Dividend Payment



http://online.wsj.com/articles/fannie-freddie-settle-into-post-crisis-norm-1407434053?mod=WSJ_hp_LEFTWhatsNewsCollection (http://online.wsj.com/articles/fannie-freddie-settle-into-post-crisis-norm-1407434053?mod=WSJ_hp_LEFTWhatsNewsCollection)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 07, 2014, 12:21:56 PM
Does anyone know why Ackman's common stock holdings never show up in the Pershing Square 13F?

http://www.sec.gov/Archives/edgar/data/1336528/000117266114001128/xslForm13F_X01/infotable.xml
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on August 11, 2014, 02:04:25 PM
Time for Fannie and Freddie Investors To Surrender


http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5 (http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 11, 2014, 02:20:35 PM
Time for Fannie and Freddie Investors To Surrender


http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5 (http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5)

Not yet.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on August 11, 2014, 03:20:08 PM
Looks like Carney is using the face value of the credit line, not accounting for the fact that it was fully paid back.

Every month or so, he writes a superficial article about F+F to stoke the flames. No one takes him very seriously.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Matson125 on August 11, 2014, 04:33:41 PM
Does anyone know why Ackman's common stock holdings never show up in the Pershing Square 13F?

http://www.sec.gov/Archives/edgar/data/1336528/000117266114001128/xslForm13F_X01/infotable.xml

Thats a good question.  I was recently looking over Richard Perry's 13F and the pfd's that he holds are not listed either http://www.sec.gov/Archives/edgar/data/919085/000114036114020916/xslForm13F_X01/form13fInfoTable.xml

Fairholme lists both common and pfd
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 13, 2014, 10:36:36 AM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
It does not look like the government attorneys are winning themselves any friends by dragging on production.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on August 13, 2014, 10:50:09 AM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Appreciate the color. Very cool that you were able to sit in on the conference!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: enoch01 on August 13, 2014, 11:07:42 AM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Thanks for the notes.  This is getting interesting.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 13, 2014, 11:31:40 AM
If anyone is thinking about attending the next joint status conference (all open to the public), I think it would be very much worth your time.

Also, we should be expecting briefs (in the next week) on the issue about producing documents relevant to whether the FHFA was directed by Treasury or other governmental agencies to enter into the 2012 Amendment -- as best as I understood the exchange, the government is claiming that it doesn't have to produce the documents because they might implicate other documents that were excluded by the compromise re privileged documents that came out a few weeks ago. Again, it seems that the government has produced zero documents relating to this issue -- though it is, noticeably, not claiming that such documents do not exist.

We'll know more when the briefs are filed though.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 13, 2014, 11:31:57 AM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Appreciate the heads up.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 13, 2014, 12:00:56 PM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Great color Merkhet, thank you for sharing your thoughts.   I will provide a link to the transcript when available.
 
The harder the government digs in, the more I am convinced of the weakness of their case.  I believe that the government is going to great lengths not only to avoid producing documents that hurt their case, but also to keep the original authorizing source for the confiscation out of the public eye.  I have no doubt that the genesis of this entire mess comes from the occupant of an office without corners.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 13, 2014, 12:13:58 PM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Great color Merkhet, thank you for sharing your thoughts.   I will provide a link to the transcript when available.
 
The harder the government digs in, the more I am convinced of the weakness of their case.  I believe that the government is going to great lengths not only to avoid producing documents that hurt their case, but also to keep the original authorizing source for the confiscation out of the public eye.  I have no doubt that the genesis of this entire mess comes from the occupant of an office without corners.

It's funny that you should say that, but Judge Sweeney mentioned something along those lines as well. I can't remember the exact quote, but she said that she didn't care if a directive came from Treasury or the White House re the 2012 Amendment. It sounded accusatory to me, and I only noted it because it sounded weird.

I'm sure that will make its way to the transcript, but you lose some of the context when it's reduced to just words on a page.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 13, 2014, 04:07:17 PM
Thanks for the update merkhet. I'm looking forward to the transcript.

These are probably some naive questions - but, 1) Can the government just destroy the documents so that they can't possibly be used as evidence?

2) Didn't the Judge say that leaked documents won't be allowed to be admissible as evidence, in order to protect the integrity of the Protective Order? So what is stopping from someone on the Defense's side from just releasing something incriminating to the public, anonymously, therefore nulling it's use in court?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 13, 2014, 05:37:13 PM
Thanks for the update merkhet. I'm looking forward to the transcript.

These are probably some naive questions - but, 1) Can the government just destroy the documents so that they can't possibly be used as evidence?

2) Didn't the Judge say that leaked documents won't be allowed to be admissible as evidence, in order to protect the integrity of the Protective Order? So what is stopping from someone on the Defense's side from just releasing something incriminating to the public, anonymously, therefore nulling it's use in court?

(1) I suspect that destroying documents puts you in hotter water than losing the case, but, yes, they could do that.

(2) The Protective Order is there to protect the defendants. Again, I suspect that getting away with this would be difficult and would put you in hotter water than losing the case.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 13, 2014, 06:17:38 PM
Thanks for the update merkhet. I'm looking forward to the transcript.

These are probably some naive questions - but, 1) Can the government just destroy the documents so that they can't possibly be used as evidence?

2) Didn't the Judge say that leaked documents won't be allowed to be admissible as evidence, in order to protect the integrity of the Protective Order? So what is stopping from someone on the Defense's side from just releasing something incriminating to the public, anonymously, therefore nulling it's use in court?

(1) I suspect that destroying documents puts you in hotter water than losing the case, but, yes, they could do that.

(2) The Protective Order is there to protect the defendants. Again, I suspect that getting away with this would be difficult and would put you in hotter water than losing the case.

Makes sense, but I'm thinking that this is the Government we are dealing with - they have the capacity to do some pretty shady things. How would the court even know if certain documents were destroyed, if they don't even know of their existence? It's pretty obvious to me that the investors have legal precedent. But the Government is in control of the evidence - and that's what scares me.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Packer16 on August 13, 2014, 06:44:21 PM
Especially when you are dealing with gov't folks who believe the ends justify the means.

Packer
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 13, 2014, 06:55:50 PM
Makes sense, but I'm thinking that this is the Government we are dealing with - they have the capacity to do some pretty shady things. How would the court even know if certain documents were destroyed, if they don't even know of their existence? It's pretty obvious to me that the investors have legal precedent. But the Government is in control of the evidence - and that's what scares me.

Destroying evidence is unlikely, IMO -- they would have to coordinate a complete destruction of evidence at FHFA and evidence at Treasury. I suspect that getting one agency to do this well would be a gargantuan task but two agencies in coordination? Damn near impossible.

Additionally, given that their response to plaintiffs has not been that there are not any documents that are responsive to their claims re documents between FHFA & Treasury, it would then probably be somewhat ridiculous for them to come forth and say that there is now suddenly nothing responsive to the discovery request establishing jurisdiction.

Besides, the important thing for them is to provide evidence once jurisdiction is established.

The government needs to provide the initial burden of proof that the FHFA had any rational reason for the enactment of the "net worth sweep." In theory, they have said that it was because they were worried that the GSEs couldn't pay them back, right? So then they need to provide the documents that prove that. This would usually be pretty easy...

...except...the FHFA has not bothered to maintain an administrative record of the considerations it made prior to enacting the 2012 Amendment. Instead, the FHFA provided a compilation of documents, after the fact, to support its decision to enact the 2012 Amendment. (This is in the 2014-06-02 Olson Reply.)

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 14, 2014, 07:37:59 PM
Common Shareholders of Fannie and Freddie, Including Pershing Square and Three Individuals, File Suit against United States Government

http://finance.yahoo.com/news/common-shareholders-fannie-freddie-including-003900827.html

Is Ichan really going to let Ackman fight this battle for him?, lol
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 16, 2014, 03:13:06 PM
I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:
  • Judge Sweeney seems to be trying her best to be fair to all parties.
  • Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  • Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  • The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  • At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
It does not look like the government attorneys are winning themselves any friends by dragging on production.

Here is the transcript for the August 13 Status Conference, courtesy of timhoward717.com.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 16, 2014, 05:17:00 PM
This is the part that really struck me while I was sitting in the courtroom. From Judge Sweeney:

Quote
And if the Justice Department receives documents from these two agencies, the conservators, showing in fact there was control, that’s hiding the -- I mean, I know three very fine attorneys, people of integrity, but I’m just saying, if that’s what you -- and you probably haven’t seen all the documents. But if you’re -- I don’t want instructions to be given to clients or to these entities that they don’t have to produce certain documents if, in fact, it’s going to answer the question, were these entities part of the United States Government. Were they controlled by Treasury? If that’s what the documents show, I realize I’m preaching to the choir saying that, you have to turn it over to Plaintiffs.

So, if you’re invoking privilege to block the Plaintiffs’ entryway into the courthouse door, you can’t do it. I know you know that, but you can go back and tell your clients I said so, and that might either make their life easier or more difficult or perhaps both, depending upon which issue you’re discussing.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: fareastwarriors on August 18, 2014, 11:57:21 AM
Snatching Defeat from Victory at Frannie


http://online.wsj.com/articles/heard-on-the-street-snatching-defeat-from-victory-at-frannie-1408294612 (http://online.wsj.com/articles/heard-on-the-street-snatching-defeat-from-victory-at-frannie-1408294612)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: topofeaturellc on August 18, 2014, 12:06:48 PM
I have to admit I really don't get this.  Putting aside whether or not FNM and FRE were insolvent, it would seem like the change from the divvy to the net worth sweep is irrelevant once they were in the conservatorship.  The terms of the conservatorship clearly state that the conservator has no fiduciary responsibility to anyone other than treasury.

I think they only way to win this is to prove the conservatorship was illegal.  And yet if you read the terms of the changes to the charters in '08 that was clearly legal.

Maybe you could argue people who bought the securities prior to the '08 and maybe '04 amendments were never compensated for the changes. Although I believe the original debentures basically said congress could change the law at any time.

Can someone explain to me what the legal argument is? Not the economic one. I know that one, agree with it, and fundamentally agree that in hindsight this was a confiscation of private property.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 18, 2014, 01:24:41 PM
The terms of the conservatorship clearly state that the conservator has no fiduciary responsibility to anyone other than treasury.


The terms of the conservatorship are that the conservator has to protect the assets of the company, with the goal of becoming profitable and returning the company to the shareholders once that happens. Sweeping most of the assets to Treasury is the opposite of that.

Furthermore, they claim the net worth sweep was in fact in the best interest of the shareholders because the company was in a state of perpetual borrowing to pay back the dividend, due to continuous losses. However, the sweep was enacted right after the GSEs started reporting profits again, which makes it hard to prove that it was necessary (not that it makes sense anyway), particularly given the huge valuation allowance for the DTA that was present on the balance sheet at the time.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 18, 2014, 01:29:10 PM
Makes sense, but I'm thinking that this is the Government we are dealing with - they have the capacity to do some pretty shady things. How would the court even know if certain documents were destroyed, if they don't even know of their existence? It's pretty obvious to me that the investors have legal precedent. But the Government is in control of the evidence - and that's what scares me.

Destroying evidence is unlikely, IMO -- they would have to coordinate a complete destruction of evidence at FHFA and evidence at Treasury. I suspect that getting one agency to do this well would be a gargantuan task but two agencies in coordination? Damn near impossible.

Additionally, given that their response to plaintiffs has not been that there are not any documents that are responsive to their claims re documents between FHFA & Treasury, it would then probably be somewhat ridiculous for them to come forth and say that there is now suddenly nothing responsive to the discovery request establishing jurisdiction.

Besides, the important thing for them is to provide evidence once jurisdiction is established.

The government needs to provide the initial burden of proof that the FHFA had any rational reason for the enactment of the "net worth sweep." In theory, they have said that it was because they were worried that the GSEs couldn't pay them back, right? So then they need to provide the documents that prove that. This would usually be pretty easy...

...except...the FHFA has not bothered to maintain an administrative record of the considerations it made prior to enacting the 2012 Amendment. Instead, the FHFA provided a compilation of documents, after the fact, to support its decision to enact the 2012 Amendment. (This is in the 2014-06-02 Olson Reply.)



I realized I forgot to reply to this. Thanks for the explanation. This does help alleviate some of the concern for me.

Really glad to see someone as persistent as Ackman on board now; especially because I own the commons.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: topofeaturellc on August 18, 2014, 01:41:10 PM
The terms of the conservatorship clearly state that the conservator has no fiduciary responsibility to anyone other than treasury.


The terms of the conservatorship are that the conservator has to protect the assets of the company, with the goal of becoming profitable and returning the company to the shareholders once that happens. Sweeping most of the assets to Treasury is the opposite of that.

Furthermore, they claim the net worth sweep was in fact in the best interest of the shareholders because the company was in a state of perpetual borrowing to pay back the dividend, due to continuous losses. However, the sweep was enacted right after the GSEs started reporting profits again, which makes it hard to prove that it was necessary (not that it makes sense anyway), particularly given the huge valuation allowance for the DTA that was present on the balance sheet at the time.

Can you provide some docs for that?

My impression was the conservators goal was not to protect the assets of the company, but rather serve the interests of the government, which in this case are one and same with the senior pref holder.  Additionally I was under the impression that other than the act of entering into conservatorship itself the conservators decisions were not subject to judicial review, nor did they have any fiduciary responsibility to the capital holders. Not only that but the conservator has the ability to unilaterally abrogate any contracts the pre-conservator entities entered into.

The issue for me is purely legalistic.   The other stuff doesn't matter if the conservator can't be challenged.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 18, 2014, 02:21:27 PM
The terms of the conservatorship clearly state that the conservator has no fiduciary responsibility to anyone other than treasury.


The terms of the conservatorship are that the conservator has to protect the assets of the company, with the goal of becoming profitable and returning the company to the shareholders once that happens. Sweeping most of the assets to Treasury is the opposite of that.

Furthermore, they claim the net worth sweep was in fact in the best interest of the shareholders because the company was in a state of perpetual borrowing to pay back the dividend, due to continuous losses. However, the sweep was enacted right after the GSEs started reporting profits again, which makes it hard to prove that it was necessary (not that it makes sense anyway), particularly given the huge valuation allowance for the DTA that was present on the balance sheet at the time.

Can you provide some docs for that?

My impression was the conservators goal was not to protect the assets of the company, but rather serve the interests of the government, which in this case are one and same with the senior pref holder.  Additionally I was under the impression that other than the act of entering into conservatorship itself the conservators decisions were not subject to judicial review, nor did they have any fiduciary responsibility to the capital holders. Not only that but the conservator has the ability to unilaterally abrogate any contracts the pre-conservator entities entered into.

The issue for me is purely legalistic.   The other stuff doesn't matter if the conservator can't be challenged.

Part of your answer is here (http://www.law.cornell.edu/uscode/text/12/4617) and part of your answer is in the case law cited by both plaintiffs & defendants in their respective briefs, so fire up PACER.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: topofeaturellc on August 18, 2014, 02:30:05 PM
do you think any of that runs counter to what I said? That's not a rhetorical question.  I have no idea how to parse docs like that as a non-lawyer

also is there existing case law WRT to conservatorships? I thought there was not?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: topofeaturellc on August 18, 2014, 02:54:41 PM
saw this tweeted out.  seems interesting

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2480835 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2480835)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 18, 2014, 03:57:47 PM
do you think any of that runs counter to what I said? That's not a rhetorical question.  I have no idea how to parse docs like that as a non-lawyer

Yes, it does. I would suggest that if you can't parse the statute and/or the legal documents, then you should not invest in this. There are plenty of non-legal-based investment ideas out there.

also is there existing case law WRT to conservatorships? I thought there was not?

Yes. Fannie & Freddie are not the only financial companies to have ever come under conservatorship.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: topofeaturellc on August 18, 2014, 04:25:13 PM
I'm asking a question here.  I can actually parse the document and I do know what I'm doing even though I am not a lawyer. Its called being self-effacing.

I've personally chosen not to invest in the situation because it appears to me to be purely a legal argument, and yet no one seems to be able to tell me why this is such a clear cut open and shut case.

You are right, there are a great many other investments out there where economics matter. This isn't one of them.  That doesn't preclude me from being interested in discussing it.


What other federally chartered institutions have come under a conservatorship.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 18, 2014, 05:16:02 PM
I've personally chosen not to invest in the situation because it appears to me to be purely a legal argument, and yet no one seems to be able to tell me why this is such a clear cut open and shut case.

The simple reason is this:  It's not a clear cut open and shut case.   The only way to get your arms around the investment thesis is to take the first step and read each claim and response.  If you don't have a PACER account you can find them at timhoward717.com.  No one is going to spoon feed you bullet points.
 
 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PullTheTrigger on August 18, 2014, 06:49:36 PM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 19, 2014, 09:19:29 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 19, 2014, 10:07:39 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

In my opinion, the common thesis of 7x - 10x return rests in the fact that the government is doing the taxpayer an incredible disservice by not exercising its warrants and unlocking that value to the American taxpayer. Any future reform can include the existing common as it stands as opposed to wiping it out and starting over, effectively costing the taxpayer over $150 billion. I think logical heads in the Treasury/FHFA/government will eventually prevail and realize the value the taxpayer would sacrifice.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 19, 2014, 10:28:45 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

In my opinion, the common thesis of 7x - 10x return rests in the fact that the government is doing the taxpayer an incredible disservice by not exercising its warrants and unlocking that value to the American taxpayer. Any future reform can include the existing common as it stands as opposed to wiping it out and starting over, effectively costing the taxpayer over $150 billion. I think logical heads in the Treasury/FHFA/government will eventually prevail and realize the value the taxpayer would sacrifice.


The 7x-10x is certainly within the realm of plausible.  But consider all that would need to happen:  Prevailing powers in DC need to agree that the GSEs should be saved and then agreed to act on it, GSEs fees would need to be raised (Ackman suggests 60-100bp), and then the market would need to apply a 15x multiple to GSE earnings.  Whew! How can anyone put a time frame on it?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 19, 2014, 11:28:18 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

In my opinion, the common thesis of 7x - 10x return rests in the fact that the government is doing the taxpayer an incredible disservice by not exercising its warrants and unlocking that value to the American taxpayer. Any future reform can include the existing common as it stands as opposed to wiping it out and starting over, effectively costing the taxpayer over $150 billion. I think logical heads in the Treasury/FHFA/government will eventually prevail and realize the value the taxpayer would sacrifice.


The 7x-10x is certainly within the realm of plausible.  But consider all that would need to happen:  Prevailing powers in DC need to agree that the GSEs should be saved and then agreed to act on it, GSEs fees would need to be raised (Ackman suggests 60-100bp), and then the market would need to apply a 15x multiple to GSE earnings.  Whew! How can anyone put a time frame on it?

Even if it took 20 years, 7-10x corresponds to 10-12% per annum. I don't think it's the time frame thats going to work against you here.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on August 19, 2014, 11:33:00 AM
Well you would think that the taxpayer and politicians would be in favor of a > $100 billion dollar windfall to the American taxpayer. It's amazing to me that it is a hard sell. It also seems like a given for the need for fees to change, but that is not a necessity.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 19, 2014, 09:07:51 PM
So, I just read every post on timhoward717 and want to make sure I'm summarizing this correctly for myself as I'm looking to make this a significantly bigger position than the current speculative-starter position that I have.

1) Conservatorship is intended to restore the health of the company until it can be business as usual. This is supported by the following quotes:
Quote from: James Lockhart - Former FHFA head
Therefore, in order to tesore the balance between safety and soundeness of mission, FHFA has placed Fannie Mae and Freddie Mac into conservatorship. That is a statutory process designed to stabilize troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized."

Quote from: Judge M. Sweeney
"The Court agrees. Discovery will enable plaintiffs to confirm that such evidence exists with regard to the profitability and additionaly answer the question as to when, and how, the conservatorship will end."
Judge Sweeney confirming that the there should be an end envisioned for the conservatorship and that Fairholme may proceed with it's discovery to prevent case dismissal on the grounds that the court doesn't have jurisdiction since the FHFA isn't the government.

Quote from: Melvin Watt, Director of FHFA
"I am well aware, and regularly express my belief, that conservatorship should never be viewed as permanent or as a desirable end state and that housing finance reform is necessary."
Current FHFA head agreeing that conservatorship will end eventually...

2) The value still resides with the shareholders even though they forfeit other rights during conservatorship
Quote from: Treasury Fact Sheet
"Q: What happens to a company's stock during conservatorship?"
A: During the conservatorship, the Company's stock will continue to trade. However, by the statute, the powers of the stockholders are suspended until the conservatorship is terminated. Stockholders will retain all rights in the stock's financial worth; as such worth is determined by the markets."
Common and preferred shareholders are entitled to the value of such shares.

So it seems pretty clear to me that conservatorship is a temporary solution and that stock holders retain economic interests. The profit sweep goes against the very purpose of conservatorship which was to stabilize the company back to "business as usual." Any earnings above and beyond the 10% owed on the gov't preferred securities belongs to the other preferred security and common shareholders and were taken. Is there a gov't response to this allegation why this sweep was appropriate or justified?


That being said, the Treasury stated in a memo back in 2010 that they were committed to preventing existing shareholders from receiving economic profits - this is an admission that they thought profits were a possibility and the beginning of the formulation of plans to sweep those profits to the Treasury. They then coordinated the 3rd Amendment profit sweep in 2012 to ensure this was the case. This suggests to me that the FHFA was working in tandem/cooperation with the Treasury and it's motives. Does this not make it a government entity for the purposes of this case and validate the current courts jurisdiction and invalidate the government's request for dismissal? How does one define a government agency for the purposes of determining if the court has jurisdiction?

It seems like there are a few things that have to happen here for shareholders to receive value:

1) Profit sweep is overturned and profits are returned
 a) Can be accomplished via a ruling in favor of the Perry injunction or Fairholme's suit. Fairholme's case looks strong. I've    seen less commentary on Perry's.
2) Company's are recapitalized
 a) Retained profits
 b) Conversion of preferred to common
 c) Gov't exercises warrants
3) Company's leave conservatorship and return to BAU.
4) Shareholders profit

If anything above is incorrect, please feel free to correct me or provide counterpoints. I intend to read through this thread over the next couple of days but devoted my time to Tim's site this evening.

1) It seems like a safe assumption that Fairholme's discovery will lead to continuation of the suit given the documents that have already been leaked. It also seems like it's an open and shut case in regards to the conservator sweeping profits to the Treasury being contrary to the purpose of conservatorship AND unrightfully taking some profits that belonged to others. Does anyone have an opinion to the contrary or why the courts may rule otherwise?
2) Does the government have any incentive to kill these entities, screw shareholders, and forfeit massive profits?
3) What are the ways that preferred and common shareholders could be screwed in the recapitalization?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 20, 2014, 05:59:33 AM
Is there a gov't response to this allegation why this sweep was appropriate or justified?


Yes.  The gov't claims that the sweep was intended to calm "fears" in the market that the GSEs would enter into "death spiral" where gov't support capacity would eventually end because up until returning to profitability, the GSEs needed to draw from the Treasury's credit line and then immediately pay that money back to the Treasury in the form of a 10% dividend.  This doesn't pass muster on many levels.  Leaving aside the fact that GSEs debt showed no evidence of this "fear", the gov't preferred had a PIK option at 12% that could have been utilized if credit capacity ever became an issue.  Furthermore, and more significantly for the legal case, this was an after-the-fact justification for the sweep.  The courts afford great deference to federal agencies actions as long as they can show they acted reasonable.  In order to show reasonableness, the agencies are required to compile an administrative record prior to taking action to demonstrate to an outside reviewer that they deliberated and considered alternative actions.  This is a strict requirement of the APA and the initial burden of compilation falls on the agency.  But once complete, an administrative record usually provides a tremendous shield against wronged parties claiming that the agency acted in an arbitrary manner.  Will a court find that the FHFA acted reasonable?  The answer is likely no.  Why?  Because the FHFA failed to compile an administrative record and admits to this failure.  This alone is justification for vacating the sweep. See Perry Injunction for more details 13-1053.


That being said, the Treasury stated in a memo back in 2010 that they were committed to preventing existing shareholders from receiving economic profits - this is an admission that they thought profits were a possibility and the beginning of the formulation of plans to sweep those profits to the Treasury. They then coordinated the 3rd Amendment profit sweep in 2012 to ensure this was the case. This suggests to me that the FHFA was working in tandem/cooperation with the Treasury and it's motives. Does this not make it a government entity for the purposes of this case and validate the current courts jurisdiction and invalidate the government's request for dismissal?

HERA prohibits the FHFA from taking direction from any other agency.  The 2010 Treasury memo is a smoking gun in many respects.  The Ackman suit just filed (14-1404) shows a timeline of statements by FHFA officials from the beginning of the conservatorship in 2008 to present.  For years,  FHFA officials asserted its duty to conserving the assets of the GSEs.  But in 2012, out of nowhere, FHFA asserted their duty was now to protect taxpayers and wind down the GSEs.  Enter the sweep.  This is wholly inconsistent with the purpose of a conservatorship, and is strong circumstantial evidence (now subject to a discovery action in the Fairholme suit 13-465) that Treasury was calling the shots at the FHFA.    Evidence that Treasury directed the sweep and benefited itself by taking all the GSE capital is game over for the gov't and a win for shareholders since the 5th Amendment to the US Constitution demands compensation for  those whose property was taken.  More details can be found in Fairholme 13-465.


I intend to read through this thread over the next couple of days but devoted my time to Tim's site this evening.


Although this tread is interesting as the thesis has morphed over the years from a capital structure arbitrage to a levered bet on a small housing recover to a legal case with many dimensions, your time is best spent on the court cases and the replies.  Keep in mind that there are two claims:  The Federal Court of Claims cases deal with seeking compensation for taking of property under the 5th Amendment.  The Fairholme case here is in the discovery phase and will take a long time to come to a conclusion.  The District Courts cases deal with the the violations of the well established Administrative Proceedures Act (APA) that if successful would allow an immediate vacation of the sweep and send the excess sweep money back to the GSEs.  This is the Perry Injunction suit. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 20, 2014, 06:41:10 AM
^ +1
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: PullTheTrigger on August 20, 2014, 07:41:48 AM
Thanks for the summary onyx1!
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on August 20, 2014, 08:18:42 AM
Having read Onyx1/valuecfa's great commentary as a refresher, it sure looks like there are a lot of ways to get to a positive outcome.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 20, 2014, 08:32:54 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

But wouldn't steps 4 and 5 be a given if the sweep is vacated? Why would the judge rule that it's illegal but not compensate the shareholders for $80 billion in excess dividends.

Also, correct me if I'm wrong, but step 6 only seems to value the shares based on the returned $68 billion, but not on any future earnings power. My back of the envelope calculation indicates that the common would be worth 4x, or 300% more if the 3A was revoked, and the Jr. Pfds were paid off at par. I based it by annualizing 2Q profits:

1) Net income of $3.7 billion x 4 = $14.7 billion.
2) Back out the $81 billion in excess dividends, arrive at a Sr. liquidation preference of $36 billion. 10% dividend on this is $3.6 billion.
3) $14.7 - $3.6 billion = $11.1 billion
4) EPS = $11.1/5,762 = $1.92. 10x multiple = $19.25.
5) Jr. Pfd of $19.1 billion/5,762 = $3.32/share
6) Common value = $19.25 - $3.32 = ~$16 per share.
7) $16/4 = 4x return vs. the 2.5x return of the Jr. Pfds.

If they do a pfd for common swap to recapitalize, and issued shares at $4, then the EPS after the Sr. dividend is $1.05, which would give the common a 2.5x return. But, the shares would be at a much higher price if we get to this point, and perhaps the dilution wouldn't be as bad.

However, why would they do this? Neither the govt nor the current common shareholders would want to dilute their stake. Can't they just keep paying the Jr. dividend and then retire when possible?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 20, 2014, 09:07:46 AM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

But wouldn't steps 4 and 5 be a given if the sweep is vacated? Why would the judge rule that it's illegal but not compensate the shareholders for $80 billion in excess dividends.

Also, correct me if I'm wrong, but step 6 only seems to value the shares based on the returned $68 billion, but not on any future earnings power. My back of the envelope calculation indicates that the common would be worth 4x, or 300% more if the 3A was revoked, and the Jr. Pfds were paid off at par. I based it by annualizing 2Q profits:

1) Net income of $3.7 billion x 4 = $14.7 billion.
2) Back out the $81 billion in excess dividends, arrive at a Sr. liquidation preference of $36 billion. 10% dividend on this is $3.6 billion.
3) $14.7 - $3.6 billion = $11.1 billion
4) EPS = $11.1/5,762 = $1.92. 10x multiple = $19.25.
5) Jr. Pfd of $19.1 billion/5,762 = $3.32/share
6) Common value = $19.25 - $3.32 = ~$16 per share.
7) $16/4 = 4x return vs. the 2.5x return of the Jr. Pfds.



     You are not wrong.  There is additional upside to the common based on a market multiple of, say, annualized 2Q earnings which appear to be somewhat normalized.  However, the market will likely enforce a large discount due to a number of looming outside events such as timing of housing reform, emergence out of conservatorship, and potential dilution from refinancing of the UST preferred.  The biggest headwind to a market multiple, in my opinion, will come from that which we saw at BAC which is the need to rebuild capital.  The scenario above leaves the GSEs without any capital at all.    Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dowfin1 on August 20, 2014, 01:05:10 PM
The scenario above leaves the GSEs without any capital at all.    Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. 


I thought capital requirements for the GSEs were set by statute in 12 USC 4612:

"For purposes of this subchapter, the minimum capital level for each enterprise shall be the sum of—
(1)   2.50 percent of the aggregate on-balance sheet assets of the enterprise, as determined in accordance with generally accepted accounting principles..."

As of 6-31-14, FNMA had total assets of $3,218 B and equity of $6.1 B or less than .2%.  But with the remaining credit line from Treasury under the SPSA ( about $83 B), one could argue under sec. 4502 (23) that FNMA has total capital of $89 B available under conservatorship or 2.76% which meets the statutory minimum.  Note that FNMA had cap ratios of 4.66%, 4.92%, and 4.98% before the crisis for YE 2005-07.


While I agree plaintiffs are likely to prevail in court, you are correct that the consequences of a victory are uncertain  -- and that's what gives me pause from increasing my position.  Bad case scenario:

1.  plaintiffs win
2.  Treasury ordered to return $80 B.
3.  Treasury terminates the SPSA under sec 6.7 and/or 6.12, and demands full repayment
4.  FHFA deems the GSEs critically undercapitalized and converts them to a receivership.

Obviously there are other possible scenarios, but it's obvious that we need Treasury cooperation/support even if the cases are won.




 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: deadspace on August 20, 2014, 01:51:10 PM
I've thought about this as well
Treasury could get vindictive and force a true receivership but it's unlikely given that the result of a receivership would cause chaos in the housing market
Also a true takings argument in these cases would need to Addresss the forcing of subprime mortgages onto the books of the GSE in 2007 used to stabilize the market.  If you really want to talk receivership we need to back out all if these as well
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 20, 2014, 01:51:17 PM
The scenario above leaves the GSEs without any capital at all.    Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. 


I thought capital requirements for the GSEs were set by statute in 12 USC 4612:

"For purposes of this subchapter, the minimum capital level for each enterprise shall be the sum of—
(1)   2.50 percent of the aggregate on-balance sheet assets of the enterprise, as determined in accordance with generally accepted accounting principles..."

As of 6-31-14, FNMA had total assets of $3,218 B and equity of $6.1 B or less than .2%.  But with the remaining credit line from Treasury under the SPSA ( about $83 B), one could argue under sec. 4502 (23) that FNMA has total capital of $89 B available under conservatorship or 2.76% which meets the statutory minimum.  Note that FNMA had cap ratios of 4.66%, 4.92%, and 4.98% before the crisis for YE 2005-07.




There are very few certainties in life, but incrementally higher required capital levels on the GSEs if they were to emerge from a conservatorship could be one of them; then throw in a SIFI buffer and stress tests on top of all that.   This, or the potential of it, would weigh on any historically-based market multiple.

While I agree plaintiffs are likely to prevail in court, you are correct that the consequences of a victory are uncertain  -- and that's what gives me pause from increasing my position.  Bad case scenario:

1.  plaintiffs win
2.  Treasury ordered to return $80 B.
3.  Treasury terminates the SPSA under sec 6.7 and/or 6.12, and demands full repayment
4.  FHFA deems the GSEs critically undercapitalized and converts them to a receivership.

Obviously there are other possible scenarios, but it's obvious that we need Treasury cooperation/support even if the cases are won.


A bad scenario indeed, and with the gov't anything is possible.  But they had a chance to do this in 2008 and choose not to (and they are paying the price for it in terms of this litigation).  One of the reasons they avoided it in 2008 was so as not to throw a wrench into the agency MBS market which operates with a slightly less than government guarantee.  There are trillions ($5? currently, I don't know the exact number) of these securities in hands all over the world and a receivership would crater the world financial markets overnight; (FHFA head Mel Watt is currently under oath that a mere disclosure of discussions about the future of the GSEs would throw the world into financial crisis).   The only way to avoid the chaos is to declare all agency MBS fully guaranteed by the US gov't (like GNMA).  The problem for the UST is that all that debt would be placed on the US gov't balance sheet raising the debt levels from $17 trillion to $22 overnight.  There would be heavy credit and political prices to pay for this avoidable action and in the end the logical political calculus would likely be that it is not worth the $80 billion when your legacy is at stake.



 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dowfin1 on August 20, 2014, 03:07:30 PM
Quote
There are very few certainties in life, but incrementally higher required capital levels on the GSEs if they were to emerge from a conservatorship could be one of them; then throw in a SIFI buffer and stress tests on top of all that.


Post-C capital is more problematic than I thought which means that a substantial new capital raise with long transition rules will likely be necessary for the GSEs to emerge with substantial value for the common.    It's a political calculus not a legal issue.  IMO the jr. preferred is the smarter bet but a blend ala BB is not a bad idea either just in case.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 20, 2014, 05:39:31 PM
VIC has a new FNMA write-up today. Any VIC members willing to give a brief summary of the write-up? I'm guessing there's not much there that you can't find on timhoward17 blog, but, of course, I'm curious.


Thesis summary


Buy FNMA common at $4.00 because:


1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.
2.  He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst).
3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit.  (Note:  Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A.  (Note:  FHFA did compile an administrative record at the time of the 1A and 2A.)
4.  Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question.
5.  Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding.
6.  The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain.


My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely.

But wouldn't steps 4 and 5 be a given if the sweep is vacated? Why would the judge rule that it's illegal but not compensate the shareholders for $80 billion in excess dividends.

Also, correct me if I'm wrong, but step 6 only seems to value the shares based on the returned $68 billion, but not on any future earnings power. My back of the envelope calculation indicates that the common would be worth 4x, or 300% more if the 3A was revoked, and the Jr. Pfds were paid off at par. I based it by annualizing 2Q profits:

1) Net income of $3.7 billion x 4 = $14.7 billion.
2) Back out the $81 billion in excess dividends, arrive at a Sr. liquidation preference of $36 billion. 10% dividend on this is $3.6 billion.
3) $14.7 - $3.6 billion = $11.1 billion
4) EPS = $11.1/5,762 = $1.92. 10x multiple = $19.25.
5) Jr. Pfd of $19.1 billion/5,762 = $3.32/share
6) Common value = $19.25 - $3.32 = ~$16 per share.
7) $16/4 = 4x return vs. the 2.5x return of the Jr. Pfds.



     You are not wrong.  There is additional upside to the common based on a market multiple of, say, annualized 2Q earnings which appear to be somewhat normalized.  However, the market will likely enforce a large discount due to a number of looming outside events such as timing of housing reform, emergence out of conservatorship, and potential dilution from refinancing of the UST preferred.  The biggest headwind to a market multiple, in my opinion, will come from that which we saw at BAC which is the need to rebuild capital.  The scenario above leaves the GSEs without any capital at all.    Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. 

Thanks onyx. IMO for this reason the best thing to do is to hold a little bit of both common and preferred, as others have pointed out.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 20, 2014, 05:40:27 PM
Separate question. Does anyone know if I sell FNMA at a loss and buy FMCC, if that counts as a wash sale? And what if you sell preferred and buy the common, or vice versa?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 20, 2014, 08:07:16 PM
The scenario above leaves the GSEs without any capital at all.    Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. 


I thought capital requirements for the GSEs were set by statute in 12 USC 4612:

"For purposes of this subchapter, the minimum capital level for each enterprise shall be the sum of—
(1)   2.50 percent of the aggregate on-balance sheet assets of the enterprise, as determined in accordance with generally accepted accounting principles..."

As of 6-31-14, FNMA had total assets of $3,218 B and equity of $6.1 B or less than .2%.  But with the remaining credit line from Treasury under the SPSA ( about $83 B), one could argue under sec. 4502 (23) that FNMA has total capital of $89 B available under conservatorship or 2.76% which meets the statutory minimum.  Note that FNMA had cap ratios of 4.66%, 4.92%, and 4.98% before the crisis for YE 2005-07.


While I agree plaintiffs are likely to prevail in court, you are correct that the consequences of a victory are uncertain  -- and that's what gives me pause from increasing my position.  Bad case scenario:

1.  plaintiffs win
2.  Treasury ordered to return $80 B.
3.  Treasury terminates the SPSA under sec 6.7 and/or 6.12, and demands full repayment
4.  FHFA deems the GSEs critically undercapitalized and converts them to a receivership.

Obviously there are other possible scenarios, but it's obvious that we need Treasury cooperation/support even if the cases are won.


I'm pretty sure this scenario can't happen. The Conservator has a set time limit to transfer from conservator ship to receivership and that time is long past. I don't think they could get away with ending the conservatorship before the purpose of conservatorship (stability) has been achieved only to turn around and liquidate it since it could be argued that this wouldn't be substantially different from simply transferring to receivership which isn't allowed.

My concern is that they find a way to screw shareholders through the recap (which only hurts themselves and tax payers). I think this is unlikely. It's more likely that they'all try to build political support around saving the institutions by touting how much money th govt will make off of them and maximize those earnings...just need a new administration without egg on its face to do it.

I think the common makes out pretty well here. Just a question of how well and how long. Ackman's presentation said could be as long as 7-10 years to recap based on retained earnings and released from conservatorship. Share offerings after a clear schedule is in place could accelerate this return to common holders but also clearly dilutes it. I think we'll see a nice pop if 3A is overturned. That might be a time to take profits, reduce position, and re-evaluate time frame/expected returns going forward with development of the companies.


Separate question. Does anyone know if I sell FNMA at a loss and buy FMCC, if that counts as a wash sale? And what if you sell preferred and buy the common, or vice versa?

They are substantially different securities even if they are similar companies. Wash sale doesn't apply here.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 20, 2014, 08:19:07 PM
I'm thinking that if the 3A is overturned the govt would focus their attention on maximizing the value of their 79.9% stake. So perhaps this risk of being declared undercapitalized or forced to dilute is not as likely, because it would be to the detriment of the headline number when they liquidate the warrants.

But then again, warrants didn't stop the regulators from forcing banks to raise substantial capital/dilute.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 20, 2014, 08:20:48 PM

They are substantially different securities even if they are similar companies. Wash sale doesn't apply here.

Ok great thanks, and I assume you mean it for both cases right (selling fannie for freddie and selling fnma common for pfds)?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 21, 2014, 03:48:31 AM

The Conservator has a set time limit to transfer from conservator ship to receivership and that time is long past. I don't think they could get away with ending the conservatorship before the purpose of conservatorship (stability) has been achieved only to turn around and liquidate it since it could be argued that this wouldn't be substantially different from simply transferring to receivership which isn't allowed.


Huh?  There is no set time limit on declaring a receivership.  HERA not only gives the option to FHFA to declare a receivership if, in the Directors opinion, it appears that assets < liabilities or the enterprise will not be able to meet its obligation when they come due, but requires the appointment of a receiver if the Director determines that for any period of 60 days assets < liabilities.  The accounting standard is not specified so there is wide latitude for interpretation and misuse.  Note also that a receiver can be appointed even if current cash and payment obligations are being met.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 21, 2014, 08:36:05 AM

The Conservator has a set time limit to transfer from conservator ship to receivership and that time is long past. I don't think they could get away with ending the conservatorship before the purpose of conservatorship (stability) has been achieved only to turn around and liquidate it since it could be argued that this wouldn't be substantially different from simply transferring to receivership which isn't allowed.


Huh?  There is no set time limit on declaring a receivership.  HERA not only gives the option to FHFA to declare a receivership if, in the Directors opinion, it appears that assets < liabilities or the enterprise will not be able to meet its obligation when they come due, but requires the appointment of a receiver if the Director determines that for any period of 60 days assets < liabilities.  The accounting standard is not specified so there is wide latitude for interpretation and misuse.  Note also that a receiver can be appointed even if current cash and payment obligations are being met.

I'm sure you're right. I must have misinterpreted what I read. What recourse do investors have against the FHFA for gross negligence as conservator? None?

Also, I still think receivership is unlikely not that the hedge funds are getting press. It's clear to drive with a brain that the gov's 80% is worth something and throwing it away is irresponsible. I think it's also clear that the private sector simply doesnt have the scale to put up capital like us required for their proposed solutions
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on August 21, 2014, 10:07:05 AM
What recourse do investors have against the FHFA for gross negligence as conservator? None?


To the extent gross negligence is a part of breaching fiduciary duty, we'll get an answer to that question when Judge Sweeney gives us a ruling.  Sooner the better.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 23, 2014, 04:14:05 PM
My favorite part of the Ackman complaint is the following:

Quote
For example, FHFA summarily denied valid written demands by Pershing Square to the Companies’ boards of directors for a books and records inspection, thus violating a fundamental right of common shareholders under state corporate law. In doing so, FHFA asserted that Pershing Square, as a common shareholder of the Companies, had no rights or powers at all.

It's funny when you deny a 10% holder the right to inspect books and records.

The Ackman complaint is actually very, very good. If you guys haven't read it yet, I would highly recommend it. (Attached.)
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on August 23, 2014, 08:19:17 PM
Just playing devil's advocate here, but don't the shareholders lose all non-financial rights in a conservatorship? So does he really have the right to review the books?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 23, 2014, 08:58:52 PM
Just playing devil's advocate here, but don't the shareholders lose all non-financial rights in a conservatorship? So does he really have the right to review the books?

Yea, they do. I just found the concept of denying Pershing access to the books to be funny. Maybe it's because it brought up thoughts of Valeant and Allergan. Ackman just can't catch a break as a shareholder, lol.

In any case, Ackman brings up some interesting points regarding the case that haven't been mentioned before in the other cases.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 26, 2014, 02:58:25 PM
How does one look up all the currently outstanding preferred shares and their terms?

Also would this source contain those also issued to the U.S. gov? Wouldn't think there'd be a difference but you never know
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: dowfin1 on August 26, 2014, 04:33:58 PM
Zach, theres a good chart in note 14 of the FNMA 10-k
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on August 26, 2014, 04:59:43 PM
There is also a list on the front page of each of the 10-Ks
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 26, 2014, 05:47:56 PM
There is also a list on the front page of each of the 10-Ks

Thanks. Must have scrolled right past that previously as I don't recall having seen it. Appreciate the help.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on August 26, 2014, 08:26:37 PM
Been doing some thinking on this and what the possible outcomes are and the best ways to gain exposure. Most presentations shows the GSEs as a single entity with figures for the combined entity. I wanted to make sense of current securities so I separated this out for FNMA below.


Possible Outcomes:

Now let's handicap them.

I think the probability of government winning the case is low. So let's focus on the probabilities of a successful injunction.

Fairholme's plan makes sense for the government. Democrats get continued service that will keep costs of mortgages low and Republicans can claim a victory for small government and private enterprise. The gov would likely receive close to $200B in addition to current profits over the next 10 years of wind down ($51B from FIA business as estimated by Ackman, and $15B per year from legacy book) so it wouldn't be a total forfeiture of rights.
Only makes sense to own the preferred in this scenario as common shares are totally wiped out.

If either Ackman's solution is accepted, or some derivation of the first possibility of the sweep reducing current obligation to gov, then common shares are likely the way to go but preferred benefit too.

There's still unknown solutions that could surface that could affect one or both differently. It seems like the present solutions suggest that the majority of exposure should be held via preferred stock that will be worth something in every scenario (and worth a lot in Fairholme's scenario). An argument could be made for having 20-30% in common makes to boost returns in any other scenario but you don't want to end up with an absolute loss.

Does the board generally agree?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 05, 2014, 07:25:10 AM
A few running notes:

Scenario A:

I would agree with most of this -- except I have no idea where you get an expected return of 24% per annum. If the government preferred goes back to a 10% rate, then the preferreds basically go to par with the possibility of a discount based on whether there's an immediate appeal.

Same thought on the common stock -- though the equity build might put a slight hamper on the common.

Scenario B:

Basically agree though I think it's less likely they go this route.

Scenario C:

Same thought as Scenario A.

Additional Notes:

Let's not forget that Fannie has about $45 billion in DTAs that they might be able to strike a deal on w/ Treasury to further reduce the government preferreds. Any such deal would accrue directly to the common stockholders. An extra $3.5 billion a year is a 35% increase to the market cap.

Alternatively, let's remember they have pre-tax income of around $22.5 billion a year @ current g-fees, so the payback on the government preferred could be quite a bit faster than you think. (If they increased that by 20 bps, they'd have $30 billion in pre-tax income per year.)

Ackman's involvement here gives me a considerable amount of comfort since, as a 10% holder, my guess is that he's going to try and get on the board and make capital allocation decisions of this nature.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on September 05, 2014, 09:14:32 AM
A few running notes:

Scenario A:

I would agree with most of this -- except I have no idea where you get an expected return of 24% per annum. If the government preferred goes back to a 10% rate, then the preferreds basically go to par with the possibility of a discount based on whether there's an immediate appeal.

Same thought on the common stock -- though the equity build might put a slight hamper on the common.

In scenario A, worth pointing out the lower coupon older prefereds should still trade well below par for the foreseeable future, maybe forever. For instance if WFC 6% fixed-for-life prefs trade below par (rated investment grade, paying), so will these most likely, even 7 years hence. Especially if rates actually ever move wider.

That said, the higher coupons are the much bigger and liquid issues.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 05, 2014, 09:30:45 AM
A few running notes:

Scenario A:

I would agree with most of this -- except I have no idea where you get an expected return of 24% per annum. If the government preferred goes back to a 10% rate, then the preferreds basically go to par with the possibility of a discount based on whether there's an immediate appeal.

Same thought on the common stock -- though the equity build might put a slight hamper on the common.

In scenario A, worth pointing out the lower coupon older prefereds should still trade well below par for the foreseeable future, maybe forever. For instance if WFC 6% fixed-for-life prefs trade below par (rated investment grade, paying), so will these most likely, even 7 years hence. Especially if rates actually ever move wider.

That said, the higher coupons are the much bigger and liquid issues.

Two things to add to that:

(1) The Fannie Mae Series S has a floor of 7.75% and floats, so it's important to pick your spots.

(2) If we are talking about the injunction winning, then you will take your chances on a market rate. If we are talking about the Takings Clause winning, then you will get par.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 08, 2014, 10:39:17 AM
1.  Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury.

That case just went to jury a few days ago...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on September 09, 2014, 09:15:00 AM
Market certainly doesn't like something going on behind the scenes....
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Yours Truly on September 09, 2014, 09:29:21 AM
Ex-CFO and writer of TimHoward717.com joins Fairholm in suit against FNMA

http://www.valuewalk.com/2014/09/ex-cfo-fannie-mae-timothy-howard-joins-berkowitz-suit/
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 09, 2014, 11:56:47 AM
Market certainly doesn't like something going on behind the scenes....

The theory has been that the Iowa case decision is bad for plaintiffs. I tend to disagree as it was just a jurisdictional issue for the Iowa plaintiffs.

Just landed in LA. I will type more later.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 09, 2014, 01:15:13 PM
Okay, so basically, as I understand it, there was a ruling in iowa where certain plaintiffs were denied additional discovery because the court said no additional discovery was needed in order to establish jurisdiction on whether the court could hear the case.

The big question was whether this could be then applied to the other cases before various courts, because, as I indicated earlier, discovery is critical to the establishment of a case that FHFA and Treasury had no authority to do what it did.

Now, the issue here is that in the case before Judge Sweeney, discovery actually IS needed because they need to be able to establish whether the court has Tucker jurisdiction based on whether FHFA was a government actor -- and/or a government actor acting in conjunction with Treasury.

Additionally, there is currently no discovery process before Judge Lamberth (there's merely a motion for summary judgment), so I don't see how the supplemental authority would matter here. And, personally, I think this is the more important near-term catalyst.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on September 10, 2014, 10:51:48 AM

What Happens if the Government Loses...

http://www.forbes.com/sites/richardepstein/2014/09/10/what-happens-if-the-government-loses-on-the-third-amendment-the-senior-preferred-stock-certificates-spell-nothing-but-trouble-for-the-government/ (http://www.forbes.com/sites/richardepstein/2014/09/10/what-happens-if-the-government-loses-on-the-third-amendment-the-senior-preferred-stock-certificates-spell-nothing-but-trouble-for-the-government/)


This is the first cogent explanation I have read on how & why the senior preferred would likely be retired in the event UST was forced to return 3rd Amendment excess distributions.  The longer the government delays, Epstein argues, the better off private shareholders will fare in the event of a favorable ruling as at some point 3rd Amendment dollars returned will exceed that required to retire all senior preferred plus coupon interest.  The excess dollars would have to be deemed capital, making it harder for FHFA to justify not retiring the senior preferred as allowed under Sections 3 & 4 of the senior preferred stock certificates.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 10, 2014, 10:56:05 PM
That's a good read. Thanks onyx1.

I'm certainly rather perplexed by the recent stock price movements over the last two weeks.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 19, 2014, 09:14:28 AM
Swapped out some prefs for common today. Large decline is common's price is make it attractive again.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 20, 2014, 07:47:28 AM
Looks like the reason for the sell down yesterday was a ruling from Judge Jackson on derivative standing.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on September 20, 2014, 08:49:03 AM
http://investorshub.advfn.com/boards/read_msg.aspx?message_id=106453409
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on September 20, 2014, 09:43:42 AM
Page 6:

"But the Court finds that there is no disabling conflict here that would permit plaintiff to assume the Conservator’s function. Furthermore, the clear statement in HERA that “no court may take any action to restrain or affect the exercise of powers or functions” of the Conservator, 12 U.S.C. 4617(f), suggests that the Court may not be empowered to authorize plaintiff to pursue litigation that the Conservator has declined to pursue."


The Conservator did not pursue the litigation because FHFA is the Conservator and would not sue that which it is working with...i.e. Treasury.

No?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 20, 2014, 02:22:08 PM
Sorry that I posted and ran this morning -- I had an alumni thing that I was in charge of throwing.

Page 6:

"But the Court finds that there is no disabling conflict here that would permit plaintiff to assume the Conservator’s function. Furthermore, the clear statement in HERA that “no court may take any action to restrain or affect the exercise of powers or functions” of the Conservator, 12 U.S.C. 4617(f), suggests that the Court may not be empowered to authorize plaintiff to pursue litigation that the Conservator has declined to pursue."

The Conservator did not pursue the litigation because FHFA is the Conservator and would not sue that which it is working with...i.e. Treasury.

No?

So, I actually agree with the ruling here, but it doesn't matter for us.

The problem is that the plaintiffs are suing Treasury on behalf of Fannie Mae via a shareholder derivative lawsuit. (1) FHFA has already moved to stand in place of the shareholders in this lawsuit against Treasury. (2) The issue that the court ruled on was basically that just because FHFA was following the rules of the contract it struck does not mean that Treasury & FHFA are essentially the same entity.

Notably, this is differentiated from the Perry & Fairholme suits because (A) Perry is suing as a shareholder, not as Fannie Mae, and (2) Fairholme is suing FHFA directly. In neither case does the issue of shareholder derivative issue come up.

The wrinkle in the Perry case is that, while it might be possible that the FHFA would substitute itself as a plaintiff, it has made absolutely no indications that it is going to do so -- and what Perry is suing for is basically misconduct on the part of FHFA. On the Fairholme side, the FHFA cannot be expected to sue itself for actions it caused.

As for the anti-injunction provision of HERA, the court specifically states the following:

Quote
Every circuit court to consider the issue has held that this provision strips courts of jurisdiction to hear challenges to the “lawful exercise of FHFA’s power as conservator.”
...
Plaintiff does not argue that the FHFA’s failure to bring suit against Treasury over the LIHTC issue was outside the scope of the FHFA’s powers as the Conservator of Fannie Mae.

In both the Perry & Fairholme cases, that's exactly what they're suing for -- the fact that the FHFA exceeded its own powers as a conservator in executing the Third Amendment. Perry for procedural mishaps under the APA and exercising powers outside of those granted to a conservator. Fairholme for an illegal Taking w/o compensation.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on September 20, 2014, 06:04:07 PM
Extremely helpful, Merkhet, thanks.

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 20, 2014, 06:26:34 PM
Thanks Merkhet. This also doesn't apply to the Ackman case, given that he is also suing the FHFA directly, and not on the behalf of FNMA/FMCC, correct?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 20, 2014, 06:51:36 PM
Basically, yes. In the Ackman case, he alleges similar things that Perry alleges but on behalf of the common. So, again, it's unreasonable to believe that the FHFA will sue itself.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: muscleman on September 21, 2014, 10:05:56 PM
Swapped out some prefs for common today. Large decline is common's price is make it attractive again.

Do you know why Ackman bought 10% of FNMA but not more? Is there any law that prevents him from buying more?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 22, 2014, 06:14:43 AM
No -- but usually people buy 9.9% of a company to avoid triggering various filing requirements.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 22, 2014, 11:09:18 AM
Stumbled on some amazing back and forth on twitter. Robert King (apparently a value investor, maybe on this board) is engaging Carney in the most thoughtful way I've seen.

https://twitter.com/robertqking/with_replies

I'm impressed by the depth of Robert's knowledge on the F+F sweep documents.

Edit: LOL It's Merkhet.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 22, 2014, 11:15:47 AM
That's me.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: onyx1 on September 22, 2014, 12:22:24 PM
That's me.

Well done Merket!

In reading Carney's responses to your tweets, I get the feeling he is in contact with Gov't attorneys.  His arguments seem circular and inconsistent.  Journalists frequently get intoxicated from direct access to power and he likely understands that his continued access is dependent on the reporting of information that reflects favorably on his sources.

Either way, your arguments are both consistent and well reasoned.  You got your moneys worth from law school! 
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 22, 2014, 05:19:31 PM
http://www.ft.com/intl/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html#axzz3E5qCSECw
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 23, 2014, 01:40:57 PM
http://online.wsj.com/articles/u-s-government-puts-points-on-board-in-fannie-fight-heard-on-the-street-1411496516

Interesting that this came out today given that he and I have already had a discussion no why the Jackson case is not applicable. *shrug*
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 23, 2014, 01:50:27 PM
Although, to be fair, he only says that it may turn on a similar issue. Not that this is necessarily precedent.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 23, 2014, 02:03:36 PM
He gets an intense reaction/publicity from his F+F articles. It's all about the eyeballs, not necessarily dissecting the nuances.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: wellmont on September 23, 2014, 03:36:23 PM
he's nothing but a shill for US Gov position.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 30, 2014, 07:37:43 AM
John Carney strikes again. This time he linked a case of a foreclosed borrower suing FNMA on the basis that they deserved Fifth Amendment Due Process prior to eviction because FNMA is a state actor. The court threw out the case. I am not a lawyer but I don't see how this relates to the shareholder suits, maybe Merkhet you can chime in? The shares are down 10% today, and it might be because of this.

https://twitter.com/carney/status/516950179728343040
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on September 30, 2014, 08:52:50 AM
I really wish people would stop filing frivolous lawsuits that have the danger of putting up stupid precedent. The opinion is attached.

Quote
Moreover, we would reach this same conclusion even without reliance on Mik. Under Supreme Court precedent, a necessary condition precedent for a conclusion that a once-private entity is a state actor is that the government’s control over the entity is permanent. Lebron, 513 U.S. at 399. Under HERA, Congress, by statute, empowered the FHFA to become conservator for Fannie Mae for the limited purpose of “reorganizing, rehabilitating, or winding up [its] affairs.” 12 U.S.C. § 4617(a)(2). This is an inherently temporary purpose. Accordingly, even if we had not previously decided Mik, we would reach the same conclusion: that following FHFA’s conservatorship, Fannie Mae is not a state actor.

I think there are a number of replies to this, including:

(1) Fannie Mae may not be a government actor, but FHFA is a government actor. Here, FHFA did not evict the homeowners, it was Fannie & Freddie. (The distinction is legally important though practically not.) In the Perry, Fairholme and Ackman cases, they're suing for things FHFA did not things Fannie Mae did.

(2) This is judicial dicta -- meaning, it's not binding precedent even in its own court -- much less the District Court of the District of Columbia or the Court of Federal Claims.

(3) Additionally, I don't think that the Court realizes that the Conservatorship is actually, so far, not a temporary thing -- the companies have been profitable for two years and there is no indication that the conservatorship will stop. The government has indicated that they view this as a strong part of their case given their inclusion of it against the Fairholme case (indicating that the claims are not ripe for review) but it stretches the boundaries of common sense.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 30, 2014, 03:24:29 PM
Well, looks like Lamberth ruled in favor of the Government...

http://timhoward717.com/2014/09/30/memorandum-opinion-and-orders-perry-injunction/

What sort of precedent does this set for the other Fairholme case?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 30, 2014, 03:46:24 PM
Well, looks like Lamberth ruled in favor of the Government...

http://timhoward717.com/2014/09/30/memorandum-opinion-and-orders-perry-injunction/

What sort of precedent does this set for the other Fairholme case?

Yup. The district court case (the injunction) was dismissed. We still have the federal claims court case that is well into discovery. A blow nonetheless. Would have been nice to wrap this one up more quickly if injunction was in our favor.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on September 30, 2014, 04:06:44 PM
The Government is probably going to use Lamberth's brief to throw a wrench in the Federal Claims Court case I feel like. He basically said that HERA allows the FHFA and Treasury to do whatever the hell they want to do.

"It was Congress, after all, that parted the legal
seas so that FHFA and Treasury could effectively do whatever they thought was needed to
stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system,
this Court does not seek to evaluate the merits of whether the Third Amendment is sound
financial--or even moral-policy. The Court does, however, find that HERA's unambiguous
statutory provisions, coupled with the unequivocal language of the plaintiffs' original GSE stock
certificates, compels the dismissal of all of the plaintiffs' claims. "
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 30, 2014, 04:15:47 PM
The Government is probably going to use Lamberth's brief to throw a wrench in the Federal Claims Court case I feel like. He basically said that HERA allows the FHFA and Treasury to do whatever the hell they want to do.

"It was Congress, after all, that parted the legal
seas so that FHFA and Treasury could effectively do whatever they thought was needed to
stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system,
this Court does not seek to evaluate the merits of whether the Third Amendment is sound
financial--or even moral-policy. The Court does, however, find that HERA's unambiguous
statutory provisions, coupled with the unequivocal language of the plaintiffs' original GSE stock
certificates, compels the dismissal of all of the plaintiffs' claims. "

There are different arguments in the Federal claims case, and of course there will be an appeal of the district court case. But, yes i'm sure the gov will reference certain particulars in the district court decision to Judge Sweeney.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: nkp007 on September 30, 2014, 04:22:17 PM
Even though Sweeney's case is currently in some sort of discovery...can she file a similar ruling or must that wait until discovery is over?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: valuecfa on September 30, 2014, 06:57:17 PM
Even though Sweeney's case is currently in some sort of discovery...can she file a similar ruling or must that wait until discovery is over?

Last time the government tried to argue something similar Judge Sweeney said -

With respect to defendant’s claim that the court lacks the authority to affect the exercise of the FHFA’s powers or functions, the court agrees with the case law of the United States Court of Appeals for the Ninth Circuit, which states that the “FHFA cannot evade judicial review
. . . simply by invoking its authority as conservator.” County of Sonoma v. Fed. Hous. Fin. Agency, 710 F.3d 987, 994 (9th Cir. 2013); Leon County v. Fed. Hous. Fin. Agency, 700 F.3d 1273, 1278 (11th Cir. 2012) (“The FHFA cannot evade judicial scrutiny by merely labeling its actions with a conservator stamp.”). Thus, rather than turning a blind eye to a case and immediately dismissing it from its docket merely because the case concerns the FHFA, the proper approach is for a court to examine the factual underpinnings and legal contentions presented by the complaint, in order to determine whether the exercise of its jurisdiction is proper. County of Sonoma, 710 F.3d at 994 (“Analysis of any challenged action is necessary to determine whether the action falls within the broad, but not infinite, conservator authority.”). Indeed, “Congress did not intend that the nature of the FHFA’s actions would be determined based upon the FHFA’s self-declarations . . . .” Leon County, 700 F.3d at 1278. For purposes of the instant motion, there is no request by plaintiffs that would potentially restrain or affect the exercise of powers or functions of the FHFA as conservator. Consequently, blanket assertions concerning the court’s ability to conduct these proceedings, especially as they pertain to a discovery matter related to the question of jurisdiction, hold no merit.



In other words, I believe Judge Sweeney will take this all the way to trial, and see what discovery brings up.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on October 01, 2014, 06:05:42 AM
1) can someone break down in layman's terms Lamberth's reasoning? I've read through both Epstein and Howard's analysis and am still fuzzy on this. Might just need to read it a few times.
2) how does the Fairholme trial differ from the Perry injunction? It was my understanding that they made similar arguments but one was requesting an immediate stop to the third amendment while the other was suing for government taking.
3) How should we be adjusting our potential for success now that one of the big cases has been thrown out
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on October 01, 2014, 08:43:57 AM
Why are the preferreds getting killed so much more than the common? I'm thinking of taking the tax loss on the common and switching over to preferred.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on October 01, 2014, 09:02:42 AM
Why are the preferreds getting killed so much more than the common? I'm thinking of taking the tax loss on the common and switching over to preferred.

Probably because they're less liquid. I bought more of.both today - still a small position while I tru to grasp an understanding of all this.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 09:36:15 AM
Zach,

(1) You should read the opinion itself. It's better to go direct to the source.
(2) Your understanding of the differences is correct.
(3) The first catalyst has gone against us, but I don't know that it affects the probabilities of in the Sweeney case -- she's not bound by precedent set in the District Court of DC

The strange thing is that the Lamberth decision rests largely on Section 4617(f) barring any relief to the plaintiffs, but valuecfa is correct to point out that Sweeney does not seem to hold the same view.

Surprisingly, Lamberth dismissed the APA Claims because there was not a preponderance of the evidence to show that the FHFA acted improperly -- except FHFA specifically did not compile a record to allow for the exposition of evidence in the first place.

This is, of course, why Sweeney asked for discovery, because she said she can't make a decision until the evidence is completely out there. Looking forward and reasoning back, the fact that the government refused to provide an administrative record in the first place and then tried to put up roadblocks in the Sweeney case in the second place seem to indicate that something is rotten in the state of Denmark. Otherwise, they'd have just produced the record and been done with it.

I wonder if anything precludes Perry from filing its APA case in the Court of Federal Claims to the extent that the Sweeney case uncovers good evidence.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 09:52:32 AM
I would expect the government to respond to the Ackman case by October 28th, 2014, and probably sooner, with a motion to dismiss, since the Ackman case is also in the District Court of the District of Columbia and would be bound by the precedent set by Judge Lamberth.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 02:00:44 PM
What are thoughts on Carney's comments that Sweeney holds Lamberth in high intellectual regard? Interesting.

Also - what are the chances the govt simply cancels the existing common and pref equity capital structure, including the Senior Pref, then IPOs F&F to the market with all proceeds going directly toward recapitalizing F&F's balance sheet?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Picasso on October 01, 2014, 02:11:31 PM
What are thoughts on Carney's comments that Sweeney holds Lamberth in high intellectual regard? Interesting.

Also - what are the chances the govt simply cancels the existing common and pref equity capital structure, including the Senior Pref, then IPOs F&F to the market with all proceeds going directly toward recapitalizing F&F's balance sheet?

Shhh, don't give Ackman a heart attack.

That has always made the most sense to me from the governments point of view.  Reminds me of when my mom used to say "I gave you life, I can take it away too."  She was dead serious at times.

I'm no lawyer so I don't understand all the lingo here.  I suppose I should look at the other proposals to judge how they compare against a new F&F.  While some people will say they will never invest in F&F if that happens, I suspect people will have rather short memories and capitalize it anyway.  I mean new GM stock seems to have done just fine.

This is outside my circle of competence.  Ignore what I said  ;D
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Grenville on October 01, 2014, 02:14:55 PM

Also - what are the chances the govt simply cancels the existing common and pref equity capital structure, including the Senior Pref, then IPOs F&F to the market with all proceeds going directly toward recapitalizing F&F's balance sheet?

my two cents, if they wipe out existing shareholders then why would anyone reinvest in the entities. The same thing could happen again since F&F don't exist without the govt backstop.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 02:24:33 PM
I'd be interested to know where Carney sourced the quote from Sweeney, but I doubt she'll halt discovery in the middle of the process just because of the Judge Lamberth ruling.

If there's action at all, I wouldn't expect Congress to move on Fannie & Freddie until after the mid-term elections. I agree with Grenville, though, that the notion of canceling the existing common and preferred equity capital structure would seriously chill investment in the new entities and highly disrupt the current functioning of the mortgage market.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 02:30:46 PM
So in the case of AIG, the govt provided a massive loan and took an 80% fully diluted stake in the common. Existing common participated alongside govt, but just on a fully diluted basis. I don't remember what the preferred structure was, but to my knowledge, no securities were outright cancelled. No?

With GM, I don't remember specifically. Didn't the govt loan get converted into common? Or was most of the common stake obtained via warrant?

What is the upside to canceling the warrant and simply returning to the private sector?

Is it not in the govt's best interest to maximize the value of the warrant? Ya they can sit here and collect the profits, but given the 80% ownership, govt could capitalize 80% of those profits at 15 or 20 times, bringing forward years worth of net worth sweep proceeds. No?

Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on October 01, 2014, 03:34:23 PM
So in the case of AIG, the govt provided a massive loan and took an 80% fully diluted stake in the common. Existing common participated alongside govt, but just on a fully diluted basis. I don't remember what the preferred structure was, but to my knowledge, no securities were outright cancelled. No?

With GM, I don't remember specifically. Didn't the govt loan get converted into common? Or was most of the common stake obtained via warrant?

What is the upside to canceling the warrant and simply returning to the private sector?

Is it not in the govt's best interest to maximize the value of the warrant? Ya they can sit here and collect the profits, but given the 80% ownership, govt could capitalize 80% of those profits at 15 or 20 times, bringing forward years worth of net worth sweep proceeds. No?

What discount rate do you think the U.S. government should use? Bringing forward those earning replaces borrowing at 2-odd percent a year. Where's the logic in selling at just a five percent earnings yield? To say nothing of the fact that the net sweep produces more money than their share of common earnings, by a large margin.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 04:25:11 PM
Would there be alternative uses to simply paying down 2% debt?

Is the status quo of just collecting NWS proceeds forever a viable solution for the mortgage market?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 04:35:31 PM
bmichaud,

AIG:

http://www.ny.frb.org/aboutthefed/aig/pdf/Recapitalization_Summary_Terms.pdf
http://phx.corporate-ir.net/phoenix.zhtml?c=76115&p=irol-newsArticle&ID=1477531&highlight=

No securities were outright cancelled. Various things were done to ensure that Treasury was repaid on its investment in the companies.

GM:

http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization#363_Sale_of_assets

The government loan was converted into 60% of the new common while the unsecured bondholders were converted into 10% of the new common. The original common stock was wiped out, that was because the company was insolvent at the time.

I think that it would be unprecedented for them to just wholesale cancel the existing capital structure absent exigency and/or insolvency.

If you believe Ackman's presentation (attached), the value of Treasury's warrants is between $165 billion to $342 billion based on various g-fees and a P/E between 12x and 16x.

---

morningstar,

The problem in my mind is that the way that the Third Amendment (http://1.usa.gov/1mSpE8u) is set up, they erode away the capital of the companies at the same time. In my opinion, this doesn't get enough play in the media.

Quote
For each Dividend Period from January 1, 2013, through and including December 31, 201 7, the "Dividend Amount" for a Dividend Period means the amount, if any, by which the Net Worth Amount at the end of the immediately preceding fiscal quarter, less the Applicable Capital Reserve Amount, exceeds zero. For each Dividend Period from January 1, 2018, the "Dividend Amount" for a Dividend Period means the amount, if any, by which the Net Worth Amount at the end of the immediately preceding fiscal quarter exceeds zero. In each case, "Net Worth Amount" means (i) the total assets o f the Company (such assets excluding the Commitment and any unfunded amounts thereof) as reflected on the balance sheet o f the Company as of the applicable date set forth in this Certificate, prepared in accordance with GAAP, less (ii) the total liabilities of the Company (such liabilities excluding any obligation in respect of any capital stock of the Company, including this Certificate), as reflected on the balance sheet of the Company as of the applicable date set forth in this Certificate, prepared in accordance with GAAP. "Applicable Capital Reserve Amount" means, as of any date of determination, for each Dividend Period from January 1, 2013, through and including December 31, 2013, $3,000,000,000; and for each Dividend Period occurring within each 12-month period thereafter, $3,000,000,000 reduced by an equal amount for each such 12-month period through and including December 31, 2017, so that for each Dividend Period from January 1, 2018, the Applicable Capital Reserve Amount shall be zero. For the avoidance ofdoubt, if the calculation of the Dividend Amount for a Dividend Period does not exceed zero, then no Dividend Amount shall accrue or be payable for such Dividend Period.

So yes, they are earning a significant amount due to their Net Sweep, but the Capital Erosion robs Peter to pay Paul, since the companies actually need a certain amount of capital to sustain the $5 trillion of existing guarantees on the Fannie & Freddie books. Again, if you believe Pershing Square, the companies require about $186 billion of capital as a reserve and, therefore, what Treasury is really doing is taking away $186 billion of capital and earning what amounts to about 10% return on that capital rather than profiting by taking $165 billion to $342 billion off the warrants and turning the market over to private insurers.

Since Congress (and just about everyone else) wants the government to get out of the mortgage business, it's difficult to see how that can happen while there's a near government monopoly on the mortgage market right now -- and it's still hard to see how they can (A) establish a completely new system and (B) entice private money since they've established that in times of crisis, that capital will be treated unfairly.

http://www.ft.com/intl/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html

Quote
Sales of private-label MBS total just $4.5bn so far this year, compared with $17bn sold last year. Some $726bn worth of private-label MBS was sold in 2007, at the height of the subprime mortgage bubble. But sales collapsed after heavy losses during the subprime crisis.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 04:44:56 PM
Additionally, let's not forget that the $200 billion that Treasury has received is only slightly more than the $189.5 billion that they put into the companies in the first place. So basically, Treasury is sitting here waiting to earn the full $186 billion of capital reserve $20 billion a year at a time -- so they're trying to earn back their return "of" capital rather than earn a return "on" capital at the moment, if that makes sense.

It's rather dumb. Berkowtiz is correct. There is a win for all constituencies. It's just a matter of when and whether all the parties end up seeing it this way.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 04:53:39 PM
So Merkhet, absent a favorable ruling, how are you handicapping the opportunity? Is there enough value there to incentivize the govt to restructure on private capital friendly terms?

There just has to be more to this thing. Berk doesn't put 15% of a mutual fund into these securities all for some horrendously reasoned ruling to just wipe it out. Gotta be more.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 05:02:19 PM
So Merkhet, absent a favorable ruling, how are you handicapping the opportunity? Is there enough value there to incentivize the govt to restructure on private capital friendly terms?

There just has to be more to this thing. Berk doesn't put 15% of a mutual fund into these securities all for some horrendously reasoned ruling to just wipe it out. Gotta be more.

This is a difficult one to handicap.

And let's be absolutely clear up front, I thought there was a better than even chance that the Perry case was going to result in vacatur of the Third Amendment, and I think Judge Lamberth completely overreached in the opinion. So, you know, take my opinion with a grain of salt at this point.

Given that there's a win for all constituencies out there (either releasing Fannie & Freddie or Berkowitz's restructuring plan), I'm just at a loss as to what's taking so long.

I dunno if I would say that there has to be more purely because Fairholme placed 15% of his fund into this thing. He's certainly smarter and more experienced than I am, but it's possible for him to be wrong as well.

I think for him, he saw the opportunity as being pretty darn similar to the AIG situation. Possibly it was unfathomable that Treasury would find a way to release AIG into the wild and not Fannie & Freddie. One was a much worse actor than the other, and what they do is arguably equally systemically important.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: Mephistopheles on October 01, 2014, 05:10:22 PM
Did Fairholme purchase a 15% position or did it rise to 15%? I thought it was the latter (in which case it would be 7-8% now).
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 05:17:16 PM
You're right. He purchased at prices rather below what they were when the preferred shares accounted for 15% of the fund, though I'd add that a non-sale is basically a purchase (ignoring taxes).
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 05:17:30 PM
Not surprising to me it's taking so long given the Conservatorship. It's not like they own a private entity like GM or AIG where there seemed to be pretty good pressure to exit. But due to all of the lawsuits and the growing recognition that there is a win for everyone, it seems to make sense a reorg will take place within a few years. But who knows.

Not saying Berk can't be wrong. But just seems like he had to have had a worst case scenario in place. Who knows.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 05:38:04 PM
I suppose it just flabbergasts me that everyone is clamoring for a private solution, but there's unlikely to be a private solution without some sort of reform that treats existing shareholders fairly.

Actually, now that I think about it, it doesn't seem like Congress is needed at all to figure this out. Treasury remains in full control over when and whether a deal is struck for reform.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on October 01, 2014, 06:14:04 PM
I suppose it just flabbergasts me that everyone is clamoring for a private solution, but there's unlikely to be a private solution without some sort of reform that treats existing shareholders fairly.

Actually, now that I think about it, it doesn't seem like Congress is needed at all to figure this out. Treasury remains in full control over when and whether a deal is struck for reform.

Treasury's primary goal is simple: radically reducing the size of FNMA and FMCC. The status quo is achieving that goal.

They don't really care about how much money the government makes or whether the companies ought to be privately owned.

Treasury is a dead end, and gridlocked Congress isn't much better. The only likely source of reform continues to be the courts.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 06:35:19 PM
Do you think Treasury can shrink F&F via starvation and the private sector will just take up the slack over time?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 06:43:31 PM
Or a better question is -- does Treasury think they can shrink F&F via starvation and the private sector will just take up the slack over time?

I suspect that even Treasury knows this isn't possible. Note the Financial Times article showing just how moribund the private sector is even though Treasury is trying its darnedest to get people interested...
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 06:44:45 PM
Were you quoting my post? Lol I cant tell
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 06:46:22 PM
Sort of -- I was just rephrasing.

i.e. -- The question isn't whether any member of the CoBaFF forum thinks that Treasury can shrink F&F and just have the private sector -- the question is whether Treasury thinks that it can do that...

Moreover, can they do it by the end of 2017, since, by the very structure of the Third Amendment, the companies will have zero dollars of capital reserve left over -- so any losses will have to be absorbed by the federal government.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 06:50:37 PM
Got it. Sorry.

That's exactly what I was driving at. It's nonsensical that Treasury believes it can wind down the entire existing mtg mkt in this manner.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 06:54:25 PM
Moreover, the Democratic administration will soon realize the following problem from that same article:

http://www.ft.com/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html#ixzz3EwrEdix5

Quote
Authorities are having to walk a fine line between encouraging private capital back into the mortgage market while ensuring availability of credit to less-than-pristine borrowers and simultaneously avoiding a repeat of the subprime bubble that brought the financial system to its knees in 2008.

Good luck doing that without at least some sort of financial backstop. Private markets will essentially perform an adverse selection issue for insurance -- the healthiest borrowers will get mortgages and everyone else will get nothing. I mean just look at how stringent the loan requirements are right now to get a mortgage. Pristine credit. Nothing else will do.

This administration literally just went over this with the Affordable Care Act. Same concept. In reverse.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 07:01:09 PM
And that's in a low rate environment. The leverage profile of the American homeowner can barely afford current levels, let alone another 100 bps for a private sector cushion plus higher rates in general.

One would assume logic will prevail here.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on October 01, 2014, 07:17:16 PM
Americans were willing to pay 15-20% on mortgages just a few decades ago.

The economic system will adapt to whatever happens, even something much more extreme than Fannie and Freddie shrinking 50% and mortgage rates rising 1%. That's the beauty of "creative destruction".
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: bmichaud on October 01, 2014, 07:21:29 PM
'Course we'll adapt. But we are still "adapting" to lower levels of leverage and the economy is slow as a result. 20% down with 6% rates would slaughter housing prices if implemented quickly (i.e. 5 to 10 years).
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on October 01, 2014, 07:50:09 PM
I've just read through the docs. I've written my understanding of what was decided below, the reasoning why, and my commentary at the end. Comments, corrections, and arguments are welcome. I'm trying to wrap my head around this whole thing and am looking for all the help I can get.

Quote
A. HERA Bars the Plaintiffs’ Prayers for Declaratory, Injunctive, and Other
Equitable Relief against FHFA and Treasury

"the question for this Court is whether the plaintiffs sufficiently plead that FHFA acted beyond the scope of its statutory “powers or functions . . . as a conservator” when the agency executed the Third Amendment to the PSPAs with Treasury"

Quote
1. Section 4617(f) Bars Claims of Arbitrary and Capricious Conduct, under APA § 706(2)(A), Which Seek Declaratory, Injunctive, or Other Equitable Relief
- TBH, I read through this section 3 times and still couldn't make much sense. I don't know why this was so hard for me to grasp but I just couldn't really understand what was being said. I'm not entirely certain this section is too important for other cases though.

Quote
2. Section 4617(f) Applies to Treasury’s Authority under HERA
"...such interdependent, contractual conduct is directly connected to FHFA’s activities as a conservator"
Essentially what I grasped from this is that the Treasury can't come under judicial review for actions taken as counterparty to the FHFA for the same reason the FHFA can't come under judicial review. Any judician review of counterparty actions, in these instances, would infringe on the FHFAs activities as Conersvator which is expressly prohibited by HERA. This actually makes sense to me, but it's appears to be hinged on the reasoning in Section 1 that I couldn't quite grasp.

Quote
3. Treasury’s Execution of the Third Amendment Does Not Constitute the Purchase of New Securities in Contravention of HERA
My understanding of the Judge's arguments: The government was able to "exercise any rights received in connection with" the GSEs without deadline. The government had a right to the dividend of 10% for it's contribution to its liquidation preference. This dividend was later replaced by the net worth sweep - therefor, replacing the dividend with the net worth sweep is just continuing to exercise a right and not a purchase of a new security. Furthermore, the  government received no additional shares or securities so it's clear that no purchase was made.

Quote
4. FHFA Acted within Its Statutory Authority
the question for this Court, simply, is whether the net worth sweep amendment represents conduct that exceeds FHFA’s authority under HERA—a statute of exceptional scope that gave immense discretion to FHFA as a conservator
My understanding of Judge's arguments: Plaintiffs failed to demonstrate how 3rd Amendment violated HERA. This was broken down further into two arguments:

4a. FHFA motives for entering the 3rd Amendment are irrelevant - FHFAs protection from judicial review means courts can only consider what the 3rd Amendment accomplishes and not the motives for entering it.

Quote
the Court will examine whether the Third Amendment actually resulted in a de facto receivership, infra; not what FHFA has publicly stated regarding any power it may or may not Case 1:13-cv-01025-RCL Document 51 Filed 09/30/14 Page 21 of 5222 have, as conservator, to prepare the GSEs for liquidation, see Individual Pls.’s Opp’n at 58-66. FHFA’s underlying motives or opinions—i.e., whether the net worth sweep would arrest a downward spiral of dividend payments (see also supra n.7), increase payments to Treasury, or keep the GSEs in a holding pattern, Individual Pls.’s Opp’n at 66-73—do not matter for the purposes of § 4617(f).

So I can agree that the FHFAs motives and reasoning don't matter, and that the FHFA will not be punished for making a poor decision, but I don't understand how the judge fails to see that the net worth sweep does result in a de facto liquidation of a large portion of the company every quarter and does prevent the rehabilitation of the co back to solvency.

4b. FHFA Has Not Viloated 12 U.S.C. § 4617(a)(7)
My understanding of the Judge's arguments:  Just because the Treasury developed the idea of the net worth sweep does not mean that the FHFA was "bound" to follow it or that it was under inappropriate influence to execute it. Therefor, the provision that provides that the Conservator "not be subject to the direction or supervision of any other agency of the United Sates...in the exercise of the rights, powers, and privileges of the Agency." Further, clearly the Conservator did it's job as the companies are now immensely profitable.

This actually makes a lot of sense to me. I agree with the judge that even though the Treasury clearly came up with the plan doesn't mean FHFA was under their influence in executing it. This was not something I had considered previously. The point on profitability seem to miss the point. Conservatorship is meant to rehabilitate a company back to independence and solvency, no? The net worth sweep makes this an impossibility which means that the FHFA acted in direct disregard of its duty as Conservator.

Quote
B. HERA Bars the Plaintiffs’ Derivative Claims against FHFA and Treasury
Quote
As the basis for its exception to the rule against shareholder derivative suits, the Federal Circuit
explained that “the very object of the derivative suit mechanism is to permit shareholders to file suit on behalf of a corporation when the managers or directors of the corporation, perhaps due to a conflict of interest, are unable or unwilling to do so, despite it being in the best interests of the corporation.” First Hartford, 194 F.3d at 1295; see also Class Pls.’s Opp’n at 32 (quoting the same). Yet the existence of a rule against shareholder derivative suits, § 4617(b)(2)(A)(i), indicates that courts cannot use the rationale for why derivative suits are available to shareholders as a legal tool—including the conflict of interest rationale—to carve out an exception to that prohibition.

My understanding of this is that the Judge is saying derivative suits exist to get around conflicts of interest. HERA bars derivative suits and it's not enough to call upon a conflict of interest to get around this bar as that is already implicit in a derivative suit which was barred. Furthermore, even if the suit was allowed, there does not appear to be a conflict of interest at the FHFA with the Treasury. This actually makes sense to me as well.

Quote
C. The Plaintiffs’ Breach of Contract and Breach of the Implied Covenant of
Good Faith and Fair Dealing Claims for Monetary Damages Must Also Be Dismissed
Quote
A claim is not ripe for adjudication if it rests upon ‘contingent future events that may not occur as anticipated, or indeed may not occur at all.
Essentially, since the companies haven't been placed into receivership, the preferred/common equity interests remain intact and no damage can be claimed. The Judge agrees that the FHFA had the authority to make the sweep as Conservator, and the worthlessness of the stock is a result of that sweep, so proposes this "injury" is ok as it was done by the Conservator in its regular course of duty. No other "injury" can yet be claimed and there is no preclusion of a 4th or 5th amendment that would undo even this prior "injury."

A lot what Lambeth says makes sense to me, but I think much of it misses the mark. It seems that Lamberth dismisses the claims that the FHFA was operating outside of it's role as Conservator by simply showing that the FHFA wasn't under undue influence of the Treasury AND that it succeeded in its Conservatorship role as evidenced by the immense profitability of the GSEs. I can agree with the validity of both of these, but they seem to be such narrow views of the questions. It's clear that the net worth sweep makes solvency and rehabilitation an impossibility which is in direct conflict with their role as Conservator (right?). This would open the FHFA (and the Treasury by extension) to judicial review for being outside of it's role. Does anyone here disagree with this or think that this was adequately refuted?

He also makes the case that no purchase occurred and that it was simply an exercise of rights - however, I disagree. It seems clear that there was an exchange that occurred between the two parties. The FHFA was received relief from the 10-12% dividend requirement in exchange for a 100% net worth sweep (in excess of an arbitrary amount that trends to 0). Even with no monetary remuneration or increase in the government securities, it seems clear to me that the result is that the government ended up with claims on a significantly greater portion of the economic value than it had before and that this was achieved through an exchange. How is this not considered a purchase of more securities when one of those securities was fundamentally changed to a greater value through an exchange of items by both parties? Does anyone believe this is incorrect or was adequately refuted. 

Lastly, the argument about no injury occurring because there is the possibility of a 4th or 5th amendment that could undo the prior injury doesn't make any sense. If I steal something, my ability to return it does not mean that no injury has occurred until a point in time where it is definitively clear that I will not be returning it. Did this strike anyone as reasonable? If so, why?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 01, 2014, 08:08:01 PM
'Course we'll adapt. But we are still "adapting" to lower levels of leverage and the economy is slow as a result. 20% down with 6% rates would slaughter housing prices if implemented quickly (i.e. 5 to 10 years).

Agreed. We would probably adapt to 15% to 20% rates on housing. However, between 4% rates and 20% rates is a destabilization of the economy and lower housing prices, which affects the average American household, which uses their home as a form of savings.

Zach, I think you're mostly right, and I'll provide my thoughts on the memorandum opinion tomorrow.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: constructive on October 01, 2014, 09:04:42 PM
It's clear that the net worth sweep makes solvency and rehabilitation an impossibility which is in direct conflict with their role as Conservator (right?). This would open the FHFA (and the Treasury by extension) to judicial review for being outside of it's role. Does anyone here disagree with this or think that this was adequately refuted?

Yes, since 2008 and especially since the third amendment I have viewed the companies as being in de facto receivership.

No, I don't think there is a good foundation for the bullish argument about what conservatorship should involve. HERA, the senior preferred stock agreements, FNMA and FMCC filings, and FHFA reports do not state or imply that that shareholders will receive any value from the conservatorship.

When FHFA is tasked with putting Fannie Mae in "sound and solvent" condition, that refers to the company, not the securities. The way they put the company in solvent condition was by impairing the existing securities (subordinating them to $188B in government equity), kind of like how bankruptcy can put companies into solvent condition by impairing the existing securities.

Unlike bankruptcy or receivership, the case law on corporate conservatorship is almost nonexistent. In some cases (insolvent credit unions for example), the term has been used interchangeably with receivership. The assumption that conservatorship means the company's value will be "returned" to shareholders, or that the conservator is required to act for the benefit of shareholders, does not appear to have solid precedent.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: brker_guy on October 02, 2014, 01:46:50 AM
Very interesting comments by Tim Howard today:

http://timhoward717.com/2014/10/02/honorable-maxine-waters-defends-the-rule-of-law-%D1%81%D1%83%D0%B4%D1%8C%D1%8F-%D0%BB%D0%B0%D0%BC%D0%B1%D0%B5%D1%80%D1%82-forever-stained/

Quote
I have resoundingly confirmed that судья Ламберт Soviet-style ruling has slammed the door on any notion that private capital will ever replace Fannie and Freddie.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: morningstar on October 02, 2014, 04:46:02 AM
Moreover, the Democratic administration will soon realize the following problem from that same article:

http://www.ft.com/cms/s/0/ad13e938-4290-11e4-847d-00144feabdc0.html#ixzz3EwrEdix5

Quote
Authorities are having to walk a fine line between encouraging private capital back into the mortgage market while ensuring availability of credit to less-than-pristine borrowers and simultaneously avoiding a repeat of the subprime bubble that brought the financial system to its knees in 2008.

Good luck doing that without at least some sort of financial backstop. Private markets will essentially perform an adverse selection issue for insurance -- the healthiest borrowers will get mortgages and everyone else will get nothing. I mean just look at how stringent the loan requirements are right now to get a mortgage. Pristine credit. Nothing else will do.

This administration literally just went over this with the Affordable Care Act. Same concept. In reverse.

This problem will be addressed more in the choice of the next AG and less in how the GSEs are treated.

There's no lack of private capital ready to enter the mortgage market - existing portfolios have been bid up to monster levels, there is huge demand across all forms of ABS driven by the Fed's liquidity. Do you really believe we can do $100bn in CLOs and not $1tn in RMBS? Especially if gov't backstops on senior tranches lower their cost.

The problems are not on the demand side but on the supply and origination sides - demand is weak because borrowers are already overleveraged and the job market remains thin, and origination is not functioning properly because the administration has put the banks in a position where a sold loan that goes bad - where you made a few hundred bps gain on sale - can create more than its face value in eventual losses. With lawsuits, the CFPB, the QM rules, etc. they have made originating any but the cleanest loans unappealing - even if the bank would love to own the loan once issued. Those restrictions have left the mortgage market still tight while all other forms of credit are back to the 2007 peak. It has little to do with how the GSEs continue to operate, in my view.

I think mortgage market would function fine if we remain in the status quo, with Fannie/Freddie continuing to operate and effectively nationalized, and I think the market would adapt fine and probably quite eagerly to the Corker/Warner proposal. That said, any proposal involving private capital, while easy to fund now at the peak of the market, will be much more cyclical than the pure GSE model. Not clear to me if this is a big problem when you consider the availability of other cycle-dampening measures including a much more aggressive Fed.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 02, 2014, 04:47:08 AM
Unlike bankruptcy or receivership, the case law on corporate conservatorship is almost nonexistent. In some cases (insolvent credit unions for example), the term has been used interchangeably with receivership. The assumption that conservatorship means the company's value will be "returned" to shareholders, or that the conservator is required to act for the benefit of shareholders, does not appear to have solid precedent.

And yet, usually, in a receivership, excess funds above and beyond what are owed to creditors go to the equity structure -- they don't pool at the very top of the equity structure, as seems to be contemplated by the current situation.

Very interesting comments by Tim Howard today:

http://timhoward717.com/2014/10/02/honorable-maxine-waters-defends-the-rule-of-law-%D1%81%D1%83%D0%B4%D1%8C%D1%8F-%D0%BB%D0%B0%D0%BC%D0%B1%D0%B5%D1%80%D1%82-forever-stained/

Quote
I have resoundingly confirmed that судья Ламберт Soviet-style ruling has slammed the door on any notion that private capital will ever replace Fannie and Freddie.

That site is particularly polarizing. That said, if Maxine Waters really thinks that Judge Lamberth has misconstrued Congressional intent, then she should come out and say that in the public... after the mid-terms.
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 02, 2014, 05:51:40 AM
The problems are not on the demand side but on the supply and origination sides - demand is weak because borrowers are already overleveraged and the job market remains thin, and origination is not functioning properly because the administration has put the banks in a position where a sold loan that goes bad - where you made a few hundred bps gain on sale - can create more than its face value in eventual losses. With lawsuits, the CFPB, the QM rules, etc. they have made originating any but the cleanest loans unappealing - even if the bank would love to own the loan once issued. Those restrictions have left the mortgage market still tight while all other forms of credit are back to the 2007 peak. It has little to do with how the GSEs continue to operate, in my view.

I mean, I think all those things that you point out are true and add to the problem, but I think there's more to it than that.

The loans that the banks want to own are the ones with the lowest risk. I think they'd happily hold a 30-year mortgage where the buyer earns $500,000 annually and bought a $250,000 home. There's practically no chance that such a buyer will end up defaulting.

The question is what happens when you start moving down the credit risk profile. Even if you're a national bank, like say Bank of America, and you can spread your risk around geographically, it's not in your interest to subject yourself to idiosyncratic credit risk if you can avoid doing so. Bank of America doesn't want to wake up one day and realize that it somehow ended up with crappier mortgages than Well Fargo -- and the way to deal with that is through a securitization mechanism -- ergo, an insurer.

I think mortgage market would function fine if we remain in the status quo, with Fannie/Freddie continuing to operate and effectively nationalized, and I think the market would adapt fine and probably quite eagerly to the Corker/Warner proposal. That said, any proposal involving private capital, while easy to fund now at the peak of the market, will be much more cyclical than the pure GSE model. Not clear to me if this is a big problem when you consider the availability of other cycle-dampening measures including a much more aggressive Fed.

So now the question is who should act as the insurance.

(1) Can Fannie & Freddie continue to provide their services as a nationalized entity?

Well, sure, but that means that there's no probably no shot of private capital coming in to fill the hole. Think about it this way, if I'm a bank, do I want to own F&F securitized loans with the, at this point, explicit backing of the federal government? Or do I want to own Private JoeCo securitized loans? I'm probably going to want to own the F&F securitized loans -- and the only way that JoeCo can compete is by doing what insurance companies do -- under-reserving and/or pricing incorrectly.

(2) Okay, so let's say we shut down Fannie & Freddie for future loans and put them into run-off and turn the market over to the JoeCos. What does this mean?

This is basically the Corker/Warner proposal, right? Well, as I pointed out to constructive, if you put Fannie & Freddie into run-off and/or receivership, what justification do you have for pooling the excess funds at the very top of the equity structure? After all, there is no solvency risk at this point. The government preferred has been repaid and the obligations of the companies continue to be met. This basically proves the Takings Claim right off the bat.

Assume you do end up pooling the excess funds at the top of the equity structure and manage to screw the private preferreds. Then what happens? Well, the private capital that you're expecting to fund the JoeCos thinks to itself, you know, if I run into temporary trouble, what's to keep the government from nationalizing me as well and doing the exact same thing to me that they did to Fannie & Freddie?

And think of the amount of capital that you'd need to sustain a $5 trillion mortgage market. The Pershing Square deck indicates that you'd need about $500 billion, but I think that's overstating it. You'd probably need at least $250 billion at a 5% ratio or $125 billion at a 2.5% ratio -- and you'd have raise that amount from scratch for a startup with absolutely no track record of success. Good luck with that.

So even in the private JoeCos version of the world, you'd be better off re-capitalizing Fannie & Freddie and possibly breaking them up into smaller pieces. (I personally think the Berkowitz proposal is pretty good.) And, again, if that's true, how do you recapitalize them and attract private capital to them when you have changed the rules on the previous owners in the middle of the game?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: TwoCitiesCapital on October 02, 2014, 09:59:08 AM
Merkhet,

 

It seems to me that the burden on the remaining lawsuits is to show:

 

1)      FHFA was derelict in its duties as conservator (as evidenced by the implications and outcome of the sweep) to open it up to judicial review and

2)      That a taking (or securities purchase) has occurred by the Treasury

 

Lamberth says that there was no dereliction of duty because the FHFA was within its rights to execute the amendment. Lamberth sees the amendment as the solution that ended the ludicrous situation of borrowing from Treasury to repay the Treasury (and ultimately increasing the amount owed to the Treasury) AND resulted in increased profitability at the GSEs. Furthermore, Lamberth does make a strong case that defendants have failed to show that the FHFA lacked independence in its actions and that motives don’t matter.

 

Can you tell me your thoughts on why Lamberth is wrong here? Is it simply that Lamberth is misunderstanding the purpose of Conservatorship and how to measure the success of such?

 

Lamberth also suggests that no taking has occurred yet because the sweep is justified and that no purchase was made because no securities were granted – the sweep was simply an amendment to a right that the Treasury and FHFA were within their duties to amend.

 

Can you tell me why you disagree here? I’m having trouble understanding why the judge would adopt the most literal definition of “purchase.” I’m also having trouble understanding why you guys think that “ripeness” will occur. If the sweep is appropriate, and if the liquidation is successfully done via the sweep, then it’s hard for me to see when we’d ever hit the point of “ripeness” where a taking has occurred. Can you help understand why you think that a liquidation would result in “ripeness?”

Also, you seem really knowledgeable about this. Do you have a background in law?
Title: Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
Post by: merkhet on October 02, 2014, 10:07:11 AM
Zach, here's my thoughts on the opinion, as promised.

Quote
Section 3(A)(1) Section 4617(f) Bars Claims of Arbitrary and Capricious Conduct, under APA § 706(2)(A), Which Seek Declaratory, Injunctive, or Other Equitable Relief

Snark Note: He cites 5 U.S.C. Section 702 a bunch of times, but he should have cited 5 U.S.C. Section 706. Shows that he (and his clerks) put a lot of care into this.

There is a statute, called the Administrative Procedure Act, that delineates how administrative agencies are supposed to go about their business. (Section 706). In that statute, there are instructions on how to review administrative procedures, one of which is that actions cannot be "arbitrary and capricious."

Lamberth believes that HERA Section 4617(f), which states that courts cannot restrain "the exercise of powers or functions of [FHFA]," meant to prevent courts from exercising the "arbitrary and capricious" or rather that Congress intended to provide FHFA with rights that can be exercised both arbitrarily and capriciously -- I suspect that this is wrong.

Therefore, the only question to him is whether FHFA exceeded its statutory authority and not whether, while within its statutory authority, it acted arbitrarily and capriciously.

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Section 3(A)(3) Treasury’s Execution of the Third Amendment Does Not Constitute the Purchase of New Securities in Contravention of HERA

Lamberth believes that just because there's an exemption that says Treasury's right to "holding securities, exercising rights received in connection with or selling any obligations or securities" was exempted from the sunset provision of 2009 doesn't mean that Treasury doesn't have other rights that it can still exert -- I suspect that this is wrong too. This would require Congress to have intended to exempt other rights but also intended not to expressly put them into the statute. (In this case, the question is whether the right to amendment by mutual assent is a right under Section 1719(g).)

Moreover, Lamberth goes on to say that the Third Amendment doesn't constitute a purchase of securities. His reasoning for this is that "Treasury neither granted the GSEs additional funding commitments nor received an increased liquidation preference." Of course, those are not the only ways that you can purchase a security -- but he seems to ignore that. Here, the companies DID give up something in exchange for the relief of the 10% dividend, and what they gave up with 100% of the profits. (Alternatively, you can argue that they gave up their Net Worth as well because of the Capital Erosion section of the Third Amendment -- requiring Net Worth to go to zero.)

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Section 4(A) FHFA motives for entering the 3rd Amendment are irrelevant - FHFAs protection from judicial review means courts can only consider what the 3rd Amendment accomplishes and not the motives for entering it.

This is only true if arbitrary and capricious is off the table, which I don't think that it is.

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