actuary

If you have 17 judges, there are (17 x 16 x 15) / (3 x 2) = 680 ways to pick 3 of them. Order doesn't matter. "17 choose 3." There are only 15 ways to pick a panel that includes the 2 judges you mentioned. So probability is 15 / 680 = 2.2%. There are 2 (judges) x "15 choose 2" (15 x 14 / 2) ways to pick a panel that includes one of the two. So 210. That means 225 ways to have at least one. 33%

Well what I'm trying to say is that even if the companies are released, D.C. still would own 79.9% of the $32 billion. So it's really a matter of $6.4 billion that they're fighting over. Take out 35% taxes from the $6.4, and it's a fight over $4.2 billion in perpetuity. So the political equation is this: Is an 11-12 figure windfall worth a cost of $4.2 billion annually? My guess is yes. However, I don't know if politicians think in this manner because all they might see is the $32 billion rolling in every year. A big wild card is the capital requirements. I don't think there would be a major dilution up front because that would erode the Government's stake. So perhaps they will allow a slow capital build. But this is all added speculation, so that's why I'm holding just the preferred. My point was that they will not keep 79.9% after release unless they pay in capital. If somehow the GSEs had $180B of excess profits swept that could be used to recapitalize them, then at that point the feds are giving up $180B to get 79.9% of $250B using your numbers. Or maybe the sweep is about even today with wiping out the senior prefs, they sell $180B in common to private mkt, the feds are left with $56B of common they can sell. In both cases, the taxpayer would be getting off a big layer of risk present today, but that is hidden from most voters. They would be giving up $21B/yr for $56B today in the second case. I just don't think it is fair to say the cost is only $4B/yr.

Exactly, why risk another bailout, it's best to give it to private hands. Here's some quick math: it looks like the companies are earning $32 billion pre-tax, all money that is going to Treasury. But the fighting is only about 20.1% of that - $6.4 billion. Of course they get to tax 35% of that, so all this drama is really only about $4.2 billion! Put on a 12x multiple on $21 billion of after-tax earnings and we get $250 billion. Take off $30 billion to pay back the preferred. And take out (I'm just making up a large number here) $150 billion to recapitalize, and we have a $70 billion market cap. So $56 billion would be the windfall. So would you want to secure $4.2 billion for perpetuity, when you're only in office for another year and half, and risk embarrassment in the Courts? Or do you want to be a hero and announce a $56 billion windfall, sealing your legacy and priming an election run for the Democratic nominee? It's not like the government cares to make their investments very profitable anyway. They auctioned off the TARP warrants, GM and AIG stakes, all at severely undervalued prices. And then they went to the media to announce that the taxpayer earned a profit. The more I think about it, the more I am convinced that the companies will be released. Having said all of this, you're right in that we must look at the price. At 12% of par for the preferreds, I'm happy with the risk/reward. I'd love to hear everyone's take on this. I'm happy with the risk/reward as well and believe they will release before the courts/media embarrass the executive branch. It was very encouraging to see Gretchen Morgenson pick this up last weekend. We own a mix of preferred and common, mostly preferred; my thought is why not own both? It's not hard to imagine the scenario where common gets severely diluted or the one where they let capital build for years to the benefit of the common. For the preferred, it seems most posters here favor the less liquid, lower dividend series that trade for a lower percentage of par... But isn't there some probability that they leave them outstanding - potentially avoiding some headline risk of "paying Wall St with taxpayer money" - and you would see those massive dividends on FNMAS/FMCKJ reinstated? We want some exposure to that scenario, too. Mephisto, your numbers seem a little rosy. Isn't the choice for gov't really between $21B in perpetuity or a $56B windfall using your figures? Not saying they can't spin it well given all the interest made on the senior preferred or that there's not value in creating a cushion of private capital for these entities. I guess they could spin it to a bigger number when they end up refunding excess payments under the 3rd amendment, increasing the equity value of which the gov't owns 79.9% pre-recap. But doesn't that mean economically even less than a $56B windfall considering they would not own the entire refund? Plus the value of releasing the implied capital the taxpayer has behind these of course.

Sunday NYT today: http://mobile.nytimes.com/2015/02/15/business/after-the-housing-crisis-a-cash-flood-and-silence.html?referrer=&_r=0 What a huge swing in public opinion over the past few months. After such a long wait, maybe this will blow open faster than anyone expects.

Always enjoyable to see discussions of concentration - the Eric path vs the Kraven path as someone mentioned. My attitude is the following. If I fail to achieve adequate risk-adjusted returns in a concentrated portfolio of 3-10 names, am I going to do so with 30+? Probably not. And, as I think ScottHall said, that would be a really bitter pill to swallow in terms of effort and emotional investment. It is the difference between starting with superinvestor holdings and understanding just a few names really well versus massive amounts of screening, reading, discipline, and a bigger belief in my personal alpha-generating abilities (assuming I can find greater number of mispriced securities). If I'm going to actively manage anything, I'd rather go ahead and do it. Think about the "punch card" and accept that it is a game of patience and volatility. Focus on finding a few fat pitches and then really swinging at them. Or, at least, that would be the goal. Mastering the art of that. But that is too much risk for life and for a family. My "base rate" or "prior" must be that passive investing wins on a risk-adjusted basis. Then you have the emotional benefits: all you need to do is consider a wide range of possible scenarios, save enough, stick to the plan, and you will get there. You drastically reduce the risk of failure and "blaming yourself." So we run the Monte Carlo and make sure that we are doing enough passive investing to cover a comfortable retirement in the tail. Only beyond that do I really have an appetite to make active bets. After two consecutive years of >80%, our actively managed assets are going to finish 2014 with an IRR around -20%. We use a lot of concentration with this money. Correct bets on BAC, AIG, MSFT we not enough to offset a large stake in Fannie/Freddie preferred and various failures of timing, especially with respect to SHLD and OUTR. One thing that surprised me a lot in 2014 but wasn't a huge driver of return was the difference in performance between domestic and international tobacco. Also, we did a decent job side-stepping energy value traps but picked up some exposure recently. I wish we'd waited until after the Lamberth decision to pick up the GSE exposure, but at least it gave us an opportunity to acquire more. But most of what we have was purchased mid-2013. I'm willing to wait years if it takes the Supreme Court to vacate the third amendment of the PSPAs. Overall, it was an excellent year for us. Subpar returns on a blended basis, but our net worth still rose healthily. Wife and I both continued to grow our skill sets, gain new responsibilities at work, increase earned income. Our child is the best in the world and growing up so quickly. We are still young, and life seems full of possibilities and pleasures. Long post, but it's great to have a public forum to hold yourself accountable. Good luck to all in 2015.

+84% in our actively managed accounts. However, we do leave the tax deferred stuff in index funds as a hedge on hubris. Still young with a high income/assets ratio, so we ran more concentration and leverage than we will later on. Biggest winners were BAC, AIG, SHLD, MSFT, GSE preferreds, CHK, short TSLA. Biggest losers were BBRY, NLY, various broad market hedges.

Unless repo liquidity for high quality collateral freezes up, shouldn't the rise in long rates be a good thing in terms of the spreads and earnings power in this space? I'm getting very interested as it seems the recent market action does not reflect the various interest rate hedges these guys have in place. There could be some catalysts coming up - declines in BV more modest than expected during the next round of earnings reports, stronger comments from fed officials about the taper / rate increase timeline, less volatile bond market action, etc. Read NLY 10K and some call transcripts this weekend... it really looks like these guys prep for a wide variety of scenarios - not just changes in fed action but reform to the gses. I can respect an attitude that these should fall into the "too hard" pile but am planning to allocate a small position this week. Implied vol on leaps is quite low, even after the recent market action.

Great thread. I'd be very interested to read any comments from Moore. We can't resist raising cash along and along from the shorter-term bets that have worked out. Trying to be patient about new opportunities. Hey, even if we're looking at 1999... mid-1999 was not a bad time to raise cash on a 3-5 year horizon. Would buy more hard assets if we needed them, but already we have two cars and a 30 year low fixed rate mortgage. We'll take some fun vacations this summer. In longer-term tax-deferred accounts, we buy the indices every two weeks and try not to think about it. What else can we do in this environment? Not looking to retire for >25 years. I guess that is a natural sort of hedge against the seller's remorse Cardboard discussed.

+88% with lots of leverage... but I am young with a high income/asset ratio. BAC was the biggest winner. Many thanks to this board for helping me cut the losers and let the winners run.

Powell continues to purchase shares. 12,000 more Monday at $7.36

Given the geographic diversity on the board, I thought it would be fun to see members' comments on whether they think of their homes as investments. I'm curious about how you all evaluate the tradeoffs of buying vs. renting, one house vs. another, renovation projects, selling vs. finding tenets, etc. What do you expect to get from your homes, financially and otherwise? Real estate investments have always scared me a bit due to the leverage, illiquidity, carrying costs (some which of which can be large and unpredictable), and all of the emotion involved. I'm thinking mainly about primary residences and vacation homes, not the securitized or at least more scaled investments discussed in other threads. In my current situation, it is difficult to find the right sort of space as a renter. And the market is such that I think buying a primary residence is one of the best financial investments I can possibly make. I live in a moderately sized southeastern US city with decent culture, schools, hospitals, weather, demographic trends, and COL. In this market, the cost of renting attractive space with more than two bedrooms and bathrooms eclipses the carrying cost of owning a more attractive home with substantially more space. Around here, you can find nice homes in established, upper middle class neighborhoods for maybe 2/3 of their depreciated replacement cost (which to me seems like a conservative measure of IV). Since this is the situation, I'm purchasing more of a primary residence than I need before having multiple children. My expectation is that, regardless of when I sell it, I will not lose money, transaction costs included. I also expect the house to be worth at least depreciated replacement cost in 5 years, provided I spend 6-10% of the purchase price on updates. In the event that we stay in the house long term, I expect it can stage a lot of great memories. Maybe this is too optimistic due to the emotion of a first time home purchase? The carrying costs could rise for potential buyers if interest rates spike... but that would probably happen in an inflationary environment that reduced the real value of my (fixed rate) mortgage debt. To me, the biggest risk seems to be getting accustomed to a certain lifestyle that could be a lot more expensive in another city if I needed to move for work-related reasons. How do others on the board think about their homes? Buffett paid cash for a nice home and never moved again... but I suspect that is not a realistic choice for many here.

Adding again as well... as is Mr. Powell http://finance.yahoo.com/q/it?s=BAC+Insider+Transactions

If the plan is massively underfunded, then by definition the decrease in liability due to higher interest rates will swamp any hit to assets, even if the assets are 100% bonds. Since pension funds try to match the duration of assets and liabilities, I doubt the shape of the yield curve could change in such a way that long rates rise but the plan funded status declines. Isn't their pension hard frozen? If no more benefits are accruing under the plan, I would think shareholders should prefer they fund it when they can get some yield on the long bond.