SnarkyPuppy

YY - Chinese live broadcasting operator trading at 3x FCF and growing 20% per year. There's a thread in the investing section.

Lol at the securities prices being flat/down today. Starting to think I need to consider the risk that the thesis plays out and nobody notices

I agree with most longs here that the risk that the GSE are dismantled is very low. The reason, imo is that the GSE’s have been providing liquidity to the mortgage market for a long time, the system work and messing it up and hurting the housing market is not worth taking. I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so. I've never understood the "NWS is very profitable for the government" argument. The key players in the executive branch are made up of elected officials who will serve either 4 or 8 years. Surely monetizing the warrants and receiving $100-150bn today is more useful to an elected official than $20bn per year paid to an entity that they will no longer be part of after 4-8 years?

One additional point - I think most look at this situation and ask "how do these go to par?" and there is no clear answer (there's a wide range of potential successful or partially successful outcomes). Those who have invested in this situation have inverted the above question and have asked "how do these go to 0?"

Probably because of some of the opinions expressed above are consistent with the consensus view. Money is made in investing when you have a variant perspective. Similar to locutusoftexas, it took me a long time to fully appreciate the various constraints involved before it became obvious that there is a (structural) margin of safety much stronger than a few hours of reading would suggest. Almost everything about this situation is nuanced and different than it appears on the surface. In addition to the fact that anyone looking at this starts with a negative opinion, there is timing risk, career risk, volatility risk, and liquidity risk. There have also been multiple dips where interested buyers have already doubled/tripled/quadrupled down. There's certainly risk of permanent loss of capital involved - I'm worried about a few low probability events. Or we can just be completely wrong - our view of the probabilities, incentives, and potential outcomes could simply be blatantly wrong. But the fact that there are 1000 pages on cobf and the fact that there are uninformed investors on the right side of this trade are absolutely independent from the final outcome. Considering either is bias.

Right - asoneone referended berkowitz "win, win, win". Who happened to be quoting Michael Scott.

I think by their own certificate preferreds have a $1 or $2.50 face value no matter what scenario, including nuclear war. So that would be the minimum amount of money that needs to be redeemed, by law. Someone correct me, please. My information is 8 years old, when I digged this up. As for a co-op, for us to be toast, banks should recapitalize the companies fully and therefore get the largest share. This may leave current shareholders with little. But it really doesn't sound like the OMB is pointing towards anything like this. What is worrisome: Coker and David Stevens happy statements since these two have always been enemies of shareholders. We just don't know what they are so happy about. Yes, someone from the Administration (WH specially) should come out and say something precise and meaningfully specific about shareholders' future. Two potential reasons why they are happy: - political reasons for posturing to uninformed as to why they were "successful" (even if they weren't actually successful). Although explicit MBS, removal of govt charters, multiple guarantors would indicate partial success (although we all know they are personally upset if shareholders who personally attacked them get rich) - bank mutualization model incoming

If the constraints truly are: - Fannie/Freddie still around - privately owned - out of conservatorship Removing any legal compensation from the equation, what scenarios would cause the preferred to go to 0 other than: - wiping old capital and IPOing new capital (irrational/unlikely) - bank owned mutualization model There are scenarios where the upside may not be as high as we think (onerous dividend reinstatement terms), but are there any other scenarios where the preferreds can actually go to $0 under the above constraints? If not - the only other variables we have to worry about are: - administration is lying about the above 3 variables - administration is removed from office Thoughts?

The unanswered questions with respect to timing do not make a lot of sense to me as a reason to avoid buying these. Even if it took 10 years to hit par, your CAGR is likely to well exceed any reasonable hurdle rate. The big risks to me seem: - whether privately owned mutualization model is in the cards - the banks collectively could easily throw $200bn of capital to meet the capital standards (yes this would create an ongoing contingent liability for the government, but I don't believe any resolution would happen while the current administration is still place so why would they care? look how slow the courts move) - whether the current administration is around long enough to implement a shareholder friendly solution (clock is ticking to January 2021 and this isn't the most stable presidency. Who knows what will happen tomorrow?) Other than that... lol @ current prices

Pure speculation but the very coordinated slow "leakage" of news as opppsed to one overwhelming announcement may be an attempt to smooth the securities prices trend upwards as opposed to creating a one day +400% spike which would definitely cause a lot of media attention. Purely speculating and aware of my bias here

Fairholme's plan for reference: http://online.wsj.com/public/resources/documents/FairholmeOffer.pdf

so isn't it kinda weird that they just stopped this call 1/2 way thru? That was the UFOs

You read them all? Almost. CoBF is my most valuable "paper" every day. What are your thoughts? Personally, I think the preferred should be trading in the mid teens. Even a 66% upside to par ($15 for a $25 par) seems absurd given the current constraints involved. Seems a combination of ignored, hated, misunderstood, and frankly most of the buyers have already bought multiple dips over the years leaving more sellers (due to timing, liquidations) than buyers. This is exactly the type of investment I look for as a contrarian investor looking for systemic edges.

You read them all?

Imagine the reaction two years ago if the following happened simultaneously: - FHFA put out a proposed capital framework (seemingly aligned to a shareholder proposal) - Treasury Secretary went on TV and agreed that Obama used fannie/freddie profits for Obamacare - Treasury Secretary confirmed in an interview that he won't consider getting rid of fannie/freddie - Treasury Secretary stating that any resolution will be contingent on the companies being "adequately capitalized" - FHFA putting out a proposal for a shareholder owned utility model - RNC resolution basically written by a shareholder - HUD Secretary stating that he wouldnt be opposed to shareholders "getting their money back" - Modification to SPSA to suspend 1 dividend payment - Consistent friction between Corker/MBA and the administration Of course the legal case has weakened since so that should be accounted for as well.

Right - I was responding to the theory that Mnuchin will go through congress to get an explicit guaranty

That's beautiful. if you think about it, the principal objection to FnF by its haters is that it could arbitrage the lower cost of financing due to the implicit fed guaranty for the benefit of its shareholders and execs (raines and howard were well paid). forget that tbtf banks benefit from fed backing of deposits and the same implicit guaranty. there is no consistency where there is hate. so if you want to do what's right (return FnF to a strong capital position) and be politic enough to understand what you have to do to do what is right (no more unpaid for implicit guaranty, and give mbs holders better regulatory capital treatment by holding fed backed mbs), then this would be a smart way of going about things. Seems odd to me that Mnuchin would explicitly call out Watt's term ending under this scenario? The FHFA proposal contemplates both shareholder owned entities w/ capital requirements & an explicit mbs all determined via congress. Why call Watt out as an impediment to reform? Possible I'm just overthinking this - and it's helpful that Mnuchin has someone in FHFA who can help push Congress to do something practical "or else"

1+ ............................................................................................

+1

Expected value is indeed very attractive at current prices

Recap release has been around for 3x the length of that paper with zero traction And again - no response to mutualization model other than it's not recap/release lol

Aren't you skeptical when crapo and corker are on your side? Admin action is wonderful if it's beneficial to us. Again - no response to the mutualization model. I'd place gw odds at 50/50 right now. Definitely +expected value at these prices but unfortunately only one coin flip.

Other than Mnuchin missteps on timing, I can't point to any commentary to date that Mnuchin has said which is anti-GSEs. In fact most of his comments continue to remain pro GSEs, pro private capital, pro government guarantee, and in an interview just a few months ago, he said point black he would not go as far as to get rid of the GSEs. His stance has always remained the same, he wants to end the conservatorship of the GSEs, not replace / get rid of them. If you find any language that he has said to date that implies the opposite, please share. The rationale behind the status quo being unsustainable is quiet simple, we all know this already, aside from a small capital buffer of $3b, there is no capital in place to support ~$5tn of liabilities. There are a few key issues with this status quo, 1) The government bears the full risk of another down cycle due to no capital (read taxpayer bailout)- Mnuchin has acknowledged this point in the past, 2) It will be difficult to reintroduce new private capital to the market based off how previous legacy investors were treated (Larry Kudlow, Trump’s recently appointed top national economic advisor, agrees- and we know Mnuchin wants private capital back), and 3) No matter how small the odds may be, the government continues to face a $100b+ overhang in litigation (this is a potential $200b+ PnL swing vs government monetizing its stake), and unless I missed it, no court has ruled on any constitutional claims yet. We have continually lost the same APA case over and over. Most importantly the takings claim is where motive (read evidence) matters. Not that its part of my thesis, but the same could be said to Trumps largest donors/contributors, Paulson, and more importantly Steve Schwarzman of the Blackstone GSO group. If the admin is truly looking out for themselves, this continues to be a path where Trump can chalk up a political win in addition to pulling $100b+ out of a magic hat as a "deal maker". The warrants cant be monetized until a reform plan is put into place. They weren't able to replace the GSEs back when they had momentum behind their back and were unprofitable. Now that they are more profitable than ever and Corker and Hensarling are on their way out, what makes you think any of the reform plans being presented is anything other than noise at this point? Additionally, the GSEs are the foundation of the U.S. housing market and are too systemically important to be wound down and replaced. It has in the past and remains a risky proposition to replace a functional system that has been in place for over 50 years with a new untested system that may or may not perform as intended. I don't see Trump admin as ones that would want to role the dice on the economy given current state of affairs and deficit issues. They were able to justify the recent draw due to a one time accounting hit. The combined draw totaled less than $4b due to some earnings and a timely settlement. The same cannot be said if a material draw is needed. Regardless of how PR will spin the GSE failure, the PR will crush Trump and the republicans for allowing that to happen under there watch, especially when one of his first mandates was to end taxpayer bailouts. Again, motive has yet to matter in any of the cases BUT the takings case. This was always a issue of takings and no court has yet to rule on that matter. Unfortunately for shareholders, the discovery process dragged this case out for 4 years. Luckily that's wrapped up now and we are in the briefings stage. I understand the frustration, you are not alone, hence the share price today. Perhaps you are not aware how shareholder claims are treated in courts, but we are all equal. There is no settling with 1 private party loophole here. That has never been a risk to the thesis. I'm exhausted and need to sleep - but I wanted to give a quick response. I don't disagree with anything you're saying. In fact, your responses are largely consistent with my responses when pitching the bull thesis. The problem is your (and my?) refusal to look at alternative downsides as you are basically just assuming that you're right and eventually you will be proven right. When there's no margin of safety - you have to be 100% confident that your thesis is bulletproof. I'm skeptical. The notion that there is no alternative to the current public/private GSE model is a bold statement that gets thrown around a lot by shareholders. I hope you're not relying on the mix of Berkowitz/Rosner/Tim Howard and crew - these people are financially biased and this is an extraordinarily complicated topic. There may be no *better* model - but there's certainly many other models. You still have not addressed the mutualization idea directly - nobody in this thread has - other than vaguely countering with the fact that the public/private model is the best. You took my point on Mnuchin saying one thing and doing another w/r/t timing out of context. It was more fundamental - to illustrate the simple fact that there is demonstrable evidence that he says one thing and does another (directly related to the GSEs as well). Given he is the entire thesis, I'd focus very closely on everything he says and does. Larry Kudlow is actually anti-GSE. He simply said in the interview that he agrees shareholders were screwed and that issuing new capital without treating old capital fairly is a difficult task/a good point raised by Rosner. But he's fundamentally against the GSE's, likely has no say in the matter, and again - assumes there are zero potential alternative outcomes where the housing market changes shape and he's cool with it. He likely couldn't care less about shareholders at the end of the day. Contingent Liability of ~$100bn. This was one of the main reasons I initially got it. This was the glue that held the entire thesis together. But again, similar to the warrant point above, the current administration couldn't care less about the liability it places on a future administration. If the government loses a lawsuit, they'll likely appeal and drag the cases out until the next administration has to deal with the issue. Even if a payment needs to made the day after, the current administration will take no blame as they can simply put full responsibility on the obama administration who created the liability. Mnuchin has done sufficient CYA by a) agreeing to a small capital buffer and b) constantly saying its a complicated topic that hes working on. Obama gave him a difficult hand and he's been trying to figure it out. Obama stole for Obamacare. Obama. Obama. These guys will PR the fuck out of your worthless shares and these arguments won't be very meaningful. By the way - what ever happened to Trump/Mnuchin seeing all of the privileged documents and releasing them / going on a rampage highlighting all of the Obama theft? Surely you are aware that the companies behind anti-GSE legislation (large banks, BlackRock, etc) are orders of magnitude more important in fundraising for an election than Paulson (also - how's the Puerto Rico debt doing that Trump was going to make whole?) and BlackStone lol. Can Berkowitz afford his own mortgage at this point? The share price is a result of the things you mentioned. But it is also the result of an administration not acting in shareholders favor when it can quite easily, today, act in shareholders favor. Regarding private settlement. Again - I see no reason the government can't settle with all current plaintiffs and end the suits (the plaintiffs at this point happen to be everyone with the actual money capable of suing). Any residual liability can be passed off to future administrations (new lawsuits seem to take on average ~5-10+ years). I forget which bailout (citi I think) made certain foreign private shareholders whole while paying fractions to remaining shareholders. Again - trying to play devils advocate and poke holes in the thesis rather than constantly repeat the same platitudes shared by Berkowitz over and over until the shares go to $0.

1. Mnuchin has already reversed his commentary to date on the timing of when the GSEs would be released. What's stopping him from reversing his commentary to date that he wants to end conservatorship? Is this in legal writing? Will he be personally punished if he keeps the status quo or go against what he said publicly? His boss quite literally lies daily...? 2. "Agrees to forfeit up to $100bn". Again - this is not money in Mnuchin's personal pocket. While the $100bn is a great incentive for the government, it doesn't contemplate whether there are other incentives at play which take priority. As an example, if there is a mechanism whereby large banks are overwhelmingly favored but shareholders are taken out, it's possible that Mnuchin/Trump would see the banks fundraising money for the 2020 election to be a personal incentive which trumps (pun intended) the $100bn for the country. Color me crazy but I don't see the current administration as a bunch of charitable good guys who are looking out for anyone but themselves. 3. Also w/r/t the warrants - they could've been exercised by now. The value of the warrants reduces as each day passes. The longer the current administration waits to monetize the warrants, the less time they will have to use the money productively. Why would Mnuchin want to monetize $100bn of warrants to hand over to the next admin? Waiting longer is coincidentally the same as waiting until closer to 2020 - hence waiting to disclose the solution until a date closer to the election is consistent with my point #2 above. 4. Please explain, in detail, why the following plan is a "low probability" event given that it's consistent with everything all key players have spoke to so far? http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf Not sure I understand Karen Petrou's argument. In the article she states "A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse." A draw just occurred on 3/31/2018 - did you hear anything about it in the news? A larger draw probably causes just as much noise. Even if it did, it could be easily PR'd to the average person that fannie/freddie are the problem and need to be killed. You are one optimistic soab to have any faith in the legal thesis at this point. I think we all should acknowledge that this is extremely complicated and at some point become sober to the fact that "lack of judicial review" was not something that was handicapped for when the initial investment thesis was presented. I'm still in the trade, but I find myself more and more recognizing that I want to be right about this after spending so much time on it. It's a clear bias and something that smells trouble in investing - and I'm very close to sizeably reducing my position as I'm worried that there's something else coming that will blindside us again. The mutualization solution (http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf) plus privately settling the lawsuits with all current large shareholders would not be totally surprising and I don't know how to handicap the odds.

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post. That's happened at least 3 times with the post I've quoted above. Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount. I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process. I have a question (note I'm not emily's 2nd secret account) I just have a question. At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it? I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't. So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else. I think it is important to remind everyone of the context here from time to time. This is supposed to be America. Oh stop it. You're just trying to get rich easily and are upset its not playing out.