SnarkyPuppy

https://twitter.com/ValuInvstrToday/status/834799983245328384

Why not setup a deal with Buffet? Buffet infuses money for the recap for 50% of the required capital ratio, government increases its strike price to an amount that fills the remaining gap for full capitalization through exercising warrants? Give large plaintiffs warrants in the new company structure (what leverage do they really have now) and then sell off the governments position slowly to the public. This won't happen. But it's an illustration of one of a million ways where Mnuchin can stay consistent with what he's said while screwing public shareholders.

"1) Mnuchin once again expressed that conservatorship is not the answer. Together with previous comments that a) he doesn't want taxpayers at risk and b) he wants to preserve the 30 year mortgage, it's obvious that he wants privately owned solution. 2) So the question is, will he do this by a) bringing in new capital and screwing over current shareholders, or b) by returning the companies to their current shareholders?" This. Everything I know about this story leads me to believe that 2b will happen, but I'm Very concerned about the unknown potential with 2a.

Stunned at the fact that some on this board are bullish from today's interviews. Seems clear to me that there won't be anything done until after tax reform is implemented -> DTAs will take a hit -> GSEs will require another draw. Seems like he has bigger things on his mind. This has become an investment based on reading between the lines of what one man says, I'm strongly considering selling the majority of my position right now but need to think through this a little bit more. Also, wasn't Henslaring an enemy 4 months ago? Suddenly it's bullish that Mnuchin is discussing GSE reform with him?

What's his incentive to be shy at this point? Also in my eyes, bipartisan strongly implies congress which is terrible for us. Maybe I'm just bad at reading tea leaves... or maybe there just aren't any to read.

Welcome to the party. 79.9% was chosen so that the debt held on the GSE balance sheets would not be consolidated with the governments balance sheet

I think this is a possibility and I would argue that this is in the best interest of the government to do so. The question is not, what is right or wrong, the question is what can you get away with. I would even argue that starting with a clean slate is going to make it simpler to issue new equity after changing the statues of FNM and FRE. Doing so would certainly maximize the governments profit. The capital markets don't care, as long as FRE and FNM debt is safe. Wall Street will happily sell the new and improved FRE and FNM to institutional investors and the general public. it has been 9 years since FRE and FNM was put under the government wings, which might as well be forever. Companies reorganize and wipe out equity all the time. in fact Trump can be considered an expert in these things, so what is the big deal? Right. -Mnuchin has used the term “restructure”. -He acknowledged he’s aware of the legal cases but hadn’t studied them. -He said he wants to get them out of government control because it displaces lending What if he truly hadn’t studied the cases up until the recent ruling? And then realized that this ruling gives him full autonomy to takeover Fannie/Freddie while restoring lending efficiency, maximizing his incentivizes of government profit + enhancing mortgage liquidity? That would be a “restructuring” ala any post bankruptcy where shareholders are wiped and senior claims take over. He could end the remaining lawsuits (which aren’t looking too great) with some cash settlement likely immaterial in the grand scheme of now owning 2 companies which make ~$15bn a year. All of us retail guys get annihilated.

I guess I might just trying to take a fresh look at what "could" happen, not what he said will happen or what rationality dictates will happen.

I agree it would be irrational for him to wipe out the warrants he holds. But why not just continue the net worth sweep and take in those profits entirely for himself? If we are talking incentives, why is his largest incentive not to continue safely taking in billions of dollars a quarter?

Are there really no scenarios where Mnuchin can be consistent with his wording (get out of government control, Fannie/Freddie important, well capitalized) but also wipe out existing shareholders? I have to think that this is a non zero event that I'm not smart enough to figure out.

My concern and what is tempting me to sizably reduce my position is my inability to calibrate the odds of a nonsensical decision/action occurring going forward. On the surface, yesterday's opinion was nonsensical and went against the general arguments of US chrcks/balances and blatant theft by the government if viewed by any honest observer. But it happened, and we all have lost a lot for it. I agree the rational/sensical approach is consistent with shareholders doing well, but it's become very clear that rationality and common sense may not dictate the final outcome. Before yesterday, I didn't reduce my position after the run up because 100% loss of investment seemed off the table. If there was a bad legal case, we still had Mnuchin. If Mnuchin did a 180, we still had the legal cases. This "margin of safety" or "floor" on the shares has been eroded.

+1 Bizarre. +1. Seems simply antithetical to the concept of checks and balances from which our founding fathers placed emphasis. I'm assuming that my layman view took too simplistic of an approach here, but why not just challenge the constitutionality of HERA in court?

What is the likelihood that the Supreme Court reviews this?

I'd imagine the quarterly financials have already been prepared and the auditors have largely performed their quarterly reviews. Is it rally likely they'll go through the process of modifying the Q ~3 days before reporting? In other words, seems unlikely to me that Mnuchin can/would just call up FNMA executives and ask them to change their SEC reporting 3 days before filing..?

Mnuchin confirmed.

Thanks for your thoughts and numbers. I am more skeptical than you (and most of this board). I realized that I'm getting close to negative Kelly's. Will probably sell (part or all) if we get more runup. Within some model perturbations Kelly's at current prices goes positive/negative at ~0.4 probability of success. Jurgis, Can you share some of the items which you are skeptical about? I think that would be helpful information for those of us who want to pay attention to downside risk. Dont feel like you have to write an essay or defend it. But I think it would be helpful to listen to another view. Thanks +1

I actually think this is a black and white thing. If equity is revived in any way, shape or form the Jrs. are automatically at par. Period. That is the big picture. No matter who whines. Then, comes reform. Not saying I think this is likely, but if the GSE's are released and recap is decided to be funded purely through retained earnings, I think the Preferred would be priced at a discount to Par given time value of money until dividends are able to be reinstated. This won't happen because it's not the rational way of recapping, but nothing is 100% here.

my biggest concern is lamberth II. you never know. im actually hoping mnuchin settles with Ps before dc court rules on the appeal I hear you but I don't think this is really an issue anymore. It wouldn't be good for the market prices in the short term, but ultimately there will remain the need for a resolution of the status quo and we know where the key players thoughts are...

I continue to feel like I'm missing something here or not fully appreciating all of the potential downside events. This is one of the higher confidence investments I've had and the upside (IRR) is still very high... I'm trying to remain rational and not overexpose myself but if this ultimately does work out, the writing was quite literally on the wall.

Optically this looks good, of course, but I would assume Cooper can't actually be involved in any decisions with respect to Fannie and Freddie given blatant conflicts of interest?

lol.

bingo. the lack of creativity by investment professionals in regard to the warrants is astonishing. if/when trump sits down to decide on amendment 4, after being briefed on the contents of most if not all of the 12000 documents and given the financial return to date for the taxpayers, what's he going to do?!?! Despite litigation status, do Trump/Mnuchin already have access to majority of docs? Also, from a legal aspect can Fairholme reach out to Sessions and DOJ following his confirmation or is that not allowed during active litigation? We know the players who'll be making the case for prf'd shareholders, but I wonder who makes it for the common in the event Icahn is no longer an owner. Ackman can certainly get a meeting, but there seems to be no relationship. if they keep the warrants in some fashion, then you're on trump's / taxpayer team in common. if they don't keep the warrants, even better (in most scenarios). if the shares were higher it would require bigger thinking than this simplified analysis imo. but at a 5bn - 25bn mkt cap (with decent odds it's not the high end)?!?!? those selling imo are betting on either confirmation troubles or immediately pending negative court news, which clearly are risk factors. I think a lot of people are overlooking the serious risk of dilution to current common shareholders. I only own some for optionality and for the unlikely event of a retained earnings recap

Mnuchin confirm vote "should" be today right?

+1

Correct