Seahug
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Posts posted by Seahug
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Didn't see this posted yet - Berkowitz sold some prefs in Q1
Fannie Mae and Freddie Mac
FNMAS and FMCKJ are preferred stocks and the largest Fannie and Freddie holdings in The Fairholme Fund. It had 38% of assets in these securities in its latest fund facts sheet as of 2/28/17. Most of my conversation with Mr. Berkowitz was spent discussing the path forward for Fannie and Freddie. The Fairholme Fund has pursued two lawsuits against the Federal Housing Finance Agency and the United States Treasury that date back to 2013. His aim has been to protect our rights as owners of preferred shares in Fannie and Freddie. Although I believe Fannie and Freddie investors will be rewarded for their patience in the end, my concern was the size of the Fannie and Freddie position. There are still significant political and legal hurdles to overcome. Bruce spoke about his large investments in financials such as Wells Fargo (NYSE:WFC) in the 1990s, and AIG (NYSE:AIG) during the financial crisis which reached as high as 60% of the fund's assets. Many thought he was crazy for taking such concentrated bets, but they worked out well in the end. He believes this will happen with Fannie and Freddie.
I questioned Bruce on the status of the government releasing the 11,000 buried documents in the Fairholme case against the federal government. He acknowledged that 3,500 documents were recently released and his lawyers are reviewing them. He said he is prepared to take the case to the U.S. Supreme Court to prevail if necessary, but remains open to a negotiated settlement first. He believes that senior officials and key advisors in the Trump Administration all understand the Fannie/Freddie situation. He believes more and more people are beginning to understand, but 99% of the world won't care until they face the prospect of paying higher fees on their mortgages than is the case with Fannie and Freddie providing liquidity to the secondary mortgage market. Bruce is looking for some positive news during the second half of 2017 and believes that FHFA Director Mel Watt may direct Fannie and Freddie to retain some of their earnings in the near future. He said Mel Watt recently testified about the need for capital at Fannie and Freddie just last month. Bruce said: "The law needs to be respected and taxpayer math tells the story about public gain backed by private capital. The math shows lots of public good backed by private capital ever since Fannie and Freddie were converted to shareholder-owned companies decades ago." He suggested that I look at the Moelis Blueprint to restore safety and soundness to Fannie and Freddie. The Blueprint calls for building $180 billion in capital at the companies and would ultimately result in additional taxpayer profit of up to $100 billion (on top of the current ~$80 billion profit). This sounds like a "win win" for all stakeholders which makes a lot of sense to me. He also suggested that I look at the newly filed lawsuit in the United States District Court for the Western District of Michigan challenging the constitutionality of the "Net Worth Sweep."
Bruce said:
"The plaintiffs in the new suit argue that FHFA was operating in violation of the constitutional separation of powers when it agreed to the Net Worth Sweep because it was not subject to meaningful oversight by any of the three branches of the federal government. In addition to being headed by a single Director who is independent from the President and other federal agencies, FHFA is not subject to supervision by Congress through the normal appropriations process. Instead, FHFA raises funds by directly imposing assessments on Fannie and Freddie. Other courts that have heard statutory challenges to the Net Worth Sweep have concluded that judicial review of FHFA's actions is severely constrained except when FHFA violates the U.S. Constitution. FHFA is thus insulated from meaningful supervision by the Executive, Legislative, and Judicial Branches."
He added:
"The Michigan suit also contends that FHFA's acting Director, Edward DeMarco, occupied his office in violation of the Constitution's Appointments Clause when he approved the Net Worth Sweep. The Appointments Clause requires that agency heads and other "principal" officers of the federal government take their positions only after being nominated by the President and confirmed by the Senate. President Obama never nominated Mr. DeMarco to lead FHFA, yet Mr. DeMarco had been the agency's acting Director for three years when he imposed the Net Worth Sweep. No court has ever approved such a lengthy tenure for the acting head of a federal agency."
Bruce stated:
"The new suit also asserts claims under the nondelegation doctrine, which requires that Congress articulate an intelligible principle to guide federal agencies when it gives them discretion. As interpreted by courts that have upheld the Net Worth Sweep under the Housing and Economic Recovery Act, that statute places no limits on what policies FHFA may pursue when acting as the conservator for Fannie and Freddie. The Michigan plaintiffs contend that the courts must vacate the Net Worth Sweep if any of their claims succeed."
Bruce expects the administration to focus on healthcare and tax reform first, and then they will turn to other economic growth initiatives, including Fannie and Freddie (and housing more generally). He believes we will have a better sense of the path forward for Fannie and Freddie in the second half of 2017, and that a positive outcome for investors should become apparent in 2018.
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What's worked for me a number of times is to write to customer service directly on the corporate website - except for car rental co's (Avis, europcar)
With Uber etc, car rental companies are hammered..in which case it's ~100 bucks. There's principle and there's being philosophical. If it's not a big amount, even when we are right, in principle we always just settle. It's just not worth the time.
Cheers!
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hi guys, am trying to not get caught up by emotional swings caused by twitter feed. there's just a lot of noise
is there an updated summary & analysis of pending legal cases - other than perry & fairholme
i read the 2015 calabria paper. i think it's ok actually
anyway would appreciate if someone could post
have not sold
thanks!
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"549 key positions in the administration need Senate confirmation. So far, Trump has filled 14"
http://www.vox.com/policy-and-politics/2017/2/21/14672984/trump-transition-slow
Maybe the reason for very measured comments by Mnuchin
FNMA is a tough investment. We're left to reading tea leaves, innuendo...and we have to worry about DJT/Mnuchin being able to field a team.
Chance for a wipe out for us are lowish, but not zero.I think Cherzeca's overall assessment is right - most likely there will be something left over for prefs/common. Given the loss in legal and optical/political leverage, I'd say partial pref right down and govt warrant exercise after the pref conversion (but prior to public offer) are both possible. It can still work out, upside is much less. The timing of the exercise of the govt warrants is meaningful in terms of dilution to common and prefs. Why would we convert to common? Well if not they can continue NWS.
I will hold though.
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Hmm ok thanks, I see that.
But I've seen companies (LVLT for ex) hold DTAs for years as long as there's hope for profitability
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Who do people assume w/ a reduction in corporate tax rate, the DTA ($33.5bn YE2016 for FNMA) will need to be written down?
Doesn't this just extend the number of years to utlize the asset?
I can understand if corporate income tax goes to zero...
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So the other shoe dropped. Hope you guys, especially those who can make sense of the legal stuff, can clarify some things...
1) In a settlement negotiation, what's the remaining leverage of each of pref holders and common? Is it just continuing litigation or is there something else?
2) The remand for breach of contract, damages and dividends, applies to both common (depending when you bought it) and the prefs? Does the date of purchase also apply to the preferred? Does it imply a liquidation preference vs common (as expected) which is why the common traded down a bit more? Why does it benefit the pref more than the common?
3) If something comes out of the 11,000 documents does the Perry judgement render that irrelevant or can fairholme bring another case with a higher chance of success?
Well (for now) I am glad i didn't bump my holding from 11% to 15% or 20% of portfolio. I was hoping for a more neutral remand to increase the chances of a settlement.
Given significantly lower leverage for P's, I believe we need to recalculate recovery values for common and prefs assuming harsher terms.
Thanks!
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Are we sure there's something in the 48 documents or it's an assumption because they wanted to restrict access?
In DJT's shoes, even wanting gse release, I would continue pressing the plaintiffs so there's incentive to settle. Also I would continue NWS/litigation unless prefs/common agree to a restructuring plan which may include conversion of pref's to equity.
Under Basel III, minimum T1 common equity is 4.5% and total T1 is 6%. Since the prefs were issued prior to Basel III guidelines, it's possible they need to be called anyway (which I've seen).
Additional Tier 1 instruments: In addition to common equity, Tier 1 capital includes certain non-common subordinated
instruments with fully discretionary non-cumulative dividends or coupons. So-called Additional Tier 1 instruments must be
perpetual, i.e., without a maturity date and precluding any incentives to redeem. In January, the Basel Committee
pronounced that Additional Tier 1 instruments, if issued by internationally active banks, must be convertible to common
equity or be written off at the point that an institution would become non-viable without state support.23 In addition, any
Tier 1 instruments that are classified as liabilities for accounting purposes must include a similar conversion or write-off
feature.
In any case 4.5% of $3tn (FNMA) = $135bn common vs 4bn now. Some ways to go even if we assume some ipo, pref conversion, net income retention.
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Haha it seems I am underinvested.
By the way, a sincere thanks to the forum for the wisdom during the thick and thin of it.
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@cherzeca
tx for reply. I agree much better risks now that 6 months ago, not just Mnuchin/DJT but also the mandamus. what's the right position size?
at 9% if i make 3x, I'd be pretty happy. at 12%, I'd be just slightly happier. At 25%, I'd be much happier, but not 2x happier.
if I lose 5%, not a big deal. at 10% i'd be kinda pissed. At 20%, I'd get into trouble with my wife :). At 50% I'd be depressed.
few here seem to really want to disclose % of port exposure so hard to gauge the measure of conviction. i actually like glen bradford because he updates developments fast and posts his port.
anyway, i've made a lot of progress on analysis paralysis :) - one of my big stumbling blocks.
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Past month, I increased 35% pref count by adding cash (half) and swapping for the lower priced prefs (half) ending at about 9% of total portfolio at current prices.
I debate adding more. There are unknown unknowns....and, aside from what's been discussed here on the legal side, significant mark to market hits or much lower recovery if...
1) Progress is slower, even if process pushed back by just a year. Right now the psychology is too positive.
2) Capital requirements are not 3% as we imagine but closer to bank tier 1 car ratios, 10% - $300bn equity for FNMA alone? Prefs would never taste a dividend.
3) Some change in DJT policy
4) Global macro, for ex interest spike - if you read the UC Berkeley paper on interest spikes, I believe beyond a certain range FNMA would take quite a big hit and may need to draw on treasury. This would be a disaster.
By now it's seems certain Mnuchin gets confirmed. Even if he weren't, as my friend said, there are so many other goldman mortgage bankers out there. Confirmation would bump prices by 5%, more if he says something nice.
If I add another 20-30%, the additional short term or long term gain would be nice it all works out. But it would not change my life. For a material change, I would need to increase by 50+%. But why do do something outside my comfort zone? Is it just for $$$, greed, or bragging rights? This is not a sure thing.
Dunno. One my psychological weaknesses, analysis paralysis...
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http://faculty.haas.berkeley.edu/jaffee/papers/FFJuly31.pdf
see if u guys can figure this out...
So... what i gather from a 5 min scan of this 2002 paper is interest rates partially but not completely hedged, 100% hedging would cost too much.
maybe this is it, p22-23, text + table 6
FNMA inc guarantee fee stream in its income. If i declines, more preterminations, hence lower fees. So they model +1 and -1% interest rate change. In both cases there's some loss but significantly more when interest rates decline by 1%.
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Why does berkowitz say GSE portfolio values increase as interest rates increase?
'As interest rates rise,
Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. "
I would have thought the opposite for the held portfolio.
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Glen Bradford's position from Seeking Alpha
" I have 4050 shares of FMCCH, 10860 shares of FMCCP, 8312 shares of FMCCT, 2600 shares of FMCKI, 1341 shares of FMCKO, 17585 shares of FMCKP, 17304 shares of FNMFN and 5 shares of FNMFO. That's a par value of over $3.5M and I have roughly $233K of debt"
All in. That's about $1mn before debt. Life changing. Hope he makes it which means we do too :)
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I was thinking of a website where small investors can vote/give their proxy for certain actions in a seamless manner, allow the most important popular opinions to be chosen, present factual information which can be commented on or corrected in an easy way. You can aggregate votes maybe not enough to block but to raise an issue. Maybe has links w other websites, twitter etc so can gain critical mass.
Ideally all automated so minimal running expenses after it's built
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Are all the junior prefs pari passu in terms of seniority?
Over past 2 weeks have swapped FNMAS for the cheaper FNMAH (actually series P, floating minimum coupon 4.5%) and got 18% more shares. Am also adding a bit more of the cheaper prefs. Overall wanted to increase by 20-30%.
Although the S will trade highest if there is coupon reinstatement (vs T also. I mentioned this here. In fact T which used to trade at a 10% premium to S, is now cheaper), I believe the most likely scenario is a conversion to equity. I don't believe the jprefs qualify as T1 capital under Basel III. So they would need to be redeemed anyway. In which case, cheaper is better and the pricing gaps between prefs should narrow? Hope this is right!
Still at about 8% of port even with the added capital.
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This interesting to me and I believe there is a need based on past experience. Examples are:
1) Colt buy out by majority shareholder Fidelity at a below market price vs selling to a consolidator.
2) LVLT management stock awards for the past several years while revenue growth and rev growth per share has been nil
3) Many, many examples in Asia & elsewhere
I guess my questions are:
1)Is it sustainable - how would the site earn money, is there enough interest and is the size of the market opportunity big enough, who would pay on an ongoing basis apart from the initial set up? Most of what I've seen is people rant on twitter or message boards like this or the bigger investors on Bloomberg
2)How would it work operationally in detail? Have you thought it through?
3) How can it gain traction
If there's serious interest, I would be willing to collaborate, help build and seed
thanks!
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Its in the language for the warrants - 79.9% after any capital raising, dilution etc.
Technically possible is all i am saying
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Can we try to think through all of the downside scenarios for the preferreds?
Is there any other possible downside scenario here that I'm missing that's in the remote realm of likelihood?
Additional possible downside for jprefs-
Based on spref/warrant language warrants can be exercised AFTER conversion of the jprefs to equity. This totally screws up jpref and common returns. Technically possible but i dont think this is the likely approach.
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Odds on Mnuchin confirmation?
https://morningconsult.com/2016/11/30/democrats-unload-mnuchin-signaling-senate-confirmation-fight/
I would think they precleared him w their party. They control senate? Wouldn't nominate if DJT dint think he would be confirmed. Giuliani withdrew.
Also I note based on the language of the warrant, it's possible that they govt could convert the jprefs before exercising their warrants & they would still end up w 80% for the same .0000001/share. That would hurt...
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Could it be they own a bond that pays annually or semi annually?
Interest is accrued/earned & reflected in NPAT, but the interest is only paid on the payment dates so is noncash until it's cash.
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I think he was margin called based on reported holdings
Hmm. Recalculated his holdings. Maybe not margin called or if at call not a big amount. I got mixed up with the 50 pars. Current market value is about $900k, which is about 2x previous value.
My bad, apologies to all.
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I dunno which brokers would provide margin on FNMA/pref. No margin currently in my 3 accts (full service, ibkr, schw). My guess is not impossible. Not sure good idea to margin this even if available.
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Well not sure how all in to be with this thing
Edit: Hmm. Recalculated his holdings. Maybe not margin called or if at call not a big amount. I got mixed up with the 50 pars. Current market value is about $900k, which is about 2x previous value.
My bad, apologies to all.
Modify message
FNMA and FMCC preferreds. In search of the elusive 10 bagger.
in General Discussion
Posted
Sorry for the late replay on this. I don't monitor this as often and mentally have thrown my prefs into a coffee can/safe or whatever. Mostly what's going is noise, who really knows. Companies are profitable, sweep was unfair I just hope it works out and one day I wake up to a 5 bagger.
Fairholme had a 31 Mar 2017 filing showing a sale of 3mn FNMAS out of a 62mn position, so down to 59 mn - all numbers approximate.
Given the SHLD issues and possible redemptions I can see how there may be this pressure on him to rebalance...
There was another series where he sold some.