Seahug

I remember 2014...a time like this. Fnma nearing 3+. Jp refs around 10. Everyone excited. Traded up to 5+ A couple of court losses then down 2/3. A few weeks ago glen Bradford on seeking alpha was on the beach posting his eviction notice and loan from an online lender. This time is different? Just trying to keep it real

77.9% was in the low/mid 20s per share if i recall. Additional shares were higher

AIG Bailout Summary is here https://fas.org/sgp/crs/misc/R42953.pdf as of 2013. Net net 184bn disbursed. Loans repaid + interest ranging from 5% to 10% + some fees. Loans were repaid via asset sales. Also sale of common in tranches to market. $47.5 bn tarp prefs additionally converted to common bringing up treasury share from 77.9% to 92%. Total of $70bn for the 92%. Warrants fully exercised. I believe the later conversion was around $40. AIG is now at 63. Net net 23.1 bn gains to Fed/Treasury. Actually 12.5bn capital loss on the conversion to common offset by interest, dividends, fees. Some security info: AIG junior subordinated bond 8.175 issued 5/15/2009 maturing 5/15 2058 $4bn issue $437 mn outstanding. Price in Aug 2009 was 24, now at 125. Aig senior unsec 5/18/17 issued 2007. 1.25 bn issued only 178mn outstanding. Low of 30 now at 101. AIG retained earnings from 90bn in 2007 to -33bn in Q12009. 2008 book value 60bn 2009 book value 90 bn Remained + inspite of loss possibly due to Govt prefs + minority interest (maybe part of bail out via separate asset holding companies)

Thanks Cherzeca. I'm 7-8% of total. Am thinking of adding if the price corrects. Would appreciate inputs on the legal probabilities if u have time. Cheers!

Absolutely right. I've reread Ack's pres, AIG bailout and FNMA's financials. I understand these more & am estimating different restructuring scenarios (spref balance paid over time or converted to equity or used to pay for the 79.9%, jpref converted at par or x% of par, etc, capital requirement raised at once or over time - all these are possible i believe). In figuring out the value of this investment and how to tackle it, all hinges on NWS reversal and a settlement: 1) Overall probability that there will be a settlement or advanced settlement discussions in 2 years? Seem very high given personalities in the new administration and their statements. 80-90% is my guess, but maybe over optimistic so would appreciate sober advice. 2) How does this change with a) Loss in both perry or fairholme cases? Does a win over p's make it more difficult or easier for the government to adopt a pro-company stance? Does it reduce the probability of a reasonable settlement? A loss in both requires the government to be somewhat benevolent in initiating a settlement - which I believe is not impossible given they will make so much more money with the GSE's vs AIG etc. A loss will make the P's less likely to have impossible conditions. Does this make sense or am i being too optimistic again? b) As a layman, a win in 1/2 I believe is sufficient to enhance our P's position, right? c) Does a win or loss result in a likely delay a settlement as parties consider & file appeals as a first priority? d) What would be the price action in the event of a loss? 60% for both previously. 35% here? 3) Is it not better/faster if no decisions in both cases by the time DT is sworn in, for govt & p's to pause and enter into settlement talks? 4) Is it valid for the govt to drive a harder bargain because the GSE's rely on some implicit guarantee? Personally I feel the financial system also benefits from a slightly less implicit guarantee. Too optimistic again? 5) Is it even worth trying to evaluate the above and just consider this as purely speculative? From AIG, my impression is it's very unlikely for the govt not to exercise warrants. Although there was a taking ruling in AIG no damages were awarded because AIG would have gone bust. In FNMA, there were actual credit losses that wiped out FNMA's pre crisis capital (whether its 1x or 3x wipeout depends on how u calculate according to ackman). This excludes any (perhaps unjustified) credit loss provisioning to justify the NWS. So there was a need for a bailout/conservatorship and seems no one has been challenging this. So 79.9% to the govt. In aig's case btw, originally it was 77.9% but ended at 92% after pref conversion. Anyway, would appreciate some more legal perspective. Thanks!

My question also. Will a settlement require congressional approval? Seems so. In which case, may still be a long way to go. But maybe also it will be like opec, kick and scream, threaten, walk away but finally agree

I don't think this is over. But, same sentiments. Thanks sincerely for your work and willingness to share. Should we add if the p's lose in the 2 appeals and price goes down a lot? Change in govt position is a big deal. Would it be easier to reach a settlement w p's if they lose because expectations are more manageable whereas govt will still want to settle to achieve their objective of privatization? Or is that stupid?

About 7% for me :), all FNMAS. Was thinking selling half at 10 but not sure now. AIG solution from my hazy memory, since i neglected to do anything there. feel free to correct on #s: prefs at 8.9% + libor completely repaid in addition 79.9% of equity (orig, dunno the final, maybe 80 or 90%) sold down in stages Jprefs reinstated i think

Under the new admin, will it be easier or harder to settle if we win in court? Won't p's expectations be too high w a win?

http://seekingalpha.com/news/3227600-next-treasury-sec-promises-tax-cuts-roll-back-dodd-frank-getting-gses?app=1#email_link Next Treasury Sec promises tax cuts, roll-back of Dodd-Frank, getting out of GSEs On the GSEs: Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) cannot be government-owned. FNMA +7.15%, FMCC +7.6% premarket

Don't have a perfect answer for scoring. Some obvious ones including for mistakes I still make - 1) Let's say you made a correct call on company/industry with respect to how it would go business wise + 1 and : a) correctly sized in relation to your targets +1 b) too small position, don't add even if makes sense -1 c) sell too early (fear/panic, too short term, incorrect long term value assessment) - 1 (impact can be a - 10 :)) ) d) something unexpected happens - fraud, delayed earnings, disaster; neutral and it depends how you assess the situation (is it temporary WFC, existential VRX) and what you do; ideally you don't have too many of these e) lack of real understanding of value for ex do you invest at the peak of the auto cycle when it looks cheap -1 f) too optimistic, requires some things to go right - 1 g) too much risk/debt - 1 h) right call on industry/company but you bought the wrong company/instrument (debt vs equity for ex) -1 2) Let's say you made a wrong call on the biz/industry - 1 because u failed to: a) identify problems in the biz model/co or industry - VRX, something probably quite wrong b) admit a mistake & cut your losses - 1 again; + 1 if you cut c) understand business/identify value drivers and just buy based on what numerically looks cheap d) understand or underestimate competition existing + new or technology obsolescence I guess this is where it makes sense to stick to what you know. I'm not really built that way. I like doing this because I learn new things. Can be maso at times. 3) Not enough homework for ex: a) liking concept & guessing - 1 b) just following smart guys - 1 c) overconfident because did really well past few investments - 1 d) don't ask what else could happen (10th man rule - World War Z :) ) - 1 e) relying on rules of thumb vs doing actual work - 1 f) not looking at entire industry chain over time - 1 g) not understanding valuation parameters, real risks, catalysts for business - 1 h) not finishing analysis, lost opportunity - 1 4) Behavioral lots of these (lack of objectivity, stuck on regret, pride, hope to solve probs, analysis paralysis, d--k for a tick, not willing to stop if wrong, giving up after a few mistakes etc) 5) Overall portfolio errors a) too many risky bets b) all in the same industry or business cycle - financials + real estate + construction c) too levered; scenario where u can go bust or get really hurt d) don't understand or appreciate all the risks Sometimes takes longer to know, but we just do the best we can. Making the wrong decision and being lucky...is not my karma. I have to work for/earn what I get which is ok and just fair. Lots to be thankful for. Hedging is something I am maybe at a 4/10 level though I've been at it for a long time. I think there's something there though as I'm losing less on it now. Haha. Cheers!

Thanks for sharing. Sorry for the late reply but was traveling. As a (now) passive investor I can only control effort & decision making. Rather than targeting higher returns, I would like to target better decision making (and its components). I believe higher returns will follow. Anyway, I consciously worked on position sizing & emotional balance and was encouraged. So I want to push it some more. At the same time, in going through 2016 investment decisions, I realized I still had quite a number of mistakes. So I feel I need to track and I really wonder what's a realistic batting average on decision making. Some specific responses. Waiting till selling, longer horizon - agree. In principle, I hesitate to count before a sale (which is why i knock on wood) but need something even if imperfect. Also, I would like to address obvious issues sooner. Assessing business performance & drivers - Agree also. I try not to be too precise as I believe accuracy is limited by real life. Business cycles, long term, etc - Yup been there. My first investment was 30yrs ago a couple of years out of college - genentech at 14, sold at 26 a year or so later. DNA was acquired for 400 (split adjusted) 20 years later by Roche. Haha. I have a few of these. Bought NFLX at 9 and sold at 25. One could argue these were value investments then, based on traditional metrics. Clearly these were more bad decisions (super stupid) than good ones. Well, I think I am pretty balanced now that I can smile at these without too much regret. Anyway, been tracking portfolio actively since 2000. I think I've done ok. I do want to get better though. It's like cooking or making bread for me. If u are going to do it, may as well do it really well. I tend to look at overall portfolio multiple, all-in (including returns on bonds + cash), not hung up on CAGR and don't really compare except as a way to do better. Circle of competence/industry cycles - I spend years trying to learn an industry as much as one can 2nd hand. Some concrete results after a while & tuition losses. I look at industry cycles as a plus these days. Investment diary - I suppose tracking & analyzing decisions is similar. The only thing is when i ask people to improve, the next question is improve from what? I need to measure. Hits, misses, no change - This implies 50%+ right? (hits = misses, no change & hedges determine returns). Withdrawals - Thanks SD. I appreciate the insight on spending. We have never really borrowed, we probably should have. I don't feel we are that old, but I find less material stuff interests me and I actually spend a lot of time trying to simplify. After years, I make really great bread but understand it's bad for you. We now only eat whole grain bread (flax,quinoa, nuts etc). I am interested in flying biz class when we travel long haul but at 4-5x reg economy and 2x prem economy (which is like the old biz class), dunno if sensible. Same for primary house upgrade or irresponsible car. I actually walk to office 3-4x a week. Life changing - Biggest life changing thing past 2 years was losing 40lbs. Other than that, I feel we've created decent amount of employment. Also now, we try to be more generous with people around us. I would like to do some more interesting stuff, startup or co invest in startups - but lost on last 2, one still alive. I find, I can only do one or two things really well at a time. Anyway, thanks everyone for the comments.

I was wondering if I could trouble you guys for some insight: 1) % of correct investment decisions - 50% in 2016 Do you mind sharing your experience and thoughts on a realistic, good percentage to shoot for? For the past 3 years (after I sold my share in a business), I've actively tried improve at investing. I want to get from a C+/B- to a B. I now do my own analysis/research and spend 75% of my time (vs maybe 20% previously). I also reflect on weaknesses (for ex: position sizing & the emotional side) and attempt to address them by reading books or talking to people. I also do a lot experimentation. If it's not working but seems to have a chance I keep at it. If it's (I'm) hopeless I stop. I try to be zen and objective. This week I tallied all my investment decisions in 2016. If I include companies I spent a lot of time on but didn't pull the trigger, I end up w only 50% right decisions. If I take those out I get to 55%. 50% is the grade for 2016 though. A right decision is for co doing well + stock price going up. Another point for correct position sizing. If I didn't execute on a plan to add when there was the opportunity to do it, then I give a wrong decision (so a stock can make money but have 2 R and 1 W). I didn't have any co's this year where co didn't do well but stock went up. I was kinda shocked at the 50% score vs Peter Lynch's 60%. Having said that, this year was my best (knock on wood) by a good margin. For some background, I've been investing for 15+ years with a low teens return. If you add business returns + a little bit of RE, it would be higher. I measure across stocks, bonds, cash. We're generally 75-80% invested. 2) % of investment income spent I hope this is okay to ask - if insensitive I apologize in advance. I also wanted to ask how you guys approach spending investment income. What % do you spend, do you spend more if you have a good year? Generally we've not spent any portfolio gains and just rolled it over. Living + kids college expenses (no aid) takes about 80%-90% of salary (some income from a 1 day a week consulting gig), dividend income (from my wife's biz + my share in remaining biz). We are in our early 50s, have 4 years of college tuition left, no debt. We live sensibly, buy 1 yr old toyotas, fly economy or premium economy on long haul. Our main luxury is a 2nd home, which we built ourselves at 50% of what it would have cost. Both my wife and I like working and plan to do it as long as we can. We try to look after our health, 70% vegetarian, mostly eat at home, drink wine but at the toyota level mostly. Thanks!

RBS 7.763 2049 noncumulative preferreds issued 1997 traded as low as $3 in 2009 par is 25, current price is 25.76 Trades on NYSE ticker is NW-C https://www.google.com/finance?q=NYSE%3ANW-C&ei=5tE0WMC7AcOB0ASkzIWIAg&ed=us I do not believe these were restructured. Coupon paying since 2014. Also traded close to par a couple of years before coupons started. Sorry, I don't mean to show you up. But I thought the best way to illustrate noncum value was to show an actual example.

Dough I am from the "back of the envelope" school of investing :) Well that's my excuse for not studying the profitability more closely. I don't really have a solid estimate of net operating profit for FNMA. Ack estimates $17bn for FNMA & FMCC combined. 2015 i think net rev 20bn, 6bn exp, 14bn pre tax, 10 bn NPAT. 10bn on 3tn or 30bps. Some portion of this is from the spread/guarantee biz and some portion from owned portfolio which they are winding down. Also need to figure out earnings in good and bad times. Also most of recent NPAT are due to writebacks. So not sure but 10bn NPAT seems like an ok, not heroic type of number +/- 20%. I find this is simpler though than the black box, big bank balance sheets w dozens of tn in derivatives - though I believe fnma also has interest rate derivs which i don't understand

Some additional thoughts on the jprefs. FNMA can't pay divs/jpref coupons until they have enough statutory capital and I believe retained earnings (though i think it's possible to restructure the balance sheet so the retained loss is eliminated and the company can build up retained earnings faster). So a slower build up of capital (less dilution for common) is actually worse for the jprefs and better for the common.

Thanks Cherzeca. Ackman seems to be "talking his book" and presents the best case for the common. He assumes a return of 75bn from Treasury (excess dividend by dec 2013) for FNMA alone, no dilution from the junior prefs (just reinstatement and payment of interest - which is ok w me btw). This results in minimal dilution from a capital raise going from 5.9bn to 9bn shares. He also presents further upside if the guarantee fee is increased to 60bps to 100bps so 23-47$/share. A significant guarantee fee bump will be unpopular because it will increase mortage interest. There's a bit of sophistry here as well as at $23, govt share = 108bn but actually it had to kick back $75bn so net gain to govt is only $33bn. Nice though if you can get it. Berkowitz is for the AIG solution, which is ending the sweep, reinstatement of the jprefs. AIG repaid the bailout money + interest and also accepted the share dilution from the bailout. Again this ok w me but it's actually closer to the situation i described and benefits from precedent. TBH I've not read through the timhoward site. I will check it out. I can't also see the best case for the jprefs as realistic - conversion to common at par (meaning jpref would own more shares than the govt; 19bn for jpref, 18bn current mkt cap for govt + common) and then common doing 2-3x. A 10+ bagger for jpref. Nice also, but come on. Still, absent a hugely pro-common decision, seems the prefs are a better risk reward in most reasonable scenarios. This is not my favorite flavor of investment as it has too many moving parts, no defined process (like chap 11). I like that it's not market correlated. But, everything hinges on the legal outcomes, which I'm not comfortable with. If the courts don't go our way, what's next? I don't know if there would be enough impetus for settlement even with a new administration. Do you guys have the patience for another appeal? Funds that bought defaulted argentina debt made 4-10x their money back, but it took 13-15 years. In reality that's quite ok. But it would be a big mark to market hit, very illiquid, and what if it goes to the next administration? However, here I am with some skin in the game. Expected value = 50% Loss (0.5) + 50% win (3x) = 1.75x from here so we should stay, right? Cheers!

Hi! I am a long time lurker and owner of FNMAS. At current market it's about 7% of my portfolio. Was wondering about calculations on the preferred value vs common? I realize there are many moving parts. On a rough basis say FNMA makes $10bn a year, at 15x PE = $150bn total equity value. But it needs to raise say $75bn (2.5% of 3tn assets) as a capital requirement. So remaining equity value is 75bn (150bn total less 75 to be raised), less $20bn assuming all junior prefs get par = $55bn equity value for 100% including 80% govt share. So $55bn/5.8bn existing shares (less the capital raise) = $9.5/share or about 3x current common share price. So upside of pref seems higher than common? However if govt returns excess profit over 10% (not sure if ackman assumes return of principal, as he says $59bn will be returned based on his 2014 presentation; but lets say only the excess over principal + 10% will be returned), say $10bn not sure the numbers but I believe its in teens, for every $10bn that will be an increase of $1.72 to common. At the same time, the capital requirement could be 3 or 4% rather than 2.5%. On a risk reward basis the prefs seem better. Unless the sweep is totally invalidated. Assuming the AIG deal which more realistic (need to repay principal + interest and govt keeps the shares), the numbers come out to 3-4x for common and at these levels 4x for the prefs. Also I don't know why FNMAT trades at a higher price (7.5/25) vs FNMAS (5.5/25). FNMAT coupon is 8.5% vs FNMAS higher of 7.75 or 3 mo libor + 4.5%. Both are noncum. Actually if both are reinstated and are dividend paying FNMAS will actually earn more because FNMAT can be called at anytime, while FNMAS has discrete calls every 5 years. Next one is Dec 2020 followd by Dec 2025. Also in case we lose the Perry or Fairholme case, I suppose prices would collapse. But given the change in administration, would you add? Would appreciate any thoughts? Cheers!