DocSnowball

It is an interesting read - I've been struggling with whether this investment has a margin of safety, or is speculative after Perry. If the judgment is based on reasonable expectations at time of purchase, what was reasonable expectation for a purchase post 2008? Mine after reading prospectus and reviewing earnings reports was that one day in the future either recap or liquidation will occur and the shares are not worthless. Hard to stand by that conviction after Lamberth and Perry. Must be hard looking at this as a lawyer! Even the non lawyers like me are still stunned by this ruling.

Couldn't find out online - does anyone know?

Maybe a survey of those with fewer than 5 or 10 investments will answer this? Would love to know. I'm in the less than 5 group, but the reason is my circle of competence is small and I don't want to touch anything outside that. Good thing, bad thing, we'll see!

Isn't all this pure speculation though? I'd think the things that matter are rights of shareholders in case of liquidation, and what percentage dilution occurs and how preferred shareholders are converted in case of restructuring. Whether the sweep reverses this month, or what GS wants - how does that matter? I'm assuming the worst anyway as a way to disconfirm my hypothesis

+1 Appreciate it so much!

Thanks so much for sharing this, it's such an interesting talk. Pages 16-20 were such a treat to read as a beginner!

I used cost of equity as these are non cumulative dividends coming from net income. Not that any of this is happening but at least can be compared to other investments this way

So after judges Millet and Ginsburg have convinced us that our company is not undergoing "liquidation", like a good corporate finance student I am trying to calculate the net present value of my equity FNMAT as promised in the prospectus (8.25% dividends unless called back at par, valuing it as a perpetuity). If dividends are turned on in future it will just be a delayed perpetuity and discounted further. I'm trying to do this to compare the best case scenario to alternative investment decisions, or to know what it is worth in case of a question of "just compensation". NPV = Dividend/(r-g) where r is the discount rate and g is the growth rate (assuming zero growth rate, and beta =1 for a low risk utility) Using Professor Aswath Damodaran's discount rate teachings, Discount rate = Risk free rate + Equity risk premium*Beta = 2.39%+ 5.39% = 7.78% NPV = 2.06/0.0778% = 26.51 Thoughts? EDIT: based on this valuation and revaluing it as an option, markets are giving 27.7% chance of this working out. That is a mispricing with the changing narrative

I've noted the fewer decisions I make the better the investing process and returns are, not to mention health and well being. Having a checklist to review before making a decision and limiting my total investments has helped the strategy of "laziness bordering on sloth". 1-2 ideas a year are enough to take up all the time at hand. And investing in areas of work that I understand (healthcare for me) makes it fun rather than extra work

At 4 pm Friday lol

+1 In the middle of an MBA with focus on healthcare and investing (got the investing bug a year ago) and considered the professional options - investing as an individual is so much easier and more fun, esp if you like your day job. Not having too much time to make silly decisions, and not being answerable to customers for the returns makes it a lot easier to concentrate and follow the small group of companies closely. I have no experience on the professional side, but to me investing makes the day job feel like "tap dancing to work" if you have another stream of income coming in from working for yourself in investing. While I agree that it is difficult to beat the index, investing is also a meritocracy unlike many corporate jobs as your hard work and luck rather than petty politics determine the rewards. Also being an active investor is worth it just for the fun and learning from it that is put to good use in future investing and other fields of life. As long as the snowball is rolling and collecting snowflakes (Buffett) and you go to sleep a little smarter than when you woke up (Munger) who cares...

if trump delivers justice, he will have a handful of community bankers + policemen + nurses in his office ---- they sold tens of billions of preferred securities to pension funds and community banks a mere months before the conservatorship. keep in mind i'm not talking bad about hera, some times investments fail. but the nws has stunk since the day I first read about it. I think the story can be told the way it is - instead of making the companies safe and sound, the previous Government "looted" them to fund failing Obamacare, or at least to balance the budget. This will lead to their needing another draw in the coming year at Taxpayer expense. Now "we" will make them safe and sound and bring in money to the taxpayer.

Both Mnuchin and Munger disagree with him. In fact Mnuchin wants to do the opposite The prior administration was more on the same page as Buffett, but not this one

This investment (while very engaging) may be injurious to health! Ask Perry et al. Following every twist is too stressful. Why did anyone think Mnuchin would announce something big after Berkowitz sent out a letter saying the fight will go on the previous evening? Also taking time allows Mnuchin to negotiate from a better place and divert attention to other issues. While I still have full faith in the thesis, being a novice I have no idea whether and when restructuring will occur and reward retail and institutional investors, or liquidation will occur and what the liquidation value may come. My simplistic view is to sit back and relax, and let this be like a binary biotech investment waiting for a drug trial result - no one knows the end results, the success is favorable based on the base rates (rates of Trump administration stiffing its supporters, of Trump administration favoring its own and investors interests over big Government, and finally of Courts protecting property rights if they finally agree a liquidation has occurred). Versus forces wanting to kill the GSEs but unable to for all this time. Bayes theorem is still on our side. Too much noise becomes a call for action for the non-expert like the last week is showing. Also the Kelly formula can't work unless you let the position run its full course, correct? Otherwise all you get is 30% gains and 100% losses. For me as a student, this case is a coming of age as an investor. Cheers to everyone's good health on this thread!

+1 Bizarre.

This from pages 68 and 69 re: timing of purchase of shares - how are they viewing shares purchased before and after July 2008? May not matter if political solution goes through We remand this claim, insofar as it seeks damages, for the district court to evaluate it under the correct legal standard, namely, whether the Third Amendment violated the reasonable expectations of the parties at the various times the class plaintiffs purchased their shares. We note that the class 69 plaintiffs specifically allege that some class members purchased their shares before the Recovery Act was enacted in July 2008 and the FHFA was appointed conservator the following September, while others purchased their shares later, but the class plaintiffs define their class action to include more broadly “all persons and entities who held shares . . . and who were damaged thereby,” J.A. 262-63. The district court may need to redefine or subdivide the class depending upon what the various plaintiffs could reasonably have expected when they purchased their shares. For those who purchased their shares after the enactment of the Recovery Act and the FHFA’s appointment as conservator, the analysis should consider, inter alia, (1) Section 4617(b)(2)(J)(ii) (authorizing the FHFA to act “in the best interests of the [Companies] or the Agency”), (2) Provision 5.1 of the Stock Agreements, J.A. 2451, 2465 (permitting the Companies to declare dividends and make other distributions only with Treasury’s consent), and (3) pertinent statements by the FHFA, e.g., J.A. 217 ¶ 8, referencing Statement of FHFA Director James B. Lockhart at News Conference Announcing Conservatorship of Fannie Mae and Freddie Mac (Sept. 7, 2008) (The “FHFA has placed Fannie Mae and Freddie Mac into conservatorship. That is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized.”).

correct. the takings case says, assuming the nws was authorized by HERA, it still amounts to a taking of property by govt. the takings claim does not depend upon whether or not govt had authority to do the nws edit: the takings case is stronger for pref than common, but the takings case is not just a pref claim Thank you. That's very interesting. Surprising to me how forgiving they were that the facts and story presented by the Treasury was different from what the Mandamus documents revealed. The judgment says on Page 29 "The proof that no de facto liquidation occurred is in the pudding: non-capital-accumulating entities that continue to operate long-term, purchasing more than 11 million mortgages and issuing more than $1.5 trillion in singlefamily mortgage-backed securities over four years, are not the same thing as liquidating entities." So they state they feel no liquidation is occuring (time value of money is lost on them but never mind). They are leaving the takings judgment to the Sweeney case, correct? Does it matter then when the securities were purchased as far as takings claim goes? And what would the value of commons be from takings perspective if both companies are liquidated into a single utility? Thank you

For what its worth, my take two on Kelly equation, this time on a 4 year timeframe, analysis of the disconfirming opinions, confirmation of Mnuchin, use of the words "corrupt business model" and "utility" in the Republican agenda, and the current political administration. Assuming current value of equities invested in preferred: 1. Restructuring into low risk public utility with Preferreds return to par, NWS retroactively voided to pay down Sr preferred :60% Value 2.5x 2. Status quo or partial solution for political or legal or economic reasons 25% (cases go on w same or new plaintiffs) Value 0.5x. Loss 0.5 3. Liquidation without just compensation or other black swan scenario:15% Value 0 , Loss 1 Edge 0.60*2.5 + (0.25*-0.5) + (0.15*-1) 1.5 - 0.275 1.225 Odds 2.5 Edge/Odds = 1.225/2.5 = 0.49

Your skepticism is valid, personally I still have no clue about the the future - "restructuring" is the operative word (see quote from Republican platform 2016 released at time of convention, and well after Mnuchin came onboard the campaign which was April). I'm basing my 50%+ probability of return to par on the historical base rate of Fifth amendment being honored in this country, I still think it is a very conservative estimate, although you can argue about timing of compensation. Also factor in the the admin/ DOJ does talk to Chuck Cooper who knows the facts. The companies are viable and profitable, despite all efforts to wind them down. If the Government wants to restructure them for public good, it has to give just compensation to the current owners. While this may not be a totally legal investment thesis, the legal part still provides the margin of safety. Quote from page 4: "For nine years, Fannie Mae and Freddie Mac have been in conservatorship and the current Administration and Democrats have prevented any effort to reform them. Their corrupt business model lets shareholders and executives reap huge profits while the taxpayers cover all loses. The utility of both agencies should be reconsidered as a Republican administration clears away the jumble of subsidies and controls that complicate and distort home-buying." Link to original: http://www.housingwire.com/ext/resources/files/Editorial/Files/DRAFT_12_FINAL1-ben_1468872234.pdf

Other activist investors (including some on this board who have the human and financial capital to become activist) are also a margin of safety against greenmail, since the goal of a settlement would be to put the cases behind. I also realize that Berkowitz is over the 35% I reach by full Kelly, ,and he may be over 50% by next weekend, so he's seeing less risk than I am perceiving.

Over a one year timeframe, assuming current value of equities invested in preferred 1. Restructuring with return to par :50% Value 2.5x 2. Status quo or settlement only favoring plaintiffs 25% (cases go on w same or new plaintiffs) Value 0.5x. Loss 0.5 3. Liquidation without just compensation or other black swan scenario:25% Value 0 , Loss 1 Edge 0.50*2.5 + (0.25*-0.5) + (0.25*-1) 1.25 - 0.375 0.875 Odds 2.5 Edge/Odds = 0.875/2.5 = 0.35 Disclosure Newbie

What about basing position size by Kelly or half Kelly?

i've been thinking about this also. first, with a rights offering, you have the existing shareholder base. second, if the NWS senior prefs are wiped out and junior prefs are enticed to convert to common, you have a clean financing slate for new conventional senior pref that would be enticing to many institutional investors (pensions, insurance etc). but you are right, more is needed. but dont forget, if income rates go down, fnma can retain mucho dinero as long as dividends are foregone on all but any new senior prefs. let me put it this way, mnuchin calls in wall st, and says to bankers he has about $1B in fees to dole out, my guess is that you will see the bushes being beaten (so to speak) Buffett is on record about what he doesn't like - the non cumulative nature of preferreds, and the companies taking on too much risk in the past and focusing too much on quarterly earnings at the time he sold them. Berkshire certainly has the cash on hand to fire the "Elephant gun" and finance a very large part of the deal, the reinsurance market is well within their core circle of competence, it is a time when there are few undervalued investments around. This would certainly beat buying more of his least favorite industries in tech and airlines lol. The word lolapalooza effect comes to mind

Glad to hear that it turned. Cheers. Take great care of yourself, we have to believe and invest in ourselves to let the magic of compounding work in the long run

Are you still holding the 3 for more? Yes, two of them are still way undervalued in my very naive opinion! Haven't found anything with high conviction in last 6 months FNMAT/FNMA, AKAO (long only)