Wiggins

Thank you! If I didn't have bad luck I wouldn't have any at all. ha

I agree with your last two posts. You may be right and I might lose, but I like my odds at 6% of par. If we recovered 75% of par and it took a few years that's still a massive return. This feels like distressed debt investing to me, which is not for everyone. It sucks, it's uncomfortable, it's unnerving... and then you win. And in those situations the time to buy is when people are panicking. Yes, it doesn't always work out but I believe this one will... I would like to see more analysis on Lamberth and on Schwartz. That's where the action is IMO.

It's exactly like eminent domain. Under certain situations the government may take your house (e.g. to build a highway that must go through your property), but they cannot do so without compensating you fairly for property taken. The first part is perfectly legal; the second part is a completely separate issue. SCOTUS said FHFA can enact the NWS (it's legal), but they said nothing whatsoever about the second part. The above is also why you can't say things like "what we've learned over the past 9 years".. The past is irrelevant since court cases have all been procedural and none have looked at the facts. I think Gary Hindes has it right. Now, it's only a matter of how much recovery there is. I think when the facts come out it will be very bad for the government given the officials involved in this case who have lied, as well as the accounting which will come to light. They GSEs are not AIG. They were profitable the whole time.

The answer to this question is best stated by Baron Rothschild: "the time to buy is when there's blood in the streets."

Because that's not what SCOTUS said. SCOTUS said they could take (what you call steal), but they didn't say it wasn't a taking and they made no mention of "impunity". In fact, David Thompson was asked "why not bring this up in the court of claims?" Lamberth also said as much, but went further in proposing that even if HERA does allow the NWS it still may violate covenants. Your post perfectly encapsulates the mismatch between market participants understanding of the situation and the reality in courts, and hence why there is such a great opportunity at present.

Most people are selling and very pessimistic, but I am buying. What part of "contrarian" about that scenario is unclear?

Disagree; I am buying. Throwing out someone's name as justification for any type of investment decision is weak. If you're following the herd this looks like a bad investment. This is a contrarian investment and that couldn't be clearer now.

Sunrider, when Lamberth writes "the court will look to Hera to determine what investors' reasonable expectations should have been", I believe he is merely introducing the topic before discussing it immediately below in the same document. I don't think he is referring to some future trial or something else, because he goes on to answer the question. allnatural references part of it in his post subsequent to yours. In sum, he concludes that if the facts plaintiffs allege are true, then FHFA/GSEs DID violate the implied covenant. The only purpose of the trial is to assess facts and damages. At the stage Lamberth wrote this document, he was dealing with the law (not facts or damages), and his conclusion is firm that the law supports plaintiffs here.

I don't see how the GSEs could be released in any form similar to before conservatorship after that ruling. SCOTUS has defined HERA to be highly averse to investors. Who would invest? There are two huge problems: 1) your capital is not safe and 2) the director is now a politician. I see the only way to save anything like the old system, utility or otherwise, is new legislation that changes HERA. That's obviously a hard lift. Fortunately there are still lawsuits, so some hope.

It's easy to be pessimistic at times like these. The law most certainly does matter. SCOTUS did not rule that the plaintiffs' weren't screwed. Rather the opposite, they serve up moral hazard on a silver platter to Lamberth's court.

The SCOTUS ruling is obviously terrible but the "implied covenant" claim in Lamberth's court is still alive, it applies to preferred shares, rights travel with shares when bought/sold, and it is a class action.

Thanks for the suggestion. So if I understand you correctly, you're saying it's hopeful because the textualists will follow the text which favors our side; and precedent -also on our side- will be brought into the discussion by Kavanaugh? That's hopeful. Now we just have to hope they don't revive something dumb like the "may vs shall" debate, or "hide an elephant in a mouse hole."

Is anyone here (besides Midas) following the controversy over Borden vs United states: https://howardonmortgagefinance.com/2021/05/24/fhfas-crt-report/#comment-23502 ? I've read Kagan's plurality opinion and Kavanaugh's dissent. I agree with Kavanaugh and after reading the plurality's opinion it worries me a bit more about an adverse outcome. I do still cling to the idea that precedent is not needed for a win in Collins though given the plain language of the text. But, curious if others have thought about this.

Tim Howard's correction (and answer to your question): [4:30 pm correction] A holder of the companies’ junior preferred stock called my attention to a fall 2018 conference call with David Thompson, counsel to plaintiffs in the Perry Capital case (and other cases), in which David made clear that damages in the claim of breach of implied covenant of good faith and fair dealing now before judge Lamberth would, if granted, be payable by the government to the current holders of Fannie and Freddie’s junior preferred securities. I do not know if the same would be the case in the event of a favorable ruling for plaintiffs in the Court of Federal Claims. I withdraw the statement I made about damages here and in the comment above (and apologize for the error).

My impression is the Lamberth Trial was not going to start until the end of 2022 but if hindes is correct will be sooner. Getting summary judgement seems the quickest/best way to go. Nice to see Tim Howard weigh in jtimothyhoward MARCH 13, 2021 AT 11:20 AM I generally don’t comment on the investment aspects of the potential resolution of Fannie and Freddie’s 12-year conservatorships–the focus of this blog instead has been on making the case for using facts as the basis for releasing the companies in a form that maximizes their value to ALL stakeholders, not just investors–but in this piece I thought Gary made a compelling case for Fannie and Freddie junior preferred stock as an investment.

Welcome back to the trade. I think the general consensus of the rank order of possible outcomes for the SCOTUS decision is as follows: 1) FHFA unconstitutionally structured, no backward relief; NWS violates APA with remand for remedy back to lower court. 2) FHFA unconstitutionally structured, backward relief; (APA ruling doesn't matter in this scenario) 3) FHFA constitutionally structured, NWS legal I view this as very positive. I would expect JPS to retest highs since 2008 in either scenario 1 or 2. I would be very interested in other views, particularly if anyone is considering the possibility that SCOTUS somehow rules on direct claims for shareholders who held at the time of the NWS. Michael Kao obliquely made reference to this in one of recent tweet threads although I believe he puts it at low probability.

@mrswanky https://uk.practicallaw.thomsonreuters.com/8-383-9148?transitionType=Default&contextData=(sc.Default)&firstPage=true A fulcrum is also a physics term for example the center support under a seesaw. Equity gets squashed on one end but the fulcrum is unharmed. The other side (eg secured debt) goes up and is safe but there's little value there. The reason you want to find the fulcrum is that's where the value is. It's the lowest part of the cap structure that does well. Agree with cherzeca although the legal special situation you refer to doesn't provide good guidance on restructuring whereas it seems a distressed debt picture does, right? So I guess I don't really understand the comment. I view the lawsuits as the tow truck pulling the car out of the ditch but the restructuring experts are the ones that will steer it.

What is the impetus to make the gov act post SCOTUS if the ruling is favorable? If it seems the gov will end up paying no matter what why wont they just drag things along? Best case is a SJ as cherzeca has said. The is the language at the end of the last agreement to address treasury's stake but at this point Im not sure thats anything more then a deadline that will come and go. The impetuses are: 1) *lobbyists of representative industries that stand to gain are happy 2) stability to the housing market making many other stakeholders (smaller industry players, housing groups, voters) happy 3) warrants, funds to Treasury 4) *underwriters make money 5) *new investors make a ton of money 6) Yellen and Biden get bragging rights Think about it in the reverse: what impetus does the gov't have now that NWS is not flowing to NOT do anything? Nothing, it just adds risk to the system and makes them look foolish *note, many of these activities directly or indirectly lead to grift for politicians I'm sure there is more to add.

@locutus I'm with you on that. I've been posting here since 2018 and have been focused on the court cases the whole time. At this point, given that the NWS is no longer flowing into Treasury, it's important to ask how our wonderful politicians can unlock further value out of these companies for themselves. The NWS was a pretty unusual mechanism of government grift. We should look to the conventional, usual mechanism which is lobbying, and thus how politicians will serve those interests. A helpful resource is to look at where the lobbying dollars are coming from in various industries: the securities and investment industry (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2018&id=F07), commercial banks (https://www.opensecrets.org/federal-lobbying/industries/summary?cycle=2020&id=F03), mortgage bankers (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F4600), and savings and loans (https://www.opensecrets.org/federal-lobbying/industries/summary?id=F04). Most of the lobbying groups that wanted the GSEs shuttered have moved to a more neutral position, now mainly asking for an explicit guarantee. SIFMA, the largest contributor in the securities and investment department published a white paper advocating for an explicit guarantees, found here (https://www.sifma.org/wp-content/uploads/2020/12/SIFMA-letter-to-Treasury-on-GSEs-2020-11-30-1.pdf). This group also includes parties such as Capital Group that have very much to gain since they are large shareholders of JPS and commons. Capital group gives 1.8 million a year alone. Of course the financial underwriters, also large lobbyists, have a lot to gain. And others such as CMLA are on these lists. Thus, many players now have a lot to gain and a lot to give, a good combo. I think Michael Kao is correct with the idea of an "Indiana Jones switch". Treasury will want to get the GSEs out of conservatorship in a way that absolutely maximizes value for incoming shareholders (ie the lobbyists), so they will want to keep share prices down as much as possible until announcements are made. The only thing Treasury cannot firmly control is the SCOTUS decision and subsequent market reaction. But other than that, I think we will see a grand settlement announcement at the exact same time we see an announcement of massive new money commitment and terms that are made before the market has time to react. Part of the above views are the believe that JPS are the fulcrum security and thus will do well, hence the massive buying opportunity that is present now.

FNMAP and FNMAO Two of the low yielding variable JPS are calculated such that they would actually have a negative interest rate if dividends were turned back on. The calculations are 2-yr CMT minus a fixed number, which is currently higher than the 2-yr CMT for both securities. I don't think the offering circular contemplates a negative rate, thus I assume they would be 0% Yes, I know, dividends are irrelevant. Still, amazing

Good read from Mr. Tim Howard: https://howardonmortgagefinance.com/ Here's to hoping facts win the day.

thanks for posting... excellent

The last letter agreement reduced the incentive for the government profiting, but since liquidation preference was and is still in place, one can make the argument they profit, but at a later date. I, personally, am dubious of the idea that the NWS being ended suddenly creates some kind of urgency for a Yellen Admin to settle. There is clear incentive for JPS to settle (and I now think Par is a best-case scenario), but I just don't see it on the Treasury side. If UST was willing to roll the dice on SCOTUS hearing the case, they are not gonna get religion now and settle before ruling. Seems like only thing that could do the trick would be a major adverse ruling from SCOTUS, as others have echoed. So much analysis here was based on the assumption that Mnuchin wanted to end the conservatorship in a manner equitable to legacy shareholders but that was never the case so all this analysis has been faulty. Mnuchin on the way out the door still talks of legislation aimed at restructuring the GSEs while his policies have firmly worked to destroy the interests of legacy shareholders. Mnuchin teed this up for Yellen nicely. She doesn't have to do anything and this is on cruise control until SCOTUS. Yellen has already stated that the GSEs need to be "restructured" and in her opinion the best option is for legislation. But she must wait for the SCOTUS decision before this can be done. (Note, she may or may not do that because the status quo may be preferred for Treasury). Our hope is that SCOTUS (or remand) unwinds the NWS, and a forced settlement occurs with JPS. That's it. Otherwise, in the event of a loss there are any number of options where JPS get nothing: selling core assets to private firms while leaving a worthless shell behind, legislation for new entrants to have an explicit backing, or, status quo. I'm staying in and betting on a SCOTUS win.

buying opportunity today

wrong. the case in front of SCOTUS will play out, so continued limbo until that ruling. (except allowing increase in retained capital with increase in liquidation preference of SPS) this sentiment is similar to thinking SCOTUS was going to take the Texas suit against PA, WI, MI, GA