valuecfa

I skimmed through it and didn't find many valid points. But I am no lawyer, so I hope someone more experienced could share some input. :) Despite my large concentration in these prefs, i haven't had the time to review it yet. I'll look it over the weekend, and would be happy to post some thoughts then.

Been halted this morning

Finally starting to see a bit up movement in some of the prefs...looking forward to litigation responses.

Ugh. I only have 1% in the common...I'm surprised the common has outperformed the prefs so much lately

I'd go as well if it were on a Friday or Saturday. Just checked my calendar and unfortunately it's a no go for me.

I'd like to catch the replay or transcript of that event.

Plaintiffs for the prefs ought to hire professor Richard Epstein. The guy is an intriguing and convincing orator. Supposedly, he is advising several hedge funds on the matter.

Video on Fannie/Freddie: http://www.law.nyu.edu/news/Fannie-Freddie-conference-CLI

They are on track to repay by 2014. I don't see the argument that the government will pull back so far (or private capital will step in so much) that Fannie runs unprofitably or at a level that is insufficient to pay the dividends.

Interest rate risk is the last thing i would worry about in this investment. The higher coupons could go well above par if the dividends are paid. It is up to the issuer whether or not they redeem them for par (at any time, in which case they are all worth par), or continue to pay the dividends in which case the majority are worth more than par.

I really envy him and would like to be the same if possible, but I know that is not easy. Well, on the second thought, if you have 6% position in this, and it becomes a 6 begger, your total portfolio return is 30%. So are you just 30% away from pulling an Ericopoly right now? Reread the thread. I initially took a 6% position, that has changed.

How about this. Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today. Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes: A) Heads you win $6,000, plus $330 per year upon completion of the flip. B) Tails you lose your $1,000. I don't think Vegas would stay in business very long with those payoffs/probabilities. And I think the odds are better than 50/50 they win the litigation. This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet. Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today. I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit. I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement. There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory. I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y. If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly. I'm new to the board and dont know the history but what does it mean to "pull an Ericopoly"? Ericopoly: 1. the state of being able to retire comfortably in one's 30's; to own a Tesla.

Read the last few pages for the answer. ;D Buy the cheapest ones regardless of yield. A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently: This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues. You can imagine situations where either is possible: - Coupon: dividend reinstated - Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon. As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation. Maybe that's right, maybe not. There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons. Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too. Just some thoughts. I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation. I was reluctant to pay up for ones like FNMAT and FNMAS b/c the price differential relative to others is so significant. However, I paid a slight premium for FNMAK and FNMAM with relatively high coupons. All depends on the price. Those coupons have the potential to be a massive part of the return, if they don't get redeemed at par.

Yes. But I suspect that the price will rally significantly more long before the conclusion of the litigation because they are priced so incredibly incorrectly in my view.

I don't use the Kelly formula either. This is the first time i have ever used it out of curiosity, and only used it after i made the investment, not prior. It will certainly be an extremely volatile investment. I get the impression that the market is valuing the company more on whether the politicians will change their minds, as opposed to the legal aspect. At least from talking to colleagues, that is their focal point, and it was my original focal point. I just don't see how they can argue what they did was legal, but we shall see when the government responds to the complaint.

How about this. Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today. Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes: A) Heads you win $6,000, plus $330 per year upon completion of the flip. B) Tails you lose your $1,000. I don't think Vegas would stay in business very long with those payoffs/probabilities. And I think the odds are better than 50/50 they win the litigation. This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet. Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today. I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit. I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement. There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory. I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y. If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

since Pacer doesn't link: Fairholme will keep track of its case here: http://fairholmefunds.com/news Though since Pacer is practically free so might as well follow it there.

How about this. Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today. Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes: A) Heads you win $6,000, plus $330 per year upon completion of the flip. B) Tails you lose your $1,000. I don't think Vegas would stay in business very long with those payoffs/probabilities. And I think the odds are better than 50/50 they win the litigation.

Time value of money will come into play when the 5% coupons turn into 33% coupons, not including the 6x principal gain.... if the plaintiffs win.

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM valuecfa why FNMAK & FNMAM? just curious there are many issue. They were the best value at the time of purchase. FNMAS and some others are trading at a higher price relative to par, but have a higher coupon so they deserve a higher price. I don't know if that coupon will get paid for very long, since they are redeemable at the issuer's option at any time. In case they do pay the coupons i want some decent yield, which the before mentioned series provide. I also own FNMAH & FNMAP, since at the time of purchase i got them at the bid, which was a discount to others. I'm reluctant to pay up for the highest yielding ones since i don't know how long they will pay the coupons.....assuming the courts rule in favor of the plaintiffs.

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

I started following it again too, but haven't invested back in the company yet. The difference now vs then in my mind is Brown's lack of financial incentive to rebuild the company compared to what his previous incentives were...but yes it is cheap on a fundamental basis.

I can't wait to read the response. I don't know how closely correlated the response will be to the share price, but the share price "should" react to a light defense of their actions. I suspect the response will be heavy on historical facts and a walk through of the crisis, but light on legal bounds for actions that occurred well after the crisis.

Mr. Market is there to serve you, not to guide you. Welcome onboard! Nice comments. I've been onboard for around 3 or 4 months now. Just made this a much more meaningful position then my original 6% size. I'm really looking forward to following the litigation in these cases.

The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.