merkhet

And yet, WEB's record was only 13 years long versus Tepper's 17 year long record (as of 2010). Alternatively, if I've compounded at a gross 50%+ for the last two years versus 20% for the market, does that make me as good as or better than Tepper? See the point I'm trying to make? I feel like you just made my point but I must be missing something. Tepper generated at least 30% alpha over 17 years versus 20% alpha for WEB over 13 years - how is that not better than WEB? And why would your 30% alpha over two years even be comparable to either of those track records? Yes if you do that for the next 15 years, you would be on par with Tepper....but again, I doubt you are managing billions (aren't you up to 3 or 4 million?). I'm trying to say that context matters in all things, and there's a lot of variables. Here are the things I'm not sure you're considering: (1) Tepper's career is not longer than WEB's. Let's not forget that WEB has been managing money for 56 years and not 13 years. -- That's the comparison I was trying to make w/ myself versus Tepper. You've taken a short record and compared it to a longer record, and then you've declared a winner. What happens if Tepper puts up goose eggs for the next 36 years? (2) Tepper's 17 year career happened to encompass both the 2001 crash and the 2009 crash. Investing (perhaps outside of activist investing) is largely a function of your available opportunities -- you can be a great value investor, but if your career is from 1994 to 1999, you're not going to look so hot. Did WEB get to benefit from two huge crashes during his 13 year partnership record? (3) Moreover, if Tepper's career was helped by a couple 100% years from T+14 to T+17, then perhaps you are short changing WEB's record -- would you have been comfortable making the same comparison when Tepper's record was only 13 years old? What if WEB had four more years to pick through the wreckage of the early 70s? (4) Additionally, let's not forget that WEB switched investment vehicles AND styles. This means that there's restrictions on the things he can buy (probably can't take similar risks w/ an insurance company as when he was managing a partnership) AND let's also not forget that when you go buy and hold, your "returns" can be lower than other people but your "total return" can be higher. If Tepper's turnover is 100% a year, then his "total gross return" is 20% and not 40% per year based on a 50% effective tax rate. Do you understand my point now? Your comparison seems specious at best... (but to be fair, most of these types of comparisons are going to be specious at best...)

And yet, WEB's record was only 13 years long versus Tepper's 17 year long record (as of 2010). Alternatively, if I've compounded at a gross 50%+ for the last two years versus 20% for the market, does that make me as good as or better than Tepper? See the point I'm trying to make?

How is 30% net for 17 years far outpassing WEB's track record?

I'm glad we have this thread because a lot of these questions have been brewing inside my head as well. So thanks for the contributors here. For those of you who have amassed a pretty significant chunk of assets, what is the origin of your asset base? Is it friends and family squared? (Friends and family of friends and family) Was there significant marketing involved? At $3M+ of AUM, my asset base is almost exclusively friends and family. I had a PM discussion with another forum participant about whether it was realistic to believe that performance would eventually do most of the marketing work for you... Anyone have further thoughts on that?

I had a similar start to Tim. I began in 2010 with a bit less than $400K in AUM using a different structure. After a year of showing that I could perform well, I distributed the capital back to my investors and started a hedge fund structure with a little less than $1 million in AUM. Now we have a little over $3 million in AUM two years later.

No one knows. Don't play that game.

I don't understand why the AIG example would matter. There wouldn't be an overhang with a $52 billion rights offering for a NewCo mortgage insurer. The government wouldn't own any piece of it. Also, if there was not a perceived margin of safety, Bruce wouldn't own it in the first place. It does not follow that because of the ownership, there is an actual margin of safety. As I've stated before, I think we're on the wrong side of the Chevron doctrine. (link: http://en.wikipedia.org/wiki/Chevron_U.S.A.,_Inc._v._Natural_Resources_Defense_Council,_Inc.) This will be interesting to watch develop. Right now it's a bit too risky for me to sell parts of SHLD and GM to buy private preferreds in Fannie & Freddie -- especially since, in light of what seems to me to be no new and/or negative news, the bet is now only paying 3 to 1. Like wellmont, I think I'd be interested if and when there is a restructuring on the table to see whether there are inefficiencies (banks that have their preferreds changed to equity and must dump, etc.)

Hopefully someone can post the CNBC video clip on here later. I watched the interview on TV, and it struck me that Bruce just kept saying "Let's just do this." over and over again -- but there was no real response to when Faber and Cramer asked them "Why would the government do this?"

I remember an old quote from somewhere that "[T]he infidels never think of themselves as infidels." You're thinking about it from the point of view of the investors needing a margin of safety for a new venture. Why shell out $52 billion of private capital when you can shell out $6.9 billion (20% of private preferred par) + $17.4 billion and get $52 billion in return. My guess is that the government (1) doesn't care about providing hedge funds and private equity firms with a margin of safety and/or good terms and (2) would view this as giving hedge funds and private equity firms a $27.7 billion windfall. Also, if you're right (and I think you might be) and the new company is likely going to be worth $100 billion, I think they will not have a problem raising $52 billion for the NewCo. dolce, I think we're all understanding this on the same lines. Note that when you confer the preferred stock as "restricted capital," Fannie & Freddie still have to provide assets to the NewCo as paid-in capital of some sort...

I'm afraid that I'm starting to sound like a broken record, but it seems like the government has two choices at the moment: (1) Keep the run-off piece, and (2) Provide $34.6 billion in cash/assets in exchange for private preferred + raise $17.4 billion in private capital for the mortgage insurance NewCo OR (1) Keep the run-off piece, (2) Keep the $34.6 billion in cash/assets, and (3) Raise the full $52 billion in private capital for the mortgage insurance NewCo I don't know why they would choose the former and basically gift $34.6 billion to Fairholme et. al. There's practically no reason for it if, as I believe, the legal argument is looking weak. They can still put the new business in private hands by just raising the $52 billion outright. (Especially since I think bmichaud's analysis is roughly right in that the company will be worth significantly more than the $52 billion.)

I agree that it's a brilliant proposal. I'm just not sure whether it'll happen. My sense is that Fannie & Freddie would have to provide $34.6 billion in cash to the NewCo. I'm not sure what you mean by "credited toward capital"... In any case, I think we've covered the legal aspect of the case, and I think that there are significant hurdles for the private preferred holders. The leverage is not terribly strong IMHO... Yes but someone has to provide the paid-in capital for the equity in the first place... it's not like they can just raise $17.4 billion in new equity and then split it as if they had $52 billion of paid in capital.

Still reading the proposal, but I'm already a little confused. When they're saying $52 billion of private capital, isn't that a bit of a head fake? They've classified this as the following: (1) $34.6 billion of restricted capital from conversion of the private preferred stock (2) $17.3 billion in new cash raised in a rights offering However, what they really seem to mean is the following: (1) $34.6 billion of restricted capital paid from Fannie & Freddie's coffers (AKA government money) (2) $17.3 billion in new cash raised in a rights offering I'm still not entirely clear on what leverage the private preferrers have to force the government to make them whole...

Attached a copy of the investor group pitch book that has been rotated so it reads the right way... [EDIT: I guess this is just a first draft of the Fairholme proposal...] 2013-11-13_Private_Equity_Proposal.pdf

Incentives matter. I agree w/ wellmont... sort of. What's the U.S. government's incentive to just turn over new issuances to the private preferred holders? If they can't win a legal battle, they have no leverage. Why doesn't FHFA split the company into two, run down the "old" F&F (while attaching the private preferrers to the old F&F) while spinning out the new F&F via a rights issue? I don't think nuisance value cuts it...

That's probably because the legal side is happening whereas the restructuring side might happen. Treasury owns 79.9% of the equity of the company through warrants. Why would they agree to forego that ownership and turn over ownership to the private preferred shares?

I'm curious to hear the analysis of some of the other lawyers on the board. I feel like a lot of people are glossing over the government's response, and it's driven by a feeling of inequity as opposed to a legal analysis of the case. I agree that what was done to Fannie & Freddie was wrong, but it does not necessarily follow that there will be a legal remedy for it. Issues: (1) Jurisdiction - I agree that this procedural aspect is at worst a nuisance. A refiling elsewhere with the correct jurisdiction will take care of these issues. This is "procedural silliness" as qanary has pointed out... (2) Standing - This actually worries me. It's possible that none of the currently filed cases can go forward because the plaintiffs might lack standing to bring a case (directly and/or derivatively) against the U.S. government / FHFA / Treasury. Professor Epstein's response to this is not compelling to me. When you have to step back and rely on "general legal maxims" and/or "the broad unconstitutionality" of a legal statute, you are probably in trouble. Notice that he does not cite case law for any of this stuff... The developed case law on this matter, which directly points to the statute in question, says that HERA transfers all rights to the FHFA. Here's the relevant quote from Kellmer v. Raines: There is an exception for situations where there is a manifest conflict of interest. In First Hartford Corp. Pension Plan & Trust v. United States, the FDIC made a regulatory change in how it counts capital for solvency purposes, and as a result of that regulatory change, they had to seize Dollar Dry Dock Bank of New York (of which First Hartford was a shareholder). First Hartford: Notably, the exception has nothing to do with the idea that the "[government institution] has acted in violation of the duty of loyalty to [shareholders]" as espoused by Professor Epstein. Instead, the exception has to do with whether FHFA can be expected to sue itself for a wrong it committed. It is not entirely clear that the wrong that was committed here comes from the FHFA rather than from Treasury -- mostly because I'm not sure you can impute to FHFA a duty to stockholders during conservatorship. The analysis would then shift to whether shareholders can have derivative standing because the two institutions are closely related based off Delta Savings Bank v. United States: I don't believe that FHFA & Treasury would fall under this test the way that FDIC & OTS did. Then the analysis is whether the FDIC then has a duty to sue Treasury on its own -- not necessarily due to damage to holders of private securities but rather whether they must sue Treasury because of damage done to FHFA. Again, I don't believe that's clear cut. (3) Takings Claim: The case law seems to directly engage with this as well. In California Housing Securities, Inc. v. United States stated: Again, I'd note that Professor Epstein's response does not engage any case law in his response. There is a question as to whether the government could legally impose a conservatorship on Fannie & Freddie, and that would be an area of attack -- though I think that it would fall under a Chevron analysis of whether they had a rational basis for such a move. (4) Exaction Claim: I feel like this was a throwaway claim from the plaintiffs, and I agree with the government response to this. I believe that the "money in its pocket" thing is actually a requirement of exaction claims, but I'm not 100% sure. As a side note, the fact that the HERA statute says "no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or receiver" also bothers me. Anyway, those are my immediate thoughts after having read the response a few times. Are there other lawyers and/or former lawyers who want to weigh in here?

Optimism and a willful ignorance of the base rate.

This is actually a pretty common and serious problem for students that attend lower ranked law schools. Legal education is not priced on quality for the most part -- pricing does not change as you go down the rankings. For better or for worse, legal employment is a very prestige heavy recruitment process. The vast majority of the six-figure type jobs go to the best 25 schools or so. Everyone else is going to be working a much worse paying job and will not see a very good ROIC on their legal education. This is really the fault of the American Bar Association for accrediting too many law schools.

The problem is that the case law is not terribly supportive on the standing issue. Multiple cases cite that the conservator is, generally, the only entity that may bring suit on behalf of the corporation. (Read all three cases cited by the government and that will become clear.) There is an exception for situations where this would cause a conflict of interest, but that has been construed fairly narrowly. (Read First Hartford Corp. Pension Plan & Trust v. United States and Delta Savings Bank v. United States) In regards to the Third Amendment: Its not altogether clear that FHFA is the beneficiary and/or perpetrator of the improper conduct, so it's not clear that there is a direct conflict of interest via First Hartford. Additionally, it's not clear that the FHFA & the Treasury are "closely-related, sister agencies" in the manner described via Delta Savings Bank.

A big part of the law is about technicalities. These technicalities can kill a case. I would not be so quick to dismiss the fact that there's a hard stop of 30 days in which to bring a case to challenge the FHFA's appointment as conservator. That part of the plaintiff's case will likely fall since there's little to no ambiguity involved. I would also not be so quick to dismiss the standing issue. If the court holds that the FHFA stands in the position of all the stockholders, per 12 USC 4617(b)(2)(A)(i), then this case will have to be dismissed. The plaintiffs then cannot file the case... ever. Only the FHFA can bring the case... against itself. How likely is that to happen? The only odd wrinkle I can see to the case is the existence of some residual value in the preferred shares and common stock of the companies. Does the FHFA hold any fiduciary duty towards those holders given that the HERA Act has transferred "all rights, titles, powers, and privileges of the regulated entity" to the FHFA? And if not, then does the FHFA owe a fiduciary duty to itself? Again, I'll have to do a few more read-throughs, but in my opinion, this is not as quick a throw away as when Bank of America et. al. challenged the NYSID's actions in the MBIA case.

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. :) I found parts of the response to be fairly compelling. For instance, a quick read through the underlying case law seems to show that there have been similar cases before with respect to whether plaintiffs have standing to bring this case. This may seem to be counterintuitive but many arcane parts of the law just happen to be like that... I'll have to go through the response a few more times before I can give further analysis. Btw, for those of you who were previously involved in the MBIA situation, it might behoove you to know that we are now on the flip side of the standard of review in that case. In MBIA, the standard of review under the APA was whether the administrative agency acted in an "arbitrary or capricious manner" when it split up MBIA. That's a difficult hurdle for a plaintiff to leap over. It is much the same here...

+1

Under no circumstances -- NONE -- should a person ever consent to talk to the police, federal investigators of any kind -- FBI, IRS, etc. without advice of council -- EVER. Never say a word....especially if you are, or believe you are, innocent. NEVER agree to a search of anything without a warrant -- EVER. Again, this is especially true if you are, or believe you are, innocent. I would also never consent to a dna test or a lie detector test without the advice of council. Once they have dna, they can use it against people even loosely related to you or as yet unborn. It isn't like fingerprints. And, yeah, bring a jacket if none of that works. 2cents from a lawyer friend. Agreed. As a former lawyer myself, regardless of guilt or innocence, if you ever get arrested for anything, the first (and only) words out of your mouth should be "I'd like to speak to (my/an) attorney."

+1 I'd love to know what he uses as well...

I liked the part where he said that in the 53 years that he and Charlie have known each other, they've never given a thought to external shocks (like the debt ceiling) when buying companies and/or stock. (paraphrasing)