colinwalt

He may have underestimated, but none-the-less he's still increasing his stake... he wasn't at 16% last time I checked - I think it was about 11% He's at 15.1% including common & preferred. Check the most recent report. Now that you mention it, I noticed that in the "Schedule of Investments" it comes to 15.1%, but in the letter he says 16.4% - not sure why the difference...

He may have underestimated, but none-the-less he's still increasing his stake... he wasn't at 16% last time I checked - I think it was about 11%

agreed. no berk third option. what ever the govt "solution" eventually is, it wont involve GSE holders if NWS is valid. He keeps saying there's no alternative to Freddie + Fannie - which seems to be the case - still no valid alternative has been proposed AFAIK, so even if the NWS isn't overturned, where does that leave the Government? They'll have effectively nationalized them and taken 7 trillion onto the Gov's balance sheet - maybe his theory is (maybe not the current Admin) but the next Admin will realize this isn't sustainable and they have to be released, in which case (to have anyone willing to invest) current shareholders have to be seen to be treated fairly... And the next admin would probably get a huge windfall selling off their stake... and not have any face to save in back-tracking... And maybe that's why he's willing to let the proceedings drag out for now... waiting for the next admin... Or is that way too simplistic? Would the Gov be able to wipe out current owners and then turn-around and get new investors?

+1 I get how people can take a shot at this, but I don't get how Berkowitz can have > 16% in this (as per the annual report) - that really seems to say that he doesn't see anyway he can lose here... Or he's crazy, but I don't think he's crazy...

Yes, that's the right place, and while I agree with you, the court could still find that the HERA powers are so broad that there's nothing that isn't within the power of FHFA to do. (Much like in the Lamberth case.) Not a lawyer but in relation to 4617(f), this is what I picked up from the "perry redacted inst appellants reply brief" P11 Seeking to perpetuate its windfall, Treasury—but not FHFA—argues that Section 4617(b)(2)(A) of HERA bars derivative claims and therefore precludes Institutional Plaintiffs’ APA claims. But the Net Worth Sweep’s elimination of Plaintiffs’ ability to receive dividends and recover on their liquidation preferences are injuries Plaintiffs suffer directly as holders of the Companies’ preferred stock; they are not injuries suffered by the Companies. And HERA does not—because it could not — provide that FHFA as conservator “succeeds to” shareholders’ direct claims against the government that authored their injuries; that would be a taking. Section 4617(f) of HERA also does not preclude this lawsuit. That provision prohibits only suits that would restrain FHFA’s exercise of its conservatorship powers. Plaintiffs’ APA claim against FHFA turns on whether the Net Worth Sweep was a valid act of conservatorship or, if not, was void ab initio. That question does not implicate Section 4617(f). As FHFA recognizes in its regulations, HERA requires a conservator to preserve and conserve the Companies’ assets and to work to rehabilitate the Companies to a sound and solvent condition. Contrary to FHFA’s newly minted position (contradicting those regulations), these are not merely suggestions from Capitol Hill that FHFA is free to ignore. Decades of FDIC practice and centuries of common law demonstrate that these obligations define what a conservator is. P16 Under Section 4617(b)(2)(A), the conservator succeeds to shareholders’ rights only “with respect to the [Companies]”; it does not succeed to shareholders’ own rights under their stock certificates. This provision thus bars (at most) only shareholder derivative claims on the Companies’ behalf; it does not prohibit shareholders from seeking relief for direct injuries. P17 That the Net Worth Sweep also harmed the Companies is irrelevant because shareholders with direct injuries may sue “even if the corporation’s rights are also implicated.” P19 A. HERA Does Not Prohibit Suits Against FHFA Alleging That FHFA Exceeded Its Powers As Conservator. As Treasury concedes (at 26), Section 4617(f) “is inapplicable when FHFA acts beyond the scope of its conservator power,” Cnty. of Sonoma v. FHFA, 710 F.3d 987, 992 (9th Cir. 2013).

Oil Is Heading Higher, According To Andrew Hall http://www.valuewalk.com/2015/12/oil-andy-hall "The hedge fund manager sometimes called “the oil G-d” is having a rough year, but is not backing down from his thesis. According to Christian Berthelsen of The Wall Street Journal, who first reviewed the letter, Hall’s fund lost 9.7% in November, bringing YTD losses to $26%. This would make 2015 the worst year for Hall since 2008 when the hedge fund was founded." "In fact, Hall’s research shows that the crude oil the market is much closer to being balanced and “for gasoline, the market is almost certainly in deficit given phenomenal demand growth in the U.S. and Asia.” EIA data for September shows gasoline demand in the U.S. grew 4.5% compared to a year earlier. Vehicle Miles Traveled grew at a similar rate, while fleet efficiency fell for the first time in eight years as buyers switched to trucks and SUVs. In India, gasoline demand increased by over 14% percent in October with auto sales up by almost 22%. Apparent demand for gasoline in China grew by nearly 11% in October: SUV sales were up 60% year-on-year. Analysts from Credit Suisse estimate that burgeoning car sales in China will result in gasoline demand there growing by around 300,000 bpd during 2016." "... global spare production capacity is wafer-thin, and as the oil sector slashes jobs to cut costs, there is a question of how well the industry can respond to any upturn in demand. As a result, “the virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market,” he said. "

I thought it was very interesting / relevant given that the industry changes that they were discussing are still (IMO) evolving today. It also gives historical context to today's challenges and insight into how Malone sees things and his approach to figuring out how things will evolve - he talked about the need to experiment and not being dependent on a single approach given how, in this industry, something can come out of the left field and wipe you out.

FAIRX Semi-Annual http://www.fairholmefunds.com/s/FAIRX-Semi-Annual-Report.pdf The guy has balls.... 11.1% in Fannie + Freddie - here's some of what he has to say... Today, shareholders of The Fairholme Fund collectively own $3.4 billion liquidation value of Fannie Mae and Freddie Mac preferred stock. That means each shareholder effectively owns approximately $25,000 (on average) of two of the most profitable franchises in America. Yet for reasons that are not entirely understood, some in government apparently want their friends in the mortgage-industrial complex to take for free what you, the shareholders of these companies, paid for with cash. So we continue to search for the truth: • Why did federal regulators design a financial support program for Fannie and Freddie on the basis of academic estimates of future performance rather than tried and true statutory accounting and claims-paying ability (which is the standard for all regulated mortgage insurers)? • Why did federal regulators require Fannie and Freddie, while in conservatorship, to purchase $40 billion per month in underperforming junk bonds from competitors? • Why did federal regulators force Fannie and Freddie, while in conservatorship, to participate in Treasury’s Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP), which resulted in more than $46 billion of losses that the companies would not have otherwise incurred? • Why did mortgage-backed securities issued by Fannie and Freddie perform dramatically better than private label securities issued by big banks throughout the financial crisis? • Why did federal regulators settle litigation cases initiated by Fannie and Freddie against major financial institutions for significantly less than what other similarly situated plaintiffs recovered? • Why did federal regulators seize more than $18 billion in litigation proceeds recovered by Fannie and Freddie to date? • Why did federal regulators order Fannie and Freddie to delist their securities from the New York Stock Exchange in 2010? • Why did federal regulators prohibit Fannie Mae from selling $3 billion of Low Income Housing Tax Credits to third-party investors? • Why were Fannie and Freddie, while in conservatorship, forced to divert billions of dollars in guaranty fees to Treasury to offset the cost of a payroll tax cut? • Why did FHFA, as conservator, force Fannie and Freddie to gift all of their capital and all future earnings to Treasury in perpetuity? • Why were Fannie and Freddie, while in conservatorship, forced to pay “voluntary” cash dividends to Treasury if funds were not available and the regulated entities were “not in capital compliance?” • Why did FHFA force Fannie and Freddie, while in conservatorship, to issue debt in order to monetize their deferred tax assets and pay the proceeds to Treasury in 2013, particularly when FHFA had previously stated that deferred tax assets “[could] not be monetized?” • Why did Fannie Mae CEO Tim Mayapoulos describe the Net Worth Sweep as a “positive change” with “a lot of good in it” in his August 2012 announcement to employees? Was he coerced by federal regulators? • Why has the Securities and Exchange Commission permitted a single controlling shareholder (i.e., Treasury) and its affiliates to simultaneously act as director, regulator, conservator, supervisor, contingent capital provider, and preferred stock investor of two publicly traded companies? • Why do some Treasury officials question the sustainability of Fannie and Freddie’s earnings power in the years ahead, when Treasury’s own 2014 Annual Report indicates that the companies will be c onsistently profitable for each of the next 25 years? • Were certain federal government employees who crafted the Net Worth Sweep acting at the behest of crony capitalists seeking to displace Fannie and Freddie?

Don't think these links were posted: PERRY CAPITAL LLC, for and on behalf of investment funds for which it acts as investment advisor - BRIEF AMICI CURIAE OF TIMOTHY HOWARD AND THE COALITION FOR MORTGAGE SECURITY IN SUPPORT OF APPELLANTS http://www.valueplays.net/wp-content/uploads/TIMOTHY-HOWARD-AND-THE-COALITION-FOR-MORTGAGE-SECURITY.pdf Found that linked from this (Glen Bradford): http://seekingalpha.com/article/3311175-involving-securities-law-professionals-with-gse-lawsuits-amplifies-scrutiny

Very clever on behalf of the Fairholme lawyers -- keep the depositions going! Another interesting tidbit from the motion: Here's a summary of the "Palazzolo v. Rhode Island" case: https://en.wikipedia.org/wiki/Palazzolo_v._Rhode_Island "Reasoning: The majority argued as follows: The argument that a claimant who acquires property after the enactment of a regulation waives the right to challenge such regulation as an unconstitutional regulatory taking fails because (1) such a principle would make the constitutionality of a regulation a matter of the passage of time, thereby creating a "[statute of limitations]" on a constitutional right; (2) such a principle also prejudices owners at the time of regulation, whose ability to transfer the land has become seriously impaired; and (3) such a principle would create different and unequal rights between different classes of owners (old owners and new owners)." And more here: http://caselaw.findlaw.com/us-supreme-court/533/606.html

Another Q... why would Maniere be more relevant than the Meritor case?

One thing that strikes me as fundamentally different with the current case is that we are talking about current shareholders of profitable companies, so if the sweep is deemed illegal, or a taking, then holders who bought after the sweep was put in place should be entitled to profits earned / divdends payable since the day they bought. I suppose the government can still argue that those who bought after the sweep was put in place, bought knowing it had happened and so can't sue, but if those people team up with owners at the time and win then what? Dividends are paid out proactively / pro-rated for the amount of time the shares were owned? Or dividends are only paid out to owners until the time the sweep went into force? But what about profits after the sweep? If the sweep is now deemed illegal - who has rights to those? Again, not a lawyer... but just thought I'd throw this out there...

Have not read this yet: http://www.glenbradford.com/2015/06/fnma-fanniegate-copy-of-the-maniere-decision-cited-by-our-government/ 13-465-0161-A_-_Maniere_v._U.S._31_Fed.Cl._410_1994.pdf

Ooops, guess that makes me the lazy one :-\

My guess is that this case's relevance is weak. Otherwise the government lawyer should have placed this onto the table in May last year instead of now. It just doesn't make sense, unless either: 1. This is just a desperate struggle. 2. This is indeed relevant but government lawyer is so crappy that they didn't know this case until now. I think #1 has a much higher probability than #2, but who knows.......... I wouldn't attach much weight to this case, I was hoping it was a link to the "Maniere" case... No idea why the blog article linked this case (lazy I guess)

http://blogs.wsj.com/moneybeat/2015/06/08/uncle-sam-sours-on-frannie-suit/ Hmmm... the case this article links to (CRV ENTERPRISES, INC. AND C. RYAN VOORHEES, v US) only seems to be partly relevant (not that I'm a lawyer) - not really a takings issue (although ownership at the time of the "taking" is an issue here too) - but overall it does seem quite different.

Thanks Jurgis

I haven't looked at the income statement in a while so I can't comment too much on that for now. But I know that the companies will need to raise quite a bit of capital, even assuming that sweep is used towards principle payments. So you need to account for dilution. FNMAS is one of the more expensive ones. I own FREJN, FMCCG, and FMCCN; which are $6.55, $5.51, and $5.26 as of the last tick, on a par value of $50. How are folks thinking about the preferreds? For example, here’s a few I’ve been looking at: FNMAS • Price as of Jun 4: 3.9 • Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series S, stated value $25 per share • Dividend: greater of 7.75 or LIBOR + 4.23% • Potential upside: 6.4 (25/3.9) - (ignoring spread for simplicity) FNMAH • Price as of Jun 4: 3.55 • Variable Rate Non-Cumulative Preferred Stock, Series P, stated value $25 per share • Dividend: greater of 4.5% or LIBOR + .75% • Potential upside: 7.04 (25/3.55) FMCCN • Price as of Jun 4: 5.26 • Variable-Rate Preferred Stock Offering, $50 per share • Dividend: 12 month LIBOR -.2% (Max 11%) • Potential upside: 9.5 (50/5.26) So FNMAS is currently about 10% more than FNMAH, which is presumably due to the large difference in dividend. However, the difference in price is just 35 cents which seems cheap if you assume you’ll start to get dividends again within a couple of years, as the difference in the potential dividend is far greater: • 25 * 7.75 = 1.9375 • 25 * 4.5 = 1.125 o Difference: .8125 • So is the market assuming that the chances of ever getting dividends are very low? For example, if the Government wins, of even if they don’t win, the Prefs will be called, so you’ll just get the $25 back without years of dividends? • Also, given that the dividend on FNMAS is so much higher than on FNMAH, I suppose there’s a much higher chance (if the Gov doesn’t win) that it will be called, also limiting the advantage of the higher dividend. • As for FMCCN, times 9.5 is a huge discount to the $50 value, I suppose because the market doesn’t see interest rates increasing any time in the near future in addition to the risk of the government winning. • But it does seem to be a big discount versus the other two given the uncertainty of ever getting the dividend. So those are my thoughts as I begin to think about this… but maybe trying to figure out which prefs will work out the best is just too uncertain and the best thing to do is hold a mix. TIA

+1

Well, I guess when you have control over your own currency, you enjoy a freedom that otherwise is precluded to you. In an economic environment of too much debt, at least in Europe, the ability to print money shouldn’t be overlooked! I agree: it is nothing but another way to default on your debt… the difference is that to print money is easy! And Greece has a desperate need to reduce its overall debt somehow… Anyhow! ;) Gio I believe that only works if the debt is denominated in the currency you are printing... and even then it can lead to hyper-inflation...

Same link was posted 7 posts up by merkhet. Ooops, that's very likely how I found it but didn't remember :-[ I guess one advantage of going senile is not remembering my losses ::)

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html "The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA." Michael H. Krimminger is a partner at Cleary Gottlieb in Washington, D.C. and a former general counsel to the FDIC.

Thanks Merkhet, that explains a lot...

A few things here don't make sense to me. Carney states that F+F were never going to be able to earn enough to pay the interest on the ~ $200B (on the face of it that does seem to make sense) but as per the "Continental Western" most of what they got was to cover large non-cash losses as per this section: "The Companies’ draws from Treasury’s commitment were made in large part to fill holes in their balance sheets created by reserves for large non-cash losses based on the government’s exceedingly pessimistic views of the Companies’ financial prospects, and by write-downs of the value of significant deferred tax assets. Complaint ¶ 55. Deferred tax assets are assets (such as net operating loss carryforwards) that may be utilized to offset future tax liability, but they must be written down to the extent they are not expected to be used." ... "Reserves for non-cash losses such as these temporarily decreased Fannie’s and Freddie’s net worth by hundreds of billions of dollars." Which also means that as soon as they started to become profitable the reverse would happen as per this section of "Continetal's Response" "... FHFA would no doubt have understood all this had it exercised its independent judgment, for it was clear that the recognition of deferred tax assets, the release of loan loss reserves, and proceeds from legal settlements would all soon make enormous contributions to the Companies’ net worth." And... "Deferred tax assets, for example, appear on the Companies’ balance sheets when management concludes that it is likely that the Companies will eventually be able to use them to offset future tax liability, but the recognition of those assets is an accounting decision that does not generate any cash. Similarly, the Companies hold numerous assets—including many billions of dollars of derivatives and available-for-sale securities—that are valued on the balance sheets at the prevailing market price. When such assets appreciate, the Companies’ net worth increases but their cash on hand does not. The result is that a cash dividend linked solely to net worth may need to be financed through borrowing. Indeed, the Companies incurred substantial additional debt in 2013 in order to pay cash dividends under the Net Worth Sweep." So Carney says that F+F had to take so much from the Treasury that they could never hope to repay - and even using the PIK option wouldn't work as the amounts were so large nobody would believe that F+F could ever repay. Then "Continental" says most of the losses were cashless (although I know from Ackman's presentation there were billions in real losses too) - so that would mean that most of what F+F got from the Treasury was never used - correct? Which blows a hole in Carney's argument, as F+F should have ample cash to pay the interest and repay most of what they got (because they never used most of what they got), thus drastically reducing the interest payments going forward, presumably to a level they could repay from "cash" profits. But then "Continental" goes on to say that once F+F booked huge non-cash profits, they had to borrow to pay the cash sweep - but if F+F never used most of what they got, why would they have to borrow to pay the cash sweep? How can that be correct? Is this because Treasury refused to take back the now unneeded funds - to keep F+F with a huge liability and related interest payments - thus making sure F+F do end up in run-off mode? Hope that all makes sense... Note: I have to admit, I have not tried to figure out what's really going on from the filings - I just do not have the time - so apologies to those on the board who probably have put in the time and effort to make sense of this.

Thanks Merkhet, I'm not a lawyer, but it seems to be very well argued... having said that, the issues involved are pretty complex to say the least - but in the end it seems to keep on coming back to the fact that the Government does seem to have arbitrarily taken a whole bunch of money that it shouldn't have and given that this is not Russia or Venezuelan etc, you'd think the shareholders should eventually win... And as you noted in an earlier post: "Given that there's a win for all constituencies out there (either releasing Fannie & Freddie or Berkowitz's restructuring plan), I'm just at a loss as to what's taking so long." Now I haven't run the numbers, but presumably the Treasury would actually get a similar or even better return if it let F&F retain profits and build capital. Given that they legally own 80% of the companies, by losing the case (and returning the swept profits) they'd probably (over time) end up in a better position due to the multiple they'd get on the current share price + dividends – after all F&F as a pair of profitable on-going concerns must (by definition) be more valuable than if liquidated – or am I missing something obvious here? And, if true, that begs the question as to why the sweep was implemented in the first place – just to screw “Hedge Funds / Speculators”? – (assuming one doesn’t believe the “official” reasons put forward so far).