Mephistopheles

Ok great thanks, and I assume you mean it for both cases right (selling fannie for freddie and selling fnma common for pfds)?

I'm thinking that if the 3A is overturned the govt would focus their attention on maximizing the value of their 79.9% stake. So perhaps this risk of being declared undercapitalized or forced to dilute is not as likely, because it would be to the detriment of the headline number when they liquidate the warrants. But then again, warrants didn't stop the regulators from forcing banks to raise substantial capital/dilute.

Separate question. Does anyone know if I sell FNMA at a loss and buy FMCC, if that counts as a wash sale? And what if you sell preferred and buy the common, or vice versa?

Thesis summary Buy FNMA common at $4.00 because: 1. Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury. 2. He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst). 3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit. (Note: Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A. (Note: FHFA did compile an administrative record at the time of the 1A and 2A.) 4. Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question. 5. Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding. 6. The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain. My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely. But wouldn't steps 4 and 5 be a given if the sweep is vacated? Why would the judge rule that it's illegal but not compensate the shareholders for $80 billion in excess dividends. Also, correct me if I'm wrong, but step 6 only seems to value the shares based on the returned $68 billion, but not on any future earnings power. My back of the envelope calculation indicates that the common would be worth 4x, or 300% more if the 3A was revoked, and the Jr. Pfds were paid off at par. I based it by annualizing 2Q profits: 1) Net income of $3.7 billion x 4 = $14.7 billion. 2) Back out the $81 billion in excess dividends, arrive at a Sr. liquidation preference of $36 billion. 10% dividend on this is $3.6 billion. 3) $14.7 - $3.6 billion = $11.1 billion 4) EPS = $11.1/5,762 = $1.92. 10x multiple = $19.25. 5) Jr. Pfd of $19.1 billion/5,762 = $3.32/share 6) Common value = $19.25 - $3.32 = ~$16 per share. 7) $16/4 = 4x return vs. the 2.5x return of the Jr. Pfds. You are not wrong. There is additional upside to the common based on a market multiple of, say, annualized 2Q earnings which appear to be somewhat normalized. However, the market will likely enforce a large discount due to a number of looming outside events such as timing of housing reform, emergence out of conservatorship, and potential dilution from refinancing of the UST preferred. The biggest headwind to a market multiple, in my opinion, will come from that which we saw at BAC which is the need to rebuild capital. The scenario above leaves the GSEs without any capital at all. Whats more, the required capital amount would have to be set first by regulators and that alone will take time and cause considerable uncertainty. Thanks onyx. IMO for this reason the best thing to do is to hold a little bit of both common and preferred, as others have pointed out.

Thesis summary Buy FNMA common at $4.00 because: 1. Regan-appointed Judge Lamberth will invalidate the 3rd amendment (3A) via summary judgement in the Perry case soon after his current Blackwater murder trial goes to jury. 2. He will rule based on facts that are not in dispute (which will expedite the time frame and offer investors a quick catalyst). 3. The 3A will be vacated based on either (a) a finding that Treasury violated HERA by invoking the 3A and creating a new security beyond the 2009 time limit. (Note: Even Treasury's own enforcement of tax law deems the 3A a new security), or (b) a finding that the 3A was arbitrary and capricious due to the fact, admitted to by FHFA, that FHFA failed to comply with the APA requirement that they compile an administrative record at the time of the 3A. (Note: FHFA did compile an administrative record at the time of the 1A and 2A.) 4. Vacation of the 3A will put $80bln of excess dividends (above and beyond the 10% as required pre-3A) into question. 5. Perry will pursue the obvious remedy and successfully have the $80bln used to reduced the $117bln Treasury senior preferred currently outstanding. 6. The incremental gain of $80bln will be reduced by $12bln (goes to private preferred to bring them to par) and then diluted by 4:1 (80% of common shares goes to Treasury via warrants) leaving $68/ (1.15*5) about $12/share value for the non-US Govt common shareholders, or a 200% gain. My only dispute with the thesis is that one could buy the private preferred's today and get a return of over 150% and avoid the risk of steps 4 & 5 entirely. But wouldn't steps 4 and 5 be a given if the sweep is vacated? Why would the judge rule that it's illegal but not compensate the shareholders for $80 billion in excess dividends. Also, correct me if I'm wrong, but step 6 only seems to value the shares based on the returned $68 billion, but not on any future earnings power. My back of the envelope calculation indicates that the common would be worth 4x, or 300% more if the 3A was revoked, and the Jr. Pfds were paid off at par. I based it by annualizing 2Q profits: 1) Net income of $3.7 billion x 4 = $14.7 billion. 2) Back out the $81 billion in excess dividends, arrive at a Sr. liquidation preference of $36 billion. 10% dividend on this is $3.6 billion. 3) $14.7 - $3.6 billion = $11.1 billion 4) EPS = $11.1/5,762 = $1.92. 10x multiple = $19.25. 5) Jr. Pfd of $19.1 billion/5,762 = $3.32/share 6) Common value = $19.25 - $3.32 = ~$16 per share. 7) $16/4 = 4x return vs. the 2.5x return of the Jr. Pfds. If they do a pfd for common swap to recapitalize, and issued shares at $4, then the EPS after the Sr. dividend is $1.05, which would give the common a 2.5x return. But, the shares would be at a much higher price if we get to this point, and perhaps the dilution wouldn't be as bad. However, why would they do this? Neither the govt nor the current common shareholders would want to dilute their stake. Can't they just keep paying the Jr. dividend and then retire when possible?

So I generally meant for major life decisions - choosing a new job, new career, whether or not to go to grad school, or even in choosing whether to date someone or not. My first instinct is to think of it like an investment - to focus on the downside. Clearly this is the wrong way to go about such things.

Destroying evidence is unlikely, IMO -- they would have to coordinate a complete destruction of evidence at FHFA and evidence at Treasury. I suspect that getting one agency to do this well would be a gargantuan task but two agencies in coordination? Damn near impossible. Additionally, given that their response to plaintiffs has not been that there are not any documents that are responsive to their claims re documents between FHFA & Treasury, it would then probably be somewhat ridiculous for them to come forth and say that there is now suddenly nothing responsive to the discovery request establishing jurisdiction. Besides, the important thing for them is to provide evidence once jurisdiction is established. The government needs to provide the initial burden of proof that the FHFA had any rational reason for the enactment of the "net worth sweep." In theory, they have said that it was because they were worried that the GSEs couldn't pay them back, right? So then they need to provide the documents that prove that. This would usually be pretty easy... ...except...the FHFA has not bothered to maintain an administrative record of the considerations it made prior to enacting the 2012 Amendment. Instead, the FHFA provided a compilation of documents, after the fact, to support its decision to enact the 2012 Amendment. (This is in the 2014-06-02 Olson Reply.) I realized I forgot to reply to this. Thanks for the explanation. This does help alleviate some of the concern for me. Really glad to see someone as persistent as Ackman on board now; especially because I own the commons.

The terms of the conservatorship are that the conservator has to protect the assets of the company, with the goal of becoming profitable and returning the company to the shareholders once that happens. Sweeping most of the assets to Treasury is the opposite of that. Furthermore, they claim the net worth sweep was in fact in the best interest of the shareholders because the company was in a state of perpetual borrowing to pay back the dividend, due to continuous losses. However, the sweep was enacted right after the GSEs started reporting profits again, which makes it hard to prove that it was necessary (not that it makes sense anyway), particularly given the huge valuation allowance for the DTA that was present on the balance sheet at the time.

Thanks all for the replies, these are all good points. Actually, with the money thing it doesn't affect me as much as it might have seemed like considering I listed it in my post. I am not afraid to spend when it adds value, though I try to be wise about it. But when it comes to unwise purchases, that's when it really bothers me because of with Future value/present value concept. Perhaps I am just unforgiving of myself when it comes to mistakes. The bigger problem for me, though, is my 2nd listed point - and that is "always thinking of the downside and letting the upside take care of itself." With stocks, I am constantly playing devil's advocate against my own investments and it's proven to be a great security (no pun intended) measure. But this can be depressing in life when making semi-major or major decisions. Although I've had a natural inclination towards frugality, this obsessing over the downside is something I trained myself to do in order to become a better investor. But then I keep doing it for non-investing related decisions. Of course, you shouldn't be a blind optimist either, but you need more of a balance between optimism and pessimism in life, more so than in investing. Does this happen to anybody else?

We are all aware of good things that value investing has done for us outside of the investing world. The ability to think independently, think long term, be patient, learn from our mistakes etc. We have also learned many great values from Warren Buffett to apply to both business and our personal lives, such as integrity and honesty. Having said all of that, there are definitely some value investing principles that I'd rather be free from in my personal life. For example, whenever I spend or lose money where I shouldn't have, it bothers me because I wired to think about the future value or use of capital of every dollar I have now. A much more bothersome issue that I often face is always thinking about the downside when it comes to making decisions, and not nearly enough about the upside. Again, this is great when applying to stocks, but it can get depressing in real life. I'm not sure if anybody else has had such issues. Would love to hear all of your thoughts. :)

(1) I suspect that destroying documents puts you in hotter water than losing the case, but, yes, they could do that. (2) The Protective Order is there to protect the defendants. Again, I suspect that getting away with this would be difficult and would put you in hotter water than losing the case. Makes sense, but I'm thinking that this is the Government we are dealing with - they have the capacity to do some pretty shady things. How would the court even know if certain documents were destroyed, if they don't even know of their existence? It's pretty obvious to me that the investors have legal precedent. But the Government is in control of the evidence - and that's what scares me.

Thanks for the update merkhet. I'm looking forward to the transcript. These are probably some naive questions - but, 1) Can the government just destroy the documents so that they can't possibly be used as evidence? 2) Didn't the Judge say that leaked documents won't be allowed to be admissible as evidence, in order to protect the integrity of the Protective Order? So what is stopping from someone on the Defense's side from just releasing something incriminating to the public, anonymously, therefore nulling it's use in court?

Apparently he suffered from drug and alcohol problems throughout his life. Very sad. :'(

Not sure if I'd ever want to buy insurance from Warren Buffett, because most likely I'm getting ripped off. :P

Hahahaha Perhaps I should sell my shares, I can see another $17 billion settlement coming. Hopefully relief for CC borrowers is a large portion.

Does anyone know why Ackman's common stock holdings never show up in the Pershing Square 13F? http://www.sec.gov/Archives/edgar/data/1336528/000117266114001128/xslForm13F_X01/infotable.xml

I imagine it's very hard to not succumb shareholder and Wall St. pressure to pay a dividend. Even Jamie Dimon said in his annual letter this year that he'd prefer no dividend at all but that's not what his shareholders want.

I once owned shares in Aeropostale. I liked the balance sheet, it had a good amount of cash and no debt (though I didn't account for operating leases). Based on the earnings, net of cash, it was pretty cheap. Luckily, I broke even. I think I sold to get into BAC in 2011 or something. What I learned is that the customers are very fickle, there is a lot of competition, and they need to update their offerings very frequently. This makes for a very tough business to be in.

Not my least favorite, in that I'm very entertained by them, but definitely some of the worst investing quotes ever: "It is hard for us, and without being flippant, to even see a scenario within any realm of reason that would see us losing $1 in any of those (CDS) transactions." - Joseph Cassano, AIG Financial Products, 2007 “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” - Chuck Prince, Citigroup, 2007

I didn't buy or sell anything today, but only read my daily 500 pages.

I just watched the first panel (The Reorganization of Fannie and Freddie) discussion of the NYU conference on the future of Fannie and Freddie. http://www.nyujlb.org/2013/08/1184/ The two panelists sitting on the right talked about some ways in which the shareholders could lose the case, or not make much money even if we win. One of them talked about how the third amendment can be seen as the FHFA following their fiduciary duty by protecting the bond holders under the assumption that the equity holders would be wiped out with or without the third amendment. He said this idea would be based on the GSEs having to borrow money from Treasury to pay the dividend in all but the last quarter before the third amendment signed. This "borrowing to pay the dividend" would keep increasing the liquidation preference well into the future, putting the bond holders at risk, whom the FHFA does have an obligation to protect. This argument that the FHFA was acting to protect the capital structure and therefore was allowed to do this as a conservator, would work against us obviously. The other one of the two panelists stated that the Court might reward the plaintiffs only the IV of the common and preferred shares on the day of the 3rd amendment. He demonstrated that a simple DCF projecting 2Q-2012 profits into the future wouldn't amount to much value after subtracting out the $189 billion liquidation preference. That DCF would be flawed because it wouldn't include the massive write downs of the valuation allowance and release of loan loss reserves that happened in 2013. Would love to hear the board's opinion on these risks. The two panelists I am referring to start talking at 35:30.

Happy birthday Sanjeev!

Guys, let's stick to investing related topics please. Some that I've been thinking of: 13. What is your YTD return? 14. What is your net worth? 15. Do you read only the minimum 500 pages/day or do you frequently go over? 16. Have you ever found that 500 hours isn't enough for researching a stock?

My question for the experts on the board is this. Is it always necessary to read the 10-k/q cover to cover, no matter what? Or can it be dependent on the situation. For example, I'm invested in the GSEs. I've read hundreds of pages of court filings and transcripts. I feel like it's not necessary to tear up two 300 pg. 10ks in this case because everything depends on the court rulings, but I feel guilty for not doing so. Am I wrong to approach it like this?

Was already posted a couple of posts up by Luke.