Mephistopheles

Lol, it must be because Bill Gates helped start the pledge

I think she's good to look at, so I watch her either way.

Wow, that's some amazing analysis, Merkhet. I have no legal background, but when I read Judge Lamberth's opinion, a lot of what he said simply didn't make sense to me, one of them being the no liquidation argument as you pointed out. He also countered the Plaintiff's claims that FHFA is depriving the FNMA/FMCC of capital by saying something to the effect of "well the 10% dividend also deprived them of capital": "The individual plaintiffs specifically argue that the net worth sweep exceeds FHFA’s authority as a conservator because it (1) depletes available capital; (2) “eliminates the possibility of normal business operations”; and (3) carries an ultimate intent to wind down the GSEs. Individual Pls.’s Opp’n at 56-58. First, the original dividend distribution scheme under the PSPAs also depleted the GSEs’ capital. Dividends distributed to security holders, by nature, constitute a depletion of available capital. ..." To me that argument is ridiculous. ____________________________________________ So the preferred are now closing in on at 10% of par value. Curious to know if anyone is adding to their position? I feel like the odds of shareholders winning in Federal Court of Claims are better than 1 in 10. Though I haven't added just yet.

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/fnma-and-fmcc-preferreds-in-search-of-the-elusive-10-bagger/

Did Fairholme purchase a 15% position or did it rise to 15%? I thought it was the latter (in which case it would be 7-8% now).

I think I may have been misinterpreted. I think Buffett is just as greedy as Winters or Icahn or Ackman. I think his abstaining from voting wasn't because he's a man of peace, but rather for self serving reasons. He's got enough of name, reputation and respect that just showing simple distaste or approaching the matter in a less confrontational way can do wonders for him where it doesn't with most other people. Don't forget that he did have private conversations with the CEO where he elucidated his views. I'm sure this had a significant impact. I think it's the same logic as to why Berkshire's culture of trust works as well as it does. When you trust and praise people, rather than criticize, it can work in your favor. But again, only he can pull that off at the magnitude that he does. And I think the Carl Icahns of the world do a fantastic job at keeping corporate America at check with their style too. I was referring to the executives and thousands of managers who would have received more options under the original plan. Probably wouldn't have been good for their morale if Buffett took a more critical and activist stance like Winters.

Well most people (myself included) wronged him in the very beginning for not taking charge and we thought it was just plain old Buffett being non-confrontational, but I think he had a very deliberate strategy here. Genius because most people didn't see it that way yet so simple.

Abstaining by Buffett was a genius move. Had he gone the Wintergreen route, it would have damaged morale at KO, ultimately costing shareholders more than the plan. Instead, he leveraged his reputation and the business world's enormous respect for him by only minimally verbalizing his disappointment without creating enemies by voting against or being overly critical. In this case, less is certainly more.

Why are the preferreds getting killed so much more than the common? I'm thinking of taking the tax loss on the common and switching over to preferred.

The Government is probably going to use Lamberth's brief to throw a wrench in the Federal Claims Court case I feel like. He basically said that HERA allows the FHFA and Treasury to do whatever the hell they want to do. "It was Congress, after all, that parted the legal seas so that FHFA and Treasury could effectively do whatever they thought was needed to stabilize and, if necessary, liquidate, the GSEs. Recognizing its role in the constitutional system, this Court does not seek to evaluate the merits of whether the Third Amendment is sound financial--or even moral-policy. The Court does, however, find that HERA's unambiguous statutory provisions, coupled with the unequivocal language of the plaintiffs' original GSE stock certificates, compels the dismissal of all of the plaintiffs' claims. "

Well, looks like Lamberth ruled in favor of the Government... http://timhoward717.com/2014/09/30/memorandum-opinion-and-orders-perry-injunction/ What sort of precedent does this set for the other Fairholme case?

John Carney strikes again. This time he linked a case of a foreclosed borrower suing FNMA on the basis that they deserved Fifth Amendment Due Process prior to eviction because FNMA is a state actor. The court threw out the case. I am not a lawyer but I don't see how this relates to the shareholder suits, maybe Merkhet you can chime in? The shares are down 10% today, and it might be because of this. https://twitter.com/carney/status/516950179728343040

I found IB's platform extremely confusing, and not user friendly. I also don't like the login process, involving the security code and matching it with your card.

Thanks Merkhet. This also doesn't apply to the Ackman case, given that he is also suing the FHFA directly, and not on the behalf of FNMA/FMCC, correct?

Investing in real estate also takes work, and has its own set of risks.

You have to pay taxes on dividends, whether or not they are reinvested.

+1

Just playing devil's advocate here, but don't the shareholders lose all non-financial rights in a conservatorship? So does he really have the right to review the books?

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.