FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[merkhet]

I could see this continue dragging. There was an agreement on discovery by the end of June, but the way the government is trudging along, I wouldn't be surprised if they try to get another lengthy extension. Whether it is granted is another thing entirely.

[doughishere]

Been quiet the last few days...just wanted to say hi

[merkhet]

Here's Fairholme's reply to the Government re the privilege logs.

 

The bickering is starting to feel a little comical. It's a good read just for some levity.

2015-05-27_Fairholme_Reply_to_Remove_the_Proteted_Information_Designation.pdf

[merkhet]

In case anyone was looking for the Saxton v. FHFA complaint.

 

Paragraph 68 is interesting:

 

For example, by the time of the Net Worth Sweep in August 2012, the government knew that the valuation allowance associated with the Companies’ deferred tax assets could be reversed, thereby creating a windfall of tens of billions of dollars of profits to be swept by the government. At that time, Fannie and Freddie had a combined deferred tax assets valuation allowance of nearly $100 billion. That valuation allowance would have to be reversed if the Companies determined that it was more likely than not that they would be able to use their deferred tax assets. The Treasury Department was intimately familiar with these issues having seen such a reversal in February 2012 in connection with its massive investment in AIG. What is more, the very projections Treasury gave to other government agencies in connection with the Net Worth Sweep in June 2012 showed Fannie and Freddie earning billions of dollars a year (and therefore generating substantial tax liability) for many years into the future. Furthermore, Freddie’s SEC filings indicated that the Company had already begun using its deferred tax assets by the middle of 2012, a fact that FHFA surely knew since its officials closely supervised the Companies’ management and financial reporting. A senior executive at one of the Companies even discussed the reversal of the deferred tax assets valuation allowance with Treasury on the eve of the Net Worth Sweep. This item alone would generate a profit of tens of billions of dollars. In short, the government had actual knowledge that the Net Worth Sweep would result in a windfall far in excess of payments that would have been realized under the prior contractual agreement.

 

Paragraph 82 is also interesting:

 

Furthermore, on information and belief, FHFA agreed to the Net Worth Sweep only at the insistence and under the direction and supervision of Treasury. The Net Worth Sweep was a Treasury initiative, it was Treasury that informed the Companies just days before the Net Worth Sweep that it was forthcoming, and a meeting addressing the Net Worth Sweep was held at Treasury on August 16, 2012 during which Secretary Geithner announced the changes. Secretary Geithner apparently believed that even before the Net Worth Sweep “we had already effectively nationalized the GSEs . . ., and could decide how to carve up, dismember, sell or restructure those institutions.” Plaintiff’s Corrected Post-Trial Proposed Findings of Fact 26.2.1(a), Starr Int’l Co. v. United States, No. 1:11-cv-779-TCW (Fed. Cl. March 2, 2015), ECF No. 430. The Net Worth Sweep is just one example of the significant influence Treasury has exerted over FHFA from the beginning of the conservatorship. Indeed, Secretary Paulson has written that “seizing control” of Fannie and Freddie, an action that is statutorily reserved to FHFA, was an action “I took.” HENRY M. PAULSON, JR., ON THE BRINK xiv (2d ed. 2013). Treasury, however, lacks the authority to impose such direction and supervision, and FHFA lacks the authority to submit to it. HERA expressly provides that “[w]hen acting as conservator, . . . [FHFA] shall not be subject to the direction or supervision of any other agency of the United States . . . .” 12 U.S.C. § 4617(a)(7).

2015-05-28_Saxton_Complaint.pdf

[Mephistopheles]

In case anyone was looking for the Saxton v. FHFA complaint.

 

Paragraph 68 is interesting:

 

For example, by the time of the Net Worth Sweep in August 2012, the government knew that the valuation allowance associated with the Companies’ deferred tax assets could be reversed, thereby creating a windfall of tens of billions of dollars of profits to be swept by the government. At that time, Fannie and Freddie had a combined deferred tax assets valuation allowance of nearly $100 billion. That valuation allowance would have to be reversed if the Companies determined that it was more likely than not that they would be able to use their deferred tax assets. The Treasury Department was intimately familiar with these issues having seen such a reversal in February 2012 in connection with its massive investment in AIG. What is more, the very projections Treasury gave to other government agencies in connection with the Net Worth Sweep in June 2012 showed Fannie and Freddie earning billions of dollars a year (and therefore generating substantial tax liability) for many years into the future. Furthermore, Freddie’s SEC filings indicated that the Company had already begun using its deferred tax assets by the middle of 2012, a fact that FHFA surely knew since its officials closely supervised the Companies’ management and financial reporting. A senior executive at one of the Companies even discussed the reversal of the deferred tax assets valuation allowance with Treasury on the eve of the Net Worth Sweep. This item alone would generate a profit of tens of billions of dollars. In short, the government had actual knowledge that the Net Worth Sweep would result in a windfall far in excess of payments that would have been realized under the prior contractual agreement.

 

Paragraph 82 is also interesting:

 

Furthermore, on information and belief, FHFA agreed to the Net Worth Sweep only at the insistence and under the direction and supervision of Treasury. The Net Worth Sweep was a Treasury initiative, it was Treasury that informed the Companies just days before the Net Worth Sweep that it was forthcoming, and a meeting addressing the Net Worth Sweep was held at Treasury on August 16, 2012 during which Secretary Geithner announced the changes. Secretary Geithner apparently believed that even before the Net Worth Sweep “we had already effectively nationalized the GSEs . . ., and could decide how to carve up, dismember, sell or restructure those institutions.” Plaintiff’s Corrected Post-Trial Proposed Findings of Fact 26.2.1(a), Starr Int’l Co. v. United States, No. 1:11-cv-779-TCW (Fed. Cl. March 2, 2015), ECF No. 430. The Net Worth Sweep is just one example of the significant influence Treasury has exerted over FHFA from the beginning of the conservatorship. Indeed, Secretary Paulson has written that “seizing control” of Fannie and Freddie, an action that is statutorily reserved to FHFA, was an action “I took.” HENRY M. PAULSON, JR., ON THE BRINK xiv (2d ed. 2013). Treasury, however, lacks the authority to impose such direction and supervision, and FHFA lacks the authority to submit to it. HERA expressly provides that “[w]hen acting as conservator, . . . [FHFA] shall not be subject to the direction or supervision of any other agency of the United States . . . .” 12 U.S.C. § 4617(a)(7).

 

Thanks

 

Are these just some strong accusations? Or do they have to have hard evidence to make these specific charges about Geithner et al? Just trying to understand the significance of this.

 

Also, this case seems to be brought on by individual retail investors, right? Doesn't seem like there is a professional money manager involved here.

 

[merkhet]

It's unclear on both counts.

 

IIRC, the legal case in Iowa brought by Continental Western was dismissed via claims preclusion because the legal counsel was the same and Continental Western was a subsidiary of W.R. Barkley which was a party to the dismissed case in the District of D.C.

 

The reason the Plaintiffs can bring this case is that none of the parties here was a party to the District of D.C. case, and the Iowa court did not rule on anything substantive -- only on something procedural.

 

At this point, it seems like this case will force the Iowa court to decide on the substantive questions like whether HERA precludes any injunctions, as Judge Lamberth ruled, or if that's not the case -- it's unclear how successful that will be though since the judge in the Iowa case seemed to agree with Lamberth though he did so in dicta (judicial opinion that has no real weight). In other words, I'm not holding my breath on this particular case.

 

What's more interesting to me are the assertions that they brought up in their Complaint, which is what I highlighted above. The first assertion might be something that would allow one of the cases to move forward with discovery because there's a dispute of fact -- and it might allow for a deeper dive into discovery than even the current Fairholme case. The second assertion is interesting because, at least the phrasing, indicates that while Geithner was at Treasury, he believed that he could control FHFA's actions in the conservatorship.

[Mephistopheles]

It's unclear on both counts.

 

IIRC, the legal case in Iowa brought by Continental Western was dismissed via claims preclusion because the legal counsel was the same and Continental Western was a subsidiary of W.R. Barkley which was a party to the dismissed case in the District of D.C.

 

The reason the Plaintiffs can bring this case is that none of the parties here was a party to the District of D.C. case, and the Iowa court did not rule on anything substantive -- only on something procedural.

 

At this point, it seems like this case will force the Iowa court to decide on the substantive questions like whether HERA precludes any injunctions, as Judge Lamberth ruled, or if that's not the case -- it's unclear how successful that will be though since the judge in the Iowa case seemed to agree with Lamberth though he did so in dicta (judicial opinion that has no real weight). In other words, I'm not holding my breath on this particular case.

 

What's more interesting to me are the assertions that they brought up in their Complaint, which is what I highlighted above. The first assertion might be something that would allow one of the cases to move forward with discovery because there's a dispute of fact -- and it might allow for a deeper dive into discovery than even the current Fairholme case. The second assertion is interesting because, at least the phrasing, indicates that while Geithner was at Treasury, he believed that he could control FHFA's actions in the conservatorship.

 

The assertions made are pretty strong. Are you saying that you are not sure whether they are baseless or not? What I don't understand is why would simply making an statement that, for example, "a senior executive met w/Treasury regarding the DTA on the eve of the 3rd amendment" warrant moving forward with discovery? Unless of course they have some memos or what not to back it up. I'm just confused with the way the law and procedure works with these cases. Can anyone just make any wild accusation without at least some basis?

[merkhet]

Well, I don't have any additional information on the assertion, so I can't make a determination as to whether it's baseless...

 

If this was brought by Paulson & Co. or something, I would be more likely to say they have something up their sleeves. However, I know nothing about the plaintiffs or the plaintiff's counsel.

[Mephistopheles]

Well, I don't have any additional information on the assertion, so I can't make a determination as to whether it's baseless...

 

If this was brought by Paulson & Co. or something, I would be more likely to say they have something up their sleeves. However, I know nothing about the plaintiffs or the plaintiff's counsel.

 

Got it, well let's hope there is some legitimacy to it :)

[doughishere]

What about the memo that was broke by inside sources a month ago from Undersecretart for Domestic Finance to Treasury Secretary Tim Geithener. Dated Jan. 4 2011.

 

 

http://www.insidesources.com/wp-content/uploads/2015/04/DOT-1.4.2011.pdf

 

 

Bullet point 4. "Potentially accelerate recognition of losses prior to 2012 (there is currently a $180 billion difference between the GAAP and Far Value balance sheets of the GSEs)."

 

 

[merkhet]

It's more useful for the public opinion part now than the litigation. Right now the litigation in the Court of Claims does not care about the reasoning behind the sweep.

[merkhet]

Government has turned over a public, non-protected, final privilege log for FHFA -- though there is no mention of when they will turn over the log for Treasury, which is probably the more important one.

 

We also feel compelled to respond to Fairholme’s accusation of a broad Government “strategy” to avoid disclosure of information related to the Third Amendment. Fairholme’s accusation that the Government is preventing disclosure of information is simply wrong.1 At this time, the Government has produced over 600,000 pages of Treasury and FHFA documents in response to Fairholme’s document requests. Fairholme has also taken exhaustive depositions of key FHFA officials related to the Third Amendment, and has noticed the depositions of present and former Treasury officials.

 

Looks like depositions are proceeding on pace.

2015-06-01_Defendants_Motion_for_Leave_to_File_Sur-Reply.pdf

[Mephistopheles]

It's more useful for the public opinion part now than the litigation. Right now the litigation in the Court of Claims does not care about the reasoning behind the sweep.

 

This is because the Court of Claims case is regarding whether or not it was an illegal 5th Amendment taking, whereas the District Court litigation is about FHFA not acting as a Conservator, right?

[merkhet]

It's more useful for the public opinion part now than the litigation. Right now the litigation in the Court of Claims does not care about the reasoning behind the sweep.

 

This is because the Court of Claims case is regarding whether or not it was an illegal 5th Amendment taking, whereas the District Court litigation is about FHFA not acting as a Conservator, right?

 

Correct.

[doughishere]

this from Valueplays

 

FANNIE MAE & FREDDIE MAC: Fresh Attack on Profit Sweep in N.D. Iowa

Three Iowa shareholders sued the Federal Housing Finance Agency and

the U.S. Treasury last week. Their complaint challenges the

legality of the government's use of the profits of Fannie Mae and

Freddie Mac under what is known as the Third Amendment Sweep, and

does so in a couple of ways not fully explored in similar earlier

lawsuits by GSE shareholders. The complaint initiating Saxton v.

FHFA, Case No. 15-cv-00047 (N.D. Iowa), tells the Court in broad

terms:

"Plaintiffs bring this action to put a stop to the federal

government's naked and unauthorized expropriation of their property

rights. . . . Treasury's violation of HERA is straightforward: the

Net Worth Sweep, by changing the fundamental economic

characteristics of Treasury's investment, created a new security,

and HERA forbade Treasury from acquiring Fannie and Freddie stock

in 2012. This Court must set aside the Net Worth Sweep and restore

to Fannie's and Freddie's private shareholders the property rights

the federal government has unlawfully expropriated for itself."

While that general overview sounds familiar, the 49-page,

146-paragraph document contains some details not found in other

shareholder lawsuits.

A spokesperson for the Iowa shareholders and their lawyers said,

"this is the first suit by individual shareholders in Iowa and the

first suit filed since Treasury documents leaked earlier this year

48

raised serious questions about whether judges lacked relevant

information before ruling in similar cases related to the Third

Amendment Sweep." As reported by HousingWire.com, one leaked

document -- dated Jan. 4, 2011, and posted at http://bit.ly/1RvKntV

-- is a planning memo by then undersecretary for domestic finance

at Treasury, Jeffrey A. Goldstein, on the disposition of the GSEs.

The Goldstein Memo was not provided to shareholders, Housing Wire

observes, going on to explain that this is most notable because

critics of the Treasury say it makes the argument that Treasury

should disregard the federal Housing and Economic Recovery Act

rules that circumscribe its duties in the conservatorship.

As previously reported in the Troubled Company Reporter and Class

Action Reporter, Fannie Mae and Freddie Mac received $187.5 billion

from Treasury between Nov. 2008 and June 2012. The GSEs have

returned $230.7 billion to Treasury to date, earning taxpayers a

23% return on their money so far. A similar lawsuit by Continental

Western Insurance Co. in the Southern District of Iowa challenging

Treasury's endlessly increasing rate of return by sweeping all of

the GSEs' profits each quarter was dismissed by Judge Pratt earlier

this year, and Judge Lamberth in the District of Columbia dismissed

several similar lawsuits in Sept. 2014. Both judges said the

government acted within the boundaries established by the Congress

when it voted to approve HERA. Judge Lamberth's decision is

currently on appeal to the U.S. Court of Appeals for the D.C.

Circuit. Briefing in the D.C. Circuit might be completed by

early-October 2015.

"It does seem peculiar that Treasury did not provide [shareholders

with a copy of the Goldstein Memo]. It raises the question of

whether, or what, other documents were not disclosed, and why,"

prolific Graham, Fisher & Co. analyst Josh Rosner told Housing

Wire. "[Additionally,] it suggests that they fully appreciated

what HERA required and chose to circumvent the spirit, if not the

letter, of [the] law." An earlier memorandum from Mr. Goldstein to

Treasury Secretary Timothy Geithner-- dated Dec. 20, 2010 and

posted at http://nyti.ms/1HCgIZ2 that was turned over to

shareholders -- unambiguously spoke about "the Administration's

commitment to ensure existing common equity holders will not have

access to any positive earnings from the GSEs in the future,"

notwithstanding the absence of any provision in HERA making that

decree.

InvestorsUnite.org observes that the Saxton case in the Northern

District of Iowa won't be encumbered by Judge Lamberth's ruling in

the District of Columbia or Judge Pratt's decision in the Southern

District of Iowa dismissing similar lawsuits. Chief Judge Linda R.

Reade -- appointed to the federal bench by President George W. Bush

in 2002 -- is free to take a fresh look at the facts and applicable

law in the Saxton case and make her own independent findings of

fact and conclusions of law about whether the government went too

far when Treasury and FHFA executed the Third Amendment and how

that overreaching should be reformed.

The Saxton plaintiffs say in paragraph 68 of their Complaint that:

49

"A senior executive at one of the Companies . . . discussed

the reversal of the deferred tax assets valuation allowance

with Treasury on eve of the Net Worth Sweep."

That factual assertion doesn't appear to have bubbled to the

surface in other GSE litigation to date and is inconsistent with

these statements appearing in the Declaration submitted by FHFA

Advisor Mario Ugoletti in Perry Capital v. Lew, Case No.

13-cv-01025 (D.D.C.), Doc. 27, Tab 1, par. 20 at 9-10:

"At the time of the negotiation of the Third Amendment, the

Conservator and the Enterprises had not yet begun to discuss

whether or when the Enterprises would be able to recognize

any value to their deferred tax assets. Thus, neither the

Conservator nor Treasury envisioned at the time of the Third

Amendment that Fannie Mae's valuation allowance on its

deferred tax assets would be reversed in early 2013,

resulting in a sudden and substantial increase in Fannie

Mae's net worth, which was paid to Treasury in mid-2013 by

virtue of the net worth dividend."

Retired Fannie Mae lobbyist Bill Maloni wondered aloud yesterday at

http://timhoward717.com/ -- the self-described "Fannie Mae-Straight

Talk" blog unaffiliated with J. Timothy Howard, Vice Chairman and

CFO of Fannie Mae until 2004 and author of "The Mortgage Wars" --

if former Fannie Mae CFO Susan R. McFarland might be the executive

to which the Saxton Plaintiffs make reference. Mr. Maloni thinks

he recalls something about Ms. McFarland threatening to resign her

CFO post if Fannie Mae didn't make changes in the way it accounted

for its deferred tax assets before she departed in 2013.

Paragraph 11 of the Saxton Plaintiffs' Complaint touches on a

question about the GSEs' actual need for cash injections from

Treasury from 2008 to 2012. The GSEs created and recorded large

loan loss reserves in 2008 and additional eye-popping loan loss

reserves in 2009. Those feared losses never materialized and were

reversed after the Net Worth Sweep was put in place. While the

large non-cash losses created by those write downs adversely

affected the GSEs' balance sheet solvency, there's no indication

that the GSEs ever faced a liquidity problem or needed Treasury's

cash injections to meet their day-to-day expenses and obligations.

"By 2012," the Saxton Complaint says in paragraph 59, "the housing

market was already recovering and both Fannie and Freddie had

returned to profitability. In August 2012, the Companies and FHFA

knew or should have known that previously anticipated losses far

exceeded their actual losses. These excess loss reserves

artificially depressed the Companies' net worth. Upon reversal of

these loss reserves, Fannie's and Freddie's net worth increases

accordingly." Paragraph 67 of the Saxton Complaint charges that

"[t]he Companies, FHFA, and Treasury knew or should have known in

August 2012 that the Companies would reverse substantial loss and

deferred tax reserves and reap substantial profits from lawsuits

and sources other than their day-to-day business operations."

The Saxton Plaintiffs assert these five claims for relief in their

Complaint:

50

(A) FHFA's conduct exceeds its statutory authority as

Conservator;

(B) Treasury's conduct exceeded its statutory authority;

© violation of the Administrative Procedure Act: Treasury's

conduct was arbitrary and capricious;

(D) breach of contract against FHFA as Conservator of Fannie

and Freddie; and

(E) breach of implied covenant of good faith and fair dealing

against FHFA as Conservator of Fannie and Freddie;

and ask the Court to grant these six forms of relief:

(1) Declaring that the Net Worth Sweep, and its adoption, are

not in accordance with and violate HERA . . . , and that Treasury

acted arbitrarily and capriciously . . . by executing the Net Worth

Sweep;

(2) Vacating and setting aside the Net Worth Sweep . . . ;

(3) Enjoining Treasury and its officers, employees, and agents

to return to FHFA as conservator of Fannie and Freddie all dividend

payments made pursuant to the Net Worth Sweep or, alternatively,

recharacterizing a portion of such payments as a pay down of the

liquidation preference and a corresponding partial redemption of

Treasury’s Government Stock rather than mere dividends;

(4) Enjoining [FHFA and Treasury from] taking any action

whatsoever pursuant to the Net Worth Sweep;

(5) Enjoining FHFA and its officers, employees, and agents

from acting at the instruction of Treasury or any other agency of

the government and from re-interpreting the duties of FHFA as

conservator under HERA; and

(6) Awarding Plaintiffs damages . . . , including . . .

contractually-due dividends on the preferred and common stock for

each quarter when a dividend based on the net worth of the

Companies was paid to Treasury.

Referring to the Sweep, plaintiff Tom Saxton of Cedar Rapids, said,

"I've invested a fair amount of money in Freddie Mac. What the

government has done is wrong, and I'm filing this lawsuit to

protect my property."

Bill Ackman at Pershing Square Capital Management LP suggested at

the 2015 Harbor Investment Conference earlier this year that Fannie

and Freddie's common shares have one of the most attractive

risk-reward profiles in the markets today. To put some meat on

those bones today, FNMA shares trade at less than $3 per share,

which is a slight discount to their book value for all authorized,

issued and outstanding shares. If one of the shareholder suits

were successful in reforming the Third Amendment and

51

recharacterizing the GSE's payments to Treasury, the book value of

FNMA common shares, for example, would rocket to more than $50 per

share, and preferred shares in the GSEs would be expected to

rebound to their par value. According to regulatory filings,

Pershing Square owns more than 100 million shares of FNMA common

stock and more than 60 million shares of FMCC common stock at an

average cost of just under $2.25 per share. Regulatory filings

disclose that Fairholme Capital Management, Icahn Associates Corp.,

Third Avenue Management, and Seamans Capital Management also

oversee large positions in the GSEs' publicly traded securities.

A full-text copy of the Saxton Complaint is available from GSE

Links -- described as "Your Starting Point for GSE News, Resources,

and Information" -- at no charge at:

http://gselinks.com/Court_Filings/Saxton/15-00047-0001.pdf

The Saxton Plaintiffs are represented by:

Alexander M. Johnson, Esq.

Sean P. Moore, Esq.

BROWN, WINICK, GRAVES, GROSS,

BASKERVILLE AND SCHOENEBAUM, P.L.C.

666 Grand Avenue, Suite 2000

Des Moines, IA 50309-2510

Telephone: 515-242-2400

E-mail: ajohnson@brownwinick.com

moore@brownwinick.com

An updated chart is available at no charge at:

http://bankrupt.com/gselitigationsummary201505.pdf

to help organize information about the many lawsuits challenging

the Third Amendment and Net Worth Sweep, including the cases

challenging the sweep as a confiscation of private property for

public use by our government without just compensation in violation

of the Fifth Amendment to the U.S. Constitution before Judge

Sweeney in the U.S. Court of Federal Claims. At this time,

jurisdictional discovery is underway in Fairholme v. U.S., Case No.

13-465 (Ct. Fed. Cl.), and (subject to further extensions),

jurisdictional discovery is currently scheduled to wrap up by June

29, 2015. Completion of jurisdictional discovery in Fairholme --

on whatever date it actually happens -- will unleash a flurry of

activity in Judge Sweeney's court including Fairholme filing its

response to the government's motion to dismiss its complaint and

other pre-trial filings by the government and other aggrieved

shareholders.

 

[doughishere]

Cool little website found in the last post. This is probably the best aggregate website i have seen on F&F

 

http://gselinks.com/

 

GSE Links

Your Starting Point for GSE News, Resources, and Information

"Ultimately, Truth Prevails"

[TwoCitiesCapital]

Cool little website found in the last post. This is probably the best aggregate website i have seen on F&F

 

http://gselinks.com/

 

GSE Links

Your Starting Point for GSE News, Resources, and Information

"Ultimately, Truth Prevails"

 

Nice find!

 

I'd be interested in having a discussion on how you guys manage the risk of a position like this all things considered. This is a really interesting situation due to the risk/reward, the time-frame, the restructuring uncertainty, and the multiple securities available with different pay-offs and certainties. It'd be interesting to hear how people are sizing this, how they trade around certain events, what securities are being used, and if they're managing for themselves or for others. I think at the very least it'd be instructive for some of us more junior investors.

 

Personally, I manage money for myself and this is sized at 7% of my portfolio (which would translate to about 5-6% of my total net worth). It's a little larger due my recent additions that I intend to sell after the results of the AIG whatever the results may be. I see a long-time frame with little in the short-term that will really move these things so I'm more comfortable trading around the position on related news over a short-to-medium time frame.

 

The majority of my position is in common shares of Fannie Mae now that recent evidence has revised my probabilities of success upwards. I still hold some of the higher "yielding" preferred shares that I had originally purchased to help hedge the event that they're treated more favorably in the restructuring. The majority of the position is held in a taxable account to help hedge my losses in the event I'm wrong - this also allows me to feel more comfortable taking a larger position knowing the IRS will subsidize the downward volatility. I have a small piece in my Roth IRA to allow for the benefits of tax free compounding if this thing really does go back to $20-30.

 

[brker_guy]

Great link, Doughishere.  Thanks for sharing:

 

Cool little website found in the last post. This is probably the best aggregate website i have seen on F&F

 

http://gselinks.com/

 

GSE Links

Your Starting Point for GSE News, Resources, and Information

"Ultimately, Truth Prevails"

[Jurgis]

It'd be interesting to hear how people are sizing this

 

1% lottery ticket. Holding prefs. No buy timing. Would sell if it went to ~0.5 expected value without resolution in courts. Otherwise hold until resolution one way or the other.

 

Unless you are a lawyer experienced in this particular branch of law, have read through all the legal documents and are experienced in assigning probabilities based on legal documents so far, this is a pure lottery ticket. Don't kid yourself that you know the "certainties" or probabilities based just on what Merkhet, Fairholme, Ackman and a bunch of journalists write.

[merkhet]

It'd be interesting to hear how people are sizing this

 

1% lottery ticket. Holding prefs. No buy timing. Would sell if it went to ~0.5 expected value without resolution in courts. Otherwise hold until resolution one way or the other.

 

Unless you are a lawyer experienced in this particular branch of law, have read through all the legal documents and are experienced in assigning probabilities based on legal documents so far, this is a pure lottery ticket. Don't kid yourself that you know the "certainties" or probabilities based just on what Merkhet, Fairholme, Ackman and a bunch of journalists write.

 

I agree -- it's hard for anyone without some sort of legal training to really understand this situation. As a result, I would size it based on your level of understanding of the situation up to some cap.

[TwoCitiesCapital]

It'd be interesting to hear how people are sizing this

 

1% lottery ticket. Holding prefs. No buy timing. Would sell if it went to ~0.5 expected value without resolution in courts. Otherwise hold until resolution one way or the other.

 

Unless you are a lawyer experienced in this particular branch of law, have read through all the legal documents and are experienced in assigning probabilities based on legal documents so far, this is a pure lottery ticket. Don't kid yourself that you know the "certainties" or probabilities based just on what Merkhet, Fairholme, Ackman and a bunch of journalists write.

 

I agree -- it's hard for anyone without some sort of legal training to really understand this situation. As a result, I would size it based on your level of understanding of the situation up to some cap.

 

Makes sense. Given how quickly it will take to me to recoup a total loss, which isn't likely to happen in the near term, I've been comfortable with a 3-4% position and wouldn't expand it much beyond for a straight bet on the outcome of the current trials. But given that I don't see any large near term downside risks on the horizon, I expanded it recently benefit from any change in sentiment a positive AIG ruling might bring and plan to reduce it back down to 3-4% after those results have been announced.

[Menko]

A lottery ticket would not sound as a share/security to invest in at any price?, though I admit it fully depends on the preference of the investor.

 

To add an additional perspective:

 

The cases of Fannie Mae and Freddy Mac are quite complex for us, yet we believe the following three questions summarize them. Taken together, we see the outcome described below as unavoidable:

- Can the conservator FHFA of Fannie Mae and Freddie Mac, change contracts as executed through the August 2012 Third Amendment, effectively sweeping 100% of the profits of both companies towards the government, forever, leaving all other shareholders with nothing despite the fact that they hold title to their shares? Our answer is a firm NO. This would mean the contracts that were signed in 2008 remain in place in the interest of all shareholders and stakeholders.

- Is there a better alternative for Fannie Mae and Freddie Mac and can they be replaced? Our answer is a firm NO. This would mean a solution must be found to keep Fannie and Freddie alive and kicking, in the interest of the United States and the world.

- Are these companies solidly profitable and is it highly likely their position and business models will enable them to continue to earn solid profits in the US financial as well as global financial system? Our answer is a firm YES.

- Therefore, we are happy shareholders in the common and the preferred shares. We are ready to wait many years if needed, but we think the United States will move faster, as the companies are vital for the health of the country.

 

[merkhet]

Yea, just to clarify -- I personally don't think it's a lottery ticket based off of what Jim Millstein said in front of the House and the Senate, but reasonable minds could disagree on that.

 

And based off that, I can, and have, allocated more than a "lottery ticket"-sized position to it.

[Jurgis]

A lottery ticket would not sound as a share/security to invest in at any price?, though I admit it fully depends on the preference of the investor.

 

To add an additional perspective:

 

The cases of Fannie Mae and Freddy Mac are quite complex for us, yet we believe the following three questions summarize them. Taken together, we see the outcome described below as unavoidable:

- Can the conservator FHFA of Fannie Mae and Freddy Mac, change contracts as executed through the August 2012 Third Amendment, effectively sweeping 100% of the profits of both companies towards the government, forever, leaving all other shareholders with nothing despite the fact that they hold title to their shares? Our answer is a firm NO. This would mean the contracts that were signed in 2008 remain in place in the interest of all shareholders and stakeholders.

- Is there a better alternative for Fannie Mae and Freddy Mac and can they be replaced? Our answer is a firm NO. This would mean a solution must be found to keep Fannie and Freddy alive and kicking, in the interest of the United States and the world.

- Are these companies solidly profitable and is it highly likely their position and business models will enable them to continue to earn solid profits in the US financial as well as global financial system? Our answer is a firm YES.

- Therefore, we are happy shareholders in the common and the preferred shares. We are ready to wait many years if needed, but we think the United States will move faster, as the companies are vital for the health of the country.

 

So it's an ideological investment for you?

[rpadebet]

1% lottery ticket for me personally as I really don't understand the legalese.

 

I however get that all shareholders need to be treated fairly and one large shareholder cannot take away all the profits for himself whatever be the circumstances. I also get that these are good necessary businesses and one way or the other the business will eventually shift to private hands. There is too much ideology and politics involved in this, but I can see that shutting these businesses down is not an option, given the number of employees associated with these companies, the popularity of 30Y mortgages and implicit promises made by US govt to Foreign Govts who hold Fannie/Freddie insured paper.

 

I don't know the outcome nor do I know when it will be resolved, so my position has to be small enough not to hurt me if it goes bad and also not to create too much opportunity cost while I wait.

 

That said, I have 25% of my 401K invested with Fairholme funds, so my actual exposure to this outcome is higher than 1%.