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

[Guest cherzeca]

Should I keep posting highlights....or are people sick of them?

 

this is a case about individual liberty. you can do what you want

[doughishere]

Aight....i'll keep doing it a bit....im gonna dramatize the sh*t out of this....

 

Mr. Ugoletti testamony. taken at the offices of Cooper & Kirk, 9:34 a.m., Friday, May 15, 2015.

 

 

Okay. What was their reaction when they told all of their income would be swept to the federal government? 

MS. HOSFORD: Objection; misstates the facts. THE WITNESS: I don't, I don't recall a specific reaction that I could sit here and say --

BY MR. THOMPSON: Well, a --

A. -- this, this CEO said that, that CEO said that, I don't recall, I don't recall a specific one.

 

Q. Do you have a recollection of the general reaction?

 

A. Well, I think their general reaction was they probably were not too happy about it.

 

Q. Why not?

 

A. Well, in many camps within Fannie Mae and Freddie Mac, I mean, I think there were people, they,

they certainly never liked the Treasury Department saying that they were going to be wound down. They didn't want to be wound down, right. You don't want

to be wound down. You want to be Fannie Mae and Freddie Mac. So to the extent that they perceived this as further somehow taking that possibility away, they might not have been very happy about it.

 

 

 

 

Q. Okay. And do you know if anyone at Treasury ever tried to calculate the value of it?

MS. HOSFORD: Objection; calls for speculation during a particular time period.

 

THE WITNESS: Not that I'm aware of.

 

BY MR. THOMPSON:

Q. Okay. What is the basis for your statement that it would be incalculably large if no one calculated it[the  the periodic commitment fee]?

 

A. Right, I think I went through a fair

amount of that at, at the last round, but, I mean, my basis for that is it is to fully compensate Treasury for the value of the guarantee they are providing and a market value. And I do not think that there was any market value you could have put on, given their financial condition, the 100 billion that we started out, I don't even think -- I think it was very difficult on that. Doubling it to 200 billion and then taking on an unlimited commitment, I just don't, I don't see a market value that corresponds to that, that anybody would even come up with a price that anybody would be willing to put that amount of capital at risk in those situations.

 

Q. Did you discuss your view that it was an incalculably large fee or would have been with anyoneat Treasury?

 

A. Not that I recall.

 

Q. Anyone at FHFA?

 

A. Not that I recall. The issue did not --wasn't coming up.

 

Q. Yeah. And did you --

 

A. Nobody was looking to calculate it, so ..

 

 

Q. And was that an objective that FHFA shared?

 

A. FHFA also believed, and I think Director DeMarco said this many times, the, the strategic plan, the second strategic plan was the next chapter in a story that needs an ending, right. The ending was for Congress to pass legislation. The ending was not for Fannie and Freddie Mac to emerge from conservatorship.

 

Q. And did the Net Worth Sweep further that goal?

 

MS. HOSFORD: Objection; calls for  speculation.

 

THE WITNESS: I'll speculate. And, and the speculation I will give you is the answer I gave you not that long ago which was, emerging from conservatorship under the structure of the PSPAs is going to be very difficult, right. And we can recall, and we can go through that whole process again where, if they were going to emerge from conservatorship, they would have to go out and raise  private equity of a hundred and 87.5 billion totaland whatever the two were split up, and Raise private equity. Pay off the liquidation preference. Raise enough private equity to be able to dilute the 79,9 warrants from Treasury and raise enough private equity to do all that and become a well-capitalized institution under regulatory standards that, by the way, had changed fundamentally from when HERA was passed, because would think in any corner of the world, if they were going to be in any corner of the United States, if there was going to be companies these -- this large, they were likely going to be systemically important financial institutions under Dodd-Frank and they were going to have to hold capital well in excess of anything that HERA or least that pre-HERA envisioned, well in excess in anything of that. So the, the amount would have been huge.  And the PSPAs also have a provision that, given that, they don't go away. If you exit conservatorship under the PSPAs as, as you were before, the financial commitment from Treasury goes with you. That's, that's how it works. And so there

 

 

They talk about screenshots of finance.google.com and CNN.com. LOL

 

 

 

THE WITNESS: Yeah, they had positiveincome, but the general rules, as I understand them, on reversing a valuation allowance of a deferred tax asset require that sometime in the future you've accumulated enough income that you can do a reversa So whether this was for some portion of that or whether this was from -- from some other  aspect of that account, all it says is, We reversed this. It doesn't say why, it doesn't say what portion of it it was, or anything else about it. So I don't know why they did it there

 

 

 

Grant Thornton

 

And the next document is going to be Ugoletti 32.

MS. HOSFORD: Thank you. (Exhibit No. 32 marked.)

BY MR. THOMPSON: Q. This says "Grant Thornton Questions for Fannie Mae Forecasting Group." It's got a Bates number of FHFA 95951, so it was produced to us out of the FHFA's own files. It's dated July 26, 2012.

 

HE WITNESS: Well, again, I think I described this process earlier, right, that, you know, Grant Thornton -- we went through a Grant Thornton document -- Grant Thornton, you know, does the Treasury financial statements, so every year they have to come in and do their valuation assessments of Treasury's holding. We went through one of those documents, so -

 

 

Q. Okay. Well, if we look at 4, "Other Items" --

A. Yes.

Q. -- and we look at b, it says "What are the  plans for the DTA?"So that tells us that on the eve of theNet Worth Sweep, FHFA was in discussions with FannieMae and Grant Thornton about what -- about the DTA; is that right?

 

THE WITNESS: Yeah, I wouldn't read it as that. I mean, you -- you just -- you just said that, I mean, they go through this process on a regular  basis on evaluating what to do about the DTA. I think Grant Thornton just wants to know where they're at in that process and what they're thinking about, what -- what the -- I mean, this is -- this is a document -- a lot of these documents are taking -- like if you -- if you go up to 3.a., "What are the components of 'guaranty fee income' and 'fee and other income'?"

So Grant Thornton has a line item on Fannie Mae's balance sheet, these two line items; and they're trying to figure out, well, what's all in that line item? You know, so they're just -- they're trying to take what -- you know, a lot of what Fannie Mae has in their published information and in other materials that they have as to how are they developing things. And so this is an issue, so they want to know what the process is and what the thinking is on it.

[doughishere]

Deposition of JEFFREY ALAN FOSTER

 

THE WITNESS: The net worth sweep and the third -- the third amendment supported the wind-down of Fannie Mae and Freddie Mac to allow the size and the scope of the portfolios and guarantee book to be shrunk gradually over time, which would lower/reduce their ability to generate net income, which would reduce their ability to cover fixed income dividend  payments and, therefore, the net worth sweep would have supported the execution of that wind-down policy.

 

 

You've been handed Foster 34. This is a document produced to us by Fannie. It's marked FM_Fairholme_CFC-00003013 on the first page. And from the context of this document, it's apparent that it's discussing the net worth sweep. And under Roman numeral (ii)3.B, it says,

"Friday Treasury press release emphasized wind down  but changes are positive." And then B says, "Pay back money faster."

 

 

 

BY MR. PATTERSON:

Q. You've been handed an exhibit marked Foster 36. This is an information memorandum for Secretary Geithner dated January 4th, 2011, a memo from Jeffrey A. Goldstein, and the subject is housingfinance reform plan. Is this something that you've seen before?9

A. Yes.

 

Q. If you turn to page 3, heading number 4 says, "Affirm our current obligations." Do you see that?

 

A. Yes.

 

Q. And there is a bullet point that says, "Ensure $275 billion of funding capacity available after 2012 is not used to pay dividends. This may require converting preferred stock into common or cutting or deferring payment of the dividend under legal review."

 

Now, was the option of converting preferred stock into common stock an alternative that you considered as a way to modify the dividend obligation?

 

MR. DINTZER: Objection. Vague.

 

THE WITNESS: Yes.

Q. And how did you consider that possibility?

 

A. We explored that option. But quickly dismissed that as a viable option under advice of counsel and other factors.

 

 

 

 

Q. And what was the basis of your awareness of that being a possibility at some point in time?

 

A. That had been flagged for me by -- I'm trying to remember what the basis for that was. I don't recall what the basis for that was. I knew that the DTAs had been written down because the expectation of income generation didn't exist and from an accounting perspective, they had not been written up or released.

 

Q. Did you have any sense of the timing of when the deferred tax asset valuation allowances potentially could be released at the time of the net worth sweep?

 

MR. DINTZER: Objection. Vague.

 

THE WITNESS: I'm not an auditor and that's really more of a question for an auditor.

 

BY MR. PATTERSON:

 

Q. Did you have any understanding of that though?

 

A. No

 

 

This is fascinating stuff.

[doughishere]

Valueplays...

 

 

http://www.valueplays.net/2016/04/12/unsealed-gse-litigation-documents-show-government-claims-in-filings-questionable-at-best/?utm_content=buffere1668&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

 

 

 

Daum!

 

What she discloses is probably explains why Mario has been out of the country in Ecuador (no extradition to US) since he gave his statement in 2013 (he knew it to be false).

[Guest cherzeca]

btw ted olson was in rare form in the PHH hearing at the dc circuit court of appeals today.  you can listen to the audio at the dc cir ct app site but take it from me, he still has his fastball

[tede02]

The circumstances around the net worth sweep amendment are so rotten.  It just seems so under-handed.  I can't wait to see the decision makers exposed. 

[doughishere]

More Bove.

 

 

http://www.valuewalk.com/2016/04/bove-fannie-mae-news/

 

 

Depositions in GSE Case Show a Total Insensitivity to the LawThis Is Truly an Outrage Some Very Simple Points

 

Here are some very simple points that have become available in the depositions in one of the Fannie Mae (FNMA/$1.48/Buy) lawsuits (I own this stock).

 

1. The Housing and Economic Recovery Act of 2008 was very clear concerning what it wanted done to Fannie Mae. A conservatorship was to be created and the conservator was to return the company to health if at all possible. The depositions that I read indicate that at no time did anyone in the Treasury Department intend to do what the Congress had asked. The goal was to strip the company of its capital and its earnings thereby rendering it insolvent. It is as if Congress did not exist.

 

2. The depositions make clear that the government knew that Fannie Mae did not have to make cash payments on its senior preferred issue but that it could make a payment in kind or in stock. When the government forced the net profit sweep on the company it stated that the company did not have the cash to make the payment on the dividend. This was not a requirement of the preferred and the government knew it.

 

3. At the time, the Treasury forced the company into the net profit sweep it was evident that management of the company did not agree. The reason is that it had just shown the Treasury that it would be profitable for the next 10 years; that it was about to get $50 billion in equity by reversing its deferred tax asset arrangement; and that it was about to start collecting refunds from banks on bad loans. It had the money to make the payment the government claims it could not make.

 

4. Despite having been told that Fannie Mae was going to have its deferred tax asset returned to the company (the $50 billion mentioned) a Treasury official signed an affidavit stating that it had no such knowledge.

 

5. The decision rendered in the case before Judge Royce Lamberth was made without the benefit of having any of this information. The Judge simply did not want to know so he would not even listen to the lawyers making presentation in his court. His decision was rendered with no knowledge of the facts and no contact with the disputants in the case.

 

6. The government has hounded the banking industry for the past 8 years that it must increase transparency. Information must be made freely available to the public. Anyone who reads the depositions made available would be appalled by the lengths to which the government is going to obfuscate, hide, and destroy information. It is the ultimate hypocrisy.

[Guest cherzeca]

after reading the docs, it seems to me the big takeaways are that i) fnma cfo clearly told treasury (ms miller) week before NWS that fnma was sustainably profitable and eventually the DTA allowance could be reversed, and soon thereafter there is an email from treasury tim bowers that it was time to get back to the NWS, and ii) treasury's foster makes clear that treasury never thought that conservatorship was for rehabbing GSEs, but rather quite the opposite to wind them down, and that NWS would further this.

[Guest cherzeca]

one of my continual questions has been whether to own fnma or fnmas.  i have looked at it in two ways: first, whether a legal outcome favors one or the other, and second, how they will trade generally.  these are intertwined, but assuming the legal news is favorable to both, what are the trading effects.

 

as to the first, i have thought that if perry wins, fnma would be better, but that if perry loses and one looks to fairholme, fnmas would do better.  has to do with fnmas being better situated for a takings win (damages award that might look to 2012 valuation), as opposed to an APA vacating of NWS.

 

as to the second, i note that over the past five days, fnma is up 55% v fnmas up 40%, as of time i write this.  perhaps not significant difference, but this indicates to me that fnma might react more strongly to good news in perry than fnmas.

 

i am long fnma.

[hardincap]

commons do seem to consume the lion's share of "animal spirits" (no doubt due to its liquidity). from a purely technical, price action perspective it does seem commons are a better bet over preferreds, but value investors tend to not put much weight to technical analysis (indeed even be skeptical of it). it may end up disadvantaging value investors in this particular instance, but in the long run, i think they benefit from underweighting TA

[Luke 532]

cherzeca and hardincap, thanks for the input.  I agree with much of what both of you said.  The reason I own prefs (3 different kinds) and no common is the possibility of dilution.  I don't think common will be diluted meaningfully, but it certainly wouldn't surprise me.  I'm finding it more and more difficult to kill the thesis that prefs return to par, or very near it, in the foreseeable future.  I'm not as confident that some level of dilution, perhaps heavy dilution, might occur to the commons.  With that said, if prefs weren't 6-baggers (FNMAS) to 10-baggers (FMCCL) from today's prices then I might be interested in taking more risk for the common and its potential upside, but that kind of multi-bagger on the prefs is plenty for me given the decreased level of risk.  I think we all end up big winners in the end.

[Guest cherzeca]

just laying out my thought process.  thanks for reaction

 

i am not wearing my value hat when looking at fnma, though if i thought perry is a loser, i sure would be and would be in fnmas.  in part, i do look at fnma as a "trade" rather than an "investment", and i "may" sell a significant amount on any substantial legal pop, and not wait out the ultimate resolution scenario.

 

but it struck me that the last 5 days offer some insight into trading effects that may also hold true when [spits 3 times] there is a perry win.  not a perfect laboratory trial, but perhaps some indication

[hardincap]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 21% vs 1% preferreds

[Luke 532]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 20% vs 1% preferreds

 

Unless there is a settlement in which prefs are called at par and converted to common, and common could potentially be crammed down. 

 

I think a settlement is still very much a possibility, especially since Sweeney may be hinting strongly at the gov't that by releasing some docs that she will release more and rule positively on the P's motion to compel.  Perhaps this is a warning to the gov't to get this wrapped up before she really lets the dirty laundry out. 

 

Just speculation, but I wouldn't be surprised to wake up tomorrow (or any other day in the near future) to hear that a settlement has been reached where prefs are called at par and are converted to common... with the common prices left up to Mr. Market.

[merkhet]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 21% vs 1% preferreds

 

That's assuming an ass whuppin' on Friday would lead to a legal resolution. Many a slip twixt cup and lip. If the beating is bad enough, there may be intervening actions before an opinion comes out.

[Luke 532]

I think a settlement is still very much a possibility, especially since Sweeney may be hinting strongly at the gov't that by releasing some docs that she will release more and rule positively on the P's motion to compel.  Perhaps this is a warning to the gov't to get this wrapped up before she really lets the dirty laundry out. 

 

 

How could they not be earnestly discussing a settlement at this very moment?  It would defy all logic.

 

I just don't see how this whole situation could possibly get any better for the gov't.  These are just a handful of documents, probably not even the most damaging, and they show some very deceitful and unlawful practices. 

 

Plus Lamberth has to be upset that the gov't lawyers lied to him. 

 

And the panel that is hearing oral arguments on Friday can't be pleased with the content within the unsealed documents.

 

How will the gov't lawyers say anything on Friday without damaging their credibility and risking disbarment with every word they say?

 

The list of risks for the gov't is seemingly endless. 

 

Yet, they could come out smelling like a rose (mostly) if they reach a settlement.  Then start preaching their mantra of "we saved the economy, made tons of money for the taxpayers, etc."

 

I don't see how this situation can get any better for the government without some out-of-left-field legal ruling (although we have seen that before).

[merkhet]

Occasionally, when people are in a bad situation, they roll the dice because taking action now will immediately recognize the loss and hope is cheap. Same reason that a trader who is already deep in the hole will take riskier and riskier bets. Heads, they find a way out. Tails, they're screwed anyway.

 

So I can understand why the government keeps going.

[Luke 532]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 21% vs 1% preferreds

 

That's assuming an ass whuppin' on Friday would lead to a legal resolution. Many a slip twixt cup and lip. If the beating is bad enough, there may be intervening actions before an opinion comes out.

 

+1 on the "intervening actions"

[Luke 532]

Occasionally, when people are in a bad situation, they roll the dice because taking action now will immediately recognize the loss and hope is cheap. Same reason that a trader who is already deep in the hole will take riskier and riskier bets. Heads, they find a way out. Tails, they're screwed anyway.

 

So I can understand why the government keeps going.

 

I understand that, too, but what is the upside over and above what they could already accomplish/say/claim via a settlement?  Continuing to steal the GSE profits the obvious one, but do they really think that could continue?  Yet, the downside could be much, much deeper than what it is today.  Only a few documents were released... one can only imagine what is still under wraps.  Then again, I'm arguing that the gov't will act logically.  I should know better.

[Guest cherzeca]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 20% vs 1% preferreds

 

Unless there is a settlement in which prefs are called at par and converted to common, and common could potentially be crammed down. 

 

I think a settlement is still very much a possibility, especially since Sweeney may be hinting strongly at the gov't that by releasing some docs that she will release more and rule positively on the P's motion to compel.  Perhaps this is a warning to the gov't to get this wrapped up before she really lets the dirty laundry out. 

 

Just speculation, but I wouldn't be surprised to wake up tomorrow (or any other day in the near future) to hear that a settlement has been reached where prefs are called at par and are converted to common... with the common prices left up to Mr. Market.

 

my only thought on the possibility of a settlement is, that if i were govt, i wouldnt want to settle unless ALL litigation was terminated.  this is really hard now, not just a two player game, but lots of Ps who have their own views, so a settlement seems to suffer from a big collective action problem...unless govt is willing to just make perry and fairholme go away

[Guest cherzeca]

I think the dilution argument is somewhat moot because as cherzeca mentioned before, that will come later, after any positive legal ruling. So from a purely price speculation perspective, commons, if history is any guide, should do better (maybe alot better) immediately following a positive legal ruling.

 

as i write this, commons are up 21% vs 1% preferreds

 

That's assuming an ass whuppin' on Friday would lead to a legal resolution. Many a slip twixt cup and lip. If the beating is bad enough, there may be intervening actions before an opinion comes out.

 

govt snatching victory from jaws of defeat.  i have been thinking how that may come out.

 

one way is simply for conservator to declare receivership, and conduct it very slowly.  hard to see, but that is about all i can realistically come up with

[doughishere]

What are the odds of me getting into the hearing Friday. I may have a chance at being in dc on Friday?

[Luke 532]

In Forbes today, my second favorite Epstein (behind Theo when he built the 2004 Sox) with his take on recent events...

 

http://www.forbes.com/sites/richardepstein/2016/04/13/new-deposition-testimony-cuts-the-legs-out-of-the-2012-net-worth-sweep/#5bfb07e13efd

[Mephistopheles]

Been a while since I posted here. I'm incredibly pleased with the news! Special thanks merkhet, cherzeca, and everyone else for their analysis.

 

I agree that the sheer number of parties involved makes settlement a harder. But one very reasonable and possible settlement is - 3rd amendment is overturned, but the '08 bailout can't be touched by any shareholder current or future. Although I don't know if this is legally possible; if I were a non-Fairholme non-Perry non-all other parties involved shareholder since pre-crisis, and wanted to sue over the bailout, wouldn't be fair to me would it?

 

At this point it's about pride and not money I think. Stealing all the money is not really an upside for anyone because nobody individually benefits, and Congress only collectively benefits, and even then it's a fairly small % of Government revenue. The downside on the other hand is born by the few, as more documents are released, more names of those involved brought to the public, etc. I suppose the true upside is to the Government lawyers, and perhaps that's one reason why there hasn't been a settlement yet...

[Guest cherzeca]

Been a while since I posted here. I'm incredibly pleased with the news! Special thanks merkhet, cherzeca, and everyone else for their analysis.

 

I agree that the sheer number of parties involved makes settlement a harder. But one very reasonable and possible settlement is - 3rd amendment is overturned, but the '08 bailout can't be touched by any shareholder current or future. Although I don't know if this is legally possible; if I were a non-Fairholme non-Perry non-all other parties involved shareholder since pre-crisis, and wanted to sue over the bailout, wouldn't be fair to me would it?

 

At this point it's about pride and not money I think. Stealing all the money is not really an upside for anyone because nobody individually benefits, and Congress only collectively benefits, and even then it's a fairly small % of Government revenue. The downside on the other hand is born by the few, as more documents are released, more names of those involved brought to the public, etc. I suppose the true upside is to the Government lawyers, and perhaps that's one reason why there hasn't been a settlement yet...

 

the only party that has brought a 2008 case so far is washington federal, currently stayed.  so they would have to be in on settlement if there is to be a settlement.

 

in terms of how govt might be able to snatch victory out of jaws of defeat, the more i think about it, the more i think this is just a legal case for govt.  all of the policy people have left, miller, stegman, parrott, sperling etc.  i dont see anyone at potus on the case other than lew and weiss, and they have only inherited this mess.  there has to be GSE fatigue at potus.  so i am thinking that potus doesnt have any grand plan b lined up, other than to deal with a court loss if that is what they have to do.  all spec of course