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

[Luke 532]

I found these 3 comments interesting.  Comments from Arkham on the following article: http://seekingalpha.com/article/4049825-gse-preferred-shareholders-win-remand-contract-claims

 

1st comment...

People were focused on legal angle too much. Legalities didn't stop the original seizure in 2008 and legalities will not matter in the reversal. It's been a political trade all along. They couldn't execute receivership, because there is no viable alternative. That $0 potentiality is off the table entirely. Listen to what Mnuchin said. The previous admin thought they could execute the new housing system, so they prepared for the receivership. They were constrained by the reality that the GSE's are very necessary and worked and the new housing system doesn't exist and it can't be created in a vacuum. This admin want privatization and reform. Mnuchin even said that reform is contingent on the enterprises being well capitalized. So capitalization issue probably comes before the reform. Legally, we were fighting against the US government, who can do as they please. They can. I never really put much stock in the ability to tell the US they can't do what they want. US killed over 1 million Vietnamese and still don't acknowledge they did anything wrong officially. Exacting an official win from the US government is unlikely. We have to focus on the goals of the administration. The goals are privatization and entities being well capitalized. The assumption that receivership is coming is insane in this new political reality. They will first do something about NWS, then they figure out recapitalization and then reform the entities. In that order. Reform is coming later in the year. Mnuchin was talking about reform proposals. Those are not trivial things and political too. Capitalization of the enterprises is not political. They all agree the enterprises should be well capitalized. So receivership is not only off the table, but NWS is off the table. I don't know if any legal ruling is worth anything without the will of the UST. We could have won the legal ruling only to face other insurmountable odds to make the UST release them. Or we could lose legal battles and have UST do what they want with the enterprises. I'd take friendly UST over legal victory any time.

 

2nd comment...

Look at it from the money point of view. Obama already sucked out all the equity that was in the GSE's. So the real money on the sweep has been made. Now there is a shell with risk. Mnuchin has to dump the risk. He can put in the government money to recap and sell at fraction of book value (losses for taxpayer) or keep the existing structure and just collect money on warrants exercise and sale of stock while letting the market recap it. Right now risk/reward for the NWS is not there. DTA's are coming, the risk is actually there, and the existing equity has already been looted. It's ugly what the government has done, but the future of NWS is bleaker. It's a stretch to expect him to continue collecting earnings when he can leverage the warrants and get rid of risk. Something like this is coming. Reform later in a year will just define government involvement.

 

3rd comment...

Well said, I speculate NSW will be suspended sometime this year to recapitalize Fannie and Freddie, and the GSE reform bill will be proposed later this year after tax reform. Any talk of receivership is of fantasy, it did not happened in 2008, and certainly won't happen this year. I understand some preferred shareholders want to get paid, dividends and principals, but paying dividend is really NOT a priority to GSEs and Mnuchin.

 

He said he believes they should be well capitalized, so did Watt. It didn't cause any controversy. I seriously doubt there is any outrage if they make money on this. The GSE's are an issue only in the DC with the politicians. There wasn't any outcry about his Nov statements. Hosing reform is political, but we don't need reform to start capitalizing the GSE's. He will do it one day like Pauson seized them. It's the same dynamics.

 

The reform will be after taxes. If there is no tax cut, there will be a new Congress anyway. This is an inverse of 2008 seizure. Mnuchin made up his mind about it and will execute it. Pretty much what Paulson done but in reverse. If taxes are not done, there is even more incentive to release the GSE's to show the admin is doing something. They seem to talk with both sides of their mouth anyway. You have to follow the money. There is more money in release than sitting on the NWS while keeping the risk on the their books. So whatever they say is irrelevant, just like Obama's wind down. They will do what they perceive benefits them the most. NWS is not risk adjusted, so it's not as good a deal now as it was for Obama.

[deadspace]

Yes there is remand for breach of contract, but people have very little faith in the Judge that it's remanded to.

 

Prior to his decision re Nws lamberth was touted as a great libertarian based on his lifetime of judicial decisions.  It may be that he was just hung up on this particular issue of lack of judicial review penned into the law.  We can't judge what he is going to do based on one decision.

[Seahug]

"549 key positions in the administration need Senate confirmation. So far, Trump has filled 14"

 

http://www.vox.com/policy-and-politics/2017/2/21/14672984/trump-transition-slow

 

Maybe the reason for very measured comments by Mnuchin

 

FNMA is a tough investment. We're left to reading tea leaves, innuendo...and we have to worry about DJT/Mnuchin being able to field a team.

 

Chance for a wipe out for us are lowish, but not zero.I think Cherzeca's overall assessment is right - most likely there will be something left over for prefs/common. Given the loss in legal and optical/political leverage, I'd say partial pref right down and govt warrant exercise after the pref conversion (but prior to public offer) are both possible. It can still work out, upside is much less. The timing of the exercise of the govt warrants is meaningful in terms of dilution to common and prefs. Why would we convert to common? Well if not they can continue NWS.

 

I will hold though.

 

[SnarkyPuppy]

Buffett commentary this morning on GSEs:

 

http://video.cnbc.com/gallery/?video=3000596553&play=1

 

[Cardboard]

I find interesting that he was quite happy to buy GSE's shares in the past, terrific businesses, etc. but, now it HAS to be done by the government... Suggesting 2% of mortgage insurance business done by private which is quite a bit lower than even Canada.

[Flynnstone5]

[glow=red,2,300][/glow]

I have been reading this but never posted before. Is there still some hope? All of us were wrong on Perry Appeal.

 

yes there is hope, though one may very well dismiss hope as a sound basis for an investment.

 

i think you have to ask yourself whether the NWS will be viewed by the trump administration as a device that the obama administration used to prepare the GSEs for wind down, setting the stage for congress to act in a manner that would replace the GSEs.  as we have seen, congress had 4 years after the NWS to act, and failed to do so.  the question is whether the trump administration will pick up where the obama administration left off, or propose something different.

 

the next question i think you have to ask yourself is whether you think the trump administration will respect shareholder rights in connection with their plans.  mnuchin has stated that he wants the GSEs to continue without govt ownership and control, with sufficient capital to insulate the taxpayer from future bailouts. so it appears that a wind down is off the table and any trump admin plan will necessarily need to raise from the capital markets alot of new capital.

 

there is no assurance that existing shareholders will be treated well in connection with this plan. 

 

but if mnuchin looks at the NWS not as a nationalization device, as per obama admin, but rather as a device to accelerate repayment to treasury, then there is some hope that the trump administration plan going forward will be build upon the existing capital structure with the junior pref, common and importantly the govt's warrants as a foundation for raising more capital.

 

there are some legal avenues that remain, certainly more for pref than common, though the legal thesis is mostly shot at this point.  i dont think current trading values reflect only a legal thesis at this point.

 

so, perhaps we are down to hope, and perhaps hope is not enough.  each of us has to decide.

 

@cherzeca - in your opinion, how strong do you think the legal case is for prfds on a scale of 1-10?

[hardincap]

big deal that buffett says we dont need f&f. hes saying berko and ackman are wrong to insist theres no viable alternative

 

edit: he does concede that the government will need to play a central role in sponsoring 30 year mortgages. i dont get where he is going with supporting private insurers though. the whole point of f&f is to have an entity based model at an enormous scale, something private insurers wont be able to achieve on their own

[SnarkyPuppy]

big deal that buffett says we dont need f&f. hes saying berko and ackman are wrong to insist theres no viable alternative

 

A strong element of the thesis is that there is no viable alternative.  If you throw this out the window, this 'investment' is even more speculative. 

[Ballinvarosig Investors]

Buffett momentary this morning on GSEs:

 

http://video.cnbc.com/gallery/?video=3000596553&play=1

Awkward.

[investorG]

buffett is the largest shareholder of bofa and wells fargo. of course he wants the explicit guarantee by govt rather than an implicit guarantee via GSEs so the banks gain market share and don't give up economics in the mortgage fee share.  buffett is asking the govt to a) give up dozens of billions of warrant value and b) have the govt explicitly guarantee an additional 5+trn of debt --- possible of course but not likely when compared to the utility + additional competition base case model.

 

 

[DocSnowball]

big deal that buffett says we dont need f&f. hes saying berko and ackman are wrong to insist theres no viable alternative

 

edit: he does concede that the government will need to play a central role in sponsoring 30 year mortgages. i dont get where he is going with supporting private insurers though. the whole point of f&f is to have an entity based model at an enormous scale, something private insurers wont be able to achieve on their own

 

Both Mnuchin and Munger disagree with him. In fact Mnuchin wants to do the opposite

The prior administration was more on the same page as Buffett, but not this one

[Cardboard]

Exactly!

 

It is the exact same thing when he can't admit that Coca Cola is bad for you. Same thing when he was all in favour of receiving grants for solar and wind power but, unwilling to pay customers in Vegas to sell back power to the grid.

 

Cardboard

[Luke 532]

Adam Spittler on Collins vs FHFA

Collins vs FHFA – Total new wild card to the litigation, and extremely strong argument. $fnma $fmcc

[beaufort]

Does the Perry anticipatory breach of K remand apply to all preferred holders or is the class more narrow than that?

IE will it matter when the preferred stock was purchased?

 

Is remedy par?

[Sunrider]

Adam Spittler on Collins vs FHFA

Collins vs FHFA – Total new wild card to the litigation, and extremely strong argument. $fnma $fmcc

 

Isn't this curable simply by changing the basis on which the director is appointed?chris/Merkhet?

[rros]

big deal that buffett says we dont need f&f. hes saying berko and ackman are wrong to insist theres no viable alternative

 

edit: he does concede that the government will need to play a central role in sponsoring 30 year mortgages. i dont get where he is going with supporting private insurers though. the whole point of f&f is to have an entity based model at an enormous scale, something private insurers wont be able to achieve on their own

 

Both Mnuchin and Munger disagree with him. In fact Mnuchin wants to do the opposite

The prior administration was more on the same page as Buffett, but not this one

This sounds right. Obama was doing Buffett's bidding. Then, when it was known Sperling would be in charge of housing related issues for HRC Buffett supported her. Now, he is out of friends and needs to do the bidding on his own.

[SnarkyPuppy]

Serious question- is anyone aware of how much of FNMA/FMCC Tim Howard owns (he must still own some from his tenure as CFO - he probably was crushed in 2008).  Trying to understand incentives here. 

[investorG]

http://www.infowars.com/exclusive-obama-illegally-robbed-fannie-freddie-to-fund-obamacare/

 

if this story has legs then it's huge because it ties something no one understands --- fannie and Freddie and profit sweep --- with something many people are incredibly interested in --- potential accounting issues with Obamacare.

[Philip Morris IV]

Serious question- is anyone aware of how much of FNMA/FMCC Tim Howard owns (he must still own some from his tenure as CFO - he probably was crushed in 2008).  Trying to understand incentives here.

 

According to his blog, he owns varying amounts of common (with "an embarrassingly high basis") from pre-2008 and series N preferreds from Aug 2009.  All in Fannie, none in Freddie.  No information on amount.

[Guest Schwab711]

http://www.infowars.com/exclusive-obama-illegally-robbed-fannie-freddie-to-fund-obamacare/

 

if this story has legs then it's huge because it ties something no one understands --- fannie and Freddie and profit sweep --- with something many people are incredibly interested in --- potential accounting issues with Obamacare.

 

https://medium.com/@ckc12_rb/the-incredible-timing-of-the-affordable-care-act-and-the-gse-net-worth-sweep-b9c81737192c#.kc1sxhl9n

http://ritholtz.com/2016/05/former-white-house-officials-involved-in-gse-scandal/

http://www.nakedcapitalism.com/2016/05/unsealed-documents-reveal-former-white-house-officials-violated-fanniefreddie-conservatorship-rules-apparently-to-advance-bank-enriching-reforms.html

 

I didn't see anything new and I'm not sure what part is supposed to be exclusive, unless I missed something. Josh Rosner and Susan Webber were on this within a 24 hrs and a week (18 months ago).

 

Which will probably bring us to the 2013 debt ceiling crisis:

https://en.wikipedia.org/wiki/United_States_debt-ceiling_crisis_of_2013

 

Disclosure: I'm long FOIA requests.

 

Well we're on the topic, NakedCapitalism is an awesome blog and anything Josh Rosner writes is usually great. I highly recommend both!

[orthopa]

I have been spending a lot of time thinking on what mnuchins motives are to bring the GSEs out of govt control and ownership and relatively quickly . Why do it and who benefits? Whats the rush? Fannie and Freddie have operated just fine since the financial crisis with dwindling capital and another amendment could easily be done to make sure FnF dont draw again or be allowed to build capital that some how creatively excludes shareholders.

 

Outside of a private interest (Hedgies) who could benefit from Mnuchins plan, and why does he feel so strongly? Himself and his family cannot no personally benefit from any changes. Is the ability to invest in a quasi FnF s/p restructuring so appealing that he has pressure to open up that market to private investors? We know a private/public system wont benefit the home buyer any differently bc the 30 year mortgage has been running along just fine in the state that he says can no longer go on.

 

Why does he feel so strongly about the situation and why is it even a priority? Who cares? The mortgage market has been fine.

[investorG]

http://www.infowars.com/exclusive-obama-illegally-robbed-fannie-freddie-to-fund-obamacare/

 

if this story has legs then it's huge because it ties something no one understands --- fannie and Freddie and profit sweep --- with something many people are incredibly interested in --- potential accounting issues with Obamacare.

 

https://medium.com/@ckc12_rb/the-incredible-timing-of-the-affordable-care-act-and-the-gse-net-worth-sweep-b9c81737192c#.kc1sxhl9n

http://ritholtz.com/2016/05/former-white-house-officials-involved-in-gse-scandal/

http://www.nakedcapitalism.com/2016/05/unsealed-documents-reveal-former-white-house-officials-violated-fanniefreddie-conservatorship-rules-apparently-to-advance-bank-enriching-reforms.html

 

I didn't see anything new and I'm not sure what part is supposed to be exclusive, unless I missed something. Josh Rosner and Susan Webber were on this within a 24 hrs and a week (18 months ago).

 

Which will probably bring us to the 2013 debt ceiling crisis:

https://en.wikipedia.org/wiki/United_States_debt-ceiling_crisis_of_2013

 

Disclosure: I'm long FOIA requests.

 

Well we're on the topic, NakedCapitalism is an awesome blog and anything Josh Rosner writes is usually great. I highly recommend both!

 

with all due respect to those guys, did they have many hundreds of comments in the first few hours of the story posting?  I obviously have no idea on the validity of this story but someone's likely going to dig -- Obamacare polling has improved a lot of late and its opponents likely desire something to knock it down as they attempt to replace it.

[investorG]

I have been spending a lot of time thinking on what mnuchins motives are to bring the GSEs out of govt control and ownership and relatively quickly . Why do it and who benefits? Whats the rush? Fannie and Freddie have operated just fine since the financial crisis with dwindling capital and another amendment could easily be done to make sure FnF dont draw again or be allowed to build capital that some how creatively excludes shareholders.

 

Outside of a private interest (Hedgies) who could benefit from Mnuchins plan, and why does he feel so strongly? Himself and his family cannot no personally benefit from any changes. Is the ability to invest in a quasi FnF s/p restructuring so appealing that he has pressure to open up that market to private investors? We know a private/public system wont benefit the home buyer any differently bc the 30 year mortgage has been running along just fine in the state that he says can no longer go on.

 

Why does he feel so strongly about the situation and why is it even a priority? Who cares? The mortgage market has been fine.

3 guesses:

 

mortgage standards are tight -- average fico is quite high.  he'd like to loosen these up and get the homeownership rate back up to help the economy.

 

in addition he likely wants competition in some form, which of course is bad for the GSEs earnings stream.

 

and he's a smart capitalist and realizes what's going on to the shareholders, many of which are his peers, is unjust.

[no_free_lunch]

http://www.infowars.com/exclusive-obama-illegally-robbed-fannie-freddie-to-fund-obamacare/

 

Can't believe we are quoting infowars on this site but I have to admit it's a good link.  Too early to tell but this could be part of the narrative shift.  I would watch for this to appear on breitbart.

[Flynnstone5]

I don't think there's any doubt that Mnuchin keeps FnF possibly close to the current model or as a utility based model despite anything Buffet has said. He specifically has said he didn't think they caused the crisis (he knows the truth) and that they ran safely for a very long time. The only question to me is the recap and the capital structure and it seems murkier than ever in trying to figure out what will happen. I'm really surprised with DOJ fighting the doc release under Sessions. Maybe Sessions is too new to establish a direction on this? I don't know how any of this would work in terms of a timeline in the DOJ as to when he would be "settled in" so to speak. If Cooper were to fill him in (hard to believe he hasn't already) - sure seems like a big negative that Sessions would take Obama admin. position. At this point, I'm mainly interested in how strong the prfd contractual rights are.