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

[muscleman]

Switching to preferreds ended up as a loss and holding commons would have been a loss too. This isn't an investment for me, too political. I am totally out on Monday after having sold half last week. I will continue to monitor it as I don't see any other place either where I can grow my measely sum, everything is down.

 

 

there is a lot to learn for you. Read the classic investing books by Warren and Graham. Understand the capital structures. Understand basics about bankruptcy. I don’t think you understand that yet.

Hey muscle, you surprisingly seem to know a lot about investing in spite of looking like someone who has spent most of his life at the gym! :)

[/quote

 

Ironically I haven’t spent much time in gym lately. I spent too much time there during college and got multiple injuries and no longer able to do those kinds of exercises.

[rros]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business,

What is not simple about this?

 

Goal: create a secondary liquid market for mortgages to stimulate housing.

 

1. borrow at the lowest possible low rate (from Fed).

2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%).

3. pool them to securitize.

5. issue securities (mbs) backed by the pool.

6. guarantee payments of principal and interest on the mbs in exchange for a fee.

7. sell the securities to institutional investors.

8. hedge interest rate.

9. make coin.

 

risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring.

 

The not so simple part is who owns this? The government think that they own this and you own toilet paper. Thes speculators who buy the “toilet paper” think otherwise. So far it looks, smells and feels like toilet paper for the last 10 years and especially since the government is on the other side of the table, I think chances are fairly high that this in fact is toilet paper. That’s my simple way of looking at this.

Docsnow discusses the merit of the investment from the business side while removing the government ingredient, however key this ingredient may be. Yet you come here to denigrate our opinions at every corner under some 30 000 feet view telling us all is well in the land of the rich. Although not overly open I suspect you would also love to denigrate us as a group as the imbeciles who bought these shares. As of today, yes, these are toilette paper. And that is why they trade as they do. What's the news you bring to this forum? We already know that and some of us are prepared to lose our money.

[rros]

Switching to preferreds ended up as a loss and holding commons would have been a loss too. This isn't an investment for me, too political. I am totally out on Monday after having sold half last week. I will continue to monitor it as I don't see any other place either where I can grow my measely sum, everything is down.

 

 

there is a lot to learn for you. Read the classic investing books by Warren and Graham. Understand the capital structures. Understand basics about bankruptcy. I don’t think you understand that yet.

Hey muscle, you surprisingly seem to know a lot about investing in spite of looking like someone who has spent most of his life at the gym! :)

 

Ironically I haven’t spent much time in gym lately. I spent too much time there during college and got multiple injuries and no longer able to do those kinds of exercises.

With torn ligaments, screws in one knee, a dislocated clavicle and torn rotator cuffs, I can relate to that.

[Spekulatius]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business, run by honest and competent people, with a durable competitive advantage, available at a wide margin of safety? Probably fails all four filters.

 

The only way this works is - you know your initial price, you know par, you figure out odds of success and realize the market is under weighing the odds because it hates this investment- then you discount par for time value of money and how long you are willing to stay in the speculation. You weight your portfolio to how much you can lose to zero (2% for me). Then you wait and wait and wait, or preferably do something else and forget about this. I think someone deciding to get out of this investment cannot be faulted. If I hadn’t seen some gains and had house money as the 2% I would have too. And I cannot see the logic in owning commons, sorry Ackman.

 

And I have a lot more than Emily to learn! In fact the education from this investment has been totally worth that 2% I have in it.

 

Depending on how you view investing.

 

I think the biggest fallacy for the Graham and Buffet group is that people believe when they do their home work, their investment is a sure success.

 

In fact it is essentially a probability game. You can do the research and improve your odds of winning but it is never a sure thing unless you trade like Steve Cohen. You can have a simple business and a great operator and you buy at a cheap price and you can still lose.

 

This Fannie/Freddie bet is no different from this view.

 

I think it is more like a bet in a poker game than value investing. Sure there are bets with good risk/ reward and those with bad ones, but I think it is much  harder to determine the probability of a those bets, than determine what an investment is worth and purchasing at a discount from that value, which is the idea of value investing. It seems to me that most investors have a way too optimistic view of the probably of a positive outcome with these binary bets.

[DocSnowball]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business,

What is not simple about this?

 

Goal: create a secondary liquid market for mortgages to stimulate housing.

 

1. borrow at the lowest possible low rate (from Fed).

2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%).

3. pool them to securitize.

5. issue securities (mbs) backed by the pool.

6. guarantee payments of principal and interest on the mbs in exchange for a fee.

7. sell the securities to institutional investors.

8. hedge interest rate.

9. make coin.

 

risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring.

 

Thank you - yes well laid out. When I made the investment I believed that some of the profits legally belong to us as part shareholders - with time I am learning to be patient and wait out rebuilding of capital and restructuring. I don’t know what the ultimate business model will look like when we get there. Perhaps not too different from what you’ve laid out. When I compare this to my own circle of competence areas in biotech, it is not simple for me. Thanks for sharing your insights

[investorG]

Would we ever see this headline?

 

"Taxpayer make 180 billion more by exercising GSE warrants in addition to 350 billion"

 

close to 0% odds

[investorG]

From a novice standpoint I disagree - this is intelligent speculating at best. None of the greats are in this - a simple business,

What is not simple about this?

 

Goal: create a secondary liquid market for mortgages to stimulate housing.

 

1. borrow at the lowest possible low rate (from Fed).

2. buy quality mortgages (95%+ of which are single home risk-weighted at 50%).

3. pool them to securitize.

5. issue securities (mbs) backed by the pool.

6. guarantee payments of principal and interest on the mbs in exchange for a fee.

7. sell the securities to institutional investors.

8. hedge interest rate.

9. make coin.

 

risks: interest rates (hedged), bad mortgages (qualified). If the fee does not cover borrowing costs CFO needs 3rd grade math tutoring.

 

The not so simple part is who owns this? The government think that they own this and you own toilet paper. Thes speculators who buy the “toilet paper” think otherwise. So far it looks, smells and feels like toilet paper for the last 10 years and especially since the government is on the other side of the table, I think chances are fairly high that this in fact is toilet paper. That’s my simple way of looking at this.

 

so what specifically do you think will happen for the next 5 years -- status quo in conservatorship?  if not, what do you specifically envision happening in a restructuring that torpedo's the minority shareholders from these levels?

[rros]

Would we ever see this headline?

 

"Taxpayer make 180 billion more by exercising GSE warrants in addition to 350 billion"

Housing reform takes precedence over cashing in the warrants. It's been the case so far and possibly even more so now. A restructuring or a hint of such, even administratively, could save the day. For the Jrs. perhaps more than for the common.

[Midas79]

You mean warrants won't be exercised?

 

Would we ever see this headline?

 

"Taxpayer make 180 billion more by exercising GSE warrants in addition to 350 billion"

 

close to 0% odds

 

Also that both the 180 billion and 350 billion numbers are quite inflated. According to Moelis the potential profit from the warrants is $75-100B, and the total dividends paid so far have been around $276B. Subtract the $187B that Treasury gave to FnF and their total profit right now is only (!) $89B.

 

The headline is also poorly written and wouldn't make it close to the editor's desk let alone past it.

[rros]

Something to that tune, but my point is about the message in general to counter the message like "Hedge Funds made rich". I was also adding all the fines that were recouped but never made it to borrowers or to GSE’s.

 

 

You mean warrants won't be exercised?

 

Would we ever see this headline?

 

"Taxpayer make 180 billion more by exercising GSE warrants in addition to 350 billion"

 

close to 0% odds

 

Also that both the 180 billion and 350 billion numbers are quite inflated. According to Moelis the potential profit from the warrants is $75-100B, and the total dividends paid so far have been around $276B. Subtract the $187B that Treasury gave to FnF and their total profit right now is only (!) $89B.

 

The headline is also poorly written and wouldn't make it close to the editor's desk let alone past it.

I actually said reform takes precedence. This has to be clear even from Mnuchin's and Philips' own words. Meaning, if the warrants are ever to be exercised this will be one aspect of the reform. Without reform, no warrants. And if they are ever exercised I have the feeling there will be no headlines and it will be another obscure move that leads to nobody talking. Just like the December letter of agreement between Tsy and the FHFA that led to stopping the bleed, partially. That was big. And it went almost unnoticed.

 

I do not think Mnuchin wants to be seen as someone who can move markets. As in specific shares.

[Midas79]

I actually said reform takes precedence. This has to be clear even from Mnuchin's and Philips' own words. Meaning, if the warrants are ever to be exercised this will be one aspect of the reform. Without reform, no warrants. And if they are ever exercised I have the feeling there will be no headlines and it will be another obscure move that leads to nobody talking. Just like the December letter of agreement between Tsy and the FHFA that led to stopping the bleed, partially. That was big. And it went almost unnoticed.

 

I do not think Mnuchin wants to be seen as someone who can move markets. As in specific shares.

 

I agree that it all basically needs to happen at once. An end to the NWS, a recapitalization and (eventual) release plan, the fate of the warrants, a potential conversion to common offered to junior pref holders, settlement of lawsuits, etc.

 

As to the last statement, it brings up an intriguing idea: what if part of the reason Mnuchin is stalling is that he doesn't want to be seen as enriching his hedge fund buddies? Politics and optics are such a big part of the FnF saga that Mnuchin (and by extension Trump) could lose a lot of political capital if releasing FnF is successfully painted as a favor to hedge funds and some donors.

 

If this is true then we could see administrative action after the midterm elections if the Democrats gain control of either chamber of Congress. That would severely limit Trump's ability to get his policy wishes passed into law. While Trump still has the nominal ability to get legislation through with no Democrat votes he has to step lightly around Republicans, including those who want FnF dead or kept in their current neutered state.

[Guest cherzeca]

@rros

"I actually said reform takes precedence."

 

i have heard alot of the use of the word reform, as it is a warm fuzzy word that sounds like it can only be good.  not sure what it realistically means.  to corker, it means killing FnF and giving tbtf banks govt guaranteed mbs.  what else does reform mean...other than returning FnF to well capitalized companies?

[investorG]

@rros

"I actually said reform takes precedence."

 

i have heard alot of the use of the word reform, as it is a warm fuzzy word that sounds like it can only be good.  not sure what it realistically means.  to corker, it means killing FnF and giving tbtf banks govt guaranteed mbs.  what else does reform mean...other than returning FnF to well capitalized companies?

 

removal of implicit guarantee.  addition of a paid-for explicit guarantee (mnuchin's stated preference in front of congress).  competition in some form.  HUD-FHA adjustments.  other things i'm not thinking of.  quite the laundry list, which is why he wants to wait for 2019 legislatively.

 

I believe mnuchin and phillips when they say they will wait for 2019.  In the mean time, we drift and hope for a brave and moral judge to stand strong and/or some modest 4th amendment which stops or slows the sweep and buys time.

 

[blackcoffee]

@rros

"I actually said reform takes precedence."

 

i have heard alot of the use of the word reform, as it is a warm fuzzy word that sounds like it can only be good.  not sure what it realistically means.  to corker, it means killing FnF and giving tbtf banks govt guaranteed mbs.  what else does reform mean...other than returning FnF to well capitalized companies?

 

removal of implicit guarantee.  addition of a paid-for explicit guarantee (mnuchin's stated preference in front of congress).  competition in some form.  HUD-FHA adjustments.  other things i'm not thinking of.  quite the laundry list, which is why he wants to wait for 2019 legislatively.

 

I believe mnuchin and phillips when they say they will wait for 2019.  In the mean time, we drift and hope for a brave and moral judge to stand strong and/or some modest 4th amendment which stops or slows the sweep and buys time.

 

What a country we've become where people have to hope for a brave and moral judge....

[Guest cherzeca]

@rros

"I actually said reform takes precedence."

 

i have heard alot of the use of the word reform, as it is a warm fuzzy word that sounds like it can only be good.  not sure what it realistically means.  to corker, it means killing FnF and giving tbtf banks govt guaranteed mbs.  what else does reform mean...other than returning FnF to well capitalized companies?

 

removal of implicit guarantee.  addition of a paid-for explicit guarantee (mnuchin's stated preference in front of congress).  competition in some form.  HUD-FHA adjustments.  other things i'm not thinking of.  quite the laundry list, which is why he wants to wait for 2019 legislatively.

 

I believe mnuchin and phillips when they say they will wait for 2019.  In the mean time, we drift and hope for a brave and moral judge to stand strong and/or some modest 4th amendment which stops or slows the sweep and buys time.

 

there was some talk about a paid for implicit guarantee...yes, i know this sounds absurd, but a fee for the status of FnF as duopolies subject to utility type regulation.

 

whenever there is talk of an explicit guarantee, you never hear how much (all mbs? only going forward mbs?), how it would blow debt ceiling etc

[Spekulatius]

so what specifically do you think will happen for the next 5 years -- status quo in conservatorship?  if not, what do you specifically envision happening in a restructuring that torpedo's the minority shareholders from these levels?

 

I expect nothing to happen, everything remains as it is. as I mentioned before, I don’t see a pressing problem. Kicking the can down the road, is common in politics , even more so, if there is no issue with the can. The chances of a lawsuit driving a change are already very slim after 10 years and so many losses.

[Eye4Valu]

so what specifically do you think will happen for the next 5 years -- status quo in conservatorship?  if not, what do you specifically envision happening in a restructuring that torpedo's the minority shareholders from these levels?

 

I expect nothing to happen, everything remains as it is. as I mentioned before, I don’t see a pressing problem. Kicking the can down the road, is common in politics , even more so, if there is no issue with the can. The chances of a lawsuit driving a change are already very slim after 10 years and so many losses.

 

My business law professor gave us some valuable advice one day in class. He said that one of the biggest mistakes lawyers make is thinking too much about the last case, and not thinking enough about the next case. What he meant by that is it's important to read dissents and think about the way other judges or courts might interpret the law, and not just rely on the prior ruling. I think that lesson will be applicable here to all that overweight the Lamberth opinion. The 5th Circuit indicated that they were willing to think about the law here.

[investorG]

@rros

"I actually said reform takes precedence."

 

i have heard alot of the use of the word reform, as it is a warm fuzzy word that sounds like it can only be good.  not sure what it realistically means.  to corker, it means killing FnF and giving tbtf banks govt guaranteed mbs.  what else does reform mean...other than returning FnF to well capitalized companies?

 

removal of implicit guarantee.  addition of a paid-for explicit guarantee (mnuchin's stated preference in front of congress).  competition in some form.  HUD-FHA adjustments.  other things i'm not thinking of.  quite the laundry list, which is why he wants to wait for 2019 legislatively.

 

I believe mnuchin and phillips when they say they will wait for 2019.  In the mean time, we drift and hope for a brave and moral judge to stand strong and/or some modest 4th amendment which stops or slows the sweep and buys time.

 

there was some talk about a paid for implicit guarantee...yes, i know this sounds absurd, but a fee for the status of FnF as duopolies subject to utility type regulation.

 

whenever there is talk of an explicit guarantee, you never hear how much (all mbs? only going forward mbs?), how it would blow debt ceiling etc

 

I'm not saying your idea is better or worse than mnuchin's.  but he said in a House hearing earlier this year he prefers an explicit guaranty on the securities, and i'm thinking he's likely thought through the issues you bring up.  in general, he's a direct / blunt guy.  and according to his wife, he's stubborn.  i'm not going to assume he wants something different than what he says on this matter.

[investorG]

so what specifically do you think will happen for the next 5 years -- status quo in conservatorship?  if not, what do you specifically envision happening in a restructuring that torpedo's the minority shareholders from these levels?

 

I expect nothing to happen, everything remains as it is. as I mentioned before, I don’t see a pressing problem. Kicking the can down the road, is common in politics , even more so, if there is no issue with the can. The chances of a lawsuit driving a change are already very slim after 10 years and so many losses.

 

ok, fair enough.  it's certainly a possibility.  on the other side, the boss in this situation (if you believe that trump doesn't care much about it) has said on multiple occasions he does not want the status quo conservatorship to continue indefinitely and also that he has, apparently, the power to make that happen administratively if necessary.  once again, i dont want to assume he's lying.  certainly he's not shy about avoiding commentary when it suits his preferences, so i rely on attempting to interpret his actions and words to the best of my ability.   

 

 

[Guest cherzeca]

so what specifically do you think will happen for the next 5 years -- status quo in conservatorship?  if not, what do you specifically envision happening in a restructuring that torpedo's the minority shareholders from these levels?

 

I expect nothing to happen, everything remains as it is. as I mentioned before, I don’t see a pressing problem. Kicking the can down the road, is common in politics , even more so, if there is no issue with the can. The chances of a lawsuit driving a change are already very slim after 10 years and so many losses.

 

ok, fair enough.  it's certainly a possibility.  on the other side, the boss in this situation (if you believe that trump doesn't care much about it) has said on multiple occasions he does not want the status quo conservatorship to continue indefinitely and also that he has, apparently, the power to make that happen administratively if necessary.  once again, i dont want to assume he's lying.  certainly he's not shy about avoiding commentary when it suits his preferences, so i rely on attempting to interpret his actions and words to the best of my ability. 

 

optionality is a big GS thing and it means that if you act you lose your options, so dont act until you have to, which means that when you do act you will do so with as much info at that late point as you are ever going to get

[investorG]

Mnuchin has never said that he wants explicit guarantee. He always said 'if' needed. One video here at 29:15

 

https://www.c-span.org/video/?428291-1/treasury-secretary-fire-glass-steagall-stance

 

 

I brought up earlier that explicit guarantee is dangerous for our country but you all did not think so. Even if it does not happen now, it could.

 

http://www.scmp.com/news/china/diplomacy-defence/article/2140933/china-should-look-beyond-us-treasuries-real-assets

 

https://www.bloomberg.com/news/articles/2018-03-23/china-s-ambassador-doesn-t-rule-out-reducing-treasury-purchases

 

in House testimony earlier this year, I believe he said explicit guaranty on the securities was his preference.

 

and you are right on his delays.  it has been quite disappointing to me relative to my incorrect (to date) expectations of him.  my best guess is this turned into more of a political football than he could handle and he needs an easier playing field with a new congress and/or a court loss to get what he wants done.

[Midas79]

I thought Preferreds were going to go to par in receivership and liquidation (if not Moelis). So how is averting receivership good for preferreds? Confirmation Bias?  I am missing something?

 

https://seekingalpha.com/article/4162112-gse-receivership-avoided

 

Not necessarily. If the senior pref liquidation stays in place, then it will absorb up to $193B of net worth (far more than would actually exist) before junior prefs or commons see anything, so juniors and commons would be zeroed out.

 

Even if the seniors are declared repaid, the companies have only just passed the 10% moment so their capital levels would still be very low. Enough to give maybe 10-20% of par to junior holders right now, and we are trading at the top end of that range. Receivership benefits noone.

[Midas79]

Another lawsuit was filed today. It looks like it was sent to Sweeney along with a bunch of the other NWS-related cases.

 

http://www.glenbradford.com/wp-content/uploads/2018/04/18-cv-00529-0001.pdf

 

I skimmed through the complaint but I can't see any real differences between the arguments made here and in other cases. If that's true wouldn't this case just get lumped in with others? And if so would the only purpose of this lawsuit be to participate in any damages awarded? This suit actually doesn't ask for injunctive relief (suspending or voiding the NWS). Instead it only asks for cold, hard cash (B,C,D,E in the prayer for relief at the end). I wonder how that will affect things?

[investorG]

I often wonder if the lawyers for FHFA and the government, who are no doubt smart people and aware of the situation of how the NWS went down, feel proud of themselves for waking up every day with a mission to shaft tens of thousands of Americans based on a technicality of how HERA was written? 

[blackcoffee]

What a great job FHFA has done in 10 years of Conservatorship. $250K Chandelier, stealing shareholders profit, leave 5T entities with 0 capital, enrich large banks, making mortgage market less safe and less sound……sad part is judges agree that they are doing god’s work.

 

“Based on our work, we have cautioned stakeholders that the safety and soundness of the operations of Fannie Mae and Freddie Mac cannot be assumed because of the significant shortcomings in FHFA’s supervision programs,” she said.

 

 

Honorable Watt is not testifying tommorrow?

 

https://financialservices.house.gov/uploadedfiles/041218_oi_memo.pdf

 

https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=403286

 

they go out of their way to say nothing of substance at all congressional hearings. Who is really in control here?