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


twacowfca

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The problem I have with the obamacare/fannie link is the US ran a trillion dollar deficit per year under Obama.  So it's not like everything was perfectly balanced to begin with.  It wasn't plugged with anything other than debt the way I see it.

 

The only value to this stuff, in my opinion, is to gauge what the Trump admin might do.  If you start to see it enough about this in the media it could be him prepping the public for a recap of fannie mae.

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I added to FMCKJ last week.  I view the higher yielders as interchangeable (FNMAS, FNMAT, FMCKJ) and the lower yielders as interchange as well (FMCCH, FMCCK etc).  I also don't distinguish between Fannie and Freddie.  I have added sporadically based on price since the election.

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I am enthused by the following from ROLG's article re capacity to issue senior prefs [edit:  with the terms of the NWS]:

 

However, it is clear that Perry majority held this in the context of Perry plaintiff claims that the NWS violated the conservator's duty to rehabilitate, and preserve and conserve assets. Hindes/Jacobs asserts a wholly different claim, that the NWS violated the conservator's power to issue preferred stock, a claim nowhere made by Perry plaintiffs and nowhere considered by the Perry circuit court.

 

Hindes/Jacob's claim invites no second-guessing of the conservator's business judgment negotiating stock terms under a broad discretionary grant of conservator power to manage FNMA's business under conservatorship, but simply a focused analysis as to whether the applicable statutory law relating to permissible stock terms has been violated.

 

HERA mandated that FHFA shall step into FNMA directors' shoes, and the FHFA's power to include any particular terms in an issue of preferred stock must be measured by the power FNMA directors had to issue preferred stock having such terms. These are Delaware corporate law shoes, and they are ill-suited to fit the terms of the NWS.

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I am enthused by the following from ROLG's article re capacity to issue senior prefs:

 

However, it is clear that Perry majority held this in the context of Perry plaintiff claims that the NWS violated the conservator's duty to rehabilitate, and preserve and conserve assets. Hindes/Jacobs asserts a wholly different claim, that the NWS violated the conservator's power to issue preferred stock, a claim nowhere made by Perry plaintiffs and nowhere considered by the Perry circuit court.

Hindes/Jacob's claim invites no second-guessing of the conservator's business judgment negotiating stock terms under a broad discretionary grant of conservator power to manage FNMA's business under conservatorship, but simply a focused analysis as to whether the applicable statutory law relating to permissible stock terms has been violated.

 

HERA mandated that FHFA shall step into FNMA directors' shoes, and the FHFA's power to include any particular terms in an issue of preferred stock must be measured by the power FNMA directors had to issue preferred stock having such terms. These are Delaware corporate law shoes, and they are ill-suited to fit the terms of the NWS.

 

I thought the original agreement disallowed further equity raises.

 

The following covenants apply to the GSEs as part of the agreements.

Without the prior consent of the Treasury, the GSEs shall not:

 

    Make any payment to purchase or redeem its capital stock, or pay any

  dividends, including preferred dividends (other than dividends on the senior

  preferred stock)

 

  Issue capital stock of any kind

 

    Enter into any new or adjust any existing compensation agreements with

  “named executive officers” without consulting with Treasury

 

    Terminate conservatorship other than in connection with receivership

 

    Sell, convey or transfer any of its assets outside the ordinary course of business

    except as necessary to meet their obligation under the agreements to reduce

    their portfolio of retained mortgages and mortgage backed securities

 

    Increase its debt to more than 110% of its debt as of June 30, 2008

 

    Acquire or consolidate with, or merge into, another entity.

https://www.fhfa.gov/Conservatorship/Documents/Senior-Preferred-Stock-Agree/2008-8-7_SPSPA_FactSheet_508.pdf

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It is an interesting read - I've been struggling with whether this investment has a margin of safety, or is speculative after Perry. If the judgment is based on reasonable expectations at time of purchase, what was reasonable expectation for a purchase post 2008? Mine after reading prospectus and reviewing earnings reports was that one day in the future either recap or liquidation will occur and the shares are not worthless.

 

Hard to stand by that conviction after Lamberth and Perry. Must be hard looking at this as a lawyer! Even the non lawyers like me are still stunned by this ruling.

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How can anyone reasonably think this has any margin of safety?  Is it really up for discussion whether this is speculative or not?  A big fat zero on this investment is entirely possible.

 

:o

 

Every investment has the potential to be a zero. The question is what is the probability? Most members in on the trade obviously believe that the probability is more remote than you want seem to think it is.

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I agree with Christian, a.k.a. Rule of Law Guy, that other legal avenues remain. I have always thought the U.S. Court of Claims was the most important legal avenue, even before Perry. Others liked the chances in Perry, but probably hoped for a quick payoff more than anything. Let's see what Mnuchin and Sweeney do. Hindes/Jacobs and Collins could certainly be helpful. It's always darkest before dawn.

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