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

[Grenville]

Nice short interview with Henry Paulson on the Fannie Mae bailout

 

 

"Henry Paulson Defends Fannie Mae Bailout"

http://blogs.wsj.com/economics/2013/09/06/henry-paulson-defends-fannie-mae-bailout/

 

Originally, we leaned toward receivership. As we got into it, I realized receivership had other complications. For instance, because we were working under a tight time schedule and weren’t cooperating with management, receivership had too many risks, including that it was more difficult to explain to the market and there was the real possibility that Fannie and Freddie would lose their hedging contracts, which would cost taxpayers billions of dollars.

[valuecfa]

The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.

[nkp007]

The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.

 

Mr. Market is there to serve you, not to guide you.

 

Welcome onboard! Nice comments.

[valuecfa]

The more i think about this investment the more i feel more secure in it then is implied by the distressed price. I've made this a pretty decent sized position. It's kind of been consuming much of my free time lately. The legal perspective just seems solid. The perspective of the importance of the agencies and what effect will take place if the proposals are implemented (higher rates, lower standards, etc)... the incentive for the government to exercise their warrants, the strategic importance that the agencies play, and their beneficial existence. It just doesn't seem right for these prefs to be trading where they are.

 

Mr. Market is there to serve you, not to guide you.

 

Welcome onboard! Nice comments.

 

I've been onboard for around 3 or 4 months now. Just made this a much more meaningful position then my original 6% size. I'm really looking forward to following the litigation in these cases.

[merkhet]

Why not wait to see the response from the government first?

[valuecfa]

Why not wait to see the response from the government first?

 

I can't wait to read the response.

 

I don't know how closely correlated the response will be to the share price, but the share price "should" react to a light defense of their actions.

 

I suspect the response will be heavy on historical facts and a walk through of the crisis, but light on legal bounds for actions that occurred well after the crisis.

[merkhet]

 

I can't wait to read the response.

 

I don't know how closely correlated the response will be to the share price, but the share price "should" react to a light defense of their actions.

 

I suspect the response will be heavy on historical facts and a walk through of the crisis, but light on legal bounds for actions that occurred well after the crisis.

 

 

That's my guess as well. I figured I would wait to see the response before I pick up a position -- might shake loose some weaker hands.

[Mephistopheles]

What are the ticker symbols for these prefs? :)

[valuecfa]

What are the ticker symbols for these prefs? :)

 

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

[Mephistopheles]

What are the ticker symbols for these prefs? :)

 

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

 

Interesting, thanks a lot

[claphands22]

What are the ticker symbols for these prefs? :)

 

http://walrusvalue.blogspot.tw/2013/08/google-spreadsheet-of-fannie-mae.html

 

http://walrusvalue.blogspot.tw/2013/08/google-spreadsheet-of-freddie-mac.html

 

Not perfect since some of the preferreds listed no longer trade, but they have current prices and their respective call price.

 

[Guest Dazel]

 

 

 

Does anyone want to a shot at what they think will happen?

 

Coversion of the prefs to equity along side the government? New equity (government)... Prefs remain...

 

Any comments would be appreciated.

 

Dazel.

[Guest Dazel]

 

 

Does anyone know off hand what the debt outstanding is at Fannie and Freddie?

 

 

[Guest Dazel]

 

 

A better question is...what effect does Fannie and Freddie have on U.S  national debt? That is why Fannie and Freddie were put in private hands in 1968 (vietnam war) to move the debt off the governments balance sheet....interesting with all the debt ceiling talks about to happen...

We know that their payments have allowed the government to not run out of money...

 

Dazel.

[Guest Dazel]

 

$5 trillion at sept 2008...national debt was $9.5 trillion..

 

Impossible for the government to absorb F&F...imagine that talk at debt ceiling time! 

 

"they are an independent corporation for debt purposes" so how can the government go in and grab? This very interesting.

 

Sorry I am rambling....with a lot of posts...

 

Dazel.

[Grenville]

 

 

 

Does anyone want to a shot at what they think will happen?

 

Coversion of the prefs to equity along side the government? New equity (government)... Prefs remain...

 

Any comments would be appreciated.

 

Dazel.

 

My guess is they either redeem the prefs, start paying the pref div or the treasury dividend sweep gets reversed and capital is allowed to build on the balance sheet.

[nkp007]

The risk is they do nothing and wind it down (status quo results in wind down). Political gridlock is a common event...

[JRH]

Does anyone want to a shot at what they think will happen?

 

It has to be treated as a decision tree, in my opinion.  Guessing which "branch" gets taken involves some speculation.

 

The single biggest necessary assumption is that the 2012 "third amendment" gets reversed.  Otherwise the value of the capital structure above the gov't stake would appear to be zero (gov't just sweeps all profits as a dividend on their stake indefinitely).

 

It's also possible (but doesn't seem likely) that the lawsuits surrounding the 2008 bailout result in some return of value.

 

Key remaining questions:

- Are they wound down, scaled down to some degree, or go forward as-is?

- What are the terms of repayment of the gov't stake if the 2012 amendment is reversed? (i.e. interest rate from 2008 bailout date until repayment)

[hyten1]

What are the ticker symbols for these prefs? :)

 

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

 

valuecfa why FNMAK & FNMAM? just curious there are many issue.

[valuecfa]

What are the ticker symbols for these prefs? :)

 

There are about 12 to 15 different series. Take your pick. The majority of mine are in FNMAK & FNMAM

 

valuecfa why FNMAK & FNMAM? just curious there are many issue.

 

They were the best value at the time of purchase. FNMAS and some others are trading at a higher price relative to par, but have a higher coupon so they deserve a higher price. I don't know if that coupon will get paid for very long, since they are redeemable at the issuer's option at any time. In case they do pay the coupons i want some decent yield, which the before mentioned series provide. I also own FNMAH & FNMAP, since at the time of purchase i got them at the bid, which was a discount to others. I'm reluctant to pay up for the highest yielding ones since i don't know how long they will pay the coupons.....assuming the courts rule in favor of the plaintiffs.

 

[twacowfca]

 

$5 trillion at sept 2008...national debt was $9.5 trillion..

 

Impossible for the government to absorb F&F...imagine that talk at debt ceiling time! 

 

"they are an independent corporation for debt purposes" so how can the government go in and grab? This very interesting.

 

Sorry I am rambling....with a lot of posts...

 

Dazel.

 

This is a key point, Dazel. Taking F&F onto the US balance sheet would blow any sensible debt limit.  They can't be wound down very much for lots of reasons. Therefore, they will continue to do what they do until something happens.  The biggest downside has been more or less eliminated.  Therefore it's like a Cpt11 with an increasingly solvent Debtor in Possession repairing its balance sheet while the creditors can't force a POR that would have them own all the the equity in the reorganized debtor. :)

[no_free_lunch]

To me the risk is not that the government swoops in and shuts them down, they have better things to worry about.  It's that they've started the wind-down, with 15% reductions per year.  So couldn't they just do nothing and in 5 years time there is really just not much of a business here and private markets have taken over?

 

This has probably been discussed on this thread before but could you play this one by buying both fannie/freddie and then hedging by buying private mortgage insurers (radian?).  Someone has to eat the pie right?  It seems that if they are shut down it will be a windfall for the private guys.  In bruce's slides, the GSEs are insuring something like 97% of mortgages if I read it right.

[Parsad]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

[valuecfa]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

Time value of money will come into play when the 5% coupons turn into 33% coupons, not including the 6x principal gain....

 

if the plaintiffs win.

[valuecfa]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.