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

[doughishere]

Cant argue with that...but it ain't over till it's over.....and right now it's not over. I agree it's starting to become a more crowded trade.

 

 

From Peter Chapman:

Magistrate Scoles approved FHFA and Treasury's request to file their Motion to Reinstate a Stay of the Deadline to File an Administrative Record and a Brief in support of that request under seal and file a redacted version for public consumption.  Following entry of that order, FHFA and Treasury filed the sealed and redacted versions of their Motion.  FHFA and Treasury stick to their positions that no facts make any difference in this case because HERA insulates them from all shareholder litigation.

 

Sent from my iPhone. Will link documents when I get home.

15-00047-0068.pdf

15-00047-0069.pdf

[Mephistopheles]

meanwhile, fnma's share price up some 20% over last few trading days.  some institutions that got out at end of 2015 may be getting back in?

 

I wouldent read too hard into that.

 

the intrinsic value (for lack of a better term) of the GSEs is their litigation value.  pure and simple. 

 

however trading values have a signaling value, and what it is signaling to me is that 30% upside change in trading value means some sort of wind shift in sentiment.  now sentiment means nothing in the face of an adverse litigation result, but i sense that there is some accumulation going on, and nobody is accumulating these stocks without some deep thinking

 

Unfortunately, that same sentiment doesn't apply to the prefs

[doughishere]

Prefs probably have less liquidity....cherzeca is right but it's the long game that the focus needs to be on. The short game will follow

[doughishere]

Shareholders have started a case in Florida....

 

 

Peter Chapman writes...

 

The screenshot attached to this e-mail message shows that Edwards v. Deloitte was filed yesterday in Florida state court.  My understanding is that 40 Fannie Mae shareholders are asserting claims against Deloitte for botching their audit of Fannie Mae. 

[Guest cherzeca]

wondering why filed in state court in dade county florida (not known for commercial litigation expertise among judges), by no name attys, and not as a class action.  deloitte gets these suits in the ordinary course, and will grind this like chopped liver. what was the objective?

 

[doughishere]

http://www.glenbradford.com/wp-content/uploads/2016/03/Deloitte-Fannie.pdf

 

Thomas Alexander and Forrester

[Guest cherzeca]

http://www.glenbradford.com/wp-content/uploads/2016/03/Deloitte-Fannie.pdf

 

Thomas Alexander and Forrester

 

waste of time

[merkhet]

I'm not sure what the point of this is either... more surprising to me is that Sullivan & Cromwell used to have a contingency-fee plaintiff's practice? What?!?

[Guest cherzeca]

I'm not sure what the point of this is either... more surprising to me is that Sullivan & Cromwell used to have a contingency-fee plaintiff's practice? What?!?

 

which is why he left!!!  i like this guy thomas, but this is a suit against an auditor by a discrete number of plaintiffs, not a class action, for money damages for those discrete plaintiffs against a defendant that is a repeat player and wont want to settle, and nothing that the court orders will affect the financial statements of GSEs (though i suppose it might cause deloitte to retract its opinion) or you or me

[Guest cherzeca]

it does occur to me that if the motion to compel in fairholme is not successful, this case might result in production of deloitte work documents that contain some of the facts sought directly from govt

[Luke 532]

it does occur to me that if the motion to compel in fairholme is not successful, this case might result in production of deloitte work documents that contain some of the facts sought directly from govt

 

That's an interesting angle.

[doughishere]

More stuff

 

http://www.law.uchicago.edu/files/file/684-12-abb-ajc-fannie.pdf

 

 

http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=3481&context=facpubs

[Guest cherzeca]

More stuff

 

http://www.law.uchicago.edu/files/file/684-12-abb-ajc-fannie.pdf

 

 

http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=3481&context=facpubs

 

these academic farts are just fulfilling publish or perish quotas. f'em

[doughishere]

More stuff

 

http://www.law.uchicago.edu/files/file/684-12-abb-ajc-fannie.pdf

 

 

http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=3481&context=facpubs

 

these academic farts are just fulfilling publish or perish quotas. f'em

 

I just keep my ear to the ground. what does munger say...only allowed to have an opinion if you can argue the other side

[merkhet]

Sounds like the tide is turning a bit on the legal front. Judge Steele submitted the following letter to Judge Sleet in Delaware.

 

Pursuant to D. Del. LR 7.1.2(b), Plaintiffs David Jacobs and Gary Hindes, on behalf of themselves and all others similarly situated, and derivatively on behalf of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, write to inform the Court of the recent Ninth Circuit Court of Appeals decision in United States of America ex rel. Adams v. Aurora Loan Servs., Inc., No. 14-15031 (9th Cir. Feb. 22, 2016), which is relevant to Defendants’ pending Motions to Dismiss (D.I. 17 and 19). The Ninth Circuit issued its opinion after the parties completed briefing on the pending Motions to Dismiss. In Adams, the Ninth Circuit held that Fannie Mae and Freddie Mac are private companies, not federal instrumentalities, and that the conservatorship placed the Federal Housing Financing Agency (“FHFA”) “in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.” Id. at 6 (emphasis in original). This holding is contrary to Defendants’ arguments that federal law, not state law, governs the conservator’s power to implement the Net Worth Sweep as a term of preferred stock, and that FHFA has authority under HERA to act as it sees fit without regard to whether Fannie Mae and Freddie Mac themselves have power under state law to issue preferred stock having the terms of the Net Worth Sweep. FHFA Op. Br. (D.I. 18) at 4-5, 13-15, 26-28; Treasury Op. Br. (D.I. 20) at 3, 22-28. For the Court’s convenience, we attach the Adams opinion as Exhibit A.

2016-03-02_Letter_to_Judge_Sleet.pdf

[Guest cherzeca]

new SA article on fnma valuation

 

http://seekingalpha.com/article/3952016-fannie-mae-cheap-value-stock-overpriced-speculation

[hardincap]

It's very interesting to me that Berkowitz believes this isn't a binary outcome, whereas Ackman readily admits the common stock can go to zero. If litigation fails, what other road to recover is there? Why in the world would the government settle if they win all the cases? 

 

It makes me wonder if he's being disingenuous or delusional

 

Bruce Berkowitz: I don’t believe this is a binary outcome. This isn’t a light switch, there isn’t an on or off, zero or one. That would clearly violate our investment rules. We have a margin of safety: there is no alternative to Fannie and Freddie. They are tremendously profitable. They are not shrinking; they are growing. Sooner rather than later, they will be transformed into low-risk, public utilities with regulated rates of return just like your local water or electric company.

[doughishere]

He may be refering to the prefs and not the common

 

"Preferred stock is not common stock. Preferred stock is a contract, a contract that protects our bundle of economic rights. One of the rights it protects is a liquidation preference, a priority claim with regard to the repayment of principal. The contract is between a buyer and seller, and it is backed by the nation’s laws. The Treasury also owns preferred stock. We own Preferred stock, the Treasury owns preferred stock, and a preferred stock is a preferred stock. But the Department of the Treasury seems to make up the rules as they go."

[merkhet]

It's very interesting to me that Berkowitz believes this isn't a binary outcome, whereas Ackman readily admits the common stock can go to zero. If litigation fails, what other road to recover is there? Why in the world would the government settle if they win all the cases? 

 

It makes me wonder if he's being disingenuous or delusional

 

Bruce Berkowitz: I don’t believe this is a binary outcome. This isn’t a light switch, there isn’t an on or off, zero or one. That would clearly violate our investment rules. We have a margin of safety: there is no alternative to Fannie and Freddie. They are tremendously profitable. They are not shrinking; they are growing. Sooner rather than later, they will be transformed into low-risk, public utilities with regulated rates of return just like your local water or electric company.

 

That's the reason that it's not binary.

[hardincap]

I agree there is no alternative, but does that necessarily mean the preferreds will be recovered? The two statements are not the same. I imagine there are scenarios where fannie is largely restored, allowed to rebuild capital, etc, but junior preferred holders are still shut out from profits.

 

If shareholders lose all cases, what incentive does the government have in doing anything that is "favorable to the hedge funds"?

[merkhet]

I agree there is no alternative, but does that necessarily mean the preferreds will be recovered? The two statements are not the same. I imagine there are scenarios where fannie is largely restored, allowed to rebuild capital, etc, but junior preferred holders are still shut out from profits.

 

If shareholders lose all cases, what incentive does the government have in doing anything that is "favorable to the hedge funds"?

 

In general, the issue is how you re-capitalize (and eventually re-privatize) the GSEs when you have just screwed the last group of equity holders. It is difficult for me to see anyone providing what will have to be hundreds of billions of private capital when the last guys were wiped out for reasons having nothing to do with the profitability of the enterprises.

[Mephistopheles]

I agree there is no alternative, but does that necessarily mean the preferreds will be recovered? The two statements are not the same. I imagine there are scenarios where fannie is largely restored, allowed to rebuild capital, etc, but junior preferred holders are still shut out from profits.

 

If shareholders lose all cases, what incentive does the government have in doing anything that is "favorable to the hedge funds"?

 

In general, the issue is how you re-capitalize (and eventually re-privatize) the GSEs when you have just screwed the last group of equity holders. It is difficult for me to see anyone providing what will have to be hundreds of billions of private capital when the last guys were wiped out for reasons having nothing to do with the profitability of the enterprises.

 

I know we've talked about this before but I still don't see a reason why they have to recap and release. If we lose all the cases, what's the incentive in doing that when they can get an endless stream of profits to help pay for the budget? I know there is pressure from many sides to do this but it's their choice and I don't see them walking away from free money.

[doughishere]

I agree there is no alternative, but does that necessarily mean the preferreds will be recovered? The two statements are not the same. I imagine there are scenarios where fannie is largely restored, allowed to rebuild capital, etc, but junior preferred holders are still shut out from profits.

 

If shareholders lose all cases, what incentive does the government have in doing anything that is "favorable to the hedge funds"?

 

In general, the issue is how you re-capitalize (and eventually re-privatize) the GSEs when you have just screwed the last group of equity holders. It is difficult for me to see anyone providing what will have to be hundreds of billions of private capital when the last guys were wiped out for reasons having nothing to do with the profitability of the enterprises.

 

I know we've talked about this before but I still don't see a reason why they have to recap and release. If we lose all the cases, what's the incentive in doing that when they can get an endless stream of profits to help pay for the budget? I know there is pressure from many sides to do this but it's their choice and I don't see them walking away from free money.

 

"Congress did not authorize the Treasury Department to nationalize these two companies. "

[merkhet]

Well, that depends. The companies can earn about $14 billion after-tax, so do you want $14 billion a year or $168 billion immediately? (80% of a 15x multiple)

 

And, remember, just because the companies are "under conservatorship" and the FHFA has suspended their capital requirements doesn't change the economic reality that the entities need capital. So under the $14 billion a year option, the government is, let's call it, "economically responsible" for $150 billion of capital or $120 billion of capital under the recap situation. The math works out to a 9.33% return in perpetuity or a 40% immediate return and then whatever return you might get from applying those funds to other uses.

 

In any case, on a non-financial level, Watt & co. are correct about the conservatorship being untenable over the long-term. And you can see that from reading the posts from way, way back that I posted concerning Jim Millstein's speeches before the House and the Senate -- very briefly, the gist is that without restructuring the GSEs in a way that re-privatizes them, the housing market recovery will remain tepid if not moribund.

[Mephistopheles]

Well, that depends. The companies can earn about $14 billion after-tax, so do you want $14 billion a year or $168 billion immediately? (80% of a 15x multiple)

 

And, remember, just because the companies are "under conservatorship" and the FHFA has suspended their capital requirements doesn't change the economic reality that the entities need capital. So under the $14 billion a year option, the government is, let's call it, "economically responsible" for $150 billion of capital or $120 billion of capital under the recap situation. The math works out to a 9.33% return in perpetuity or a 40% immediate return and then whatever return you might get from applying those funds to other uses.

 

In any case, on a non-financial level, Watt & co. are correct about the conservatorship being untenable over the long-term. And you can see that from reading the posts from way, way back that I posted concerning Jim Millstein's speeches before the House and the Senate.

 

In that case why not just release them regardless of the courts? Actually I agree that 80% up front is better for multiple reasons and wouldn't be surprised if Obama does just that right before the election. It makes for a great headline number, and if I were a politician I'd rather spend 80% all by myself than share 100% in perpetuity with others. But again, why fight it to death in the courts?

 

Re: the capital, in the Government's hands they have an infinite line of credit to cover any losses so it's not like they need all that capital at all times or any given moment.

 

I didn't read Watt's statements yet but I don't understand why do all these people think that recap and release is essential? From their perspective (non financial) what are they worried about if they have essentially unlimited govt backstop in the situation we have today?