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

[onyx1]

we have 302 pages on this thread, and i spent a little time doing some archaeology, seeing all of the posters who were interested in GSEs from 2011 -2014.  there were a LOT of posters who analyzed the investment quite well, and i am frankly surprised not to see them posting now, as we approach what i believe will be a denouement.

 

are you guys lurking? did everyone throw this on the too hard pile?

 

 

cherzeca:

 

I bought a bunch of preferred in late 2011 in anticipation of the return to profitability and the reversal of the DTA reserve.  In my mind it was only a matter of time when the well underwritten loans starting in 2009 would overpower the bad (2007 and prior).  I expected the DTA alone to more than cover the value of the preferred and eventually force a release by the conservator.  But, I didn’t anticipated the possibility of a nefarious NWS.  Oh well.

 

That said, I still hold the preferred, and have added on several occasions since the original purchase.  I also added common pre-Lamberth and still hold it. 

 

Since 2011, I have seen my preferred shares trade at 4x my cost basis, and at other times 15% of my cost basis.  It been a wild ride and I have learned over five years to temper my enthusiasm when things appear like a “lock”.  It’s a long, unpredictable, journey and it will likely continue for years. 

 

I still follow it closely.  I try read every legal filing but it is getting so expansive that it is hard to keep up with details on all the cases. 

 

I mostly lurk here now.  The investment is a so legally intensive that I don’t have a lot of value to add. 

 

Also, the quality of commentary from merkhet and you cherzeca is outstanding and I believe that keeps us all as reasonably informed as can be expected.  Appreciated!

[Luke 532]

I never watch CNBC, but here is a video from this morning...

http://video.cnbc.com/gallery/?video=3000509862

[Luke 532]

Also, the quality of commentary from merkhet and you cherzeca is outstanding and I believe that keeps us all as reasonably informed as can be expected.  Appreciated!

 

+1

 

I'm incredibly grateful that cherzeca accepted my nudging to join COB&F so we could all benefit from his insight. 

 

Merkhet has been an incredibly valuable member of this thread for as long as I can remember.

[colinwalt]

Also, the quality of commentary from merkhet and you cherzeca is outstanding and I believe that keeps us all as reasonably informed as can be expected.  Appreciated!

 

+1

 

I'm incredibly grateful that cherzeca accepted my nudging to join COB&F so we could all benefit from his insight. 

 

Merkhet has been an incredibly valuable member of this thread for as long as I can remember.

 

+1

[Menko]

Also, the quality of commentary from merkhet and you cherzeca is outstanding and I believe that keeps us all as reasonably informed as can be expected.  Appreciated!

 

+1

 

I'm incredibly grateful that cherzeca accepted my nudging to join COB&F so we could all benefit from his insight. 

 

Merkhet has been an incredibly valuable member of this thread for as long as I can remember.

 

+1

 

 

Fully agree. Thank you.

[merkhet]

Just got out of court. My read is winner winner chicken dinner. Will update when I'm back at a computer.

[Guest cherzeca]

thanks for quickie!  look forward to reading your write up.  owe you a drink or three

[merkhet]

(Update from the phone while in an uber)

 

So, as far as I can tell, the worst case scenario is that they will remand it to the district court to get a full and complete administrative record. Ginsburg was pretty adamant on that.

 

Millet was a hard read as she came down hard on both sides. Not sure how she's going to come out.

 

What was very interesting was that at one point Ginsburg specifically stated that he didn't read that one provision that Gov cites (about conservators and receivers both being able to wind down) they same way that Gov does. His exact quote was something along the lines of "that's why it says respectively."

 

More updates later because typing on a phone sucks.

[merkhet]

Also, someone mentioned that the audio will be posted eventually but I don't know if that's true.

[doughishere]

Just got out of court. My read is winner winner chicken dinner. Will update when I'm back at a computer.

 

Heh. Thanks Merk! Cherez et all.

[Mephistopheles]

Wow, thanks Merkhet, looking fwd to reading your analysis.

[Luke 532]

The fake Tim Howard (I know, I know... don't shoot me) said around 9:00am today that it would not be streamed.  He has boots on the ground at the actual event.

 

Tweet from fake TimHoward (I know, I know)...

 

"Major Update received: Perry oral arguments make it clear 2 out of 3 judges will overturn Lamberth ruling."

[redhots]

Yes thanks so much for your insight Merkhet and Cherzeca.  Super educational.

[Mephistopheles]

The fake Tim Howard (I know, I know... don't shoot me) said around 9:00am today that it would not be streamed.  He has boots on the ground at the actual event.

 

Tweet from fake TimHoward (I know, I know)...

 

"Major Update received: Perry oral arguments make it clear 2 out of 3 judges will overturn Lamberth ruling."

 

Reply from Glen Bradford to that tweet: "that's not what i'm hearing, but it is what it is."

 

lol

 

Which brings me to a question - if there is a disagreement, is it majority wins? What if the 3 judges each want a different ruling? Do they ultimately have to agree to one before giving a ruling?

[Guest cherzeca]

The fake Tim Howard (I know, I know... don't shoot me) said around 9:00am today that it would not be streamed.  He has boots on the ground at the actual event.

 

Tweet from fake TimHoward (I know, I know)...

 

"Major Update received: Perry oral arguments make it clear 2 out of 3 judges will overturn Lamberth ruling."

 

Reply from Glen Bradford to that tweet: "that's not what i'm hearing, but it is what it is."

 

lol

 

Which brings me to a question - if there is a disagreement, is it majority wins? What if the 3 judges each want a different ruling? Do they ultimately have to agree to one before giving a ruling?

 

there are at least a couple of ways to go, reverse, or vacate and remand for trial, or uphold, each with respect to multiple theories (treasury didnt have authority to purchase securities, fhfa/tres misconstruing HERA re what are the conservator's powers etc).  so there will be a menage a trois where they will get together and figure out where they stand on all issues.  two judges win the day

[Mephistopheles]

The fake Tim Howard (I know, I know... don't shoot me) said around 9:00am today that it would not be streamed.  He has boots on the ground at the actual event.

 

Tweet from fake TimHoward (I know, I know)...

 

"Major Update received: Perry oral arguments make it clear 2 out of 3 judges will overturn Lamberth ruling."

 

Reply from Glen Bradford to that tweet: "that's not what i'm hearing, but it is what it is."

 

lol

 

Which brings me to a question - if there is a disagreement, is it majority wins? What if the 3 judges each want a different ruling? Do they ultimately have to agree to one before giving a ruling?

 

there are at least a couple of ways to go, reverse, or vacate and remand for trial, or uphold, each with respect to multiple theories (treasury didnt have authority to purchase securities, fhfa/tres misconstruing HERA re what are the conservator's powers etc).  so there will be a menage a trois where they will get together and figure out where they stand on all issues.  two judges win the day

 

got it, so two of them have to share one single opinion? so if all 3 of them have 3 different views, then each would have to convince the other two why their opinion is the right one, and sooner or later one of them will fold and join one of the other two? etc etc?

[Guest cherzeca]

@M

 

right,  whatever the theory 2 judges have to agree on a result. 

[merkhet]

Okay, so here goes my recap:

 

Olson went up first, and Judge Millett was pretty aggressive on the APA claim. Mostly, she parroted Lamberth's arguments on whether we should be second guessing FHFA. Moreover, she raised the question of whether, if FHFA figured that the GSEs were beyond saving, that they could have used the NWS to stem the tide of losses. In other words, what's wrong w/ saying "give us what you have, and if you make nothing, you give us nothing?" Sadly, I thought Olson missed a great opportunity to mention that the NWS is not just about profits but that they also sweep away the equity of the company over time. (And I agree w/ TH717 that Olson did not seem prepared.) Additionally, she asked whether there was fluidity between conservatorship and receivership such that FHFA could conceivably be doing what Lamberth said in his opinion, and Olson responded no. Surprisingly, she seemed to be helping him out at one point by asking whether this is just an issue about notice -- i.e. at some point, maybe they should have just notified people that they were doing receivership instead, but Olson seemed not to catch the point. (The point is that during receivership, you have different safeguards and protection, so this isn't just a situation where you "cure" the violation by backdating notice.) With more prodding from Millett, Olson did eventually get there.

 

During Olson's time, Ginsburg also brought up the idea that the idea that Susan McFarland saying that things were going sustainably well was just one opinion. It's still possible that Treasury & FHFA might have honestly believed that things were getting worse. (However, Olson missed another opportunity to say that Treasury & FHFA's sworn affidavit was that no one thought things were turning rather than that there was some difference of opinion and they decided to make a judgment one way versus another.) Furthermore, it was worrisome because she signed off on the 10-Q a few days before that saying that they actually didn't think that things were getting better. Seemed to bother him. On the other hand, Ginsburg also brought up the question of whether there is a conceivable situation where Treasury is conserving as much as they can and that $5 trillion of assets is a lot to run down before you can even put it into receivership -- Olson said that it's possible but unlikely, and that's why they would really like to have an administrative record. Ginsburg agreed with him that an administrative record would be necessary.

 

Hume's argument went much better, and I actually think the court was much more receptive to his claims about breach of contract, implied convenient, good faith, etc. There was some back and forth about derivative versus direct claims, but he was pretty adamant about direct claims of breach of contract, and the three judges seemed to agree. There was also some back and forth between DE and VA differences of law. One thing to note is that if this comes down to a breach of contract claim, you have a much better shot being in the preferreds than the common, IMO. Not as many questions during the Hume time.

 

Cain (sp?) went up for the FHFA and talked a lot about 4623, which went a bit over my head. They seemed to spend most of the time talking about the classification of capital (adequate, undercapitlized, severely undeocatpialized) where the attorney was saying it's okay to run at razor thin capital because FHFA suspended capital -- but I found that to be oddly beside the point? Later on, the judges asked for supplemental briefing on 4623. Ginsburg, however, was a bit annoyed that FHFA decided to suspend capital requirements rather than following the statute and putting the companies into a category. Possibly, he doesn't like the end run around putting the company into a receivership due to capitalization by just stating by fiat that capital doesn't matter.

 

Forget the name of the person who stood up for Treasury, but Ginsburg came alive when he started talking. I think it was Dintzer, but I'm not sure. I'll use his name unless someone corrects me. Dintzer started off talking about how the world was ending in 2008, and Congress intended for HERA to grant really broad powers to the conservator, etc. Finally Ginsburg interjected and said "I don't know why you and your colleague keep talking about things at 30,000 feet and haven't referenced the statute." They have a bit of back and forth, and they get to a point where Ginsburg asks him to point to the statute where the conservator is allowed to wind things down and then says that he reads the conservator and receiver having different powers because of the word respectively. Specifically, he says "that's not how I read the statute." In any case, that throws the government lawyer off his game a little bit. Millett actually also lays into the government lawyer a little bit by adopting some of the arguments from the appellants, which is what makes her a bit harder for me to read. Moreover, the government lawyer says something about how the liquidation preference hasn't been changed at all so the appellants aren't harmed, and Ginsburg says something to the effect of "and what does that leave them with?" to which the government lawyer has no response and then the courtroom chuckled a bit.

 

Both Olson & Hume closed w/ good rebuttals. Olson pointed to Lockhart's statements in 2008 about conservatorship being to rehabilitate things and shareholders being left with residual value as what FHFA understood its role to be. Hume closed with the idea, again, that their claim for breach of K was direct and not supplanted by the statute that says shareholder claims accrue to the FHFA. I thought Olson really came back strong in the rebuttal.

 

Judge Brown was surprisingly silent. She basically made a clarifying remark saying that appellants are arguing that 4617(f) is not a bar because conservator acted ultra vires, beyond their power, and then asked Olson a question about "why isn't this just a bad judgment on the part of FHFA," during rebuttal, and he answered that FHFA's action wasn't just a bad judgment because it was beyond the scope of their powers -- picking up on her earlier ultra vires comment.

[doughishere]

This post should go on gselinks.com

[merkhet]

As a side note, two things I forgot:

 

(1) Hume made a fantastic argument in terms of looking at things economically rather than formalistically. Basically, Treasury sat at the top of the capital stack, then junior preferreds and then Treasury had 80% of the common stock and 20% of common was in other hands. He talked about how if you look at it economically, basically what Treasury did was leapfrog all the other participants.

 

(2) In rebuttal (possibly also in his opening), he makes it very clear that what Treasury sought to do was create a second level of common (i.e. the Steele argument) above the other common AND above the junior preferred. I think that resonated well w/ Brown & Ginsburg, and I thought it was a genius move to get part of that into this oral argument rather than to wait for the MDL panel a few months down the line.

 

In any case, the biggest surprise for me was Ginsburg saying flat out that he didn't read the conservator & receiver having the same powers. If he can convince one of the other two of that, then, by definition, the conservator is acting outside of its powers, which means 4617(f) falls and a lot of other things fall with it.

[tthompson]

Merkhet, were you in the court room or the press room?

[merkhet]

Merkhet, were you in the court room or the press room?

 

Press room. Video feed. Were you there as well?

[tthompson]

I was the guy in the grey suit in the front left row. I think we had this conversation there lol. I have the exact same read, except I lean toward Millett being more likely to go against us.

[merkhet]

I was the guy in the grey suit in the front left row. I think we had this conversation there lol. I have the exact same read, except I lean toward Millett being more likely to go against us.

 

Were you in the middle or on the right? (Boston or Philly?) I was on the left. Asian guy w/ the orange Berkshire tie. And yes, I think we had this exact same conversation at the courthouse.

 

I think Millett might go against us, but it's so tough to tell. I mean, on the appellate level, I've seen judges lay into lawyers on this and that and then rule in their favor -- it's tough to tell. If pressed, I'd say she's learning against, but it's difficult to know because she never really came out w/ a statement the way that Ginsburg did.

[merkhet]

Audio is up.

 

https://www.cadc.uscourts.gov/recordings/recordings2016.nsf/74B30C9776477AA885257F96006585FE/$file/14-5243.mp3