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

[merkhet]

You said this is because Delaware law is more established as opposed to Virginia law right? Is it also because McFarland was Fannie CFO not Freddie?

 

I know DE and VA law is different but how do you assess one is more favorable than the other ? Wouldn't it be safer to do 50/50 in each?

 

Delaware law is more established than Virginia law re various corporate rights. Assessing that is just a function of knowing general corporate law. I don't really know how to get more granular than that. It's not like I did a review of hundreds of years of case law in both states or anything. Although, my guess is that it'd be easier to do that for VA law because the VA case law is likely pretty light.

 

That's true that DE is more established but I was just concerned about a (very unlikely) scenario in which a judge in Virginia rules in favor of us and one in Delaware for the govt.

 

Like if we get a Lamberth type character in DE and Gingsburg/Brown type in VA.

 

I think that would be highly unlikely -- not the least because most cases that are suing both companies are being brought before a single judge? So that same judge would have to rule separately based on the case law of each of the states. Unlikely unless they find that one state has some version of relief that doesn't exist in the other one. And were that the case, my guess is that the place that wouldn't have relief would be Virginia.

[deadspace]

Again for the lawyers on the board

With regard to  the supplemental briefs - are they meant to allow the lawyers from either side to correct errors or perceived errors in the judges interpretation of events??

there are two issues that are glaring

 

1) The interpretation by Ginsberg of McFarlanes testimony as stating that she "would have told them" that Fannie Mae was going to be profitable  - clearly this is NOT what she said  - She said I told them and I think thats why they did the NWS  (how could he get something so crucial so wrong)

2) Ginsberg also mentions well only one person had another opinion about GSE outcome being positive and that was McFarlane - key point here is that is only the one we are allowed to know about because the government is hiding so much information - so at best you have to assume a MINIMUM of one person had another opinion with UNKNOWN as to the maximum

 

 

[merkhet]

The supplemental briefing is on 4623

[deadspace]

The supplemental briefing is on 4623

 

I see - so these other issues will remain unchallenged?

[Guest cherzeca]

Again for the lawyers on the board

With regard to  the supplemental briefs - are they meant to allow the lawyers from either side to correct errors or perceived errors in the judges interpretation of events??

there are two issues that are glaring

 

1) The interpretation by Ginsberg of McFarlanes testimony as stating that she "would have told them" that Fannie Mae was going to be profitable  - clearly this is NOT what she said  - She said I told them and I think thats why they did the NWS  (how could he get something so crucial so wrong)

2) Ginsberg also mentions well only one person had another opinion about GSE outcome being positive and that was McFarlane - key point here is that is only the one we are allowed to know about because the government is hiding so much information - so at best you have to assume a MINIMUM of one person had another opinion with UNKNOWN as to the maximum

 

@dead

 

while the questions and answers are important, i wouldn't over-attach importance to what a judge asks or remarks at any particular time.  you can certainly garner how a judge is seeing the case but, to take the fnma cfo communication as an example, you cant assume that any judge has decided in his/her mind that the substance of her communication is unimportant.  judges probe and test.

 

 

[muscleman]

http://gselinks.com/Court_Filings/Judicial_Panel/MDL-2713-0027.pdf

 

The JPMDL has set FHFA's transfer and consolidation motion in MDL No. 2713 for hearing on May 26, 2016, in Chicago.

 

 

Well, at least the MDL training is moving at the fastest possible schedule.

Does anyone know how long it takes for the MDL court to issue the order?

[Guest cherzeca]

Again for the lawyers on the board

With regard to  the supplemental briefs - are they meant to allow the lawyers from either side to correct errors or perceived errors in the judges interpretation of events??

there are two issues that are glaring

 

1) The interpretation by Ginsberg of McFarlanes testimony as stating that she "would have told them" that Fannie Mae was going to be profitable  - clearly this is NOT what she said  - She said I told them and I think thats why they did the NWS  (how could he get something so crucial so wrong)

2) Ginsberg also mentions well only one person had another opinion about GSE outcome being positive and that was McFarlane - key point here is that is only the one we are allowed to know about because the government is hiding so much information - so at best you have to assume a MINIMUM of one person had another opinion with UNKNOWN as to the maximum

 

@dead

 

while the questions and answers are important, i wouldn't over-attach importance to what a judge asks or remarks at any particular time.  you can certainly garner how a judge is seeing the case but, to take the fnma cfo communication as an example, you cant assume that any judge has decided in his/her mind that the substance of her communication is unimportant.  judges probe and test.

 

the other thing i would say about the oral args is that it is conducted against the backdrop of hundreds of pages of written briefs, to which the judges now return (or instruct their clerks to return).  so any piece of the oral arg that appears to "go against" a party will be assessed if need be to the parties' written arguments on the point. if you havent read the written briefs, you likely will be inclined to place excessive reliance onto what you hear in the oral arg

[Guest cherzeca]

Definitely appreciate your perspective - the legal aspect of this is very much over my head and therefore I only hold a small position.  Assuming your rationale for preferreds is to limit downside exposure - i.e., it seems in most scenarios (excluding the status quo) the preferreds would likely be liquidated?

 

Not necessarily. It's certainly easier to establish valuation in a liquidation scenario given that the junior preferreds have a par amount that means something. However, there is also some concern on my part that any settlement that involved converting the junior preferred over to common stock would involve significant dilution -- but yes, primarily it's downside protection.

 

we are all in speculation land here, but when you realize that IF govt were to settle, they would want to get repaid their senior preferred and maximize the value of their commons stock warrants.  so forcing conversion of junior pref at less than par would be in govt's interest

[merkhet]

Definitely appreciate your perspective - the legal aspect of this is very much over my head and therefore I only hold a small position.  Assuming your rationale for preferreds is to limit downside exposure - i.e., it seems in most scenarios (excluding the status quo) the preferreds would likely be liquidated?

 

Not necessarily. It's certainly easier to establish valuation in a liquidation scenario given that the junior preferreds have a par amount that means something. However, there is also some concern on my part that any settlement that involved converting the junior preferred over to common stock would involve significant dilution -- but yes, primarily it's downside protection.

 

we are all in speculation land here, but when you realize that IF govt were to settle, they would want to get repaid their senior preferred and maximize the value of their commons stock warrants.  so forcing conversion of junior pref at less than par would be in govt's interest

 

Sure, but it takes two to tango, and you'd need to get junior pref to agree to such a settlement, which seems unlikely. Between the pref and the common, I suspect that the pref is the fulcrum security.

[hardincap]

I'm still working through the audio but these are fantastic notes. Ty!

[rros]

The supplemental briefing is on 4623

 

To the lawyers in the forum, please.

 

Could judges -after briefs- reach the conclusion that a discretionary action by the regulator (supervisory discretionary action, as per J. Ginsburg) worked against applicable laws (conservatorship)? Then, judicial review is granted and possible enjoining of Lockhardt's action.

 

If enjoined, sound and solvent becomes prevalent and enforceable opening the door to determining the conservatorship did not conserve and that the companies ended up critically undercapitalized. Remember, Watt's argument has always been "sound and solvent" does not matter because capital is not being assessed. Therefore, the bizarre logic that "life support" is equal to a successful conservatorship.

 

We know 4623 allows for suspending a metric (discretionary action, unless arbitrary or contrary to applicable laws). But we also know it doesn't say -neither equates to- capital depletion being irrelevant.

 

It is Lockhardt's action that made it possible for Treasury to steal capital from the companies.

 

This is like the original sin.

[doughishere]

I just want to see more of these documents that are sealed......

 

 

Edit: I also cant wait for Epstein's next piece. I bet its going to be pretty good.

[doughishere]

The ultimate sell signal.

 

Cramer -

 

 

Here's some old analysis of fnma in 2009. Bronte Capital. 10 Parts. http://brontecapital.blogspot.com/2014/08/my-sincere-best-wishes-to-bill-

 

 

Edit: More from the archive.

http://neoalpha.blogspot.com/2011/06/michael-kao-akanthos-capital-management.html

 

 

[SnarkyPuppy]

One last legal to layman question - are there any nuances to the various different preferreds from a legal perspective?  Or do they all stand to binary do well or not do well together?  Digging through myself right now but obviously the legalise is over my head (too hard bucket - going to keep a small position)

[merkhet]

The supplemental briefing is on 4623

 

To the lawyers in the forum, please.

 

Could judges -after briefs- reach the conclusion that a discretionary action by the regulator (supervisory discretionary action, as per J. Ginsburg) worked against applicable laws (conservatorship)? Then, judicial review is granted and possible enjoining of Lockhardt's action.

 

The judges can reach whatever conclusion that they want -- but if the reason 4623 is important is that if they reach the conclusion that suspending capital classifications means that shareholders cannot argue what is and is not safe and sound, then that's bad for the shareholders.

 

Of course, as @doughishere immediately pointed out, just a few months ago, Mel Watt publicly mentioned the lack of capital in the Enterprises as making them very risky -- which would be a very strange thing to say if the suspension of the capital classifications made the Enterprises safe and sound.

 

One last legal to layman question - are there any nuances to the various different preferreds from a legal perspective?  Or do they all stand to binary do well or not do well together?  Digging through myself right now but obviously the legalise is over my head (too hard bucket - going to keep a small position)

 

The different versions of the junior preferreds have different economic properties (interest rates, etc.), but they are legally pari passu.

[Jurgis]

The different versions of the junior preferreds have different economic properties (interest rates, etc.), but they are legally pari passu.

 

But you personally prefer Fannie prefs vs Freddie prefs because of some (minor?) legal differences (different state law?)?

 

Edit: I understand that what you wrote was for single company prefs only, I am not implying that you said that different company prefs are legally the same.

[tede02]

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.

 

Maybe I missed this but is there a time line for their decisions

 

No deadline. The supplemental briefing is due 7 days from now.

 

 

Merkhet & others, I understand there is no deadline after the supplemental briefing for a ruling.  However, what is your gut instinct?  Weeks?  Months?  By year end?

[merkhet]

The different versions of the junior preferreds have different economic properties (interest rates, etc.), but they are legally pari passu.

 

But you personally prefer Fannie prefs vs Freddie prefs because of some (minor?) legal differences (different state law?)?

 

Edit: I understand that what you wrote was for single company prefs only, I am not implying that you said that different company prefs are legally the same.

 

I am personally in Fannie junior preferreds versus Freddie junior preferreds because I have a better sense of how Delaware corporate law plays out and a not so good sense of how Virginia corporate law plays out. My intuition is that the differences probably aren't material, but, to the extent that there is a difference, it would break in favor of Delaware corporate law.

 

And yes, that's right. Each junior preferred is pari passu within its individual entity cap structure.

 

Merkhet & others, I understand there is no deadline after the supplemental briefing for a ruling.  However, what is your gut instinct?  Weeks?  Months?  By year end?

 

I am literally batting 0.00 in terms of figuring out my timing, so my answer is that my gut instinct is that my gut instinct is probably going to be wrong. Bayes Theorem FTW.

[tede02]

LOL!  ;D  So we wait I guess.  Best, Ted

[tthompson]

The text of the Mulvaney bill is finally here. It’s available at https://www.congress.gov/bill/114th-congress/house-bill/4913/text

 

Key sections:

 

"(1) DEEMED REPAYMENT IN FULL.—Effective on the date of the date of the enactment of this Act, the liquidation preference on the Variable Liquidation Preference Senior Preferred Stocks of each enterprise is reduced to zero."

 

“(e) Termination Of Conservatorships.—The Director shall terminate the conservatorship of an enterprise under section 1367 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4617) at such time that the enterprise attains, as determined by the Director, an amount of capital that is equal to or exceeds 5 percent of the risk-weighted assets of the enterprise.”

 

“(4) RISK-WEIGHTED.—The term “risk-weighted” means, with respect to the assets of an enterprise, that the amount of any such assets that are single family housing mortgages meeting the requirements of section 618(a)(1)(B) of the Resolution Trust Corporation, Refinancing, Restructuring, and Improvement Act of 1991 (12 U.S.C. 1831n note) are calculated using a risk-weighting of 50 percent, in the same manner required under subsection (a)(1)(A) of such section 618 with respect to single family housing loans.”

[doughishere]

http://www.valuewalk.com/2016/04/dick-bove-another-bomb-exploding-part-governments-case/

[orthopa]

http://www.valuewalk.com/2016/04/dick-bove-another-bomb-exploding-part-governments-case/

 

So more documents are going to be coming out?

[merkhet]

I think they're just quoting Sweeney's order un-sealing the seven documents for the Perry oral arguments.

[rros]

The judges can reach whatever conclusion that they want -- but if the reason 4623 is important is that if they reach the conclusion that suspending capital classifications means that shareholders cannot argue what is and is not safe and sound, then that's bad for the shareholders.

 

Of course, as @doughishere immediately pointed out, just a few months ago, Mel Watt publicly mentioned the lack of capital in the Enterprises as making them very risky -- which would be a very strange thing to say if the suspension of the capital classifications made the Enterprises safe and sound.

 

Thanks.

[Luke 532]

Rolling Stone picked up the story?  http://www.rollingstone.com/politics/news/why-is-the-obama-administration-trying-to-keep-11-000-documents-sealed-20160418#ixzz46D5RemLP