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

[Mephistopheles]

Bill Ackman getting in the mix:

http://www.businessinsider.com/bill-ackmans-pershing-square-reports-98-stake-in-freddie-mac-2013-11

 

Interesting to see Ackman build 10% positions in both Freddie and Fannie common stock. He was buying heavy at $3 at least in Fannie.

 

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/0001193125-13-443212-index.htm

 

The article says 10% stake, not 10% position. :)

 

I'm confused though because a 10% stake in FNMA would be nearly $2 billion, and in FMCC would be $1 billion.

 

According to Fannie's 10-Q, there are 5.8 billion shares outstanding. http://www.sec.gov/Archives/edgar/data/310522/000031052213000205/fanniemaeq30930201310q.htm#sBE5B9CCD847B2587CC9B7E4F6CD88837

 

But according to Pershing's 13D, there are 1.2 billion shares outstanding, which if so would make the 115 million share stake a 10% position.

http://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dsc13d.htm

 

Am I missing something here?

 

Just realized that the 5.8 billion outstanding includes the Treasury warrants.

[fareastwarriors]

Ackman Takes Fannie Mae Stake as Berkowitz Plans Revamp

 

 

http://www.bloomberg.com/news/2013-11-15/ackman-s-pershing-buys-stakes-in-fannie-mae-freddie-mac.html

[txlaw]

Option 2: berkowitz plan

          run off (govt + common benefit) + newco (mostly pref and some common)

          pros: pref gets more upside (no wonder berkowitz is proposing it)

                  common: limited upside compared to Option 1

 

So for this option, there's also some variability in terms of upside for the prefs depending on how the Newcos are capitalized. 

 

What if the government says, we are not going to help recapitalize Newco with cash + secs at par value.  Instead, we'll give you $0.30 on the dollar in cash + secs, with the remaining $0.70 being exchanged for the operating assets.  That gets us to roughly $10.4 billion of cash and securities contributed by the government in order to resolve the litigation and set into play a restructuring of the entire mortgage market.  Newcos will also get additional capital from the proposed rights offering.  Because Newcos will definitely be smaller than as proposed, there will need to be a number of other MBS insurers that are lined up to ensure that all securitizations from the common securitization platform can be insured. 

 

The key is that the $10.4 billion cash outflow by the gov is really in exchange to resolve the restructuring of the mortgage market on an expedited basis.  And it's more than covered by the divs, cash sweep, and cash generated from the run-off portfolio.

 

Makes sense to me, but will the politics of all this work out?

 

----------

 

In addition to F&F secs, it seems to me there are a number of ways to play this changing market. 

 

AIG is one way, as they could have UGC participate as an MBS insurer.  And then spinoff, perhaps?

 

MBI is another.  MBIA Insurance stands for mortgage bond insurance (instead of municipal bond insurance) after being recapitalized as a JV between MBIA Corp and someone else (maybe Warburg Pincus).

 

ORI and other MI providers could be another way to go depending on how the PMI market evolves in the wake of F&F dismantling.

[muscleman]

Have you every thought about whether BB's plan is viable or not? The current bonds that F&F sells are attractive only because they are considered almost as risk free as the T bills.

But for BB's plan, the new co's products will not be as riskless, so why would the market continue to buy those products? Maybe they will, but the rate will be much higher than the T bills, and that would be bad for the real estate market.

 

I think the safest thing that the government would do is to continue to keep F&F running as it is, and let the courts decide if they need to pay off the preferred.

[Vish_ram]

I would think that the govt will provide some catastrophic insurance (similar to the ones in terrorist attack).

 

The influence of F&F pref in recapitalization is also questionable. In traditional bankruptcy, the debt holders (senior ones) gain full/more control during recapitalization. Here F&F are healthy profitable companies, albeit with govt support. In a year or two, they may have enough money to redeem prefs, negating their influence.

 

Have you every thought about whether BB's plan is viable or not? The current bonds that F&F sells are attractive only because they are considered almost as risk free as the T bills.

But for BB's plan, the new co's products will not be as riskless, so why would the market continue to buy those products? Maybe they will, but the rate will be much higher than the T bills, and that would be bad for the real estate market.

 

I think the safest thing that the government would do is to continue to keep F&F running as it is, and let the courts decide if they need to pay off the preferred.

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-18/ackman-joins-fray-to-pry-once-worthless-fannie-from-u-s-.html

 

Ackman Joins Fray to Pry Once-Worthless Fannie From U.S.

[bmichaud]

Quick question....

 

FNMA's fully diluted share count is 5,893 million taking into account Treasury's warrant. At the recent PPS of $2.61, the implied market cap is $15.4 billion.

 

The FNMAS preferred series is trading at $8.26, or ~33% of its $25 par value. Applying the 33% to the $19.13B face value of FNMA's private preferreds, the implied market cap is $6.3B.

 

Am I looking at this right? Is there really a high enough probability of a favorable restructuring for the common to warrant a market cap over 2 times the value of the preferreds?

 

[muscleman]

Quick question....

 

FNMA's fully diluted share count is 5,893 million taking into account Treasury's warrant. At the recent PPS of $2.61, the implied market cap is $15.4 billion.

 

The FNMAS preferred series is trading at $8.26, or ~33% of its $25 par value. Applying the 33% to the $19.13B face value of FNMA's private preferreds, the implied market cap is $6.3B.

 

Am I looking at this right? Is there really a high enough probability of a favorable restructuring for the common to warrant a market cap over 2 times the value of the preferreds?

 

If everything goes back to normal, preferred will be paid in par, and common will be worth $150 bn market cap, if Fannie mae makes $15 bn a year.

So common has more upside in this scenario.

In BB's plan, common may have no value after run off, but I think that plan is not viable.

[dcollon]

Sperling: WH not interested in GSE recap plan from SeekingAlpha

 

"I want to make clear our administration believes the risks are simply too great, that this would re-create the problems of the past," says the president's chief economic adviser Gene Sperling of any recapitalization plan for Fannie Mae (FNMA +7.5%) and Freddie Mac (FMCC +6.4%).Speaking at an industry conference in D.C., Sperling says the administration is interested in rebuilding a stronger mortgage market not dominated by two mammoth institutions, and Frannie - even if restructured - would retain a large advantage over newer entrants.Needless to say, Sperling's remarks come in wake of Bruce Berkowitz's buyout and recap proposal for the GSEs from last week.

[fareastwarriors]

White House Rejects Fannie-Freddie Recapitalization Plans

 

 

http://online.wsj.com/news/articles/SB10001424052702304607104579210092350929498?mod=WSJ_hp_LEFTWhatsNewsCollection

[valuecfa]

 

What's the alternative? If they wind them down and dissolve them, instead of sell them, then who has the capability to step in and take their place...let alone take their place with minimal disruption to the mortgage market. The only possible viable alternative is an FDIC like entity, but that keeps the government on the hook. The Fairholme proposal really is the most logical one yet.

[muscleman]

 

What's the alternative? If they wind them down and dissolve them, instead of sell them, then who has the capability to step in and take their place...let alone take their place with minimal disruption to the mortgage market. The only possible viable alternative is an FDIC like entity, but that keeps the government on the hook. The Fairholme proposal really is the most logical one yet.

 

I think the most logical plan is to do nothing and keep F&F in its current state. Only in this way will these two companies' package bonds trade like T bills, and have high demand.

[fareastwarriors]

http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html

 

 

Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity

[dcollon]

From SeekingAlpha

 

Fannie bets a puzzle to many

 

"When you talk to anybody in Washington, there is an almost universal view that Fannie (FNMA -3.1%) and Freddie (FMCC -1.5%) should be a part of the past, that it is a broken model, and also that private investors in Fannie and Freddie shouldn’t realize any returns from those investments," says PIne River's Colin Teiccholtz, scratching his head over anyone owning stock in the two as a play on them being privatized.

 

"We've looked at it," says Avenue Capital's Marc Lasry. "I think you’re making a bet that you’re going to be able to force the government to do something.

 

”It's "a puzzle to me," says an investor in Bill Ackman's Pershing Square. "If you think the Target board is hard to convince of a policy change, you have got to believe you’re really taking on a tall job to try and influence the government.

 

"Taking a break from talking Herbalife, Ackman - who recently disclosed near-10% stakes in the common of both Fannie and Freddie - says he's not supportive of Bruce Berkowitz's recap plan (which would be of benefit to preferred owners like Berokowitz, but not so much for owners of the common)

 

MBS trader Deepak Narula calls the common stock of Frannie an option which should rise any time chatter about privatization picks up. "Whether the option is worth anything in the short run is immaterial.”

[valuecfa]

http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html

 

 

Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity

 

I'm interested to see what Ackman's proposal will be, whereby he expects the common to do so well even more so than the prefs. He is obviously expecting more than a 3x from the common given that is where most of the prefs are relative to par

[muscleman]

http://www.bloomberg.com/news/2013-11-22/bill-ackman-says-fannie-mae-is-most-interesting-opportunity.html

 

 

Ackman Says Fannie, Freddie ‘Most Interesting’ Opportunity

 

I'm interested to see what Ackman's proposal will be, whereby he expects the common to do so well even more so than the prefs. He is obviously expecting more than a 3x from the common given that is where most of the prefs are relative to par

 

After reading the court documents and posts in this forum, I kinda feel like the common shares the same risk as the preferred, but the upside for common seems higher. What do you think? If the current taking clause suits are deemed eligible to go to trial, then both common and preferred should recover.

Is there a scenario where common is wiped out but preferred is fully recovered?

[CorpRaider]

Barron's had an article on this situation this weekend.  Nothing really substantitve imop (it was really just a political opinion article to my mind) but thought I would note it for you.

[Yours Truly]

New article by Dick Bove:

 

http://www.valuewalk.com/2013/12/fannie-mae-freddie-mac-500-price-appreciation-bove/

[Vish_ram]

Freddie mac investor presentation

http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf

 

[Grenville]

Does anyone know if the consolidated class action complaint was submitted?

 

The date on the joint status report had the document due 12/3/13. I checked the Perry Capital case Docket Report on Pacer and didn't see a filing.

[onyx1]

US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.

13-465_Motion_to_dismiss_12-9-2013.pdf

[constructive]

US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.

 

Looks pretty solid to me. I wouldn't be surprised if the motion succeeds.

 

The weak point is the claim that the intent of the Third Amendment was to strengthen the enterprises and reduce their cost of debt. But if the rest of their arguments are solid, that doesn't matter because the lawsuits will be thrown out.

[nkp007]

US Government's response to Fairholme's 5th Amendment takings lawsuit filed last night, attached.

 

Looks pretty solid to me. I wouldn't be surprised if the motion succeeds.

 

The weak point is the claim that the intent of the Third Amendment was to strengthen the enterprises and reduce their cost of debt. But if the rest of their arguments are solid, that doesn't matter because the lawsuits will be thrown out.

 

Lot of straw-man arguments in the motion. I don't know what the judge will do, but there are many holes.

[bmichaud]

I had not read Perry Capital's complaint until yesterday (not yet finished), but I think they make more compelling "taking" case given they purchased their preferred position in 2010 before the net worth sweep was implemented. This appears to assume, however, that the FHFA should legally be held to its word that its job was to rehabilitate F&F until they were stabilized, and that the F&F securities should remain outstanding due to the potential for this rehabilitation, which the net worth sweep entirely negates.

[bmichaud]

I am not at all expecting a response of any kind, as I am extremely late to this party and it is likely highly annoying to have someone asking such basic questions this late in the game....but I am going to ask anyway.....

 

On page 27 of the Perry Complaint, paragraph 71 states the following:

 

"Before Treasury exercises its temporary authority to purchase the Companies' securities, HERA requires Treasury to determine that the financial support is necessary to "provide stability to the financial markets," "prevent disruptions in the availability of mortgage finance," and "protect the taxpayer." In making these determinations, HERA further requires Treasury to "take into consideration" several factors, including the "plan for the orderly resumption of private market funding or capital market access," and the "need to maintain [the] status [of Fannie and Freddie] as...private shareholder-owned compan[ies]."

 

 

At first glance, the last bolded point appears quite compelling from a government agency responsibility perspective. However, here is what the HERA actually says:

 

From H. R. 3221--30 of the HERA:

 

"© CONSIDERATIONS.--To protect the taxpayers, the Secretary of the Treasury shall take into consideration the following in connection with exercising the authority contained in this paragraph: ....... "(v) The need to maintain the corporation's status as a private shareholder-owned company.

 

 

I interpret the Perry section as: no matter what Treasury does with respect to its temporary authority to purchase F&F obligations, it NEEDS to maintain the private shareholder status of F&F (public securities trading as penny stocks with no apparent future do not count as maintaining private shareholder status).

 

I interpret the HERA section as: in order to protect the taxpayer, the Treasury can reevaluate the "need" to maintain the private shareholder status and deem it unnecessary in the spirit of "protecting the taxpayer" - in other words, the govt has extreme latitude to impose the net worth sweep in order to "protect the taxpayer".

 

 

If there is no response, I will deem my confusion between the two interpretations moot. But, if anyone else has considered how one should interpret this HERA passage, I'd love to hear your thoughts.

HERA_of_2008.pdf

Perry_Capital_FHFA_Complaint.pdf