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

[ericd1]

The market didn't like the news...The pfds started dropping at 2 PM...Down $0.43 for the day

[twacowfca]

The price action for the last few days and today was suggestive of a bubble, so we were able to sell most of our positions into the dramatically increased liquidity.  If there should be a pull back, we may jump back in with all the apparently favorable developments behind the scenes suggesting light at the end of the tunnel.  However, we may instead wait to see what the administration's plan is and how well it's received by congress before making a long term commitment.

 

:)

 

You are proving to be quite the value trader  :). I am taking notes lol.

 

If anyone wants to know more about when a certain kind of price action suggests a surge in price is about to pull back or a bubble is about to pop,  may I suggest Didier Sornette's book, Why Stock Markets Crash.  Don't let the advanced math scare you. Just read around any parts you don't understand. 

 

His ideas work especially well in markets or stocks where there is a lot of short selling and short covering without potential regulatory action interfering with price adjustments.   :)

 

[alertmeipp]

let us know when you see the market about to...  ;D

 

 

[twacowfca]

let us know when you see the market about to...  ;D

 

 

 

Are you wanting a prediction about the future or the past?  The former is "especially difficult", as the man said.   ;)

[twacowfca]

There is a story about an oil driller who died and found himself standing at the pearly gates of heaven in front of Saint Peter.

 

    "May I go in," asked the oil driller?

 

    "Look at all those other drillers ahead of you, just inside the gates," answered Saint Peter.  "You'll have to wait till we process them.  Some big deepwater event."

 

    The oil driller fidgited for a minute, and then yelled: "Oil discovered in Hell!"  When they heard this, all the other drillers jumped up and ran back through the pearly gates straight down to Hell.

 

    Saint Peter turned to the oil driller standing before him and said, "Well, there's no line ahead of you now.   I guess you can go in."

 

    But, the oil driller turned away and started to follow the other oil drillers down to Hell.  "Why are you going that way," asked Saint Peter?

 

    "I can't take a chance," replied the oil driller.  "There might be some truth in that rumor!"

 

This is an appropriate prelude to letting the board know that we took about one third of our Fannie and Freddie profits and bought their preferred stock once again on the recent pullback.   :o

[S2S]

^ Love it.

 

This is probably old news by now, but here's an interesting exchange between Bill Ackman and Clayton Rose  on FMCC:

 

Mr. Ackman: So you can make decisions that are adverse to shareholders?

Mr. Rose: Correct.

Mr. Ackman: And there’s no liability to you?

Mr. Rose: Correct.

 

Link: http://www.cnbc.com/id/15840232?video=1786618239&play=1

 

The pertinent part starts around 7:30. There's another short Q&A near the end of the clip.

 

Thoughts, twacowcfa?

[twacowfca]

It's good to hear them tell it like it is.  The speculation is that the Treasury Dept may be about to make a big change in the way these GSE"s are managed.  If Fannie and Freddie transitioned to charging anything close to market clearing rates for their guarantees, they would soon be profitable.  If the Treasury also cut the dividend rate on their preferred from 10% to 5%, they would soon be on their way to begin paying down the government's preferred stock.  

 

Clayton Rose is on the Board of Directors of FMCC.  Recent news reports say that  FMCC and FNMA have been lobbying the administration to cut the 10% dividends the US receives to 5%.  If these reports are true, it is likely that the board members of these GSE's are behind the lobbying.  Keep in mind that it was Hank Paulson, Bush's Secretary of the Treasury, who slapped them with such a high dividend rate, much higher than the rate that GS et al. had to pay on the preferreds the Treasury demanded in their bailouts.  The severe treatment of Fannie and Freddie could be interpreted as payback for all the shabby dealings between their former officers and the Democrat Party.

 

Geithner's recent statements indicate that the first of the two big ifs that could restore Fannie and Freddie's financial health will very likely happen with a progression of fee increases, to begin soon.  The second big if about lowering the dividend rate they pay the Treasury is much more iffy.  That may be too much of a political hot potato for now.  However, if the Treasury did cut their dividend rate, these GSE's should soon be on their way to becoming profitable, steady Freddies, so to speak.  Who knows, it's possible that they could once again become the fattest cash cow ever for the Democrat party.  Fannie and Freddie used to be Barney Frank's biggest source of funds, and Franklin Raines, the former Chairman of Fannie Mae, was Chairman of Obama's campaign financial committee.

 

Congress almost certainly will not be able to pass any legislation changing the structure of these GSE's, given the divided control of the house and senate.  The initiative is entirely with the administration, and it looks like Geithner's plan has prevailed.  Geithner says the Treasury intends to "crowd private capital into the mortgage market."  The only sensible way for this to happen is for the US to charge much more for Fannie and Freddie's guarantees.  We should know very soon if this will happen.

[ericd1]

Wow - 'market rates' - What a novel concept. 

 

I agree Congress would find it difficult, if not impossible to pay any legislation to clean up the mess and Geithner’s ‘market rate’ plan is a viable solution.

 

Presuming the GSE’s become financially stable, the PFDs would increase in value. It might take ten years or longer, but even with that a return to par over ten years it would be huge return…There could be some bumps along the way, perhaps a change in direction if the plan doesn’t work, etc.

 

Yet the market seems to be reacting unfavorably to the news…

 

[Myth465]

Interesting comments.

 

http://www.bloomberg.com/news/2011-02-11/obama-administration-calls-for-ultimately-winding-down-fannie-freddie.html

[Aberhound]

1. I wonder if there is enough juice in doubling the insurance rates and cutting the government preferred dividend in half to increase the value of the commons as well.

 

2. Considering the massive amounts of agencies, these are at risk without continued government and Fed support unless the government can create some value in the common shares. Presumably the government and the Fed want to stop providing that support so this is a way to do it.

 

3. Creating value in the common shares might give the government an exit path. They can convert the preferred shares to common and double the insurance rates. This will further dilute the existing common shares but will create the exit strategy if the common shares start to rise since the government could then sell the converted common shares at a profit. Earning capital gains on the common may be more profitable than getting a 10% dividend on the preferred. The government could create the profit on the common by simplifying regulation and taxation to make US more competitive and increasing immigration or granting amnesty for illegal immigrants. There are 14 million empty homes to fill. These policies would be good for the big banks too so I am surprised that bank friendly Obama hasn't already adopted these policies. And how else are you going to fix social security and medicare unless US brings in millions of young employable people to pay for the growing number of old retirees.

 

4. This is a better path than simply letting banks take over the business as doing so would concentrate even more risk in the big banks where there is enough risk already. Better to split the risk of mortgage defaults like in Canada and soon Australia as well although I would prefer the risk born by the Canadian government to be born by private publicly traded companies instead. Obviously whoever starts writing market rate mortgage insurance at low real estate prices is going to make a lot of money. It could be argued whether prices have further to fall or not but that depends on government policy on competitiveness and immigration. Buffett and Munger have written previously what a wonderful business it is so the government has a good game plan to follow.

 

5. My bet is the best way to play it is to buy the preferred for now and then switch to the common shares if the government swaps the preferred shares for common shares. Hopefully the dilution will cause the commons to fall in price but that depends on the terms so can't be predicted. I think the desire to get the agencies self-supporting gives the government and the Fed no choice but to follow this path. 

 

[twacowfca]

1. I wonder if there is enough juice in doubling the insurance rates and cutting the government preferred dividend in half to increase the value of the commons as well.

 

2. Considering the massive amounts of agencies, these are at risk without continued government and Fed support unless the government can create some value in the common shares. Presumably the government and the Fed want to stop providing that support so this is a way to do it.

 

3. Creating value in the common shares might give the government an exit path. They can convert the preferred shares to common and double the insurance rates. This will further dilute the existing common shares but will create the exit strategy if the common shares start to rise since the government could then sell the converted common shares at a profit. Earning capital gains on the common may be more profitable than getting a 10% dividend on the preferred. The government could create the profit on the common by simplifying regulation and taxation to make US more competitive and increasing immigration or granting amnesty for illegal immigrants. There are 14 million empty homes to fill. These policies would be good for the big banks too so I am surprised that bank friendly Obama hasn't already adopted these policies. And how else are you going to fix social security and medicare unless US brings in millions of young employable people to pay for the growing number of old retirees.

 

4. This is a better path than simply letting banks take over the business as doing so would concentrate even more risk in the big banks where there is enough risk already. Better to split the risk of mortgage defaults like in Canada and soon Australia as well although I would prefer the risk born by the Canadian government to be born by private publicly traded companies instead. Obviously whoever starts writing market rate mortgage insurance at low real estate prices is going to make a lot of money. It could be argued whether prices have further to fall or not but that depends on government policy on competitiveness and immigration. Buffett and Munger have written previously what a wonderful business it is so the government has a good game plan to follow.

 

5. My bet is the best way to play it is to buy the preferred for now and then switch to the common shares if the government swaps the preferred shares for common shares. Hopefully the dilution will cause the commons to fall in price but that depends on the terms so can't be predicted. I think the desire to get the agencies self-supporting gives the government and the Fed no choice but to follow this path.  

 

 

We closed out our remaining relatively small position in the preferreds a few days ago, keeping only a token

amount to remind us to look at them periodically and assess developments.  

 

Comparing the market caps of the commons and preferreds, I don't see any way that purchase of the commons could be worth more than buying the preferreds if there is ultimately some value for the equity.

 

 The new plans all raise the fees they charge for their securitizations, but it may take more than that to get them out of the hole.  Cutting the dividend on the Treasury's preferreds may be necessary to turn them around.  If this happens, things could get interesting.  Exchanging the Treasury's preferred for common would be even better, but that may be a long shot in the current political climate.  Meanwhile, I still haven't figured out how to multiply by zero!   ::)

[kasi]

Freddie reported 1q2011 earnings. Official release, financial supplement, and an article from Wsj attached below.

[BargainValueHunter]

Fed keeping rates stapled to the floor through 2013 and the downgrade of Fannie and Freddie...

 

Any updates on how one may take advantage of this new information with regards to the preferreds?

 

http://www.insidestocks.com/quote.asp?sym=FNMAT

 

http://www.insidestocks.com/quote.asp?sym=FMCKM&code=BSTK

[onyx1]

Freddie is leading Fannie on the way to eventual profitability but they haven’t been able to get over the huge 10% Govt preferred coupon hurdle.  Like last quarter, they are like a dog eating its own tail.  They were forced to borrow $1.5bln from the Treasury, so they can turn right around and pay the Treasury a quarterly coupon of $1.6bln.  Crazy.  At some point, the politicians will see the GSEs as a money pot and will allow them to cut the preferred dividend and raise guarantee fees.  Cash will poor in, the allowance for tax deferred assets will be eliminated, and the taxpayer will get their money back in full with an IPO like GM/AIG.  Everyone wins, and the holders of the private preferred make a fortune!

[twacowfca]

Freddie is leading Fannie on the way to eventual profitability but they haven’t been able to get over the huge 10% Govt preferred coupon hurdle.  Like last quarter, they are like a dog eating its own tail.  They were forced to borrow $1.5bln from the Treasury, so they can turn right around and pay the Treasury a quarterly coupon of $1.6bln.  Crazy.  At some point, the politicians will see the GSEs as a money pot and will allow them to cut the preferred dividend and raise guarantee fees.  Cash will poor in, the allowance for tax deferred assets will be eliminated, and the taxpayer will get their money back in full with an IPO like GM/AIG.  Everyone wins, and the holders of the private preferred make a fortune!

 

I agree.  This seems to be the most likely outcome, eventually.  But it may not happen while there is a stalemate in Congress.  The probability goes up dramatically if the Democrats win the White House and both houses of Congress in 2012.

[CONeal]

Wondering with the news today regarding the Fannie and Freddie lawsuit if this is a big step for pfds and better yet getting them back on their own feet.

 

http://news.yahoo.com/feds-sue-big-banks-over-sales-risky-investments-000212787.html

 

 

NEW YORK (AP) — The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.

The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.

The government didn't say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.

The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.

It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.

After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.

Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.

In a statement Friday, Bank of America rejected the claims in the government's lawsuits.

Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses," it said.

Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 percent, JP Morgan Chase fell 4.6 percent, Citigroup lost 5.3 percent, Goldman shed off 4.5 percent and Morgan Stanley's ended down 5.7 percent.

Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.

The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."

The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.

Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.

JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement said the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.

Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.

"This will be nothing but a distraction to them and the quicker you settle something like this the better," he said.

 

[twacowfca]

Wondering with the news today regarding the Fannie and Freddie lawsuit if this is a big step for pfds and better yet getting them back on their own feet.

 

http://news.yahoo.com/feds-sue-big-banks-over-sales-risky-investments-000212787.html

 

 

NEW YORK (AP) — The government on Friday sued 17 financial firms, including the largest U.S. banks, for selling Fannie Mae and Freddie Mac billions of dollars worth of mortgage-backed securities that turned toxic when the housing market collapsed.

Among those targeted by the lawsuits were Bank of America Corp., Citigroup Inc., JP Morgan Chase & Co., and Goldman Sachs Group Inc. Large European banks including The Royal Bank of Scotland, Barclays Bank and Credit Suisse were also sued.

The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.

The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.

The government didn't say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.

The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the U.S. and European economies.

It is particularly damaging to Bank of America, which bought Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009. All three are being separately sued by the government for mortgage-backed security sales totaling $57.5 billion.

After Bank of America, JPMorgan Chase was listed in the lawsuits with the second-highest total at $33 billion. Royal Bank of Scotland followed at $30.4 billion.

Bank of America has already paid $12.7 billion this year to settle similar claims. Last month insurer American International Group Inc. sued the bank for more than $10 billion for allegedly selling it faulty mortgage investments.

In a statement Friday, Bank of America rejected the claims in the government's lawsuits.

Fannie and Freddie invested heavily in the mortgage-backed securities even after their regulator said they didn't have the needed risk-management capabilities, the bank said. "Despite this, (Fannie and Freddie) are now seeking to hold other market participants responsible for their losses," it said.

Bank stocks fell sharply on Friday as news of the government's lawsuits emerged. Bank of America tumbled 8.3 percent, JP Morgan Chase fell 4.6 percent, Citigroup lost 5.3 percent, Goldman shed off 4.5 percent and Morgan Stanley's ended down 5.7 percent.

Residential mortgage-backed securities bundled pools of mortgages into complex investments. They collapsed after the real-estate bust and helped fuel the financial crisis in late 2008.

The FHFA said the mortgage-backed securities were sold to Fannie and Freddie based on documents that "contained misstatements and omissions of material facts concerning the quality of the underlying mortgage loans, the creditworthiness of the borrowers, and the practices used to originate such loans."

The FHFA filed a similar lawsuit in July against Swiss bank UBS AG, seeking to recoup more than $900 million in losses from mortgage-backed securities.

Also sued Friday were are Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Morgan Stanley, Nomura Holding America Inc., and Societe Generale.

JPMorgan, Goldman, Citigroup and Morgan Stanley declined to comment on the lawsuits. Ally Financial said in a statement said the government's "claims are meritless, and the company intends to defend its position aggressively." A spokeswoman for First Horizon said the bank intends to "vigorously defend" itself.

Ken Thomas, a Miami-based banking consultant and economist, said he expects the banks to settle soon with the government.

"This will be nothing but a distraction to them and the quicker you settle something like this the better," he said.

 

This has curb appeal for bank bears, but the economic impact may be little more than a rounding error for F&F if the amounts they got from settlements of similar lawsuits a few months ago is any guide.

 

What is interesting though from a political angle is that the banks are being sued not by F&F but by F&F's regulator.  During the financial crisis, the Obama administration, and Paulson during the Bush administration, used F&F as a CPR machine to help keep the big banks alive. 

 

I think this development is most interesting, especially because the Democrat party historically has greatly favored F&F.  F&F used to be ATM machines for  Democrat Party fund raising until F&F sparked the financial crisis by buying and guaranteeing enormous quantities of bad paper, leading nearly to systemic collapse after the Bush administration facilitated the erection of a house of cards by repealing Glass-Stegal.

[BargainValueHunter]

For those interested:

 

http://gatorcapitalblog.com/tag/freddie-mac-preferred-stock/

 

If you or your organization own common or preferred stock of Fannie Mae or Freddie Mac and would like to join with other shareholders in preserving value for the Fannie Mae and Freddie Mac, please contact me at derek.pilecki@gatorcapital.com or call me at (813) 282-7870. We are organizing and are going to help policymakers in Washington understand the importance of the GSEs to the nation’s housing market. We hope to maximize value for GSE preferred shareholders and common shareholders.

[BargainValueHunter]

Interesting discussion about a series of Freddie preferreds on Y! Boards (I was shocked too...)

 

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_F/threadview?m=tm&bn=62603&tid=2197&mid=2197&tof=2&frt=2

 

Converting would be "easy" if it were to go to bankruptcy court and a judge mandates a restructuring arrangement. I doubt this goes to bankruptcy. Usually in a voluntary reorganization, all "classes" of debt, preferred and common as well as vendors owed money, etc. all file motions, fight for their rights and get the most of what they deserve under bankruptcy law. Thus it isn't the easiest scenario, but it is one scenario that could force a conversion.

 

The other scenario is where the shareholders of the company (in this case, it would become the US Government) instruct the Board to negotiate to restructure the capital structure with all parties involved. In this case, they would have to offer terms that are better than what preferred shareholders have today without amending the terms of the security. If the offer is good enough to get 2/3 of the vote, then all things are possible. Usually in this scenario, the offer is "You can get nothing in bankruptcy, or you can help this company survive by taking the deal presented (cash, common shares, lower dividend...any number of creative ideas) even if it means less money than is contractually obligated to you.

 

There is no rush to do this because all of the redemptions that I am aware of are at Freddie's option (I think Fannie had/has some mandatory redemption dates) and the dividends are not cumulative, so it costs Freddie nothing to sit on the jr. preferred angst and do nothing. However, if common shareholders ever want a dividend again, that is when preferreds will have to be addressed. Jr. Preferreds must be paid the full contractual dividend before common shareholders see their first penny.

[twacowfca]

Interesting discussion about a series of Freddie preferreds on Y! Boards (I was shocked too...)

 

http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_F/threadview?m=tm&bn=62603&tid=2197&mid=2197&tof=2&frt=2

 

Converting would be "easy" if it were to go to bankruptcy court and a judge mandates a restructuring arrangement. I doubt this goes to bankruptcy. Usually in a voluntary reorganization, all "classes" of debt, preferred and common as well as vendors owed money, etc. all file motions, fight for their rights and get the most of what they deserve under bankruptcy law. Thus it isn't the easiest scenario, but it is one scenario that could force a conversion.

 

The other scenario is where the shareholders of the company (in this case, it would become the US Government) instruct the Board to negotiate to restructure the capital structure with all parties involved. In this case, they would have to offer terms that are better than what preferred shareholders have today without amending the terms of the security. If the offer is good enough to get 2/3 of the vote, then all things are possible. Usually in this scenario, the offer is "You can get nothing in bankruptcy, or you can help this company survive by taking the deal presented (cash, common shares, lower dividend...any number of creative ideas) even if it means less money than is contractually obligated to you.

 

There is no rush to do this because all of the redemptions that I am aware of are at Freddie's option (I think Fannie had/has some mandatory redemption dates) and the dividends are not cumulative, so it costs Freddie nothing to sit on the jr. preferred angst and do nothing. However, if common shareholders ever want a dividend again, that is when preferreds will have to be addressed. Jr. Preferreds must be paid the full contractual dividend before common shareholders see their first penny.

 

Lots of wishful thinking there.  In a liquidation, the US government's preferred comes ahead of the common and the preferred held by the public.  There's no margin of safety in a liquidation, but in a restructuring politics and fairness come into play.  At this stage, that's what it's about.  Don't expect big news till after the 2012 election.  :)

[BargainValueHunter]

http://www.businessweek.com/ap/2012-08-07/freddie-mac-posts-1-dot-2b-net-income-for-2q

 

WASHINGTON (AP) — Government-controlled mortgage giant Freddie Mac posted net income of $1.2 billion for the second quarter and isn't requesting any additional federal aid for the period.

 

The government rescued Freddie and larger sibling Fannie Mae in September 2008 after massive losses on risky mortgages threatened to topple them.

 

Taxpayers have spent about $170 billion to rescue Fannie and Freddie, the costliest bailout of the 2008 financial crisis. It could cost about $200 billion more to support the companies through 2014 after subtracting dividend payments, according to the government.

 

This is the fifth quarter in which Freddie hasn't requested new federal aid since it was taken over in September 2008.

 

Freddie Mac requested $19 million in federal aid in the first quarter. The company received $7.6 billion for all of 2011 and $13 billion for all of 2010.

 

McLean, Va.-based Freddie Mac said Tuesday that its net income attributable to common shareholders amounted to 37 cents per share in the April-June period. That compares with a loss of $3.76 billion, or $1.16 per share, in the same period a year ago.

 

It was Freddie's first profitable quarter since the first quarter of 2011.

 

Freddie's latest results take into account $1.8 billion in dividend payments that Freddie made to the government, its primary shareholder. The company said the gain reflected a decrease in the amounts that it had to set aside to cover potential losses on mortgages as the housing market has improved.

[twacowfca]

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

[sampr01]

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT. if you don't mind can you share your entry price because they are up more than $1

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

[twacowfca]

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

 

 

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

[twacowfca]

hi twacowfca

 

are looking it as a trade or for long term investement. Which prefs did you buy FMCKJ or FNMAS or FNMAT.

 

Thanks

 

We got back in to the preferreds a few weeks ago because it became evident that F&F would post awesome earnings, despite the fact that there is no resolution to the ultimate standing of the holders of the public preferred.

 

 

We generally buy the best bargains measured by discount to stated value.  These are not always the most traded.  We will buy the most liquid if they are not too pricey.  It's more of a trading opportunity with a call on possible future value because a reorganization that wipes out the public preferred seems unlikely.

 

 

Congress guaranteed the survival of the GSEs at the end of 2011 when they raised guarantee fees for ten years to pay for a six-month extension of the paroll tax cut.  Today, the GSEs are gushing cash as the housing market recovers and no doubt the politicians will find a way to tap this honey pot to repay taxpayers and fill DC coffers.  When word that the White House was considering the sale of the Gov't preferred to the private market, Senators reacted by proposing a bi-partisan bill that would require congressional approval prior to any sale.  Everyone wants a piece of this action.   

 

The often overlooked asset on the books of the GSEs is the DTAs which have up to now been written down to zero.  But that too may change soon as FNMA is looking to reclaim their DTA to the tune of $62mm which would be 70% of the net amount owed to the US Govt.  I expect FMCC to follow soon with a similar request.

 

http://online.wsj.com/article/SB10001424127887323639604578368443773821834.html

 

There is political risk here, but with the private preferreds trading at 9-12 cents on the dollar it is a very convex risk/return profile.

 

That's an excellent summary, Wayne.  Also today, Freddy has sued 15 big banks over LIBOR manipulation, asking triple damages be awarded under the Sherman Antitrust Act. Actual damages are estimated to be about $3B.  :)