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

[Vish_ram]

Thanks for the links Onyx1.

 

I just found out that Tim Howard was the ex-CFO of Fannie Mae. I ordered his book on amazon now.

 

http://www.amazon.com/Mortgage-Wars-Big-Money-Politics-Collapse-ebook/dp/B00GJNTO4U/ref=sr_sp-atf_title_1_1?ie=UTF8&qid=1403712820&sr=8-1&keywords=tim+howard+fannie+mae

 

 

[merkhet]

Well, briefs are written to be persuasive...

 

A ruling on most of the other things will seem to go a little further than is necessary. Most judges dislike making rulings that are too far beyond necessity because it opens them up to reverse on appeal, and judges, having egos like the rest of us, dislike being told that they are wrong.

 

My sense is that a ruling, if it comes to that, will come on the fact that the government has failed to satisfy the burden of proving that it had a rational reason for its decision given that there is no evidentiary trail. So the most likely outcome, IMO, is that they will rule on the lack of meeting this burden of proof without necessarily ruling on any of the other claims.

 

That being said, it doesn't matter which one they win on. They only need one.

[jay21]

Thanks for the links Onyx1.

 

I just found out that Tim Howard was the ex-CFO of Fannie Mae. I ordered his book on amazon now.

 

http://www.amazon.com/Mortgage-Wars-Big-Money-Politics-Collapse-ebook/dp/B00GJNTO4U/ref=sr_sp-atf_title_1_1?ie=UTF8&qid=1403712820&sr=8-1&keywords=tim+howard+fannie+mae

 

I read someone's quick blurb on this book.  Basically he is arguing that the GSEs were better than private capital in terms:

 

Tim’s Turn

Last week, I asked Tim to describe the final draft sent to McGraw Hill.

One of the most bizarre aspects of the current debate on mortgage finance reform is that the consensus objective for reform-- getting rid of the GSEs and providing a greater role for the private sector-- was the goal of the anti-Fannie Mae cabal in the late 1990s and early 2000s, and pursuing it is what led to the 2008 mortgage crisis!  Why would anyone want to do the same thing again?  We shouldn't, but the major proponents of today’s ideas for mortgage reform are the large banks and their supporters, and they're the ones who control the narrative about what happened during the crisis.  The story they tell about the crisis is completely wrong, but before my book there has been no fact-based alternative view for anyone to consider instead.  That's what "The Mortgage Wars" will offer. It makes clear how and why the crisis evolved-- using actual events and developments in the correct sequence in which they occurred-- and it's told from the perspective of an insider who lived through the events he's relating.

 

As I've noted before, the mortgage crisis was the result of a fight between the supporters and the opponents of the GSEs over who would control the largest credit market in the world.  Fannie and Freddie always had been controversial, but the controversy got serious in the late 1990s, when two decades of banking deregulation produced giant financial services companies (mostly banks) with national ambitions who viewed Fannie and Freddie's dominant position in the mortgage market as a threat to those ambitions.  They came to Washington to try to convince policymakers and regulators to replace a mortgage finance system based on the GSE with one based on private-market mechanisms and incentives, with very little government involvement or regulation.  Fannie Mae fought back, and what I call "the mortgage wars" began.  The banks and their supporters succeeded in getting control of the mortgage standard-setting process in 2004-- when private label mortgage-backed securities accounted for over half of all new MBS issues for the first time ever-- and that got the bubble going.  Fannie Mae was pulled into it after OFHEO used allegations of accounting fraud-- subsequently shown by Federal District court judge Leon to have been completely invented-- to oust Fannie Mae's top leadership and force the company to change its risk management organization and practices.  But even with that, five years after crisis ended it is clear that Fannie Mae's mortgages performed twice as well as the banks' and four times better than those put into private-label securities.

 

The GSE-based system was the best and safest in the country's history.  The bank-based private-market system that replaced it in the mid-2000s-- with the support and assistance of the Treasury, the Fed and the Bush administration-- led to a catastrophic failure that ended up killing everybody, including the GSEs.  Anyone with an accurate understanding of what happened during the mortgage crisis, and why it happened, would be highly unlikely to ever again fall for the siren song of basing an $11 trillion market essential to the country's economic health on free-market principles with no government oversight or regulation.

 

http://www.restorefanniemae.us/mortgagewars

 

I find quite a bit of what he is saying to be troubling.  He compares GSE performance to private performance, except the credit quality is widely different.  If the private capital system held on to all the super prime products that the GSEs hold, the performance would not look so unequal.  If the performance of the PL RMBS products were so poor, why did the GSEs hold on to so many?  The expansion of their retained portfolio caused a huge increase in the demand for these products. 

 

I would suggest All the Devils Are Here as a counterweight to this book, which will probably be very pro-GSE.  All the Devils are Here came off as somewhat objective to me as I believe it praised the turnaround efforts of the GSEs in the 80s and 90s and cast them negatively in the late 90s and early 2000s.

[Mephistopheles]

I just watched the first panel (The Reorganization of Fannie and Freddie) discussion of the NYU conference on the future of Fannie and Freddie. http://www.nyujlb.org/2013/08/1184/

 

The two panelists sitting on the right talked about some ways in which the shareholders could lose the case, or not make much money even if we win.

 

One of them talked about how the third amendment can be seen as the FHFA following their fiduciary duty by protecting the bond holders under the assumption that the equity holders would be wiped out with or without the third amendment. He said this idea would be based on the GSEs having to borrow money from Treasury to pay the dividend in all but the last quarter before the third amendment signed. This "borrowing to pay the dividend" would keep increasing the liquidation preference well into the future, putting the bond holders at risk, whom the FHFA does have an obligation to protect. This argument that the FHFA was acting to protect the capital structure and therefore was allowed to do this as a conservator, would work against us obviously.

 

The other one of the two panelists stated that the Court might reward the plaintiffs only the IV of the common and preferred shares on the day of the 3rd amendment. He demonstrated that a simple DCF projecting 2Q-2012 profits into the future wouldn't amount to much value after subtracting out the $189 billion liquidation preference. That DCF would be flawed because it wouldn't include the massive write downs of the valuation allowance and release of loan loss reserves that happened in 2013.

 

Would love to hear the board's opinion on these risks. The two panelists I am referring to start talking at 35:30.

 

 

[merkhet]

I'll take a crack at the response:

 

(1) Protecting the Bondholders

 

(I'm assuming by bondholders, you mean the government preferred shareholders.)

 

Assuming, arguendo, that the FHFA was just protecting the bondholders, that does not explain why the amendment should continue in effect now that the bondholders have received in excess of the amount that they initially put up in principal. The capital structure has been protected, and the government bondholder's cup runneth over.

 

(2) The Intrinsic Value Question

 

I think you answered your own question there. The intrinsic value of a security is the sum of all discounted cash flows that will accrue to the securityholder over the life of the security. Usually, this creates a problem because the future is unknowable. However, we have an additional two years of profitability that provides us with a better sense of the intrinsic value of the common and preferred shares -- so why would anyone create a DCF projecting the 2Q2012 profits in perpetuity when we already know that doesn't match reality?

 

---

 

As a side note, a great opinion piece released in the WSJ yesterday:

 

http://online.wsj.com/articles/william-isaac-playing-semantic-games-with-fannie-and-freddie-investors-1404683708?mod=yahoo_hs

[Eye4Valu]

Do you think that the commentator providing the posts at http://timhoward717.com is Ralph Nader? If not,  any guesses at to who it is?

[valuecfa]

I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

[merkhet]

I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

 

How large is uncomfortably large? (If you're okay with sharing that.)

[valuecfa]

I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

 

How large is uncomfortably large? (If you're okay with sharing that.)

 

Large enough to not want to share  :)

[merkhet]

I now have a slightly uncomfortably large position in the common. On another note, it's nice to see some statements from the judge that the court will not be mulled over by the government for the sake of being the government.

 

How large is uncomfortably large? (If you're okay with sharing that.)

 

Large enough to not want to share  :)

 

Haha, fair enough.

[ap1234]

Does anyone have thoughts on the Delaney, Carney and Himes reform legislation? This seems to be the best proposal to date (better than the Johnson-Crapo bill, etc.). I know nothing is likely to be resolved before mid-term elections but this proposal seems to be a potential long-term solution to housing reform.

 

http://delaney.house.gov/news/press-releases/delaney-carney-and-himes-introduce-housing-finance-reform-legislation

 

The Delaney bill attempts to preserve the 30 year fixed-rate, prepayable mortgage as well as keep home ownership affordable. These were both the arguments for why Fannie/Freddie can’t be replaced (i.e. previous private market solutions would be disruptive to the housing recovery by increasing the cost of home ownership).

 

I would love to hear anyone’s thoughts on what the Delaney bill and what this could mean for Fannie shareholders (i.e. is Fannie common worthless if the Delaney bill is passed)?

 

 

[merkhet]

How does Delaney hope to bring in the immense amount of private capital that would be needed for his bill to succeed?

[Guest wellmont]

The bill winds down Fannie Mae’s and Freddie Mac’s current activities and revokes their charter, but allows them to be sold and recapitalized as entities with different business plans without any of their current unique powers.

 

this of course is a confusing statement on it's face, that lacks specificity. However, one thing is clear. If they wipe out the rights and value of PRF and common shareholders, they could never recapitalize the new entities. They would never attract new capital. The most likely outcome still is a compromise between regulators and holders that will preserve value for stakeholders, and create a plan to continue and strengthen fannie and freddie structures. the regulating authorities are now figuring out how to extract themselves from this terrible mistake.

[morningstar]

In this environment it would probably be easy enough to find investors for the equity tranches. Look at the absolute thirst for CLO paper of all seniorities. MBS structured in the way proposed here would need less equity than a CLO and offer much better cash arbitrage - the senior paper would likely be very, very cheap as the credit risk is pretty benign and the funding would be better than under the current system (e.g. for banks, Ginnie Mae's actual guarantees are meaningfully more useful than Fannie/Freddie quasi-guarantees). It's probably easy to get a modelled IRR of 15% for the equity - seems like it would be possible to eventually get to the $500bn market size you'd need for that.

[fareastwarriors]

Fannie, Freddie Settle Into Post-Crisis Norm

 

Earnings Fall as One-Time Events Fade; Treasury to Get $5.6 Billion Dividend Payment

 

 

 

http://online.wsj.com/articles/fannie-freddie-settle-into-post-crisis-norm-1407434053?mod=WSJ_hp_LEFTWhatsNewsCollection

[Mephistopheles]

Does anyone know why Ackman's common stock holdings never show up in the Pershing Square 13F?

 

http://www.sec.gov/Archives/edgar/data/1336528/000117266114001128/xslForm13F_X01/infotable.xml

[fareastwarriors]

Time for Fannie and Freddie Investors To Surrender

 

 

http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5

[valuecfa]

Time for Fannie and Freddie Investors To Surrender

 

 

http://online.wsj.com/articles/heard-on-the-street-time-for-fannie-and-freddie-investors-to-surrender-1407782039?mod=Markets_newsreel_5

 

Not yet.

 

[nkp007]

Looks like Carney is using the face value of the credit line, not accounting for the fact that it was fully paid back.

 

Every month or so, he writes a superficial article about F+F to stoke the flames. No one takes him very seriously.

[Matson125]

Does anyone know why Ackman's common stock holdings never show up in the Pershing Square 13F?

 

http://www.sec.gov/Archives/edgar/data/1336528/000117266114001128/xslForm13F_X01/infotable.xml

 

Thats a good question.  I was recently looking over Richard Perry's 13F and the pfd's that he holds are not listed either http://www.sec.gov/Archives/edgar/data/919085/000114036114020916/xslForm13F_X01/form13fInfoTable.xml

 

Fairholme lists both common and pfd

[merkhet]

I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:

• Judge Sweeney seems to be trying her best to be fair to all parties.
  
• Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  
• Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  
• The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  
• At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
  

It does not look like the government attorneys are winning themselves any friends by dragging on production.

[Grenville]

I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:

• Judge Sweeney seems to be trying her best to be fair to all parties.
  
• Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  
• Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  
• The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  
• At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
  

It does not look like the government attorneys are winning themselves any friends by dragging on production.

 

Appreciate the color. Very cool that you were able to sit in on the conference!

[enoch01]

I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:

• Judge Sweeney seems to be trying her best to be fair to all parties.
  
• Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  
• Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  
• The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  
• At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
  

It does not look like the government attorneys are winning themselves any friends by dragging on production.

 

Thanks for the notes.  This is getting interesting.

[merkhet]

If anyone is thinking about attending the next joint status conference (all open to the public), I think it would be very much worth your time.

 

Also, we should be expecting briefs (in the next week) on the issue about producing documents relevant to whether the FHFA was directed by Treasury or other governmental agencies to enter into the 2012 Amendment -- as best as I understood the exchange, the government is claiming that it doesn't have to produce the documents because they might implicate other documents that were excluded by the compromise re privileged documents that came out a few weeks ago. Again, it seems that the government has produced zero documents relating to this issue -- though it is, noticeably, not claiming that such documents do not exist.

 

We'll know more when the briefs are filed though.

[valuecfa]

I recently moved to Washington, DC, so I was able to sit in the joint status conference in Judge Sweeney's courtroom today. A few things struck me as interesting:

• Judge Sweeney seems to be trying her best to be fair to all parties.
  
• Charles Cooper is a far better attorney than (I think it was) Gregg Schwind.
  
• Judge Sweeney mentioned the possibility of sanctions on the government for non-production.
  
• The government has refused to produce documents relating to whether the FHFA was directed to enter into the 2012 Amendment at the behest of Treasury or other governmental branches.
  
• At the end of the conference, Judge Sweeney directly addressed the government by saying that, while she knows all the government attorneys have the upmost integrity and would never do this, they would do well to inform their clients that they had better not refuse to disclose documents that were detrimental to the government's case.
  

It does not look like the government attorneys are winning themselves any friends by dragging on production.

 

Appreciate the heads up.