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

[Luke 532]

May 30th is the deadline for gov't to submit the status report for compliance with court order to produce documents to plaintiffs.  Haven't seen any filings from Fairholme complaining about not receiving documents, so perhaps in fact they have received some.

[SnarkyPuppy]

...and to continue my parade of posts....For whatever reason it seems like on TV Mnuchin comes across as much more shareholder friendly in that he says the right things. Once he talks to congress or on the record its easy to start to question his stance. Which is a better impression of the real thing? When he speaks off the cuff on TV or in front of a congressional panel on the record?

 

Mnuchin's tone flipped once the court rejected the appeal, so I think it's safe to say that he isn't exactly in our corner anymore. If he can accomplish what he prefers while screwing us is another matter.

 

Mnuchin isn't pro-FnF shareholders, he's pro-Treasury. That's his job. I haven't seen anything from him to indicate that he wants to  specifically help or screw FnF shareholders. Given that some people included Mnuchin's relationships with shareholders as a positive in the investment thesis, I would give Mnuchin some credit for showing integrity in his job and not overtly favoring them.

 

I still don't think Mnuchin will go out of his way to screw shareholders. To me, he has been consistent that FnF need to continue to exist because they provide necessary liquidity and would, as private shareholder-owned companies, also provide private capital as a buffer to taxpayer support in the event of crisis. But neither is he going to cut a deal that hands shareholders a huge windfall profit for no reason.

 

Yeah, no. I get the gist of what you're saying, and with that I agree, but stealing because you can, because Lew did, is still wrong no matter how you slice it. Anyone in Mnuchin's position should be standing up and saying no, I won't be part of this. That's not to say he isn't doing exactly that behind closed doors.

 

These high level arguments, i.e. "this is theft / rule of law in our country" argument, have done absolutely nothing for this investment.  You can actually make a strong case that the court has so far very strongly ruled that it isn't wrong / isn't theft.  We obviously have our own opinions on the issue, but the court has so far said they're wrong.  Your personal opinions may simply hold the bag at the end of this. 

 

The reason I still own this has nothing to do with these nonsensical claims regarding "obamacare theft" and "rule of law" and "mnuchin is shareholder friendly" (incredible amounts of bias at play to think that this guy cares at all about shareholders and is on any "team" - in all reality he probably hasn't spoken to Berkowitz and Berk is just as in the dark as the rest of us).  It's also a major risk that Mnuchin settles with the plaintiffs in the private lawsuit, and any other major hedge funds who own the preferreds outside of public markets, screwing the retail shareholders.  If he does this at the same time as ending the current GSE structures and the shares stop trading, a new hedge fund cant swoop in and continue the lawsuits. 

 

The reason I still own this is because it's an incredibly messy situation and I'm not sure the government can come up with a clean solution without at least paying out contractual rights on preferred shareholders to end the lawsuits, but as I said I worry heavily about a private settlement (ala Citigroup deal which converted public shares at much less than par, but some private shareholders at par). 

 

The problem is, there's a strong case to be made that "new" GSE's will be established (probably utility-like FNMA/FMCC with new charters) and as part of that reform shareholders will be wiped and some form of new capital will be brought in.  Once again, there's a school of thought that "not a single investor would provide capital to a new entity if shareholders are wiped out", and once again I don't think this argument is entirely bulletproof.  If you make explicit what historically has been implied, and if you remove any actual real risk that taxpayers will need to step in again, there will absolutely be people lining up to purchase government regulated oligopolies.  Give investors a certain level of return related to risk, and capital will come in.     

[beaufort]

From BB's Jan 31, 2017 lettter:

 

"We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators. In this instance, we have invested in two superb insurance companies with unparalleled brand recognition, talented human capital, proprietary information technology infrastructure, and robust industry relationships. Fannie Mae and Freddie Mac are quintessential examples of what Warren Buffett (Trades, Portfolio) would describe as “economic castles protected by unbreachable moats.” As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. Allow me to emphasize a few points that you may have heard before:

 

Any intellectually honest observer would proffer that the rational steps for resolution are: (i) halt the payment of any further monies to the United States Treasury; (ii) permit the companies to retain capital in order to protect taxpayers; (iii) transform the companies into low-risk, public utilities with regulated rates of return, just like your local electric company; and (iv) eventually release them from the shackles of a perpetual conservatorship so they can help more low- and moderate-income families move up the economic ladder."

 

I would say we are well on our way to both (i) and (ii).  (iii) happens in second half 2017.  (iv) happens after Jan 2018, following the disposition of the senior preferred stake.

[SnarkyPuppy]

From BB's Jan 31, 2017 lettter:

 

"We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators. In this instance, we have invested in two superb insurance companies with unparalleled brand recognition, talented human capital, proprietary information technology infrastructure, and robust industry relationships. Fannie Mae and Freddie Mac are quintessential examples of what Warren Buffett (Trades, Portfolio) would describe as “economic castles protected by unbreachable moats.” As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. Allow me to emphasize a few points that you may have heard before:

 

Any intellectually honest observer would proffer that the rational steps for resolution are: (i) halt the payment of any further monies to the United States Treasury; (ii) permit the companies to retain capital in order to protect taxpayers; (iii) transform the companies into low-risk, public utilities with regulated rates of return, just like your local electric company; and (iv) eventually release them from the shackles of a perpetual conservatorship so they can help more low- and moderate-income families move up the economic ladder."

 

I would say we are well on our way to both (i) and (ii).  (iii) happens in second half 2017.  (iv) happens after Jan 2018, following the disposition of the senior preferred stake.

 

I don't disagree.  I'm largely playing devils advocate to spur conversation.  I'm very confident this will scenario above is one of the most likely, if not the likeliest scenarios which is why I own shares.  But there's a few ways in which the current capital is dealt with and if we're going through congress, it's pretty clear there's a lot of animosity against shareholders (probably self created). 

[Guest cherzeca]

this board has degenerated into abject mindlessness. 

 

+1. as trump would say, sad!

 

Agreed. We're better than that--let's raise our game. Did anyone else notice Mnuchin's left nostril flare slightly when Corker said...

 

+1. the left one is always the tell...

[Guest cherzeca]

this board has degenerated into abject mindlessness. 

 

+1. as trump would say, sad!

 

+1 Chris

 

Certainly some madness going on and I'll admit that I have contributed, but then again the thousands of legal posts supporting our position were all completely wrong so value add seems about the same.

 

and i have contributed to the madness as well.  but the legal is not over, and the machinations in DC are beyond prediction.  so what are we left with? FnF are irreplaceable and the only way to biuld up capital is to declare that the seniors are paid off, which of course they are under the original terms.  waiting game

[Desert_Rat]

These high level arguments, i.e. "this is theft / rule of law in our country" argument, have done absolutely nothing for this investment.  You can actually make a strong case that the court has so far very strongly ruled that it isn't wrong / isn't theft.  We obviously have our own opinions on the issue, but the court has so far said they're wrong.  Your personal opinions may simply hold the bag at the end of this. 

I'll disagree with both those points. One, I'm reading and listening to a growing number of supporters of our cause, whereas 5 years ago we deserved it. So much so that I think a nice base has settled under the preferreds and I'd be highly surprised if we dropped into the $2's again. Two, Judge Brown's statement about banana republic indicates there was nothing at all strong about the appeal court's decision.

 

The reason I still own this has nothing to do with these nonsensical claims regarding "obamacare theft" and "rule of law" and "mnuchin is shareholder friendly" (incredible amounts of bias at play to think that this guy cares at all about shareholders and is on any "team" - in all reality he probably hasn't spoken to Berkowitz and Berk is just as in the dark as the rest of us).  It's also a major risk that Mnuchin settles with the plaintiffs in the private lawsuit, and any other major hedge funds who own the preferreds outside of public markets, screwing the retail shareholders.  If he does this at the same time as ending the current GSE structures and the shares stop trading, a new hedge fund cant swoop in and continue the lawsuits. 

 

The reason I still own this is because it's an incredibly messy situation and I'm not sure the government can come up with a clean solution without at least paying out contractual rights on preferred shareholders to end the lawsuits, but as I said I worry heavily about a private settlement (ala Citigroup deal which converted public shares at much less than par, but some private shareholders at par). 

 

I bought originally at like 50 cents not knowing much about FnF except that other bailouts were paying off. I sold around 6x and sat out until it crashed again. I did continue reading about the opportunity though.

 

The reasons I own today is because this does constitute the greatest 'taking' in US history. There is no valid argument against that although many have tried. Even the two judges who struck us down did so because, not only did they fail to acknowledge the political element, HUD, which primarily caused the mess, but also because they aren't accountants - they had no idea how forced the conservatorship was.

 

I'd bet most of DC does though. Even Corky.

 

I was also sold after reading papers like this : http://www.housingwire.com/ext/resources/images/A-Forensic-Look-at-the-Fannie-Mae-Bailout-Parts-I-II-III-FINAL-20150616.pdf

 

(I'm not aware of Citibank deal. Are you referring to Wachovia shareholders?)

 

The problem is, there's a strong case to be made that "new" GSE's will be established (probab[/url]ly utility-like FNMA/FMCC with new charters) and as part of that reform shareholders will be wiped and some form of new capital will be brought in.  Once again, there's a school of thought that "not a single investor would provide capital to a new entity if shareholders are wiped out", and once again I don't think this argument is entirely bulletproof.  If you make explicit what historically has been implied, and if you remove any actual real risk that taxpayers will need to step in again, there will absolutely be people lining up to purchase government regulated oligopolies.  Give investors a certain level of return related to risk, and capital will come in.   

 

I really don't understand how anyone could even imagine a bill that substantially changes the way housing finance has been done in this country for 70 years; that supports the 30 year; that Congress is able to tweak on occasion, would pass. I can't. The Dem's can't. Where are the votes coming from that would side with tossing out a highly successful housing finance platform? Christ, Congress can barely tie its own shoes.

 

Watt is doing fine. CRT is actively protecting taxpayers. Nothing needs to be changed.

 

[Desert_Rat]

From BB's Jan 31, 2017 lettter:

 

"We are frequently asked (i) why we own the preferred stock of Fannie Mae and Freddie Mac instead of common shares, and (ii) how this story ends. Our answers are simple: the provisions of the preferred stock contracts that we own provide us with greater security and certainty than the common stock and, as you know, we are not speculators. In this instance, we have invested in two superb insurance companies with unparalleled brand recognition, talented human capital, proprietary information technology infrastructure, and robust industry relationships. Fannie Mae and Freddie Mac are quintessential examples of what Warren Buffett (Trades, Portfolio) would describe as “economic castles protected by unbreachable moats.” As interest rates rise, Fannie Mae’s and Freddie Mac’s portfolios become even more valuable – and we anticipate that Q4 2016 results will reflect this positive impact. Allow me to emphasize a few points that you may have heard before:

 

Any intellectually honest observer would proffer that the rational steps for resolution are: (i) halt the payment of any further monies to the United States Treasury; (ii) permit the companies to retain capital in order to protect taxpayers; (iii) transform the companies into low-risk, public utilities with regulated rates of return, just like your local electric company; and (iv) eventually release them from the shackles of a perpetual conservatorship so they can help more low- and moderate-income families move up the economic ladder."

 

I would say we are well on our way to both (i) and (ii).  (iii) happens in second half 2017.  (iv) happens after Jan 2018, following the disposition of the senior preferred stake.

 

Thanks for sharing

[SnarkyPuppy]

Desert_Rat- thanks for the response.  I am just going to use quotes from specific areas of your post or else this will get too messy with embedded quotes.

 

"I'll disagree with both those points. One, I'm reading and listening to a growing number of supporters of our cause, whereas 5 years ago we deserved it. So much so that I think a nice base has settled under the preferreds and I'd be highly surprised if we dropped into the $2's again. Two, Judge Brown's statement about banana republic indicates there was nothing at all strong about the appeal court's decision."

 

It's wonderful that Judge Brown wrote that.  We still lost the appeal.  So back here in reality, this was a massive negative.

 

"The reasons I own today is because this does constitute the greatest 'taking' in US history. There is no valid argument against that although many have tried. Even the two judges who struck us down did so because, not only did they fail to acknowledge the political element, HUD, which primarily caused the mess, but also because they aren't accountants - they had no idea how forced the  conservatorship was."

 

But there has been a valid argument against shareholders.  See Perry appeals case.  I know you disagree, but the facts that matter so far dictate otherwise. 

 

"(I'm not aware of Citibank deal. Are you referring to Wachovia shareholders?)"

 

I'm referring to the Citigroup bailout deal where the government converted the preferred shares at a haircut to par, yet a private shareholder (foreign country, can't remember) was converted at par.  There's "retail shareholder" risk here in any "settlement", IMHO.

 

"I really don't understand how anyone could even imagine a bill that substantially changes the way housing finance has been done in this country for 70 years; that supports the 30 year; that Congress is able to tweak on occasion, would pass. I can't. The Dem's can't. Where are the votes coming from that would side with tossing out a highly successful housing finance platform? Christ, Congress can barely tie its own shoes."

 

Really?  You can't imagine any scenarios where the jr preferreds are wiped out?  You should go all in then since this is such a home run. 

 

Agree with cherceza that the preferreds are a good gamble at current prices.  But for very different reasons than those posted by yourself.  Indignation has proven to be a losing thesis (so far). 

[Desert_Rat]

I can imagine scenarios where shareholders are wiped out but they're not logical. My point though was that I can't imagine a housing bill passing that drastically alters the GSE/govt backstop model.

[SnarkyPuppy]

I can imagine scenarios where shareholders are wiped out but they're not logical. My point though was that I can't imagine a housing bill passing that drastically alters the GSE/govt backstop model.

 

But you agree that there are potential situations where a housing bill that doesn't drastically alter the GSE/govt backstop model can still wipe out shareholders?

[Desert_Rat]

Had to think for a bit...

 

Yes I can. It doesn't wipe us out, more like we continue like today for a very long time. Nothing changes, including us. That's our biggest risk, imo.

 

That's why I asked this question the other day:

 

Would someone familiar with law answer this question?

if the context of 3rd's language is changed by the existence of a capital reserve amount does that affect the contract in any way? Like, would it mandate an amendment or will the language work as is?

 

For each Dividend Period from January 1, 2013, through and including

December 31, 2017, the "Dividend Amount" for a Dividend Period means the amount, if

any, by which the Net Worth Amount at the end of the immediately preceding fiscal

quarter, less the Applicable Capital Reserve Amount, exceeds zero. For each Dividend

Period from January 1, 2018, the "Dividend Amount" for a Dividend Period means the

amount, if any, by which the Net Worth Amount at the end of the immediately preceding

fiscal quarter exceeds zero.

[Luke 532]

I'm referring to the Citigroup bailout deal where the government converted the preferred shares at a haircut to par, yet a private shareholder (foreign country, can't remember) was converted at par.  There's "retail shareholder" risk here in any "settlement", IMHO.

 

At what percentage of par were the retail shareholders converted?

 

It's also a major risk that Mnuchin settles with the plaintiffs in the private lawsuit, and any other major hedge funds who own the preferreds outside of public markets, screwing the retail shareholders.  If he does this at the same time as ending the current GSE structures and the shares stop trading, a new hedge fund cant swoop in and continue the lawsuits. 

 

That certainly could happen, but probably unlikely given the optics that the hedge funds won, pensions (teachers, cops, etc.) lost and taxpayers lost* (by paying some money to hedge funds).  That really would be hedge funds (and one mutual fund) won and everybody else lost (pensions by losing their investment, taxpayers by paying money to hedge funds).  In other words, all investors except hedge funds (and Berkowitz) lost.

 

*of course, taxpayers don't lose (except the pensions) but that would be the optics of the situation.

[SnarkyPuppy]

I'm referring to the Citigroup bailout deal where the government converted the preferred shares at a haircut to par, yet a private shareholder (foreign country, can't remember) was converted at par.  There's "retail shareholder" risk here in any "settlement", IMHO.

 

At what percentage of par were the retail shareholders converted?

 

It's also a major risk that Mnuchin settles with the plaintiffs in the private lawsuit, and any other major hedge funds who own the preferreds outside of public markets, screwing the retail shareholders.  If he does this at the same time as ending the current GSE structures and the shares stop trading, a new hedge fund cant swoop in and continue the lawsuits. 

 

That certainly could happen, but probably unlikely given the optics that the hedge funds won, pensions (teachers, cops, etc.) lost and taxpayers lost* (by paying some money to hedge funds).  That really would be hedge funds (and one mutual fund) won and everybody else lost (pensions by losing their investment, taxpayers by paying money to hedge funds).  In other words, all investors except hedge funds (and Berkowitz) lost.

 

*of course, taxpayers don't lose (except the pensions) but that would be the optics of the situation.

 

Why are you so sure optics matter?  It's immaterial if just the hedge funds win versus if hedge funds+ other shareholders win. 

[Luke 532]

Why are you so sure optics matter?  It's immaterial if just the hedge funds win versus if hedge funds+ other shareholders win.

 

I'm not so sure optics matter, but given Mnuchin is now a politician that hopes to get stuff done over the next 4 (8?) years then the hedge funds win coupled with teachers and cops losing is much more damaging to him than hedge funds win but so do teachers and cops.  The latter is based on the principle that shareholders of all kinds deserve something (no bias).  The former is based on the principle that Mnuchin doesn't care about anybody but hedge funds (bias).  That likely wouldn't go over too well for his next 4-8 years in office.

[Luke 532]

Anybody know off-hand how much of the $33B of junior prefs is owned by hedge funds and/or plaintiffs of pending litigation?

[SnarkyPuppy]

Why are you so sure optics matter?  It's immaterial if just the hedge funds win versus if hedge funds+ other shareholders win.

 

I'm not so sure optics matter, but given Mnuchin is now a politician that hopes to get stuff done over the next 4 (8?) years then the hedge funds win coupled with teachers and cops losing is much more damaging to him than hedge funds win but so do teachers and cops.  The latter is based on the principle that shareholders of all kinds deserve something (no bias).  The former is based on the principle that Mnuchin doesn't care about anybody but hedge funds (bias).  That likely wouldn't go over too well for his next 4-8 years in office.

 

With all do respect, this is not investable information.

[Luke 532]

With all do respect, this is not investable information.

 

Fair enough, but in any situation involving politics (and Fannie/Freddie qualifies) one should factor in the consequences (both good and bad) that impact the primary political decision-maker.  The consequences of GSE reform, housing, HUD, etc. are all paramount on the mind of Mnuchin. 

[Desert_Rat]

Would someone give an example of certain equity of the same shareholder class being treated differently post-bankruptcy? But not the foreign entity referred to with Citi, that could be a myriad of things.

 

You boys obviously play these distressed situations more than I do as I think it's all crazy talk. What judge would sign off on that?

 

Edit (24 hours later): Ok, than, don't concoct something that is so highly unlikely it hasn't occurred before. Thank you and have a wonderful day :)

[Guest cherzeca]

hedge fund ownership is an issue for pols when the little red light is on.  in back room, not so sure

[SnarkyPuppy]

Would someone give an example of certain equity of the same shareholder class being treated differently post-bankruptcy? But not the foreign entity referred to with Citi, that could be a myriad of things.

 

You boys obviously play these distressed situations more than I do as I think it's all crazy talk. What judge would sign off on that?

 

Edit (24 hours later): Ok, than, don't concoct something that is so highly unlikely it hasn't occurred before. Thank you and have a wonderful day :)

 

Yes, you win.  Isn't that all you ever wanted?

[Desert_Rat]

No, I was genuinely curious. I can't imagine such a thing and was pleased it didn't exist.

[SnarkyPuppy]

No, I was genuinely curious. I can't imagine such a thing and was pleased it didn't exist.

 

Was clearly implying a settlement. 

[Desert_Rat]

Clarify with a scenario. Thanks

[Luke 532]

Collins case dismissed.