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

[rros]

there are class actions in perry, hindes/jacobs, bhatti and rop that are going forward.  if you own shares you are a member of the classes.  so this is not a case where fairholme can do what it wants

Also,... is this rationale of shares going to zero with a settlement based on some kind of logic or is born out of irrational fear?

 

Lately, Zandi affirmed companies are almost completely reformed. Pollock being in a somewhat similar camp, admitting w/o a doubt Treasury has been paid or about to be. How about Watt, who more than once stated the companies today do not resemble the ones from the past. Freddie ceo singing the same tune. Most antagonistic forces belonged to the Obama administration (Stegman et.al) and are now gone. Others feel legacy shareholders must not be hurt for private capital to come in and fund a restructuring. Within this context, how much money would the government offer Fairlhome to drop the takings case, a case the government has been winning and a case where the plaintiff decided to sue after the fact?

 

It makes no sense that the government will pay Fairholme to go away just so that they can then shut down all the remaining shares. More likely, administrative reform is advanced and Treasury feels the lawsuits are future time bombs that need to be defused today.

 

I'm just constantly reassessing the downside from different angles here as I do with any investment.  I actually think overall we are in a good spot, I just threw the risk out there as I was reminded that it has always been one of the potential downside options that I've thought about and this quote reminded me:

 

"It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…"

 

Re-reading it, it's probably moreso contemplating settling with preferred plaintiffs vs common plaintiffs rather than what I've highlighted.  Understand there are still class actions but is there a risk the government sees that as much lower chance of loss than the Fairholme case?

 

Fairholme and Paulson drop this in a second if they are offered something that screws everyone else. 

 

Seems to me (I've been wrong before...) that there is a non-zero chance that the government settles w/ the major players funding the lawsuits, leaves the low risk of a class action loss, simultaneously announces reform which explicitly states government role in mortgage finance and re-charters new GSEs etc.  IMO, the argument that the government will have trouble raising private capital only holds true if the current structure is maintained (i.e. governments role is implicit, shareholders role ambiguous).   

 

It wouldn't necessarily be a rational decision in terms of maximizing housing finance efficiency, but there could be other incentives at play and I'm not sure any of us can say with a straight face that this administration has been consistently rational.   

 

Think we're fine, just talking through some of this since you guys provide great feedback.

Paulson is not involved in lawsuits. And has said his bet is based on another outcome independent of lawsuits. So just like us, Paulson -the closest Trump ally involved in FF shares- will get screwed. Berkowitz and Perry have been the big ones. Although the ones mentioned by Chris seem to also be meaningful.

 

A question... What would be the point of completing an administrative reform that includes leaving the door open for Congress to re-charter the companies in a narrow way, establishing explicit guarantees, cancelling the sweep, establishing a permanent line of credit paid for with a commitment fee, issuing secondaries to recapitalize both entities, etc. All so that in a few years there is a ruling by the Supreme court that puts a sizable dent in Treasury ordering them to pay billions to shareholders?

[SnarkyPuppy]

there are class actions in perry, hindes/jacobs, bhatti and rop that are going forward.  if you own shares you are a member of the classes.  so this is not a case where fairholme can do what it wants

Also,... is this rationale of shares going to zero with a settlement based on some kind of logic or is born out of irrational fear?

 

Lately, Zandi affirmed companies are almost completely reformed. Pollock being in a somewhat similar camp, admitting w/o a doubt Treasury has been paid or about to be. How about Watt, who more than once stated the companies today do not resemble the ones from the past. Freddie ceo singing the same tune. Most antagonistic forces belonged to the Obama administration (Stegman et.al) and are now gone. Others feel legacy shareholders must not be hurt for private capital to come in and fund a restructuring. Within this context, how much money would the government offer Fairlhome to drop the takings case, a case the government has been winning and a case where the plaintiff decided to sue after the fact?

 

It makes no sense that the government will pay Fairholme to go away just so that they can then shut down all the remaining shares. More likely, administrative reform is advanced and Treasury feels the lawsuits are future time bombs that need to be defused today.

 

I'm just constantly reassessing the downside from different angles here as I do with any investment.  I actually think overall we are in a good spot, I just threw the risk out there as I was reminded that it has always been one of the potential downside options that I've thought about and this quote reminded me:

 

"It’s anticipated that Treasury – at the very least – will contemplate settling with some of the GSE plaintiffs in the “takings” cases and solve the Fannie Mae/Freddie Mac “problem” administratively. As for the details…"

 

Re-reading it, it's probably moreso contemplating settling with preferred plaintiffs vs common plaintiffs rather than what I've highlighted.  Understand there are still class actions but is there a risk the government sees that as much lower chance of loss than the Fairholme case?

 

Fairholme and Paulson drop this in a second if they are offered something that screws everyone else. 

 

Seems to me (I've been wrong before...) that there is a non-zero chance that the government settles w/ the major players funding the lawsuits, leaves the low risk of a class action loss, simultaneously announces reform which explicitly states government role in mortgage finance and re-charters new GSEs etc.  IMO, the argument that the government will have trouble raising private capital only holds true if the current structure is maintained (i.e. governments role is implicit, shareholders role ambiguous).   

 

It wouldn't necessarily be a rational decision in terms of maximizing housing finance efficiency, but there could be other incentives at play and I'm not sure any of us can say with a straight face that this administration has been consistently rational.   

 

Think we're fine, just talking through some of this since you guys provide great feedback.

Paulson is not involved in lawsuits. And has said his bet is based on another outcome independent of lawsuits. So just like us, Paulson -the closest Trump ally involved in FF shares- will get screwed. Berkowitz and Perry have been the big ones. Although the ones mentioned by Chris seem to also be meaningful.

 

A question... What would be the point of completing an administrative reform that includes leaving the door open for Congress to re-charter the companies in a narrow way, establishing explicit guarantees, cancelling the sweep, establishing a permanent line of credit paid for with a commitment fee, issuing secondaries to recapitalize both entities, etc. All so that in a few years there is a ruling by the Supreme court that puts a sizable dent in Treasury ordering them to pay billions to shareholders?

 

You're right re- Paulson, good point and forgot he isn't a current party in the suits.  I suppose that's a solid data point.  And with regards to your second questions, it likely would be a different administration, different problem.  With that said, seems the incentives are aligned for the current admin to take $100bn in warrants for immediate use rather than quarterly sweeps going forward.

 

I'm very bullish and own a sizable position.  Just playing devils advocate where I can.

[rros]

I actually think this is a great exercise because I am usually too optimistic (but pessimistic as of late). So, thank you!

 

Last thoughts on settlements for those who have not held shares long enough.

 

There was a major rumor of settlement talks back in late summer of 2015 with a climax reached at the beginning of October that year. Shares were at a breakthrough point. Almost waiting for an announcement to skyrocket. Instead, Treasury came out guns blazing. Major disappointment and by November shares crashed. I ended up selling half my position. Such was the despair. Berkowitz confirmed later that the rumored settlement talks had been real.

 

Was Obama going to reward shareholders, thus the breakthrough price of shares? And now Mnuchin's settlement rumors are destined to crash shareholders? Really? Obama rewarding and Mnuchin chastising?

[Luke 532]

Mark Calabria, chief economist for Vice President Mike Pence, will provide an insider view of President Donald Trump's economic agenda during a luncheon session during NAFCU's Congressional Caucus Sept. 11.

https://www.nafcu.org/News/2017_News/August/Pence_economist_Mark_Calabria_at_NAFCU_Caucus/

 

NAFCU: "The GSEs should be allowed to rebuild their capital buffers."

(see attached document)

NAFCU_on_GSEs.pdf

[Luke 532]

Mark Calabria, chief economist for Vice President Mike Pence, will provide an insider view of President Donald Trump's economic agenda during a luncheon session during NAFCU's Congressional Caucus Sept. 11.

https://www.nafcu.org/News/2017_News/August/Pence_economist_Mark_Calabria_at_NAFCU_Caucus/

 

NAFCU: "The GSEs should be allowed to rebuild their capital buffers."

(see attached document)

 

Mnuchin and NAFCU Chairman of the Board, Rich Harris, earlier this morning (see attached pic).

[Luke 532]

[waynepolsonAtoZ]

Things are getting a bit whacky, LOL. To me, tax reform seems very unlikely. The Rs may have the WH, House, and Senate, but that doesn't mean that they can all agree on a tax cut.

 

It seems likely (to me) that the "debt ceiling" "debt default" issue will be a big deal in September and October. Again, even though the Rs have majorities, it seems likely that the Rs are going to have a hard time agreeing on what to do about the debt ceiling.

 

"President Donald Trump himself is already in demand-making mode: On Tuesday, he threatened a government shutdown at the end of September if he hasn’t gotten money for his border wall (which Congress was unwilling to give him in April)."

 

https://www.vox.com/policy-and-politics/2017/8/23/16112322/immigration-congress-trump

[Luke 532]

Today from Peter A. Chapman, peter@bankrupt.com

In anticipation, presumably, of Judge Lamberth acting on the D.C. Circuit's mandate in the near future, Caroline J. Anderson entered her appearance in the District Court on behalf of Secretary Mnuchin and Treasury.

[muscleman]

Things are getting a bit whacky, LOL. To me, tax reform seems very unlikely. The Rs may have the WH, House, and Senate, but that doesn't mean that they can all agree on a tax cut.

 

It seems likely (to me) that the "debt ceiling" "debt default" issue will be a big deal in September and October. Again, even though the Rs have majorities, it seems likely that the Rs are going to have a hard time agreeing on what to do about the debt ceiling.

 

"President Donald Trump himself is already in demand-making mode: On Tuesday, he threatened a government shutdown at the end of September if he hasn’t gotten money for his border wall (which Congress was unwilling to give him in April)."

 

https://www.vox.com/policy-and-politics/2017/8/23/16112322/immigration-congress-trump

 

Yeah it is a big mess. They need 60 votes to get a budget bill but there are not so many Reps.

[waynepolsonAtoZ]

"Mr. Cohn’s staff felt frustrated to discover that Craig Phillips, the Treasury counselor most involved with planning structural reforms to the government-backed mortgage buyers Fannie Mae and Freddie Mac, had been meeting with key players in the private sector to discuss potential policy without alerting the National Economic Council."

 

https://www.nytimes.com/2017/08/28/us/politics/trump-tax-plan-cohn-mnuchin.html?emc=edit_tnt_20170828&nlid=12864748&tntemail0=y&_r=0

 

[rros]

"Mr. Cohn’s staff felt frustrated to discover that Craig Phillips, the Treasury counselor most involved with planning structural reforms to the government-backed mortgage buyers Fannie Mae and Freddie Mac, had been meeting with key players in the private sector to discuss potential policy without alerting the National Economic Council."

 

https://www.nytimes.com/2017/08/28/us/politics/trump-tax-plan-cohn-mnuchin.html?emc=edit_tnt_20170828&nlid=12864748&tntemail0=y&_r=0

"key players" as in Blackrock?

[Luke 532]

Don't think this was posted.  It's from late last month and is written by Gary Hindes.

http://gselinks.com/pdf/Fanniegate_July_25_2017.pdf

[Luke 532]

Mnuchin on CNBC in a few minutes...

[Luke 532]

Mnuchin on CNBC in a few minutes...

 

Mnuchin: "Tax reform details will come out later this month*."

 

*I think he meant in September

[SnarkyPuppy]

Still seems odd to me that Mnuchin was directly asked and agreed that Obama was using Fannie profits to fund other parts of the government, and then nothing since. 

 

Have to think the questions that get asked get vetted and agreed upon before hand.  Why was that publicly discussed and why has it been completely ignored since?  Why has fox stopped mentioning it at all?  Seems odd to me and almost indicates some form of reversal. 

[rros]

Still seems odd to me that Mnuchin was directly asked and agreed that Obama was using Fannie profits to fund other parts of the government, and then nothing since. 

 

Have to think the questions that get asked get vetted and agreed upon before hand.  Why was that publicly discussed and why has it been completely ignored since?  Why has fox stopped mentioning it at all?  Seems odd to me and almost indicates some form of reversal.

// and then nothing since. 

// reversal

 

Not at all. If anything, that triggered the feverish response going on behind the scenes with Senators working on a bill (as per Ackman) and Craig Philips' nightclubs meetings with the Blackrocks of W.St. I have a feeling there is something somewhere already in progress. That is, far advanced, late stage development.

[SnarkyPuppy]

Still seems odd to me that Mnuchin was directly asked and agreed that Obama was using Fannie profits to fund other parts of the government, and then nothing since. 

 

Have to think the questions that get asked get vetted and agreed upon before hand.  Why was that publicly discussed and why has it been completely ignored since?  Why has fox stopped mentioning it at all?  Seems odd to me and almost indicates some form of reversal.

// and then nothing since. 

// reversal

 

Not all. If anything, that triggered the feverish response going on behind the scenes with Senators working on a bill (as per Ackman) and Craig Philips' nightclubs meetings with the Blackrocks of W.St. I have a feeling there is something somewhere already in progress. That is, far advanced, late stage development.

 

Craig Phillips / Blackrock is another top-5 risk here IMO.  But I suppose there's probably some middle ground utility-like explicit backing reform that keeps current GSEs and makes Blackrock happy.

[waynepolsonAtoZ]

There is definite a "this is the best of times, this is the worst of times" quality to the news on FnF, encouraging news, discouraging news. Having said that, the FnF preferreds have held up pretty well in recent months.

 

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us,...'

[investorG]

Still seems odd to me that Mnuchin was directly asked and agreed that Obama was using Fannie profits to fund other parts of the government, and then nothing since. 

 

Have to think the questions that get asked get vetted and agreed upon before hand.  Why was that publicly discussed and why has it been completely ignored since?  Why has fox stopped mentioning it at all?  Seems odd to me and almost indicates some form of reversal.

 

tax reform is his major priority by far, he doesn't want to do anything to jeopardize it by upsetting some republican congressmen.  in his mind, he'd like to see FnF issues stay well in the background until tax reform gets done.  conveniently his options increase on jan1 as well.

[racemize]

Still seems odd to me that Mnuchin was directly asked and agreed that Obama was using Fannie profits to fund other parts of the government, and then nothing since. 

 

Have to think the questions that get asked get vetted and agreed upon before hand.  Why was that publicly discussed and why has it been completely ignored since?  Why has fox stopped mentioning it at all?  Seems odd to me and almost indicates some form of reversal.

 

tax reform is his major priority by far, he doesn't want to do anything to jeopardize it by upsetting some republican congressmen.  in his mind, he'd like to see FnF issues stay well in the background until tax reform gets done.  conveniently his options increase on jan1 as well.

 

I think he wants taxes done first because it increase the value of Freddie/Fannie, and therefore their warrants.

[TwoCitiesCapital]

There is definite a "this is the best of times, this is the worst of times" quality to the news on FnF, encouraging news, discouraging news. Having said that, the FnF preferreds have held up pretty well in recent months.

 

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us,...'

 

I appreciate this quote more than most, methinks

 

:)

[DocSnowball]

There is definite a "this is the best of times, this is the worst of times" quality to the news on FnF, encouraging news, discouraging news. Having said that, the FnF preferreds have held up pretty well in recent months.

 

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us,...'

 

I appreciate this quote more than most, methinks

 

:)

 

+1

[Luke 532]

https://www.insidemortgagefinance.com/imfnews/1_1183/daily/-1000042694-1.html#Login

 

September has finally arrived and that means more hearings on the future of Fannie Mae and Freddie Mac, right? Cowen & Co. is predicting at least one, maybe two hearings in the Senate Banking Committee. But the big question, according to analyst Jaret Seiberg, will be whether Federal Housing Finance Agency Director Mel Watt “permits the enterprises in 2018 to drop to a zero capital position or if he permits them to retain a small share of their profits to build a $1 billion buffer. Also possible is moving to an end-of-year payment to Treasury rather than a quarterly payment. This would smooth out any accounting generated losses that might otherwise precipitate a draw on the preferred capital line.” Stay tuned…

[rros]

https://www.insidemortgagefinance.com/imfnews/1_1183/daily/-1000042694-1.html#Login

 

September has finally arrived and that means more hearings on the future of Fannie Mae and Freddie Mac, right? Cowen & Co. is predicting at least one, maybe two hearings in the Senate Banking Committee. But the big question, according to analyst Jaret Seiberg, will be whether Federal Housing Finance Agency Director Mel Watt “permits the enterprises in 2018 to drop to a zero capital position or if he permits them to retain a small share of their profits to build a $1 billion buffer. Also possible is moving to an end-of-year payment to Treasury rather than a quarterly payment. This would smooth out any accounting generated losses that might otherwise precipitate a draw on the preferred capital line.” Stay tuned…

Thank you for the link. I am shooting from the hip. A 1 billion (or 10 billion) buffer is a negative. Yearly payments is a positive.

[investorG]

https://www.insidemortgagefinance.com/imfnews/1_1183/daily/-1000042694-1.html#Login

 

September has finally arrived and that means more hearings on the future of Fannie Mae and Freddie Mac, right? Cowen & Co. is predicting at least one, maybe two hearings in the Senate Banking Committee. But the big question, according to analyst Jaret Seiberg, will be whether Federal Housing Finance Agency Director Mel Watt “permits the enterprises in 2018 to drop to a zero capital position or if he permits them to retain a small share of their profits to build a $1 billion buffer. Also possible is moving to an end-of-year payment to Treasury rather than a quarterly payment. This would smooth out any accounting generated losses that might otherwise precipitate a draw on the preferred capital line.” Stay tuned…

 

my baseline, which could be misguided, is that the collective goal of mnuchin-watt is a stall until early 2018 without upsetting anyone.  under that lens, the tip-toeing around an obviously reasonable move (creating a buffer) makes sense to me at the moment (even though it's frustrating to wait).  ditto on TSY-FHFA still fighting the lawsuits.  we also need to get past the point where FNMA has repaid the full sr preferred with interest, which I believe is close but not there yet.  However I will say that under my scenario, the share prices would naturally be higher than they are now due to eager anticipation, so maybe I'm wrong.  either way, let's all cross our fingers for a well oiled tax reform process that concludes by year end.  good luck everyone, and have a nice holiday weekend.