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

[Luke 532]

You have been brainwashed with all the books written by the experts

 

The word "all" is dangerous.  Writing a book does not make one an expert.  The content of their book that has stood the test of time makes one an expert.  There are only a handful of books one needs, and the one I've recommended to you in the past is The Intelligent Investor, so I'm guessing that's what you have in mind as the source of my being brainwashed.

 

The Intelligent Investor, although not directly quantifiable, is likely responsible for 95% of why I'm a self-made millionaire.  I'll gladly be brainwashed, if that's what you call it.

 

I've mentioned before that you need to guard yourself against emotions (read The Little Book of Behavioral Investing if you haven't already).  That's not unique to you, it's something all investors need to do.  Posting/griping about the current situation and current stock prices is more of an emotional release that results in wasted energy.

[Sunrider]

Emily, with all due respect, many (not all) of your posts are simply a complaint about the current situation.  That doesn't add value to the board and just bogs it down.  With that said, I do appreciate it when you post something that adds value to the board.  Thank you.

 

Amen.

 

[locutusoftexas]

So I read/scanned through the Document detailing the ruling by the Seventh Circuit Court of Appeals (filed 5/03). As I understand it, the Court ruled that Treasury and  FHFA acted in accordance with HERA and consistently with precedent in past court cases involving, e.g., FDIC. The most chilling option provided by HERA was: "(ii) collect all obligations and money due the regulated entity." Naively, I interpret that to mean that they can legally take all of the money/earnings (NWS). The Court, however, specifically pointed to the Court of Claims regarding the 5th Amendment and taking of property without appropriate compensation to owners.

 

Although I believe that the argument that the companies have been nationalized is a slam dunk and that the shareholders are due appropriate compensation under the 5th, I find the past rulings regarding the legality of Treasury and FHFA actions vis a vis HERA and NWS to be very discouraging. This is especially in the context of item (ii) quoted above. For this reason and the general trend of plaintiffs losing in federal court, I see the odds of a ruling for plaintiffs by Sweeney to be 50-50 at best. Ultimately the Supreme Court will have to rule, which will incur the passage of a few more years at least. If the plaintiffs lose in the SCOTUS (again 50-50 at best), Treasury will continue to grab all of the free money until circumstances force a resolution. In this scenario, the common and junior preferred will necessarily decrease in value. Unfortunately, such "forcing" circumstances are likely to be dire, in which case the value of these shares will approach zero (and stocks in general will also decline significantly). My conclusion: the most likely scenario is long-term loss of capital for common and junior preferred shareholders and the passage of a decade or more before these shares are worth more than zero.

 

Other "standard" models of stock valuation (e.g., Buffett or Graham) also support a value of approximately zero.

[Midas79]

So I read/scanned through the Document detailing the ruling by the Seventh Circuit Court of Appeals (filed 5/03). As I understand it, the Court ruled that Treasury and  FHFA acted in accordance with HERA and consistently with precedent in past court cases involving, e.g., FDIC. The most chilling option provided by HERA was: "(ii) collect all obligations and money due the regulated entity." Naively, I interpret that to mean that they can legally take all of the money/earnings (NWS). The Court, however, specifically pointed to the Court of Claims regarding the 5th Amendment and taking of property without appropriate compensation to owners.

 

Although I believe that the argument that the companies have been nationalized is a slam dunk and that the shareholders are due appropriate compensation under the 5th, I find the past rulings regarding the legality of Treasury and FHFA actions vis a vis HERA and NWS to be very discouraging. This is especially in the context of item (ii) quoted above. For this reason and the general trend of plaintiffs losing in federal court, I see the odds of a ruling for plaintiffs by Sweeney to be 50-50 at best. Ultimately the Supreme Court will have to rule, which will incur the passage of a few more years at least. If the plaintiffs lose in the SCOTUS (again 50-50 at best), Treasury will continue to grab all of the free money until circumstances force a resolution. In this scenario, the common and junior preferred will necessarily decrease in value. Unfortunately, such "forcing" circumstances are likely to be dire, in which case the value of these shares will approach zero (and stocks in general will also decline significantly). My conclusion: the most likely scenario is long-term loss of capital for common and junior preferred shareholders and the passage of a decade or more before these shares are worth more than zero.

 

Other "standard" models of stock valuation (e.g., Buffett or Graham) also support a value of approximately zero.

 

I would need a better understanding of the different claims made by the different plaintiffs to know how the Roberts appeal affirmance affects other cases. The Roberts opinion, to me, boiled down to another re-affirmation that the NWS was the act of a conservator and not ultra vires, and thus 4617(f) bars claims. Same as all the other cases I have seen so far. It also said that plaintiffs' claims were, by and large, derivative and also thus not applicable.

 

Graham-style valuations are naturally going to be zero because shareholders don't participate in any of the companies' profits. The thesis most of us preferred holders have is that i) there is no (plausible) alternative to Fannie and Freddie, meaning that they will eventually be released and the junior prefs will either be redeemed or have their dividends turned back on, and ii) the cases have largely been brought by junior pref holders. If a court awards damages then ostensibly any other junior pref holder (who held since before the NWS) can also sue for the same damages, right? I don't know where this leaves people who bought junior prefs after the NWS.

 

I disagree that "forcing" action must necessarily be bad for junior pref holders. If getting out from under those contracts was that easy, FnF/Treasury would have done so long ago.

[Cox022]

Petrou on Mnuchin's comments this week and GSE reform.

 

http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance

 

 

[Guest cherzeca]

Petrou on Mnuchin's comments this week and GSE reform.

 

http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance

 

i did not understand a word.  anyone translate?

[locutusoftexas]

Midas,

 

The thesis that Fannie and Freddie are the only viable option (which I readily accept) implies neither that, in the absence of negative events or issues, Treasury/FHFA will willingly change the current situation (in which it accepts free money with common and junior preferred shareholders in limbo) nor that Congress will pass appropriate legislation. Furthermore, the existence of private shareholders maintains the fiction that the companies are separate from the government, providing "cover" for Treasury's de facto nationalization of the companies. If something goes wrong, this separation allows Treasury to deflect criticism to the companies' officers and leaves the private shareholders holding the bag. The complaint filed in Sweeney's court by Mason Capital on April 11 addresses this by focusing not on Treasury's misuse of HERA and NWS but instead on the de facto nationalization of the companies without proper compensation of the private shareholders. Compensation is what Mason Capital seeks. This would force Treasury to address the nationalization publicly. An easy solution for Treasury would be to  have the companies borrow money from Treasury to make a tender offer for all common and junior preferred shares. The shares could be cancelled upon being tendered. The nationalization would then be complete and official. Of course, Treasury does not want to do this for reasons given above and possibly for additional reasons that I cannot imagine. More impartantly, if the private shareholders cannot win a case on nationalization in violation of the 5th amendment, then the shares are truly worthless. 

[DocSnowball]

This is now in the too hard pile for me. Legal thesis is all but disconfirmed. Administrative action thesis is too hard to predict. Will look to reinvest when the companies offer shareholder rights again in the future and are available at a margin of safety. Good luck to everyone, and very sincere thanks for sharing your thoughts and feelings on this journey for the last few years.

[Midas79]

The thesis that Fannie and Freddie are the only viable option (which I readily accept) implies neither that, in the absence of negative events or issues, Treasury/FHFA will willingly change the current situation (in which it accepts free money with common and junior preferred shareholders in limbo) nor that Congress will pass appropriate legislation.

 

I agree here. But Mnuchin is on record saying that the companies will not be in conservatorship by the end of Trump's term. While the status quo is comfortable for the major players, the person with the most authority to effect a change has said that something will happen within 2.5 years. I can't see Congress agreeing on sweeping housing finance reform that kills FnF: the Republicans have just about run out of time and the Democrats, who are likely to take at least one chamber of Congress in November, don't want them dead.

 

Furthermore, the existence of private shareholders maintains the fiction that the companies are separate from the government, providing "cover" for Treasury's de facto nationalization of the companies. If something goes wrong, this separation allows Treasury to deflect criticism to the companies' officers and leaves the private shareholders holding the bag.

 

A fair point, but also a potentially good one for existing shareholders. Somebody other than the government has to own the companies when it's all said and done, and it's hard to argue that existing shareholders won't be among them. Dilution to common is all but inevitable in my eyes, making the prefs a safer investment.

 

The complaint filed in Sweeney's court by Mason Capital on April 11 addresses this by focusing not on Treasury's misuse of HERA and NWS but instead on the de facto nationalization of the companies without proper compensation of the private shareholders. Compensation is what Mason Capital seeks. This would force Treasury to address the nationalization publicly.

 

Thanks for drawing my attention to this specific case. I will read the complaint more carefully; I skimmed through it the first time. If it can avoid claims that are barred by 4617(f) then it has a fighting chance.

 

An easy solution for Treasury would be to  have the companies borrow money from Treasury to make a tender offer for all common and junior preferred shares. The shares could be cancelled upon being tendered. The nationalization would then be complete and official. Of course, Treasury does not want to do this for reasons given above and possibly for additional reasons that I cannot imagine. More impartantly, if the private shareholders cannot win a case on nationalization in violation of the 5th amendment, then the shares are truly worthless.

 

I can see a clear reason that this won't happen. Nationalizing the companies would make the GSEs essentially government agencies, and at that point they would have to consolidate FnF's assets and liabilities onto the country's balance sheet. That would add $5T to the national debt overnight, political suicide for Trump. The way politicians spin things, it won't matter than the overall net worth of the country would remain unchanged (because assets would also go up by $5T): they just focus on the debt number.

 

The most recent presidential budget confirms this. On page 104 (page 116 of the pdf):

 

Although Federally chartered to serve public-policy purposes,  GSEs are classified as non-budgetary because they are intended to be privately owned and controlled—with any public benefits accruing indirectly from the GSEs’ business transactions.

 

https://www.whitehouse.gov/wp-content/uploads/2018/02/spec-fy2019.pdf

[locutusoftexas]

Midas,

 

Thank you for your time in responding and the excellent points that you have made. I believe that you have a very good chance of being right on all counts and hope that you are. I cannot be as optimistic about what Mnuchin will do but I absolutely agree about Congress. I have also observed over many years that the federal government is very unlikely to kill a program once it starts, although every "rule" has exceptions. I further agree with your comments about the administration's reluctance to nationalize the companies and past demonstrations of this reluctance. This is why I believe that a complaint aimed at de facto nationalization in violation of the 5th Amendment is not only the most likely to succeed but also a potential trigger to action by Mnuchin or Congress. It is possible that I did not read the Mason Capital complaint closely enough and would appreciate hearing that I somehow got it wrong.

 

The Mason complaint is particularly ironic to me as I wrote an email to a major private shareholder suggesting exactly such a complaint two days before the Mason complaint was filed. I am sure that my email had nothing to do with it, but the filing gave me some hope that I wasn't completely off the mark. Past discussions over the years have used the term "nationalization," so this thought was new only to me.

 

Anyway, I don't believe that I will have much to add to the thread beyond this, but will do so if I have anything else to offer.

[DRValue]

You sell one investment for another if a better one comes along. Could be for portfolio rebalancing too.

 

How do you know he didn't sell for redemptions?

[DRValue]

So reading that, the Sears sale would almost cover the Vista investment. Likely a combination of reallocation and redemptions.

 

I've pretty much given up on lawsuits at this point. Bhatti is interesting but we'll see. Sweeney, I have no idea what's taking so long. It never seems to move.

[orthopa]

Emily, with all due respect, many (not all) of your posts are simply a complaint about the current situation.  That doesn't add value to the board and just bogs it down.  With that said, I do appreciate it when you post something that adds value to the board.  Thank you.

 

1+

[Luke 532]

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

[blackcoffee]

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

[Luke 532]

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

 

I agree that we should be reminded from time to time of the atrocities taking place but it's on a weekly basis, if not more often, from one person.  When the central thesis of an investment is that a wrong should be corrected, well, we shouldn't have to be reminded over and over again that there's a wrong that should be corrected.  If somebody has forgotten that part of the thesis then they shouldn't be invested in this situation at all.

 

[Sunrider]

Yes, I agree! It’s very very unfair ... as your CinC would say (kinda like when the US lost against Trinidad and Tobago in cricket - had to play two countries at the same time ... very very unfair!

 

Seriously - don’t bitch,  ... go vote. Go write to your congressman and get everyone else you know to write as well. If there’s no public pressure, why would a politician do anything? It’s not in their nature.

 

:)

 

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

[SnarkyPuppy]

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

 

Oh stop it.  You're just trying to get rich easily and are upset its not playing out. 

[blackcoffee]

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

 

Oh stop it.  You're just trying to get rich easily and are upset its not playing out.

 

wait am I crazy or was that not an answer the question? That was an attack on me!?!? What's that in Latin?

[blackcoffee]

Yes, I agree! It’s very very unfair ... as your CinC would say (kinda like when the US lost against Trinidad and Tobago in cricket - had to play two countries at the same time ... very very unfair!

 

Seriously - don’t bitch,  ... go vote. Go write to your congressman and get everyone else you know to write as well. If there’s no public pressure, why would a politician do anything? It’s not in their nature.

 

:)

 

"The solid first quarter performance reflects the strength of the underlying business and the benefits of our business model. $2.87EPS!"

 

Common shares should be over $25.00 and Preferreds should pay dividends and should be at par. Theft from shareholders is on a massive scale and no one wants to publicly speak up or can do anything. Venezuela type.

 

Emily, it's probably against the rules of this website to copy a previous post of yours, delete the original, and then re-post it so it shows up as the most recent post.  That's happened at least 3 times with the post I've quoted above.

 

Keep in mind that the fundamental concept of value investing is to find something that should be at $X but instead is trading at a discount.  I understand your frustration, but security prices staying low for a lot longer (or forever) than one would hope or think is part of the process.

 

I have a question (note I'm not emily's 2nd secret account) I just have a question.

 

At what point does it become problematic that the entire gov't and 100% of the media is lying to the public about this subject and has been for an entire decade while the public is on the hook for it?

 

I would think people here, while I'm sure are feeling beat down, wouldn't be so quick to berate others pointing out the inequities that have persisted for so long. We're supposedly a country where the rule of law is equally applied. Thusfar the justice system has done nothing to convince me of that in my LIFETIME. Not just this case but everywhere I look. When the going gets tough the judges seem to get paid under the table or coerced into rulings that benefit the gov't.

 

So yes it isn't helpful to keep bringing up the same crimes over and over but it's worth remembering that at some point, if we continue down this path, our institutions are going to face votes of no confidence top to bottom. We must reverse course or else.

 

I think it is important to remind everyone of the context here from time to time. This is supposed to be America.

You realize that people are waking up to the fact they have 0 political efficacy right?

[orthopa]

It seems like fatigue with this investment is setting in. Maybe the end is near! ;)

[rros]

It seems like fatigue with this investment is setting in. Maybe the end is near! ;)

Orthopa,

 

;) or  :-\ or maybe  >:(?

[allnatural]

Investor fatigue is definitely kicking in!

 

Hello all- long time lurker first time poster here. Apologies in advance for the gibberish, just threw this together.

 

I have been following the saga alongside everyone for a few years now and figured I would share my 2 cents given the recent negativity. I think the shares depressed because 1) it doesn’t seem like congress is up to the task this year (or ever), 2) investors are fatigued after 10 years (just got delayed another year), and 3) the largest holders are putting technical selling pressure on the shares due to redemptions and/or funds shutting down.

 

The preferred shares today are implying that there is greater than a ~75% chance that the preferred shares are worthless and ~25% chance par value will be recouped. To me, the shares are materially mispriced (I believe there is >90% chance that GSEs aren’t going anywhere anytime soon as the GSEs are more so the foundation of the US housing market today than anytime in history).

 

Instead of thinking what has to go right, it's always interesting to think of what needs to go wrong. In this specific situation, a series of low probability events have to occur simultaneously. Administratively is Mnuchin going to reverse his positive commentary to date (end the conservatorship, wants private capital, understands the counter-cyclical role gses provide, etc.) and agree to forfeit up to $100b+? Legislatively will congress ever find a viable alternative to the GSEs while not disturbing the housing / mortgage market (e.g. not negatively impacting affordability, liquidity, or interest rates), and in litigation no judge has yet to rule on any constitutional issues.

 

I believe an administrative resolution will happen sometime in 2019 (I am not going to attempt repeating the rationale as Karen Petrou eloquenty lays it out for us- http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance), with optionality for a late 2018 event if we were to get a favorable court ruling.

 

Regarding litigation, it’s clear the issue has always been the nationalization and takings of shareholder property. While the courts have been disappointing thus far, no judge has yet to rule on this matter. And with discovery wrapped up, the Sweeney case is finally beginning to progress with a decision expected in early 2019. There are also interesting developments taking place in the Collins case which we should hear back soon enough.

 

I believe after the summer/midterms it will get very bumpy as GSE reform picks up steam. It will only take one headline to send shares soaring, while risk seems priced out at these levels. Best of luck to everyone!

 

[Eye4Valu]

Herbert Stein's Law: "If something cannot go on forever, it will stop." Question is, when it stops, do shareholders make any money? I guess that question is what makes a market.

[SnarkyPuppy]

Instead of thinking what has to go right, it's always interesting to think of what needs to go wrong. In this specific situation, a series of low probability events have to occur simultaneously. Administratively is Mnuchin going to reverse his positive commentary to date (end the conservatorship, wants private capital, understands the counter-cyclical role gses provide, etc.) and agree to forfeit up to $100b+? Legislatively will congress ever find a viable alternative to the GSEs while not disturbing the housing / mortgage market (e.g. not negatively impacting affordability, liquidity, or interest rates), and in litigation no judge has yet to rule on any constitutional issues.

 

1.  Mnuchin has already reversed his commentary to date on the timing of when the GSEs would be released.  What's stopping him from reversing his commentary to date that he wants to end conservatorship?  Is this in legal writing?  Will he be personally punished if he keeps the status quo or go against what he said publicly?  His boss quite literally lies daily...? 

 

2.  "Agrees to forfeit up to $100bn".  Again - this is not money in Mnuchin's personal pocket.  While the $100bn is a great incentive for the government, it doesn't contemplate whether there are other incentives at play which take priority.  As an example, if there is a mechanism whereby large banks are overwhelmingly favored but shareholders are taken out, it's possible that Mnuchin/Trump would see the banks fundraising money for the 2020 election to be a personal incentive which trumps (pun intended) the $100bn for the country.  Color me crazy but I don't see the current administration as a bunch of charitable good guys who are looking out for anyone but themselves.   

 

3.  Also w/r/t the warrants - they could've been exercised by now.  The value of the warrants reduces as each day passes.  The longer the current administration waits to monetize the warrants, the less time they will have to use the money productively.  Why would Mnuchin want to monetize $100bn of warrants to hand over to the next admin?  Waiting longer is coincidentally the same as waiting until closer to 2020 - hence waiting to disclose the solution until a date closer to the election is consistent with my point #2 above.

 

4. Please explain, in detail, why the following plan is a "low probability" event given that it's consistent with everything all key players have spoke to so far?  http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf

 

I believe an administrative resolution will happen sometime in 2019 (I am not going to attempt repeating the rationale as Karen Petrou eloquenty lays it out for us- http://www.fedfin.com/blog/2671-karen-petrou-on-why-treasury-will-recraft-housing-finance), with optionality for a late 2018 event if we were to get a favorable court ruling.

 

Not sure I understand Karen Petrou's argument.  In the article she states "A draw or two from Treasury ahead of the 2020 election would be more than embarrassing, especially given Republican angst over the deficit even before Fannie or Freddie make it worse."    A draw just occurred on 3/31/2018 - did you hear anything about it in the news?  A larger draw probably causes just as much noise.  Even if it did, it could be easily PR'd to the average person that fannie/freddie are the problem and need to be killed. 

 

Regarding litigation, it’s clear the issue has always been the nationalization and takings of shareholder property. While the courts have been disappointing thus far, no judge has yet to rule on this matter. And with discovery wrapped up, the Sweeney case is finally beginning to progress with a decision expected in early 2019. There are also interesting developments taking place in the Collins case which we should hear back soon enough.

 

You are one optimistic soab to have any faith in the legal thesis at this point.  I think we all should acknowledge that this is extremely complicated and at some point become sober to the fact that "lack of judicial review" was not something that was handicapped for when the initial investment thesis was presented. 

 

 

 

I'm still in the trade, but I find myself more and more recognizing that I want to be right about this after spending so much time on it.  It's a clear bias and something that smells trouble in investing - and I'm very close to sizeably reducing my position as I'm worried that there's something else coming that will blindside us again. 

 

The mutualization solution (http://assets1b.milkeninstitute.org/assets/Publication/Viewpoint/PDF/Toward-a-New-Secondary-Mortgage-Market.pdf) plus privately settling the lawsuits with all current large shareholders would not be totally surprising and I don't know how to handicap the odds.