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

[thecynic]

i doubt that he sold out. he just not disclose the stake. nothing more.

 

If he did, I'm sure Carney would have been all over it by now & we could expect another article Sunday evening.

[merkhet]

 

I was at his office, and he stated that it was one of his largest positions. Hell, they extended me an interview because of my questions about Fannie & Freddie.

 

Impressive! How did you end up in his office, if you don't mind me asking?

 

It was an office visit for the investment club at business school. He made a presentation to us, and we ended up having a quick conversation about Fannie & Freddie after I asked a Q about it.

[merkhet]

I'm expecting a bloodbath come Monday -- should get mighty interesting for those that are thinking about buying more -- I picked up a few more preferred shares today.

 

If the bloodbath comes on Monday, why buy today instead of on Monday?

 

Timing. When I picked up more shares today, this news hadn't broken. I suspect I will be picking up more shares next week as well.

 

 

I was at his office, and he stated that it was one of his largest positions. Hell, they extended me an interview because of my questions about Fannie & Freddie.

 

Impressive! How did you end up in his office, if you don't mind me asking?

 

Same question here. How did your interview end up? Did you get an offer from Paulson?

 

It went fine, but it was very clear that they wanted an Excel monkey. Plus, I had a job at the time (same fund I run now), so I basically took the interview because I wanted to pick Paulson's brain some more.

[merkhet]

i doubt that he sold out. he just not disclose the stake. nothing more.

 

If he did, I'm sure Carney would have been all over it by now & we could expect another article Sunday evening.

 

We might get an article insinuating that he did anyway. :)

[dcollon]

A different look at Fairholme's quarterly holdings

Fairholme_13f.xls

[muscleman]

I'm expecting a bloodbath come Monday -- should get mighty interesting for those that are thinking about buying more -- I picked up a few more preferred shares today.

 

If the bloodbath comes on Monday, why buy today instead of on Monday?

 

Timing. When I picked up more shares today, this news hadn't broken. I suspect I will be picking up more shares next week as well.

 

 

I was at his office, and he stated that it was one of his largest positions. Hell, they extended me an interview because of my questions about Fannie & Freddie.

 

Impressive! How did you end up in his office, if you don't mind me asking?

 

Same question here. How did your interview end up? Did you get an offer from Paulson?

 

It went fine, but it was very clear that they wanted an Excel monkey. Plus, I had a job at the time (same fund I run now), so I basically took the interview because I wanted to pick Paulson's brain some more.

 

Wow cool! So you are a fund manager as well. That's nice!

 

Regarding this: http://www.bloomberg.com/news/2014-11-14/aig-may-be-on-hook-if-hank-greenberg-wins-bailout-suit.html

Why did you say:"We'll probably get a resolution on the AIG case before year-end, which may provide some interesting guidance towards the Fannie & Freddie cases."?

I assume you meant that the judge will rule by the end of this year, right? But appeal will take many years from this point on.

[merkhet]

Yes, the judge will rule by the end of the year.

 

The losing party at the lower level gets one appeal as of right. It's unclear whether they'll use it -- especially if the judge's ruling is airtight. Bloomberg might say it'll take years to get through appeals, but I figure it'll be two years on the outset -- though this might be a case that interests the Supreme Court.

 

For the purposes of providing some guidance on Fannie & Freddie, the lower court ruling (Wheeler) is what matters.

 

On another note, I was taking my morning walk, and a thought occurred to me. Could it be that Berkowitz has stopped disclosing because he wanted to do tax selling this year? I spoke to him briefly at the Graham & Dodd breakfast a few weeks ago, and I didn't get the sense that he felt defeated on the Fannie & Freddie investment. So I'm wondering what the possible motivations might be to stop disclosing.

[muscleman]

Yes, the judge will rule by the end of the year.

 

The losing party at the lower level gets one appeal as of right. It's unclear whether they'll use it -- especially if the judge's ruling is airtight. Bloomberg might say it'll take years to get through appeals, but I figure it'll be two years on the outset -- though this might be a case that interests the Supreme Court.

 

For the purposes of providing some guidance on Fannie & Freddie, the lower court ruling (Wheeler) is what matters.

 

On another note, I was taking my morning walk, and a thought occurred to me. Could it be that Berkowitz has stopped disclosing because he wanted to do tax selling this year? I spoke to him briefly at the Graham & Dodd breakfast a few weeks ago, and I didn't get the sense that he felt defeated on the Fannie & Freddie investment. So I'm wondering what the possible motivations might be to stop disclosing.

 

He has over 118 Million shares of FNMAS. The average daily volume is merely 2 million. It would not be practical to do tax selling for him at all. Maybe he has been hassled by too much media attention and just want his peace?

 

It is awesome that you have such great opportunities to speak with such great guys as Bruce and Paulson.  :)

 

[Mephistopheles]

Yes, the judge will rule by the end of the year.

 

The losing party at the lower level gets one appeal as of right. It's unclear whether they'll use it -- especially if the judge's ruling is airtight. Bloomberg might say it'll take years to get through appeals, but I figure it'll be two years on the outset -- though this might be a case that interests the Supreme Court.

 

For the purposes of providing some guidance on Fannie & Freddie, the lower court ruling (Wheeler) is what matters.

 

On another note, I was taking my morning walk, and a thought occurred to me. Could it be that Berkowitz has stopped disclosing because he wanted to do tax selling this year? I spoke to him briefly at the Graham & Dodd breakfast a few weeks ago, and I didn't get the sense that he felt defeated on the Fannie & Freddie investment. So I'm wondering what the possible motivations might be to stop disclosing.

 

I posted this question earlier, but I'll just repost here. Would he even be allowed to sell, given that he presumably has access to material non-public information from the Discovery process?

[merkhet]

Good point on the lack of volume -- we'll see if volume increases because people misconstrue the Bloomberg article next week.

 

It's unclear to me whether the discovery process would be deemed material -- for instance, is the process itself deemed material? If he's 20% through the documents, and he hasn't found anything, does that count as having "material" information? Is non-information "material"? *shrug*

[Grenville]

It is awesome that you have such great opportunities to speak with such great guys as Bruce and Paulson.  :)

 

It's also awesome that you have such great opportunities to speak with such great/thoughtful guys as merkhet. :)

[merkhet]

I am neither great nor thoughtful -- occasionally, I am lucky, though.

 

(In this particular investment, I have been somewhat unlucky on timing -- I really wish I had built the majority of my position post-Lamberth rather than pre-Lamberth. C'est la vie.)

[Eye4Valu]

My take is that he maintains his position or is adding, but is no longer disclosing and probably shouldn't have been, similar to other hedgies. I wouldn't be the least bit surprised if he added recently.

[Mephistopheles]

It's unclear to me whether the discovery process would be deemed material -- for instance, is the process itself deemed material? If he's 20% through the documents, and he hasn't found anything, does that count as having "material" information? Is non-information "material"? *shrug*

 

This is exactly my concern. Not only is there technically no "information", but he also doesn't have to disclose anything if he does sell. Seems to be a huge advantage for those involved in discovery.

 

I guess it's the price we have to pay for having the fund managers put up millions of dollars in order to fight for all investors.

[ap1234]

I would be VERY surprised if Berkowitz exited his Fannie/Freddie prefs in Q3. That wouldn't make any sense given what he has said publicly since that time not to mention the current Sweeney court case.

 

Merkhet and I attended the Graham & Dodd breakfast in late October (after Q3 filings). Berkowitz was one of the panelists and spoke very candidly (and with a lot of conviction) about Fannie/Freddie. In short, he reiterated his stance: either Judge Lambert is dead wrong or the law is unconstitutional. He went on to say that what the government did breaks securities law, it breaks corporate law and it breaks the fifth amendment of the constitution. Similar with Ackman, he believes there is no substitute for Fannie/Freddie and as such a compromise with shareholders is likely to be reached (whether it is in or out of the court system).

 

As an aside, I remember a few months ago when Eddie made the loan to Sears backed by some of the company's real estate. There was lots of discussion on the board about whether Bruce was going to sell his stake as a result. Fairholme ended up participating in the real estate loan and added to its position in SHLD afterwards.

 

That said, I think it's worth noting...IF the reason you are invested in Fannie is solely because Berkowitz is investing, then I think it makes more sense to invest directly in the Fairholme fund. You should ask yourself this question: if Berkowitz exited Fannie/Freddie tomorrow, would I still be comfortable holdings shares?

 

There is absolutely nothing wrong with following Berkowitz. He is a great investor. But if you are going to make your decisions solely based upon his actions, it will be very dangerous going forward as Bruce won't be disclosing his positions in Fannie/Freddie. Instead, if you invest in his fund, you only pay a 1% fee and get to participate in his buys/sells in real time.

 

I am not a Fairholme unit holder. As such, I accept the risk that Bruce may change his mind about any of his holdings at any given time. For those that wouldn't be comfortable if Bruce sold tomorrow, there is nothing wrong with that but they should probably invest directly in his fund and not try and coattail his individual holdings with imperfect information.

[Mephistopheles]

I would be VERY surprised if Berkowitz exited his Fannie/Freddie prefs in Q3. That wouldn't make any sense given what he has said publicly since that time not to mention the current Sweeney court case.

 

Merkhet and I attended the Graham & Dodd breakfast in late October (after Q3 filings). Berkowitz was one of the panelists and spoke very candidly (and with a lot of conviction) about Fannie/Freddie. In short, he reiterated his stance: either Judge Lambert is dead wrong or the law is unconstitutional. He went on to say that what the government did breaks securities law, it breaks corporate law and it breaks the fifth amendment of the constitution. Similar with Ackman, he believes there is no substitute for Fannie/Freddie and as such a compromise with shareholders is likely to be reached (whether it is in or out of the court system).

 

As an aside, I remember a few months ago when Eddie made the loan to Sears backed by some of the company's real estate. There was lots of discussion on the board about whether Bruce was going to sell his stake as a result. Fairholme ended up participating in the real estate loan and added to its position in SHLD afterwards.

 

That said, I think it's worth noting...IF the reason you are invested in Fannie is solely because Berkowitz is investing, then I think it makes more sense to invest directly in the Fairholme fund. You should ask yourself this question: if Berkowitz exited Fannie/Freddie tomorrow, would I still be comfortable holdings shares?

 

There is absolutely nothing wrong with following Berkowitz. He is a great investor. But if you are going to make your decisions solely based upon his actions, it will be very dangerous going forward as Bruce won't be disclosing his positions in Fannie/Freddie. Instead, if you invest in his fund, you only pay a 1% fee and get to participate in his buys/sells in real time.

 

I am not a Fairholme unit holder. As such, I accept the risk that Bruce may change his mind about any of his holdings at any given time. For those that wouldn't be comfortable if Bruce sold tomorrow, there is nothing wrong with that but they should probably invest directly in his fund and not try and coattail his individual holdings with imperfect information.

 

I agree with everything you said. I'm not holding just because Berkowitz is in. I've read most of the court transcripts and filings and at this price it seems like an obvious bet for a small portion of my portfolio.

 

What I'm worried about is that Discovery means that Fairholme and Perry have access to material non-public information (or lack their of) and have a huge advantage over everyone else; and given that he doesn't have to report his holdings, he can sell without causing a massive price drop.

[Grenville]

I agree with everything you said. I'm not holding just because Berkowitz is in. I've read most of the court transcripts and filings and at this price it seems like an obvious bet for a small portion of my portfolio.

 

What I'm worried about is that Discovery means that Fairholme and Perry have access to material non-public information (or lack their of) and have a huge advantage over everyone else; and given that he doesn't have to report his holdings, he can sell without causing a massive price drop.

 

I think it's crazy to think Berkowitz could sell his holdings at current prices without moving the share price. He's got a massive position and  others would figure out quickly if he tried to move his position in the public market. If he move his positions in a privately negotiated position deal off market (assuming it doesn't have to be publicly reported in the daily ticker) that would be different.

[Mephistopheles]

I agree with everything you said. I'm not holding just because Berkowitz is in. I've read most of the court transcripts and filings and at this price it seems like an obvious bet for a small portion of my portfolio.

 

What I'm worried about is that Discovery means that Fairholme and Perry have access to material non-public information (or lack their of) and have a huge advantage over everyone else; and given that he doesn't have to report his holdings, he can sell without causing a massive price drop.

 

I think it's crazy to think Berkowitz could sell his holdings at current prices without moving the share price. He's got a massive position and  others would figure out quickly if he tried to move his position in the public market. If he move his positions in a privately negotiated position deal off market (assuming it doesn't have to be publicly reported in the daily ticker) that would be different.

 

Touche. I meant since he wouldn't have to file if he sold, cloners wouldn't follow, but you're right.

[merkhet]

The plaintiff's response to the motion to stay was sealed.

 

**SEALED**RESPONSE to [103] Motion to Stay , filed by All Plaintiffs. (Attachments: # (1) Exhibit A, # (2) Exhibit B, # (3) Exhibit C, # (4) Exhibit D, # (5) Exhibit E, # (6) Exhibit F, # (7) Exhibit G)(Cooper, Charles)

 

Let the speculation begin. :)

[muscleman]

The plaintiff's response to the motion to stay was sealed.

 

**SEALED**RESPONSE to [103] Motion to Stay , filed by All Plaintiffs. (Attachments: # (1) Exhibit A, # (2) Exhibit B, # (3) Exhibit C, # (4) Exhibit D, # (5) Exhibit E, # (6) Exhibit F, # (7) Exhibit G)(Cooper, Charles)

 

Let the speculation begin. :)

 

Nice! This probably implies at least the discover did identify documents that are highly controversial.  :)

[merkhet]

My take is that plaintiff's response to defendants using the Lamberth opinion to push for a motion to dismiss and/or a motion to stay is to present evidence they've found during discovery that makes Lamberth's opinion irrelevant.

[Eye4Valu]

My view is that Lamberth's opinion is irrelevant in the Court of Claims anyway. Lamberth's case involved the injunction, where as Sweeney's involves monetary damages pursuant to taking. Sealed exhibits must bolster Plaintiff's jurisdictional arguments, or they wouldn't be included. On Ackman's conference call, he mentioned that Lamberth weighed in on takings claim, although that was not the issue before his court. Ackman felt Lamberth's argument that the stock still trades is weak. So what if the stock still trades if you have no claim to residual interest. Ackman likes risk/reward at 2-2.5% of his portfolio. But it could never be a larger position for him with the U.S. owning rights to 80% of it. Its interesting that Bruce made the Prefs a decent sized position is his portfolio. Shows you his absolute conviction that the dividends will be restored. I think you can hedge common exposure with preferred, and wonder why more people with common exposure don't think to hedge it with the Prefs. 

 

 

[TwoCitiesCapital]

Maybe it's a bit premature, but I'm trying to think of ways we could lose while still winning th court case.

 

Is it feasible that the government would convert the preferred to common at some price other than the $25 or $50 face value? Is there precedent for a preferred to common conversion at some value other than face?

 

How likely do you think it is for the government to simply release the GSEs from conservatorship and issue a ton of equity at current prices to make up for the capital shortfall (as opposed to retaining earnings and selling fixed income assets) to dilute the benefit of a legal victory?

 

What would occur if another recession occurred prior to release resulting in GSEs seeking more capital since the govt has allowed for them to retain any?

 

I'm getting more and mor comfortable with the legal aspects of this. I'm trying to wrap my head around other ways we could still lose this.

[merkhet]

So, there's "precedence" in terms of the GM bankruptcy where the bondholders took an immense haircut in order to satisfy the UAW.

 

In this case, F&F need something on the order of $125 billion in capital -- possibly $250 billion in capital.

 

The junior preferreds come out to about $34.6 billion @ par. If you convert that at a lower price than par, then that's just an addition $X amount that you have to come up with in some other way. Never say never, but I don't quite see the point.

 

I think that if the government issues equity to make up for the capital shortfall w/o converting the preferred, then that's perfectly fine for the preferreds because we sit above the equity anyway.

 

If the GSEs continue to draw down on the credit line, they actually trip a provision in the SPSAs that allows them the mechanism to unilaterally pay back the government preferreds.

[brker_guy]

Here we go:

 

Senator Asks FHFA to End Treasury Conservatorship of Fannie Mae (FNMA), Freddie Mac (FMCC)

 

http://www.streetinsider.com/Insiders+Blog/Senator+Asks+FHFA+to+End+Treasury+Conservatorship+of+Fannie+Mae+(FNMA),+Freddie+Mac+(FMCC)/10031403.html