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

[rros]

One additional point - I think most look at this situation and ask "how do these go to par?" and there is no clear answer (there's a wide range of potential successful or partially successful outcomes).

 

Those who have invested in this situation have inverted the above question and have asked "how do these go to 0?"

In my view, and court rulings aside, there is only one bet for us to win or lose: Mnuchin deciding to railroad everyone on the upside just like  Hank Paulson did on the downside. Recap will breed air into equity no matter what and it will not interfere with reforms of any kind this year, next or whenever. Including taking us out. Except this will become costly. There is a long list of laws, regulations, rules, rulings that will support such decision and very few that will prevent it. It's only the political decision that hasn't been taken yet. And it is a downer Treasury did not come out forcefully supporting Mulvaney in this particular issue. That was a perfect opportunity.

 

Hank Paulson could easily persuade G. Bush. And his decisions were made in the midst of a crisis. Mnuchin may have more roadblocks with his boss and circumstances may not be as favorable.

[orthopa]

Is there a reason preferreds are trading for quite some time in a tight range around $6.00 and commons around $1.50?

 

I would say its because the buyers and sellers think the best price for buying and selling is very similar.

[allnatural]

One additional point - I think most look at this situation and ask "how do these go to par?" and there is no clear answer (there's a wide range of potential successful or partially successful outcomes).

 

Those who have invested in this situation have inverted the above question and have asked "how do these go to 0?"

 

This is a key point many people miss due to the complexity of the situation. Once you come to the conclusion that the GSEs aren't going anywhere as they are the pillars behind US's housing economy, how do we get to zero? Are we going to see a new housing system built from scratch? Unlikely...  Is the status quo sustainable? Sure until another downturn in the market and the government is on the hook for all future losses... Is the government going to be able to monetize its warrants by jumping over the Jr Pfds? No we are senior to them... Will congress ever pass anything? don't make me laugh... You say the government wants private capital back in the GSEs? Ok we are sitting in a pretty position then.

 

How do we get there? that's another question. But between admin reform trending in our favor little by little and litigation as a backdrop- I don't think investors are risking much at current levels.

[Luke 532]

One additional point - I think most look at this situation and ask "how do these go to par?" and there is no clear answer (there's a wide range of potential successful or partially successful outcomes).

 

Those who have invested in this situation have inverted the above question and have asked "how do these go to 0?"

 

This is a key point many people miss due to the complexity of the situation. Once you come to the conclusion that the GSEs aren't going anywhere as they are the pillars behind US's housing economy, how do we get to zero? Are we going to see a new housing system built from scratch? Unlikely...  Is the status quo sustainable? Sure until another downturn in the market and the government is on the hook for all future losses... Is the government going to be able to monetize its warrants by jumping over the Jr Pfds? No we are senior to them... Will congress ever pass anything? don't make me laugh... You say the government wants private capital back in the GSEs? Ok we are sitting in a pretty position then.

 

How do we get there? that's another question. But between admin reform trending in our favor little by little and litigation as a backdrop- I don't think investors are risking much at current levels.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

[allnatural]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

[rros]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

Your statement "Ok we are sitting in a pretty position then".

 

Here is one way you can get closer to zero while everything else remains the same. If you buy at current prices and prices stay put for 30+ years, given inflation (specially if high inflation becomes the norm) and cost of opportunity, your purchasing power when you sell will be half of today's or worse. Time value of money. I am 8 into that count and by the time warrants expire -2025?- I will have to add another 7, provided that's the master plan by any Administration. It's been 10 since the Conservatorships were instituted. And Mnuchin seems to have a hard time keeping promises.

 

[Spekulatius]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

 

I agree with most longs here that the risk that the GSE are dismantled is very low. The reason, imo is that the GSE’s have been providing liquidity to the mortgage market for a long time, the system work and messing it up and hurting the housing market is not worth taking.

 

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

[SnarkyPuppy]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

 

I agree with most longs here that the risk that the GSE are dismantled is very low. The reason, imo is that the GSE’s have been providing liquidity to the mortgage market for a long time, the system work and messing it up and hurting the housing market is not worth taking.

 

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

 

I've never understood the "NWS is very profitable for the government" argument.  The key players in the executive branch are made up of elected officials who will serve either 4 or 8 years.  Surely monetizing the warrants and receiving $100-150bn today is more useful to an elected official than $20bn per year paid to an entity that they will no longer be part of after 4-8 years?   

[blackcoffee]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

 

I agree with most longs here that the risk that the GSE are dismantled is very low. The reason, imo is that the GSE’s have been providing liquidity to the mortgage market for a long time, the system work and messing it up and hurting the housing market is not worth taking.

 

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

 

I've never understood the "NWS is very profitable for the government" argument.  The key players in the executive branch are made up of elected officials who will serve either 4 or 8 years.  Surely monetizing the warrants and receiving $100-150bn today is more useful to an elected official than $20bn per year paid to an entity that they will no longer be part of after 4-8 years? 

 

You don't understand how scraping money into perpetuity at $20B/year is better for an entity than $100B today?

 

hmmm I would like to sell you some insurance.

[rros]

Anything is possible right, including a zero.. But this is far from a binary investment that some make it out to be.

 

You guys both nailed it.  I think the chances of the prefs getting zeroed out are about as close to 0% as it can get, but never can be truly 0%.

 

I agree with most longs here that the risk that the GSE are dismantled is very low. The reason, imo is that the GSE’s have been providing liquidity to the mortgage market for a long time, the system work and messing it up and hurting the housing market is not worth taking.

 

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

I am starting to agree. Which is linked to how this investment could become worthless in terms of time value of money. The NWS has proven to be Administration-agnostic. Both Republicans and Democrats will tend to keep it once in office.

[Luke 532]

You don't understand how scraping money into perpetuity at $20B/year is better for an entity than $100B today?

 

hmmm I would like to sell you some insurance.

 

What he's saying is $100B today in a politician's pocket (with a term ending in X years) that he can use any way he sees fit is better than $20B every year for eternity in someone else's pocket... especially if that somebody else likely will use it for purposes the politician doesn't agree with.  Generally speaking, legacies in politics are built with what is actually accomplished while somebody is in office, not with the impact it has for years to come. 

 

[Luke 532]

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

 

I hear you, but how does the NWS stay intact if the conservatorship ends?  Mnuchin has been very vocal about ending the conservatorship on his watch, as has Watt, and the White House (if we're to believe the Mulvaney report).  Yes, it is possible that all of them are lying or change their minds.

 

Edit: I didn't word that carefully enough.  Watt hasn't said he wants conservatorship ended on his watch, but he has said it can't last forever.

[locutusoftexas]

I am starting to agree. Which is linked to how this investment could become worthless in terms of time value of money. The NWS has proven to be Administration-agnostic. Both Republicans and Democrats will tend to keep it once in office.

As I said early on in posting to this thread, human nature being what it is, virtually no one in any administration would be able to turn down risk-free money at the level of ~$20 B/year in perpetuity. Hence the NWS would only stop if a court decrees it to do so. That is how I see the situation, in which case, all court cases could end in judgements for the government, resulting in an effective value of $0 for privately held shares.

 

Admittedly, one exception might lie in someone's perceiving more value in receiving on immediate $100 B payment and at the same time removing the possibility of an unforeseen adverse event or situation for the government. Whatever the odds are of that would define the minimum odds that the NWS will be voluntarily terminated.

 

The maximum odds of NWS termination would be approximately the sum of the probability of at least one successful shareholder lawsuit + the probability that someone prefers the exception laid out in the previous paragraph.

[blackcoffee]

My head is spinning. Is that's why he did NWS so that banks can keep doing predatory lending while Fannie Mae and Freddie Mac are subdued with a gag order?

 

 

"Monetizing Poor People": Obama Treasury Secretary Tim Geithner Is Now A Predatory Lender

 

https://www.zerohedge.com/news/2018-07-02/monetizing-poor-people-obama-treasury-secretary-tim-geithner-now-predatory-lender

 

When you don't punish criminals for crimes - you get the worst.

What might serve in a Banana Republic will not do in a constitutional one. <-- That is a quote from a freaking judge that dissented in the Perry appeal. What is going on here?

 

Look at Howard's comments on the relationship between Ginsberg and certain fellow travelers - do you think we have a justice system? I have my freaking doubts.

[Midas79]

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

 

I hear you, but how does the NWS stay intact if the conservatorship ends?  Mnuchin has been very vocal about ending the conservatorship on his watch, as has Watt, and the White House (if we're to believe the Mulvaney report).  Yes, it is possible that all of them are lying or change their minds.

 

Edit: I didn't word that carefully enough.  Watt hasn't said he wants conservatorship ended on his watch, but he has said it can't last forever.

 

I can't see the conservatorships being ended with the seniors still intact, let alone with the NWS still in place. Treasury can block any release, and Mnuchin wants the companies to be safe and for taxpayers to be protected. I think the companies will have to be either fully capitalized or on a path there (perhaps with a declining Treasury commitment) before release can happen.

[Spekulatius]

I believe the risk for investors is that the politicians are incentivized to keep thing exactly how they are right now. The NWS is very profitable for the government, so I would not expect it to give it up without an adverse ruling that absolutely forces them to do so.

 

I hear you, but how does the NWS stay intact if the conservatorship ends?  Mnuchin has been very vocal about ending the conservatorship on his watch, as has Watt, and the White House (if we're to believe the Mulvaney report).  Yes, it is possible that all of them are lying or change their minds.

 

Edit: I didn't word that carefully enough.  Watt hasn't said he wants conservatorship ended on his watch, but he has said it can't last forever.

 

It’s simple, the conservatorship won’t end. Mnuchin is just a pawn, he does what he is told, or gets fired, which is something the pres is very good at. The Pres has many other fish to fry. The best chance for investors to get whole is a court decision that forecasters the government hand to do something. Otherwise, it is in the best interest , to keep things exactly how they are.

 

Also what’s $100B, if you are President? Money is fungible, it doesnt matter where it is coming from. If they “find” $100B, it still doesn’t mean they can find it the way they see fit.

[Luke 532]

 

It’s simple, the conservatorship won’t end. Mnuchin is just a pawn, he does what he is told, or gets fired, which is something the pres is very good at. The Pres has many other fish to fry. The best chance for investors to get whole is a court decision that forecasters the government hand to do something. Otherwise, it is in the best interest , to keep things exactly how they are.

 

Also what’s $100B, if you are President? Money is fungible, it doesnt matter where it is coming from. If they “find” $100B, it still doesn’t mean they can find it the way they see fit.

 

How is it in the gov't best interest to keep the conservatorship going? On one hand you claim that $20B is great and the incentive to keep the conservatorship going, on the other hand that money is fungible and doesn't matter to the President. Which is it?

 

I happen to think, no matter where one stands on the money issue of 20B/100B, that there are more incentives than not for the gov't to end conservatorship. All quotes from this Admin which make logical sense for the gov't: "need to reduce gov't role in housing", "need to end conservatorship on our watch", "need to preserve 30 yr fixed rate", etc.

 

Perhaps I'm alone in this line of thinking, but I'm comfortable with that as I believe the prefs represent a rare investment opportunity given the current discount to par and what I see as the writing on the wall for what the future holds.

[rros]

There are risks with Conservatorships. Risks brought up by Watt and Mayopoulos in a few occasions. Because of no capital, both companies operate on a short leash being overly conservative on how they deploy credit. Why take even low risks extending credit with no money of your own to support that? This greatly affects the real estate market. Yes, all is well in the land of the rich but here, in South FL, banks are requesting 20% down and things aren't moving. At some point, hopefully we are still on this planet, Treasury's self-interest may collide with economic reality.

[DRValue]

We slipped off the first page and on to the second, so I bought some more commons so I could tell you about it and get us back on the front page.

 

Tgif.

 

That is all.

[DRValue]

Bhatti is a loss.

 

https://www.scribd.com/document/383362380/Bhatti

[Luke 532]

Bhatti is a loss.

 

https://www.scribd.com/document/383362380/Bhatti

 

Yikes! No es bueno. Thanks for posting. Curious of the thoughts on this ruling from the lawyers on this message board...thanks in advance for any input you provide.

[DRValue]

Bhatti is a loss.

 

https://www.scribd.com/document/383362380/Bhatti

 

Yikes! No es bueno. Thanks for posting. Curious of the thoughts on this ruling from the lawyers on this message board...thanks in advance for any input you provide.

 

I have no idea how taking all of the shareholders private property without consideration can stand.

Or Delaware law and favouring one shareholder over another.

 

Maybe the framers had a secret amendment saying government can take all your stuff cos hera.

 

Really starting to get angry about this now.

 

Feeling like we're going to have to go after this ourselves.

 

What's that government petition site you can use to, well, petition government?

[doughishere]

Bhatti is a loss.

 

https://www.scribd.com/document/383362380/Bhatti

 

Have shareholders won anything?

[Luke 532]

Bhatti is a loss.

 

https://www.scribd.com/document/383362380/Bhatti

 

Have shareholders won anything?

 

Remand to Lamberth

Sweeney allowances throughout discovery

Probably some other stuff I don't recall off the top of my mind

 

Admittedly, this is getting frustrating from a legal standpoint. I believe Mnuchin will act without the courts, but I was hoping Bhatti would be favorable to speed up Mnuchin's actions and give him cover to do so.

[Luke 532]

Tim Howard commentary:

 

I’m obviously disappointed by this ruling. I had a couple of reactions to it, one specific and one general. My specific reaction is that, unlike the appeal of the Perry Capital decision, which was based on contorted logic and deliberate misquoting of the HERA statute, Judge Schiltz’s ruling on whether plaintiffs had standing to bring the suit seemed to me to be reasonable. He said, “Plaintiffs have no coherent theory for how their injury—a Third Amendment that, in Plaintiff’s view, is unduly favorable to the President, could have resulted from the President having too little control over FHFA. Nor do plaintiffs have a coherent theory as to why giving the President more control of FHFA will lead to him renegotiating the Third Amendment so that it is less favorable to himself.” And while I’m not qualified to assess Judge Schiltz’s legal arguments in support of his statement that even absent the issue of standing he still would have ruled for defendants on the merits, I didn’t find those to be unreasonable either.

 

My bigger concern relates to the first several pages of the decision, which show Judge Schiltz continuing the pattern of judges in the net worth sweep cases completely buying into the government’s argument that, “Lending policies by government-sponsored companies Fannie Mae and Freddie Mac resulted in massive losses during the financial crisis; Treasury heroically saved them with an $187 bailout, and now greedy hedge funds want to recover the value of their investment by suing the government. They tried and failed to get the net worth sweep declared illegal as an APA violation, and now they’re trying to get the same result through this lawsuit.” (Judge Schiltz called this “killing the tree [to] kill one of its fruits).”

 

It has now become clear that plaintiffs’ counsel in their initial filings in all of these cases did not react aggressively enough to the lies put out by Treasury and others about their handling of Fannie and Freddie during the crisis; those lies now have become embedded into the historical record, and plaintiffs are paying the price.

 

The strategy by plaintiffs’ counsel not to attack the government’s actions or motives for the conservatorship in the initial filings (which it has changed in the more recent motions and amended complaints, but the damage has been done) was taken consciously, for what appeared at the time to be good reasons. Back then I had several conversations with plaintiffs’ counsel urging them to be more aggressive in challenging the government’s version of the 2008 takeovers. Their reason for not doing so went along the lines of: “it will be very difficult to win a challenge against the 2008 conservatorship decision because the courts grant great deference to regulators during a time of crisis, and if we call too much attention to the results of what FHFA and Treasury did to Fannie and Freddie after the conservatorship (i.e., running up their losses with non-cash expenses and forcing them to take so much senior preferred stock that they owed more each year in non-deductible senior preferred stock dividends than they ever had made in after-tax earnings), it will weaken the case we’re filing on behalf of the junior preferred holders, because the government’s argument then will be, ‘the net worth sweep really didn’t prejudice your clients, because the original terms of the PSPA would have made their shares worthless anyway’.” I understand how plaintiffs counsel could have thought that, but we’re now seeing how allowing the “false narrative” to become entrenched is backfiring.

 

Framing plaintiffs’ cases as an opportunistic attempt to game the legal system for selfish financial advantage—as opposed to seeking a justified judicial remedy for the premeditated theft of all of the assets of two private companies who were operating in compliance with their capital standards at the time Treasury bullied them into conservatorship—gives any judge air cover to accept virtually all of the arguments made by the government in a motion to dismiss, and to grant that motion. Judge Schiltz showed early on that he would be no exception, when he essentially rejected the plaintiffs’ version of the facts in this statement: “Plaintiffs’ assertion that Fannie and Freddie could have remained solvent without the help of the federal government is dubious…but the Court is required to treat it as true at this stage of the litigation.”