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

[Eye4Valu]

I actually think it's more likely that we lose first rounds legally, but still come out OK with release from conservatorship, than the other way around. Most judges fall in line and don't want to rock the boat. While I think the legal cases are strong on the merits, the stronger possibility for resolution rests with Mel Watt and the Treasury. Everyone says Congress is deadlocked and won't come up with a solution. The courts take a long time too. Most likely outcome is release from Conservatorship by Watt and Lew in my opinion. At that point, easiest solution is to sell the 80% equity stake and put it in a first loss position. 

[merkhet]

As I mentioned to another poster here, it seems to me like the stars are aligning a bit on this one. President Obama taking executive action on immigration policy is making the GOP rather angry, so it looks like the likelihood of GSE reform is rather low now.

 

Add that to the fact that Johnson (the Johnson of Crapo-Johnson) asked the FHFA to consider ending the conservatorship if there was no Congressional action, and I think you have a resolution to this story in the next year or two -- even if the legal route falls through (which I find unlikely).

 

Picked up some more preferreds today.

[merkhet]

http://online.wsj.com/articles/u-s-wont-change-fannie-and-freddie-control-without-legislation-1416613223?mg=id-wsj

 

A Treasury Department spokesman on Friday said the Obama administration wouldn’t consider ending government control of mortgage-finance companies Fannie Mae and Freddie Mac without legislation.

 

“The administration’s position has not changed,” the spokesman wrote in an email. “Comprehensive housing finance reform legislation is the only way to end the conservatorship responsibly and transition to a new system that brings stability back to the housing market while protecting taxpayers.”

 

The comment came after Sen. Tim Johnson (D., S.D.) in the opening remarks of a Senate Banking Committee hearing on Wednesday called on a top housing regulator to “engage with the Treasury Department in talks to end the conservatorship” of Fannie and Freddie if Congress doesn’t proceed with legislative reform.

 

Interesting response from Treasury.

 

Johnson asks FHFA to consider ending the conservatorship by entering into negotiations with Treasury. Watt says that the negotiations have to be initiated by Treasury. Treasury then says that they're waiting for Congress. Oh, politics.

 

After the hearing, Mr. Watt seemingly left the door open to the FHFA and Treasury’s ending the conservatorship without Congress. “It’s something that would have to be initiated by Treasury, not by me,” he said. “In the short term I would rule it out, in the long term, I might not rule it out.”

[enoch01]

http://online.wsj.com/articles/u-s-wont-change-fannie-and-freddie-control-without-legislation-1416613223?mg=id-wsj

 

A Treasury Department spokesman on Friday said the Obama administration wouldn’t consider ending government control of mortgage-finance companies Fannie Mae and Freddie Mac without legislation.

 

“The administration’s position has not changed,” the spokesman wrote in an email. “Comprehensive housing finance reform legislation is the only way to end the conservatorship responsibly and transition to a new system that brings stability back to the housing market while protecting taxpayers.”

 

The comment came after Sen. Tim Johnson (D., S.D.) in the opening remarks of a Senate Banking Committee hearing on Wednesday called on a top housing regulator to “engage with the Treasury Department in talks to end the conservatorship” of Fannie and Freddie if Congress doesn’t proceed with legislative reform.

 

Interesting response from Treasury.

 

Johnson asks FHFA to consider ending the conservatorship by entering into negotiations with Treasury. Watt says that the negotiations have to be initiated by Treasury. Treasury then says that they're waiting for Congress. Oh, politics.

 

After the hearing, Mr. Watt seemingly left the door open to the FHFA and Treasury’s ending the conservatorship without Congress. “It’s something that would have to be initiated by Treasury, not by me,” he said. “In the short term I would rule it out, in the long term, I might not rule it out.”

 

So now the President will have an out when the GSE's are released: He really wanted to work with the Republicans (really, he did), but the Republicans just weren't able to "come to the table" and "work together" to accomplish housing reform.  Therefore, he really had no other choice but respect the FHFA's decision to release the GSE's.  He'll be "proud of the work" that Watt has performed during the conservatorship in setting Fannie and Freddie on a safe, solid path for the future.

 

"If you like your 30 year mortgage, you can keep your 30 year mortgage."

 

I have been buying more of the preferreds recently.

[merkhet]

Yup, sounds about right.

 

Once Watt shows that F&F are completely administratively revamped (via CSS, etc.), then they'll be able to play politics and say that it's a shame that Republicans couldn't get their act together to provide "comprehensive housing finance reform," but, given that "conservatorship cannot continue forever," it's time to recapitalize Fannie & Freddie to "bring stability back to the housing market while protecting taxpayers."

 

The Democrats get to play this as Republicans being unable to govern despite holding a majority of both houses of Congress. Republicans get to play this as a complete overreach of executive action on the part of the President. Everyone's happy.

 

----

 

http://www.ft.com/intl/cms/s/0/9c7820f0-71cd-11e4-b178-00144feabdc0.html?siteedition=intl#axzz3JniYaEHO

 

President Barack Obama warned Republicans against letting conflict over his action on immigration become a “deal breaker” on other issues as political rancour grew on Friday.

 

The president took his sales pitch on the road, using a fiery speech in Las Vegas to tell Republican opponents not to take drastic measures like a government shutdown as they continued to accuse him of abusing his authority.

 

Mr Obama’s speech came the day after he unveiled a sweeping order that uses the powers of his office to remove the threat of deportation hanging over nearly 5m unauthorised immigrants.

 

“Washington should not let disagreement over one issue be a deal breaker on every issue. That’s not how a democracy works,” he said on Friday.

 

“Congress certainly should not shut down the government again over this, because Americans are tired of gridlock. We are ready to move forward.”

 

The ire sparked by the president’s move threatens to kill off any chance of legislative co-operation next year between the White House and a new Republican-controlled Congress on issues such as trade, tax reform and energy policy.

[merkhet]

Pershing wants to file an amicus brief in the Sweeney court. Attached.

2014-11-21_Pershing_Motion_for_Leave_to_File_Amicus_Brief_Regarding_Defendants_Motion_to_Stay.pdf

[Matson125]

Mel Watt will be in Miami on December 5th.  I'd laugh if Bruce Berkowitz stands up and asks the 1st question in the Q+A

 

http://investorsunite.org/discussion/topic/fhfa-town-hall-meeting-in-miami-dec-5th/

[TwoCitiesCapital]

Mel Watt will be in Miami on December 5th.  I'd laugh if Bruce Berkowitz stands up and asks the 1st question in the Q+A

 

http://investorsunite.org/discussion/topic/fhfa-town-hall-meeting-in-miami-dec-5th/

 

Lol. Fingers crossed. How could he miss such an opportunity?

[merkhet]

http://bankrupt.com/DI2014/ -- looks like there's a panel on GSEs.

 

Also, nice chart of significant lawsuits for the sweep. (Attached.)

gselitigationsummary201411.pdf

[tede02]

The chart of lawsuits is amazing.  Common sense would seem to suggest that at some point, the pressure will be so great, a resolution will have to reached. 

[merkhet]

There's some disagreement as to when any oral arguments might be held for the stay in Sweeney's court. Joint status report attached.

2014-12-01_Joint_Status_Report_Regarding_December_3_Status_Conference.pdf

[muscleman]

There's some disagreement as to when any oral arguments might be held for the stay in Sweeney's court. Joint status report attached.

 

Doesn't seem like a material event to me. What do you think? Of course  the government will object to everything that the plaintiff proposes, even for scheduling. If the judge rules that the delay is not warranted, then I assume the plaintiff has to somehow get someone into this meeting, right?

[merkhet]

It doesn't seem material to me either.

 

However, it's clear to me that the government seems to be feeling some pressure. They can't stop production of discovery unless Sweeney gives them an all-clear. She's yelled at them before for dragging their feet, and they clearly want to stop discovery as soon as possible given that they're unwilling to wait a month.

 

I wonder if they've run out of innocuous discovery documents to give the plaintiffs. (In fact, the plaintiff's sealed response to their motion w/ discovery exhibits indicates that the government has already begun to turn over less-than-innocuous documents.)

[muscleman]

It doesn't seem material to me either.

 

However, it's clear to me that the government seems to be feeling some pressure. They can't stop production of discovery unless Sweeney gives them an all-clear. She's yelled at them before for dragging their feet, and they clearly want to stop discovery as soon as possible given that they're unwilling to wait a month.

 

I wonder if they've run out of innocuous discovery documents to give the plaintiffs. (In fact, the plaintiff's sealed response to their motion w/ discovery exhibits indicates that the government has already begun to turn over less-than-innocuous documents.)

 

Is there any law regarding how the turning over of documents work? Let's say the government has 1 million pages of evil documents, but they are only turning over 1 page per month. That would drag the whole discovery process to 1 million months. Why wouldn't they just turn over everything at once?

[merkhet]

There are judges that watch over the discovery process.

[Eye4Valu]

Discovery deadlines are set by which everything must be turned over. Not sure how Judge Sweeney, Plaintiffs and Defendant are handling this timeline.

[muscleman]

This part is very interesting. I originally thought Mr. Obama was involved in 3rd amendment. Now it sounds like he was not, and he started to realize what happened.

 

http://timhoward717.com/2014/12/11/unleashed-at-last/

We will be sharing how Obama came to realize that some of his closest confidantes like Timothy Geithner and Gene Sperling deceived him into believing Fannie and Freddie needed to go. Their motives will be examined in great detail. We have reason to believe Mr. Sperlings fingerprints are all over the lawless third amendment sweep. Sperling earned $887,727 from Goldman Sachs in 2008 for his advice on charitable giving. He then so charitably sought to reward them by handing them Fannie and Freddies lucrative secondary mortgage business.

[doughishere]

http://i.imgur.com/bA0tFRJ.gif

[merkhet]

Interesting slide I came across today from November 2014.

2014-11_Possible_Restructuring_Method.pdf

[merkhet]

I'm going to add a few thoughts to what I posted yesterday.

 

I was alerted to two interesting articles in the Journal yesterday. I'll quote the parts I find relevant.

 

http://www.wsj.com/articles/fannie-freddie-to-begin-payments-to-affordable-housing-funds-1418316369

 

In letters to the chief executives of Fannie and Freddie on Thursday, Federal Housing Finance Agency director Mel Watt lifted a suspension of payments to the funds put into effect in 2008, when Fannie and Freddie teetered on the brink of collapse.

 

The companies returned to profitability in 2012 and Mr. Watt wrote in the letters that “circumstances have changed [since the suspension was implemented] and the temporary suspension is no longer justified.”

 

...

 

On the other hand, many Republican lawmakers have repeatedly asked Mr. Watt to leave the suspension in place, citing the taxpayer backing of the companies and continuing legislative efforts to overhaul them.

 

“It is beyond irresponsible to restart these affordable-housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac,” said Sen. Bob Corker (R., Tenn.) on Thursday. Mr. Corker had been one of the primary proponents of a bill to overhaul the housing-finance system that stalled in May.

 

http://www.wsj.com/articles/obamas-fannie-mae-payday-1418344017

 

Mr. Watt is one of the President’s appointees who Senate Democrats broke the filibuster rule to confirm, and now we know why. His letter to Fannie Mae justifies the new payments by saying “circumstances have changed” because the companies are now profitable. He also, in the Obama manner, waves away two provisions of the 2008 law that call for suspending the payments if there is reason to think they would be “classified as undercapitalized” or prevented from “completing a capital restoration plan.”

 

Neither Fannie nor Freddie are building capital because all of their profits are now going to Treasury. Presto, says Mr. Watt, the capital provisions are no barrier to financing the trust funds. So Democrats get another source of political largesse without Congress having to pass another spending bill.

 

Now let's go to the source material.

 

http://www.fhfa.gov/Media/PublicAffairs/Documents/FNM_HTFCMF12112014.pdf

 

In the letter, Watt notes that the FHFA can suspend allocations "upon a finding by the Director that such allocations (1) are contributing, or would contribute, to the financial instability of Fannie Mae; (2) are causing, or would cause, Fannie Mae to be classified as undercapitalized; or (3) are preventing, or would prevent, Fannie Mae from successfully completing a capital restoration plan; 12 USC 4567(b)."

 

He further states that this allocation will not contribute to the financial instability of Fannie Mae, because they have "suspended capital classifications for Fannie Mae during conservatorship and entered into the SPSPA with the Department of the Treasury to maintain positive net worth and avoid receivership," and that "Fannie Mae is not attempting to complete a capital restoration plan."

 

Now, I have a certain amount of disdain for politics, but I am beginning to have a greater appreciation for the strategery (sic) involved.

 

It seems to me that the Administration is pushing Congress towards having a conversation about the fact that the GSEs are undercapitalized. Of course, the Administration's response would then be to tell Congress to pass a bill knowing full well that they won't pass something that the President would sign because it would likely strip out exactly the low-income housing financing provisions that Watt just enacted through his regulatory position as FHFA Chairman. This, naturally, leaves the President open to enacting something similar to the Millstein plan that I posted above this one, leaving the nominal GSEs in conservatorship while spinning off parts of the GSEs into private entities -- all while staying true to their word that they wouldn't take the GSEs out of conservatorship without legislative action of some sort.

 

The Administration can then say, look, we're dealing with the undercapitalization by doing a recap and taking action on protecting taxpayers, but Congress must do its part to deal with the remaining GSEs. (Think immigration.)

[muscleman]

I'm going to add a few thoughts to what I posted yesterday.

 

I was alerted to two interesting articles in the Journal yesterday. I'll quote the parts I find relevant.

 

http://www.wsj.com/articles/fannie-freddie-to-begin-payments-to-affordable-housing-funds-1418316369

 

In letters to the chief executives of Fannie and Freddie on Thursday, Federal Housing Finance Agency director Mel Watt lifted a suspension of payments to the funds put into effect in 2008, when Fannie and Freddie teetered on the brink of collapse.

 

The companies returned to profitability in 2012 and Mr. Watt wrote in the letters that “circumstances have changed [since the suspension was implemented] and the temporary suspension is no longer justified.”

 

...

 

On the other hand, many Republican lawmakers have repeatedly asked Mr. Watt to leave the suspension in place, citing the taxpayer backing of the companies and continuing legislative efforts to overhaul them.

 

“It is beyond irresponsible to restart these affordable-housing allocations without first dealing with the underlying problems at Fannie Mae and Freddie Mac,” said Sen. Bob Corker (R., Tenn.) on Thursday. Mr. Corker had been one of the primary proponents of a bill to overhaul the housing-finance system that stalled in May.

 

http://www.wsj.com/articles/obamas-fannie-mae-payday-1418344017

 

Mr. Watt is one of the President’s appointees who Senate Democrats broke the filibuster rule to confirm, and now we know why. His letter to Fannie Mae justifies the new payments by saying “circumstances have changed” because the companies are now profitable. He also, in the Obama manner, waves away two provisions of the 2008 law that call for suspending the payments if there is reason to think they would be “classified as undercapitalized” or prevented from “completing a capital restoration plan.”

 

Neither Fannie nor Freddie are building capital because all of their profits are now going to Treasury. Presto, says Mr. Watt, the capital provisions are no barrier to financing the trust funds. So Democrats get another source of political largesse without Congress having to pass another spending bill.

 

Now let's go to the source material.

 

http://www.fhfa.gov/Media/PublicAffairs/Documents/FNM_HTFCMF12112014.pdf

 

In the letter, Watt notes that the FHFA can suspend allocations "upon a finding by the Director that such allocations (1) are contributing, or would contribute, to the financial instability of Fannie Mae; (2) are causing, or would cause, Fannie Mae to be classified as undercapitalized; or (3) are preventing, or would prevent, Fannie Mae from successfully completing a capital restoration plan; 12 USC 4567(b)."

 

He further states that this allocation will not contribute to the financial instability of Fannie Mae, because they have "suspended capital classifications for Fannie Mae during conservatorship and entered into the SPSPA with the Department of the Treasury to maintain positive net worth and avoid receivership," and that "Fannie Mae is not attempting to complete a capital restoration plan."

 

Now, I have a certain amount of disdain for politics, but I am beginning to have a greater appreciation for the strategery (sic) involved.

 

It seems to me that the Administration is pushing Congress towards having a conversation about the fact that the GSEs are undercapitalized. Of course, the Administration's response would then be to tell Congress to pass a bill knowing full well that they won't pass something that the President would sign because it would likely strip out exactly the low-income housing financing provisions that Watt just enacted through his regulatory position as FHFA Chairman. This, naturally, leaves the President open to enacting something similar to the Millstein plan that I posted above this one, leaving the nominal GSEs in conservatorship while spinning off parts of the GSEs into private entities -- all while staying true to their word that they wouldn't take the GSEs out of conservatorship without legislative action of some sort.

 

The Administration can then say, look, we're dealing with the undercapitalization by doing a recap and taking action on protecting taxpayers, but Congress must do its part to deal with the remaining GSEs. (Think immigration.)

 

If the spin off happens, is it bad for the preferred shares? I think if spin off happens, common should receive the spin off shares right? But preferred will not. Will this trigger fraudulent conveyance if they spin off the valuable parts and leave the remaining as a zombie?

[merkhet]

There are many different ways to do a spinoff, and the new entities will need capitalization as well.

[Mephistopheles]

Some of the preferreds traded at $.10 on the dollar today and one even went below. I managed to do a few tax swaps. I hope that Berkowitz is not getting out based on information (or lack thereof) that he is seeing in discovery.

[Mephistopheles]

At today's price of $2.07, the common is up 37% from the bottom tick of $1.51 after Lamberth threw out the DC case. Most of the preferreds are just about flat since the same time.

[merkhet]

Some of the preferreds traded at $.10 on the dollar today and one even went below. I managed to do a few tax swaps. I hope that Berkowitz is not getting out based on information (or lack thereof) that he is seeing in discovery.

 

Many of the non-FNMAS have always traded at a significant discount to FNMAS, and FNMAS is at around $3.50 per preferred share. I don't know if anything of use can be gleaned from the price action the last few days -- I suspect there is some tax selling going on.

 

At today's price of $2.07, the common is up 37% from the bottom tick of $1.51 after Lamberth threw out the DC case. Most of the preferreds are just about flat since the same time.

 

Actually, most of the preferreds are down -- I believe my prefs were trading at around $4 a share on 10/1.