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

[doughishere]

The more this gets headlines...the more people jump in the trade....the more exposure for all to see

 

http://video.foxbusiness.com/v/4060009384001/gasparino-money-managers-predicting-greenberg-victory/?playlist_id=933116651001#sp=show-clips

[doughishere]

Did this get posted? Sorry if its a repost.

 

The Untouchable Profits of Fannie Mae and Freddie Mac By GRETCHEN MORGENSON

 

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html

 

 

 

The memo someone save on dockstock: http://graphics8.nytimes.com/packages/pdf/business/Tab25.pdf

 

December 20, 2010

 

Reasons to Set the PCF: !) Makes clear the Administrations comitment to ensure existing common equit holders will not have access to any positive earnings from the GSEs in the future.

2) Illustrates further commitment to recouping taxpayer support.

[doughishere]

Did this get posted? Sorry if its a repost.

 

The Untouchable Profits of Fannie Mae and Freddie Mac By GRETCHEN MORGENSON

 

http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html

 

 

 

The memo someone save on dockstock: http://graphics8.nytimes.com/packages/pdf/business/Tab25.pdf

 

December 20, 2010

 

Reasons to Set the PCF: !) Makes clear the Administrations comitment to ensure existing common equit holders will not have access to any positive earnings from the GSEs in the future.

2) Illustrates further commitment to recouping taxpayer support.

 

 

My 2 cents on Nick Timiraos WSJ Twitter comment

 

“Columnist who wrote book blaming financial crisis on GSE greed doesn’t like how U.S. is treating their shareholders http://nyti.ms/19i6X8y ”

 

Grechen writes for the NYT Column titled "Fair Game".......at least shes consistently fair.

[Guest Schwab711]

GSEs were never private corporations like Lehman or anyone else who failed during the time! This is an extremely important distinction. You'd have to read the charter but I'm pretty sure the point Fairholme is attempting to make is the same reason why Sallie Mae dropped their public charter in 95'.

[Mephistopheles]

Merkhet, you mentioned some time ago that it would be great if the plaintiffs score David Boies as an attorney for these cases. I noticed that his law firm is involved in one of the GSE suits in Court of Claims: Cacciapelle v. United States, No. 13-466:

 

http://www.valuewalk.com/2015/01/fannie-mae-conference-fairholme-coming-soon/

 

Boies himself isn't involved. I'm not sure what the significance of this is, just wanted to point it out. What are the chances that he gets involved after he's done with AIG, based on this?

 

 

[merkhet]

Merkhet, you mentioned some time ago that it would be great if the plaintiffs score David Boies as an attorney for these cases. I noticed that his law firm is involved in one of the GSE suits in Court of Claims: Cacciapelle v. United States, No. 13-466:

 

http://www.valuewalk.com/2015/01/fannie-mae-conference-fairholme-coming-soon/

 

Boies himself isn't involved. I'm not sure what the significance of this is, just wanted to point it out. What are the chances that he gets involved after he's done with AIG, based on this?

 

Not sure. I don't know if Hume is the lead or not. Would be nice though.

[doughishere]

This has come out...anyone know where to find the conference call?

 

 

Dow Jones Newswires - Feb 20, 2015 11:00:00 AM (EST)

 

11:00 EST - Fannie Mae (FNMA) CEO Timothy J. Mayopoulos says during the 4Q conference financier's dwindling capital reserves, which are being wound down under a government agreement, may increase the chances of a need for another taxpayer infusion. By 2018, FNMA will have no capital reserves, meaning any loss could trigger a bailout. That might increase pressure on policy makers to revise the bailout to allow FNMA and counterpart Freddie Mac (FMCC) to retain some sort of buffer. ([email protected]; @joelight)

 

[Grenville]

This has come out...anyone know where to find the conference call?

 

 

Dow Jones Newswires - Feb 20, 2015 11:00:00 AM (EST)

 

11:00 EST - Fannie Mae (FNMA) CEO Timothy J. Mayopoulos says during the 4Q conference financier's dwindling capital reserves, which are being wound down under a government agreement, may increase the chances of a need for another taxpayer infusion. By 2018, FNMA will have no capital reserves, meaning any loss could trigger a bailout. That might increase pressure on policy makers to revise the bailout to allow FNMA and counterpart Freddie Mac (FMCC) to retain some sort of buffer. ([email protected]; @joelight)

 

Good catch. Apparently they had a media call last quarter and based on your above they had another one today. I haven't been able to find a link on the website.

 

Here is the one from Q3. There is a .mp3 link and the transcript:

http://www.fanniemae.com/portal/about-us/media/commentary/110614-mayopoulos.html

[doughishere]

Economist is now picking up the turn around.

 

http://www.economist.com/news/business-and-finance/21644525-americas-mortgage-insurance-giants-are-now-making-bigger-profits-financial-crisis

[doughishere]

Cato Institute....founded by the Charles Koch.

 

http://www.cato.org/publications/working-paper/conservatorships-fannie-mae-freddie-mac-actions-violate-hera-established

[merkhet]

Joe Light's article is up on WSJ.

 

http://www.wsj.com/articles/fannie-freddie-weak-earnings-raise-possibility-of-future-bailouts-1424463119

[doughishere]

Carney

 

http://www.wsj.com/articles/the-real-state-of-fannie-maes-potential-heard-on-the-street-1424461388?mod=yahoo_hs

[Mephistopheles]

I just had an intuition. Several of us have mentioned the Government's incentive to continue collecting profits for the rest of eternity, so they might never voluntarily release the company's from Conservatorship. However, we all know that more than anything, politicians are impatient and will take short term gain over anything.

 

So I think there is a possibility that, with continued pressure in Discovery, with depositions soon to begin, and with the continued risk of another bailout in the near future, there is an ever increasing chance that the White House will release the companies , cancel out the Senior Preferred, return excess profits to help recapitalize, and announce a major windfall in the tune of $100 billion+ because the shares would rally 5-10x, all before Obama leaves office. This will certainly provide a major boost to Obama's image and legacy, and perhaps even boost the Democratic nominee's chances in '16.

 

I think this may spell out as a better scenario than the alternative, which includes the release of embarrassing documents and depositions, the risk of an embarrassing loss in the courts, and of course the chances of another bailout. And really, why not cash in on all of the profits up front (from the warrants), rather than share the profits in perpetuity with future politicians after you're long gone? The former is better politically, and gives you more money to spend in the mean time. This can especially happen if chances are looking bleak for the Government in the Court - in which case it might be better to take the windfall while you're still President rather than have your successor lose the case and announce the share gains?

 

It might make sense to bet on the common after all, because we'd be investing alongside the Treasury in this scenario. Maybe this is Ackman's thinking as well.

 

Anyway these are just my humble thoughts, feel free to critique.

[Jurgis]

Not bad Mephisto.  8)

 

I'll go cynical: if there is a chance of collapse in the future, the best thing now would be to put this into private hands, so next time it collapses shareholders and bondholders can be "conserved" again.

 

However, all these potentialities might assume more smarts and coordination than might be available in Washington.

 

I continue to look at this as a option with pretty unknown chances, high potential payout and zero value otherwise. The price is the only thing that I look at. Things were much more attractive below $1. Right now the price is somewhat attractive, but not very much. If prefs run up to $20 on $50 as they were before recent collapse, that would be not attractive at all. :)

[Mephistopheles]

Not bad Mephisto.  8)

 

I'll go cynical: if there is a chance of collapse in the future, the best thing now would be to put this into private hands, so next time it collapses shareholders and bondholders can be "conserved" again.

 

However, all these potentialities might assume more smarts and coordination than might be available in Washington.

 

I continue to look at this as a option with pretty unknown chances, high potential payout and zero value otherwise. The price is the only thing that I look at. Things were much more attractive below $1. Right now the price is somewhat attractive, but not very much. If prefs run up to $20 on $50 as they were before recent collapse, that would be not attractive at all. :)

 

Exactly, why risk another bailout, it's best to give it to private hands.

 

Here's some quick math: it looks like the companies are earning $32 billion pre-tax, all money that is going to Treasury. But the fighting is only about 20.1% of that - $6.4 billion. Of course they get to tax 35% of that, so all this drama is really only about $4.2 billion!

 

Put on a 12x multiple on $21 billion of after-tax earnings and we get $250 billion. Take off $30 billion to pay back the preferred. And take out (I'm just making up a large number here) $150 billion to recapitalize, and we have a $70 billion market cap. So $56 billion would be the windfall.

 

So would you want to secure $4.2 billion for perpetuity, when you're only in office for another year and half, and risk embarrassment in the Courts? Or do you want to be a hero and announce a $56 billion windfall, sealing your legacy and priming an election run for the Democratic nominee?

 

It's not like the government cares to make their investments very profitable anyway. They auctioned off the TARP warrants, GM and AIG stakes, all at severely undervalued prices. And then they went to the media to announce that the taxpayer earned a profit.

 

The more I think about it, the more I am convinced that the companies will be released.

 

Having said all of this, you're right in that we must look at the price. At 12% of par for the preferreds, I'm happy with the risk/reward.

 

I'd love to hear everyone's take on this.

[actuary]

Not bad Mephisto.  8)

 

I'll go cynical: if there is a chance of collapse in the future, the best thing now would be to put this into private hands, so next time it collapses shareholders and bondholders can be "conserved" again.

 

However, all these potentialities might assume more smarts and coordination than might be available in Washington.

 

I continue to look at this as a option with pretty unknown chances, high potential payout and zero value otherwise. The price is the only thing that I look at. Things were much more attractive below $1. Right now the price is somewhat attractive, but not very much. If prefs run up to $20 on $50 as they were before recent collapse, that would be not attractive at all. :)

 

Exactly, why risk another bailout, it's best to give it to private hands.

 

Here's some quick math: it looks like the companies are earning $32 billion pre-tax, all money that is going to Treasury. But the fighting is only about 20.1% of that - $6.4 billion. Of course they get to tax 35% of that, so all this drama is really only about $4.2 billion!

 

Put on a 12x multiple on $21 billion of after-tax earnings and we get $250 billion. Take off $30 billion to pay back the preferred. And take out (I'm just making up a large number here) $150 billion to recapitalize, and we have a $70 billion market cap. So $56 billion would be the windfall.

 

So would you want to secure $4.2 billion for perpetuity, when you're only in office for another year and half, and risk embarrassment in the Courts? Or do you want to be a hero and announce a $56 billion windfall, sealing your legacy and priming an election run for the Democratic nominee?

 

It's not like the government cares to make their investments very profitable anyway. They auctioned off the TARP warrants, GM and AIG stakes, all at severely undervalued prices. And then they went to the media to announce that the taxpayer earned a profit.

 

The more I think about it, the more I am convinced that the companies will be released.

 

Having said all of this, you're right in that we must look at the price. At 12% of par for the preferreds, I'm happy with the risk/reward.

 

I'd love to hear everyone's take on this.

 

I'm happy with the risk/reward as well and believe they will release before the courts/media embarrass the executive branch. It was very encouraging to see Gretchen Morgenson pick this up last weekend.

 

We own a mix of preferred and common, mostly preferred; my thought is why not own both? It's not hard to imagine the scenario where common gets severely diluted or the one where they let capital build for years to the benefit of the common. For the preferred, it seems most posters here favor the less liquid, lower dividend series that trade for a lower percentage of par... But isn't there some probability that they leave them outstanding - potentially avoiding some headline risk of "paying Wall St with taxpayer money" - and you would see those massive dividends on FNMAS/FMCKJ reinstated? We want some exposure to that scenario, too. 

 

Mephisto, your numbers seem a little rosy. Isn't the choice for gov't really between $21B in perpetuity or a $56B windfall using your figures? Not saying they can't spin it well given all the interest made on the senior preferred or that there's not value in creating a cushion of private capital for these entities. I guess they could spin it to a bigger number when they end up refunding excess payments under the 3rd amendment, increasing the equity value of which the gov't owns 79.9% pre-recap. But doesn't that mean economically even less than a $56B windfall considering they would not own the entire refund? Plus the value of releasing the implied capital the taxpayer has behind these of course.

[Mephistopheles]

I'm happy with the risk/reward as well and believe they will release before the courts/media embarrass the executive branch. It was very encouraging to see Gretchen Morgenson pick this up last weekend.

 

We own a mix of preferred and common, mostly preferred; my thought is why not own both? It's not hard to imagine the scenario where common gets severely diluted or the one where they let capital build for years to the benefit of the common. For the preferred, it seems most posters here favor the less liquid, lower dividend series that trade for a lower percentage of par... But isn't there some probability that they leave them outstanding - potentially avoiding some headline risk of "paying Wall St with taxpayer money" - and you would see those massive dividends on FNMAS/FMCKJ reinstated? We want some exposure to that scenario, too. 

 

Mephisto, your numbers seem a little rosy. Isn't the choice for gov't really between $21B in perpetuity or a $56B windfall using your figures? Not saying they can't spin it well given all the interest made on the senior preferred or that there's not value in creating a cushion of private capital for these entities. I guess they could spin it to a bigger number when they end up refunding excess payments under the 3rd amendment, increasing the equity value of which the gov't owns 79.9% pre-recap. But doesn't that mean economically even less than a $56B windfall considering they would not own the entire refund? Plus the value of releasing the implied capital the taxpayer has behind these of course.

 

Well what I'm trying to say is that even if the companies are released, D.C. still would own 79.9% of the $32 billion. So it's really a matter of $6.4 billion that they're fighting over. Take out 35% taxes from the $6.4, and it's a fight over $4.2 billion in perpetuity.

 

So the political equation is this: Is an 11-12 figure windfall worth a cost of $4.2 billion annually? My guess is yes. However, I don't know if politicians think in this manner because all they might see is the $32 billion rolling in every year.

 

A big wild card is the capital requirements. I don't think there would be a major dilution up front because that would erode the Government's stake. So perhaps they will allow a slow capital build. But this is all added speculation, so that's why I'm holding just the preferred.

[actuary]

I'm happy with the risk/reward as well and believe they will release before the courts/media embarrass the executive branch. It was very encouraging to see Gretchen Morgenson pick this up last weekend.

 

We own a mix of preferred and common, mostly preferred; my thought is why not own both? It's not hard to imagine the scenario where common gets severely diluted or the one where they let capital build for years to the benefit of the common. For the preferred, it seems most posters here favor the less liquid, lower dividend series that trade for a lower percentage of par... But isn't there some probability that they leave them outstanding - potentially avoiding some headline risk of "paying Wall St with taxpayer money" - and you would see those massive dividends on FNMAS/FMCKJ reinstated? We want some exposure to that scenario, too. 

 

Mephisto, your numbers seem a little rosy. Isn't the choice for gov't really between $21B in perpetuity or a $56B windfall using your figures? Not saying they can't spin it well given all the interest made on the senior preferred or that there's not value in creating a cushion of private capital for these entities. I guess they could spin it to a bigger number when they end up refunding excess payments under the 3rd amendment, increasing the equity value of which the gov't owns 79.9% pre-recap. But doesn't that mean economically even less than a $56B windfall considering they would not own the entire refund? Plus the value of releasing the implied capital the taxpayer has behind these of course.

 

Well what I'm trying to say is that even if the companies are released, D.C. still would own 79.9% of the $32 billion. So it's really a matter of $6.4 billion that they're fighting over. Take out 35% taxes from the $6.4, and it's a fight over $4.2 billion in perpetuity.

 

So the political equation is this: Is an 11-12 figure windfall worth a cost of $4.2 billion annually? My guess is yes. However, I don't know if politicians think in this manner because all they might see is the $32 billion rolling in every year.

 

A big wild card is the capital requirements. I don't think there would be a major dilution up front because that would erode the Government's stake. So perhaps they will allow a slow capital build. But this is all added speculation, so that's why I'm holding just the preferred.

 

My point was that they will not keep 79.9% after release unless they pay in capital. If somehow the GSEs had $180B of excess profits swept that could be used to recapitalize them, then at that point the feds are giving up $180B to get 79.9% of $250B using your numbers. Or maybe the sweep is about even today with wiping out the senior prefs, they sell $180B in common to private mkt, the feds are left with $56B of common they can sell. In both cases, the taxpayer would be getting off a big layer of risk present today, but that is hidden from most voters. They would be giving up $21B/yr for $56B today in the second case. I just don't think it is fair to say the cost is only $4B/yr.

[Mephistopheles]

I'm happy with the risk/reward as well and believe they will release before the courts/media embarrass the executive branch. It was very encouraging to see Gretchen Morgenson pick this up last weekend.

 

We own a mix of preferred and common, mostly preferred; my thought is why not own both? It's not hard to imagine the scenario where common gets severely diluted or the one where they let capital build for years to the benefit of the common. For the preferred, it seems most posters here favor the less liquid, lower dividend series that trade for a lower percentage of par... But isn't there some probability that they leave them outstanding - potentially avoiding some headline risk of "paying Wall St with taxpayer money" - and you would see those massive dividends on FNMAS/FMCKJ reinstated? We want some exposure to that scenario, too. 

 

Mephisto, your numbers seem a little rosy. Isn't the choice for gov't really between $21B in perpetuity or a $56B windfall using your figures? Not saying they can't spin it well given all the interest made on the senior preferred or that there's not value in creating a cushion of private capital for these entities. I guess they could spin it to a bigger number when they end up refunding excess payments under the 3rd amendment, increasing the equity value of which the gov't owns 79.9% pre-recap. But doesn't that mean economically even less than a $56B windfall considering they would not own the entire refund? Plus the value of releasing the implied capital the taxpayer has behind these of course.

 

Well what I'm trying to say is that even if the companies are released, D.C. still would own 79.9% of the $32 billion. So it's really a matter of $6.4 billion that they're fighting over. Take out 35% taxes from the $6.4, and it's a fight over $4.2 billion in perpetuity.

 

So the political equation is this: Is an 11-12 figure windfall worth a cost of $4.2 billion annually? My guess is yes. However, I don't know if politicians think in this manner because all they might see is the $32 billion rolling in every year.

 

A big wild card is the capital requirements. I don't think there would be a major dilution up front because that would erode the Government's stake. So perhaps they will allow a slow capital build. But this is all added speculation, so that's why I'm holding just the preferred.

 

My point was that they will not keep 79.9% after release unless they pay in capital. If somehow the GSEs had $180B of excess profits swept that could be used to recapitalize them, then at that point the feds are giving up $180B to get 79.9% of $250B using your numbers. Or maybe the sweep is about even today with wiping out the senior prefs, they sell $180B in common to private mkt, the feds are left with $56B of common they can sell. In both cases, the taxpayer would be getting off a big layer of risk present today, but that is hidden from most voters. They would be giving up $21B/yr for $56B today in the second case. I just don't think it is fair to say the cost is only $4B/yr.

 

I see what you're saying. So in either of these scenarios, there is either dilution (how little or large idk) or the Govt. has to return excess profits. So you're right that the true cost is not just $4 billion/year; and if it is, than the true windfall is smaller. However, I think we can agree that the cost is still significantly less than the pre-tax earnings of $32 billion annualized, particularly if we're counting the taxing power.

[twacowfca]

here's My view as the OP if that means anything.

 

The current market value of the preferred far exceeds my original speculation for 10 times the $0.50 or so paid in the first round of our trading in or out of those issues.  Anchoring on that reference price is irrelevant to the current valuation. What's different now is that part of the thesis has come true; Fanny and Fred have earned themselves out of the  deep hole, thanks to the easiest money ever, but those earnings have been expropriated. It's entirely possible that the expropriation may eventually be determined to be legal, thanks to the enabling legislation that was passed. However, I think shareholders still have the advantage in the Court of claims, having suffered an unjust taking despite the enabling legislation.

 

If the case eventually works through the court of claims to a positive ruling, the outcome is likely to disappoint, because there are multiple ways to determine the value of the claim. With the US holding 80% of the preferred and being most senior, plus holding a ton of warrants at a nominal strike price, the math indicates only a small percentage recovery for the rest of the preferred, not to mention the common, after many years of litigation.

 

That leaves the most likely outcome in my opinion : a settlement heavily influenced by politics. The present administration will be replaced after the election next year. They would have an unbelievable task to spin a settlement that made public preferred shareholders whole and even more unbelievable spin if common shareholders got a nice pot.

 

Yet that could happen if senior officials are forced to give depositions before the election. The US court of claims is notorious for lengthy delays in discovery.

 

How likely is it that key administration officials will be deposed before the election ?

 

 

[merkhet]

I think that would depend on Sweeney. She seems pretty on top of the discovery schedule -- and unlikely to give a further extension from the one she granted in January.

[merkhet]

Upon further reflection, which is always dangerous given how much I have thought about FNMA already, Gretchen Morgensen may have given us the best catalyst we could have hoped for in this case:

 

gmorgenson: Interesting: in $FNMA takings case, DOJ asserts presidential privilege 45 times. In Starr case (AIG) not once. http://t.co/fvbPMRWSti

 

If the Republicans smell blood, they will go after the President for asserting executive privilege this aggressively -- in the hopes that where there's smoke there's fire -- and this could lead to a settlement.

[Mephistopheles]

Upon further reflection, which is always dangerous given how much I have thought about FNMA already, Gretchen Morgensen may have given us the best catalyst we could have hoped for in this case:

 

gmorgenson: Interesting: in $FNMA takings case, DOJ asserts presidential privilege 45 times. In Starr case (AIG) not once. http://t.co/fvbPMRWSti

 

If the Republicans smell blood, they will go after the President for asserting executive privilege this aggressively -- in the hopes that where there's smoke there's fire -- and this could lead to a settlement.

 

To take it one step further. It's hard not to imagine Bill Ackman making calls to D.C. politicians to turn them in our favor. With the smoke showing, why not lobby the Republicans with this information help ignite a political war against Obama? This is in the same way he lobbied regulators to investigate MBIA and Herbalife.

[doughishere]

http://investorsunite.org/wp-content/uploads/2015/01/Krimminger-Calabria-HERA-White-Paper-Jan-29.pdf

 

Mark Calabria, a former top aide at the Senate Banking Committee, and Michael Krimminger, former general counsel to the FDIC, were both instrumental in the creation of HERA and authored a very smart white paper.

 

 

“They understood Congress didn’t have to start from scratch when writing HERA. Lawmakers looked at bank conservatorships and receiverships under the Federal Deposit Insurance Act (FDIA) and made a conscious decision to replicate the provisions aimed at protecting stakeholders. Congress embraced the long-held understanding of conservatorships should be relatively short-term proceedings with the interests of stakeholders in mind.

 

“‘Foremost in the drafters’ minds was the importance of both continuing the Companies’ operations without disruption and maintaining market confidence in the fair treatment of the Companies’ stakeholders by the government,’ they wrote.”

 

[Grenville]

Q4 Media Call recording and transcript:

 

http://www.fanniemae.com/portal/about-us/media/commentary/022015-mayopoulos.html