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


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Fannie Mae’s 2,000% Year, Briefly

 

http://blogs.wsj.com/moneybeat/2013/05/29/fannie-maes-2000-year-briefly/?mod=yahoo_hs

 

On Wednesday, mutual fund investor Bruce Berkowitz of Fairholme Capital Management told CNBC he had invested $500 million in the preferred shares. Volume in the shares exceeded 230 million shares, the highest in three years and nearly six times the average daily trading.

 

A representative of the Fairholme Funds’ shareholder services confirmed that the firm bought roughly $500 million in preferred equity of Fannie Mae and Freddie Mac FMCC -38.70%. He declined to elaborate further.

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Fairholme makes $500 mln bet on Fannie, Freddie preferred

 

Fund manager Bruce Berkowitz's Fairholme Capital Management is making a big bet on Fannie Mae and Freddie Mac preferred shares

 

http://in.reuters.com/article/2013/05/29/usa-fannie-freddie-idINL2N0EA1JY20130529

 

------

 

Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

 

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

 

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

 

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

 

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

 

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."

 

 

 

 

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Like Chanticleer, I must conclude that Mr. Market has taken my advice to sell the F&F common to arbitrage the difference in prospective value of the F&F preferred.  The common has lost half its market value in the last couple of days while the preferred has been flattish.

 

Should I try for making the sun rise?  :)

 

Haha nice.  Please do!

 

I think I bounced around the short common-long preferred trade on twitter a few weeks ago when the common had a (at the time) "crazy" rally up to $1.20.  The tricky part is, for good risk management you need some way to make the trade last until there is resolution in the GSE's status - because only then can an anchoring event force rationality on the prices.  Either that or fully hedge with some way out-of-the-money options, but I'm not aware of any that trade.  The common prices were almost as nuts at $1.20 as they are at $4, but I would have gotten destroyed shorting it.

 

 

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Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

 

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

 

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

 

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

 

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

 

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."

 

Go Bruce Berkowitz! Making the case very eloquently. I hope he gains traction.

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Paulson leads hedge funds lobbying to privatize Fannie Mae

 

http://www.delawareonline.com/article/20130502/BUSINESS05/305020039/Paulson-leads-hedge-funds-lobbying-privatize-Fannie-Mae

 

Paulson & Co. is among funds that met with members of the Senate Banking Committee and with staff members in the House of Representatives, said two of the people briefed on the matter. Claren Road Asset Management LLC and Perry Capital LLC also have lobbied, said those people and a third person. They spoke on condition of anonymity because the meetings weren’t public.

 

The funds’ proposal is similar to one being circulated by James Millstein, the former Treasury official who oversaw the restructuring of bailed-out insurer American International Group. Millstein’s multiple-step blueprint calls for recapitalizing the two mortgage companies, eliminating their implicit government backing and selling off the Treasury stake. He would also create a new U.S. agency to reinsure loans. Millstein said his plan could leave taxpayers with $100 billion to $190 billion in profit.

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Bruce Berkowitz Of Fairholme Takes A $500 Million Stake In Fannie Mae And Freddie Mac

 

http://www.gurufocus.com/news/220216/bruce-berkowitz-of-fairholme-takes-a-500-million-stake-in-fannie-mae-and-freddie-mac

 

Berkowitz wrote the following to CNBC with respect to his newly revealed positions:

 

"Taxpayer dollars expended by the government during a time of national crisis will be fully repaid, and equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

 

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive. This is the American way.

 

"The time to restructure Fannie and Freddie is upon us, sustaining our nation's economic recovery requires it. On behalf of the hundreds of thousands of Fairholme shareholders who helped to rebuild American International Group,Bank of America, CIT Group, General Growth Properties, MBIA Inc., and others after the Great Recession – we stand ready to do our part."

 

Go Bruce Berkowitz! Making the case very eloquently. I hope he gains traction.

 

Yes, welcome to the party, Bruce.  Sorry, you declined my invitation to join USG's coming back party ten years ago, but this could make up for that lost opportunity. :)

 

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Berkowitz is betting that dividend on Common preferred will be restored and Preferred will trade at Par.

The questions if that will  Treasury after getting their money back still punish common preferred?

We know Fannie will be earning lot of money even in run off mode.

Will govt's exit in Fannie take AIG route or some other form.

Even if the Govt. does not get out of Fannie, govt. will face pressure to restore dividend to common preferred after they have got their money back.

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Berkowitz is betting that dividend on Common preferred will be restored and Preferred will trade at Par.

The questions if that will  Treasury after getting their money back still punish common preferred?

We know Fannie will be earning lot of money even in run off mode.

Will govt's exit in Fannie take AIG route or some other form.

Even if the Govt. does not get out of Fannie, govt. will face pressure to restore dividend to common preferred after they have got their money back.

 

No, obviously the situation is nothing like AIG or BAC. Fannie and Freddie are in conservatorship and are winding down. The government owns senior preferred shares in Fannie and Freddie, which currently hold 100% of economic value.

 

It's possible that they will decide to recapitalize, and Treasury will give up the senior preferred for cash. But how would that happen? Treasury and FHFA agreed on the current approach which gives all profits to Treasury, and no value left for public shareholders.  Do you think Treasury will change their mind and give money away to hedge funds, just because they asked for it?  If not, do you think both houses of Congress can agree on that?

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Correct, this is different from AIG/BAC.

 

Treasury changed from getting dividend to getting anything above "A-L-buffer" to prevent the circular flow of funds (ie borrowing from treasury to pay them).

 

Once the loan is paid out in full, what legal/moral argument would they have to continue to get (usurp) all income of a private enterprise?

 

In 10-K, the covenant says

Covenants

The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is repaid or

redeemed in full, we may not, without the prior written consent of Treasury:

---

--Terminate the conservatorship

- Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

Also

Termination Provisions

The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the

following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding

commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not

contingent, including mortgage guaranty obligations),

 

The treasury's stranglehold may loosen once they are paid in full

 

 

No, obviously the situation is nothing like AIG or BAC. Fannie and Freddie are in conservatorship and are winding down. The government owns senior preferred shares in Fannie and Freddie, which currently hold 100% of economic value.

 

It's possible that they will decide to recapitalize, and Treasury will give up the senior preferred for cash. But how would that happen? Treasury and FHFA agreed on the current approach which gives all profits to Treasury, and no value left for public shareholders.  Do you think Treasury will change their mind and give money away to hedge funds, just because they asked for it?  If not, do you think both houses of Congress can agree on that?

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Correct, this is different from AIG/BAC.

 

Treasury changed from getting dividend to getting anything above "A-L-buffer" to prevent the circular flow of funds (ie borrowing from treasury to pay them).

 

Once the loan is paid out in full, what legal/moral argument would they have to continue to get (usurp) all income of a private enterprise?

 

In 10-K, the covenant says

Covenants

The senior preferred stock purchase agreement, as amended, provides that, until the senior preferred stock is repaid or

redeemed in full, we may not, without the prior written consent of Treasury:

---

--Terminate the conservatorship

- Enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or

Also

Termination Provisions

The senior preferred stock purchase agreement provides that Treasury’s funding commitment will terminate under any the

following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under its funding

commitment at that time, (2) the payment in full of, or reasonable provision for, all of our liabilities (whether or not

contingent, including mortgage guaranty obligations),

 

The treasury's stranglehold may loosen once they are paid in full

 

 

Morality is not an investable thesis.

 

"Payment in full of all of our liabilities" means liquidation of the company and paying off $3.2 trillion in liabilities. It doesn't mean that anything happens once they pay dividends equal to the face value of the preferred stake.

 

Their is currently no mechanism for Fannie and Freddie to repay the preferred.

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Clearly FNMA not being recapitalized is the biggest risk for common preferred.

But Fed has more to gain with recapitalization than liquidation.Fed can probably get $100B with recapitalization in 2014 than $50B in dividends over 10 years or may be more.

Berkowitz thinks recapitalization will happen, that is why he has risked $500m in the common preferred.

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Maximizing ROI is probably not Treasury's primary goal here. They aren't capital or time constrained so there is no rush to do anything. Judging by the preferred share agreement, their primary goal is to radically reduce the size of the GSEs. Recapitalizing and turning the companies back to the public markets doesn't support that.

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“The tough work is over,” Berkowitz said. “I don’t understand the politics involved but it seems obvious to me what needs to take place.”

 

Despite the tremendous, self-interested investor support for the dividend’s restoration, legislators seem unlikely to grant Wall Street’s wishes. Changing the current arrangement at Fannie and Freddie has been non-starter in Washington, and a bipartisan group of senators is working on a bill to replace the two companies, leaving no room for private shareholders. ""

 

mmm … nothing new here.

 

 

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Just a newbie question, but doesn't killing off Fannie/Freddie mean that 30 year fixed rate mortgages would disappear?

 

No,  Private Label securitizations are competitive with GSE's in some cases already.  Also banks retain some mortgages.

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“The tough work is over,” Berkowitz said. “I don’t understand the politics involved but it seems obvious to me what needs to take place.”

 

Despite the tremendous, self-interested investor support for the dividend’s restoration, legislators seem unlikely to grant Wall Street’s wishes. Changing the current arrangement at Fannie and Freddie has been non-starter in Washington, and a bipartisan group of senators is working on a bill to replace the two companies, leaving no room for private shareholders. ""

 

mmm … nothing new here.

 

I think Kyle Bass stated that the house never agrees on anything except now they both want Fannie and Freddie gone.  So what do you think might happen?  It sounds like a much more realistic synopsis of the politics surrounding this than Berkowitz just shrugging it off.  I m big time leery of this one working out for any shareholders except the hourly traders.

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