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

[Castanza]

5 minutes ago, TwoCitiesCapital said:

 

What's new here is that it can be done even if they don't fail. Fannie/Freddie never did. In hindsight, they never needed a penny of the bailout.

 

Now, I'm not one of those to argue that the bailouts themselves were illegal or shouldn't have happened. I get it. Times of crisis and all. 

 

 But having the knowledge that the board was coerced into the decision, the money was never actually needed, and the accounting write-downs that made it look like it was needed were reversed and proceeds swept to the gov't is certainly a very different situation than say Lehman Brothers or AIG. 

 

Isn't this directly in opposition to what you're saying? 

 

"Finally, the shareholders argue that because the third amendment left the companies unable to build capital reserves and exit conservatorship, it is best viewed as a step toward liquidation, which the FHFA lacked the authority to take without first placing the companies in receivership. This characterization is inaccurate. Nothing about the third amendment precluded the companies from operating at full steam in the marketplace, and all available evidence suggests that they did. The companies were not in the process of winding down their affairs."

 

"It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment. Instead, we conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim."

[Wiggins]

It's easy to be pessimistic at times like these. The law most certainly does matter. SCOTUS did not rule that the plaintiffs' weren't screwed. Rather the opposite, they serve up moral hazard on a silver platter to Lamberth's court.

[Castanza]

I've noticed there are some members who frequent this thread that no longer have accounts. 

[DRValue]

2 minutes ago, Castanza said:

I've noticed there are some members who frequent this thread that no longer have accounts. 

Oooh who

[Castanza]

1 minute ago, DRValue said:

Oooh who

Emily - all their content is gone 

[muscleman]

There was no sign of technical weakness before this. Actually the chart looks like it is about to shape up. But something out of blue like this ruling certainly can have dramatic impact on where the water flows next.

I am glad I was only on a tiny position since March, after seeing how SCOTUS behaved after the election. It is no longer a place for rule of law anymore.

The US is quickly deteriorating into another version of China, and China is sliding into another version of North Korea, unfortunately.

 

[Gregmal]

A few post mortem notes, at least my take aways:

 

1) Anyone who says politics and investing shouldn't go together can go fuck themselves.

 

2) This was not something that was going to be settled by market factors, but rather the "system/establishment". Trading to de-risk should have been a given, and I didnt really do this here because the position was small. Can do better there for sure.

 

3) If the past 18 months have branded with a white hot iron anything into folks, it should be that regardless of red/blue, government can and will do absolutely whatever they want and people have no recourse or at best a very expensive legal journal with shitty risk/reward skew. There's still gym owners with 7 figure fines and court battles for doing nothing but trying to operate and serve their customers. Every year that passes people have less sympathy for investors who last money in 2009. Dont fight the Fed, and dont fight the government. Period.

 

4)America is in the process of doling out dual class share structure vouchers. Certain people just dont have rights anymore and others are seeing their greatly diminished. Here, on the lowest end, you still had people with savings whom were harmed. There is a significant portion of the country that feels that if you have money to save/invest, you have more than you need. On the other end, you had a bunch of wealthy hedge funds....LOL yea right! No way they get their headline victory. This I feel is ultimately what determined the outcome. 

 

5) Fuck Mnuchin. He was kind of the key and chose the establishment and self interest over doing what he was put in place to do. 

[james22]

7 minutes ago, Gregmal said:

America is in the process of doling out dual class share structure vouchers. Certain people just dont have rights anymore and others are seeing their greatly diminished.

 

And others are seeing their rights expanded.

 

Maybe I can recoup my losses by looting? Or shoplifting?

[TwoCitiesCapital]

24 minutes ago, Castanza said:

 

Isn't this directly in opposition to what you're saying? 

 

"Finally, the shareholders argue that because the third amendment left the companies unable to build capital reserves and exit conservatorship, it is best viewed as a step toward liquidation, which the FHFA lacked the authority to take without first placing the companies in receivership. This characterization is inaccurate. Nothing about the third amendment precluded the companies from operating at full steam in the marketplace, and all available evidence suggests that they did. The companies were not in the process of winding down their affairs."

 

"It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment. Instead, we conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim."

 

They were only able to operate without capital because of the govt backstop. The backstop was only needed because govt stole all of the money. 

 

Without the backstop they were fine and would have retained/built plenty of capital. With it, the government could steal all of the capital in return. 

 

The ruling of the court is basically:

 

"yea, it's pretty clear this sucks and doesn't resemble a conservatorship, but there's nothing we can do about it so the evidence doesn't matter" 

 

 

 

 

[james22]

Rule of Law Guy Quick Reaction:

 

1. I was shocked that SCOTUS did not permit the APA statutory claim to go forward. The constitutional claim portion of the case was presaged by oral argument questioning, so while I do not agree with that outcome either, I cant say that I was totally surprised. On a day on which SCOTUS states that a farmer can exclude from his private property union organizers, SCOTUS also decides that the conservator has the statutory authority to appropriate over $100 billion of shareholder property.

2. Going forward on remand, Collins Ps should argue that all senior preferred distributions from the time Director Watt came on board are subject to invalidation. There is some question whether Ps can only argue that the excess of distributions over the 10% dividend amount should be voided…but I would argue that the POTUS unremovable Director Watt did not have the authority to make any and all distributions on the senior preferred. 

3. This remanded portion of the case goes to the Houston federal district court, and however that court decides, it will be appealed to the 5th Circuit, which is already on record as believing that SCOTUS is wrong as to the merits of the APA claim. So while SCOTUS’s decision prevails for pre-2014 distributions, one might think that the 5th Circuit will be solicitous of the Collins Ps argument with regard to the post 2014 distributions.

4. The Lamberth trial goes forward, with Ps arguing that the NWS breached the implied duty of FHFA/Treasury to deal in good faith which was owed to public shareholders. Judge Lamberth has already essentially stated that there was no APA claim, so having SCOTUS agree with him doesnt affect the case moving forward as is. To my mind, Ps should argue that there are exactly zero instances in the history of shareholder capitalism where the terms similar to the NWS have been implemented and upheld…so how could public shareholders have expected the NWS as a possible outcome…and if this is right (and it is), how can the public shareholders have expected that the NWS would comply with this fair dealing duty (understanding that expectations as to what is fair are based in major part on what history and custom informs one to expect).

5. The court of federal claims case survives with added urgency. If congress is permitted to authorize the conservator to appropriate shareholder wealth, then shareholders should receive the fair value of their expropriated wealth as damages. A major issue in this case is whether this claim “runs with the shares”, or whether only 2012 shareholder can assert this claim.

6. TINA (There Is No Alternative to the GSEs) still exists but the public shareholders ownership claims to the GSEs in the future have taken a hit. Dont ask me how the Biden administration can expect to recapitalize the GSEs given this outcome…and therefore one might expect that the GSEs will simply limp along in conservatorship for the next three years, building capital albeit with the Treasury having the right to all of that capital as its senior preferred stock preference increases.

[Castanza]

That was fast

 

https://www.housingwire.com/articles/biden-to-replace-fhfa-director-mark-calabria-today/

[Gregmal]

Already word out from NYT that Calabria is gone. Any guesses on a replacement? My guess is its a walking diversity meme that will use shareholder resources to get lower income folks into homes on terms not available to other parts of the population. Debating whether to sell out here, but will probably just keep it til year end rounds out and I can do some more tax planning. Also want to keep an eye out for any angle where there could be a glimmer of hope. Typically when all hope is lost thats where an opportunity emerges. But as I said before, this isnt a market driven investment. And I see no light at the tunnel as far as getting out of the current government dictated situation. 

[DRValue]

Just now, Castanza said:

That was fast

 

https://www.housingwire.com/articles/biden-to-replace-fhfa-director-mark-calabria-today/

Good. At least now calabria's nonsense and fucking about ends.

[Spekulatius]

Sorry for the losses to everyone who invested here. I know I was only an casual here and had a diverging opinion, mostly because of my instinct to avoid any investment that looks like a binary event.

 

I have played a few and watched many more and they never seem to work out as expected. I hope everyone is OK and can move past this.
 

[DRValue]

What I hope happens is that Republicans use calabria's high capital requirement to negotiate and they are released with less capital required. 

[orthopa]

Im as shell shocked as anyone. How much more can a shareholder in these companies take? First the disappointment in January and now this. Damn. 

 

Gregmal is absolutely right. What has become clear is dont ever, ever fuck with the govt. It wont end well and if it does by the time its done you will be broke or ready to blow your brains out. 

 

There are so many questions and as clear as this ever had become at any point its even  less clear now. Rule of law guy has a good point. How do they raise capital with this ruling? What happens in a housing market down turn in the future?

 

Maybe there is a hidden silver lining to this? I doubt it. If there was/is anything to read from what mnuchin said back in  December. 

 

"Mnuchin also alluded to a case heard by the Supreme Court on Wednesday in which legacy shareholders of Fannie and Freddie are suing in an attempt to reclaim profits they say the government illegally directed to the Treasury. Mnuchin said that case and other issues must be resolved before Fannie and Freddie could raise capital in private markets, which they would need to endure losses outside of government control.

 

“If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

This maybe simplifies things for the gov. 

 

And in the 4th letter agreement:

IX  Commitment to develop Proposal to resolve conservatorships

 

Treasury is supposed to deliver a proposal to congress on how to resolve the treasury stake and raise third party capital by 9/30/21.  But dont hold your fucking breath that these scumbags wont push this off. 

 

 

[Gregmal]

4 minutes ago, Spekulatius said:

Sorry for the losses to everyone who invested here. I know I was only an casual here and had a diverging opinion, mostly because of my instinct to avoid any investment that looks like a binary event.

 

I have played a few and watched many more and they never seem to work out as expected. I hope everyone is OK and can move past this.
 

https://seekingalpha.com/author/glen-bradford#regular_articles

 

You wanna start the gofundme or should I?

 

I enjoyed his analysis from time to time but holy risk management. 

[DRValue]

10 minutes ago, orthopa said:

Im as shell shocked as anyone. How much more can a shareholder in these companies take? First the disappointment in January and now this. Damn. 

 

Gregmal is absolutely right. What has become clear is dont ever, ever fuck with the govt. It wont end well and if it does by the time its done you will be broke or ready to blow your brains out. 

 

There are so many questions and as clear as this ever had become at any point its even  less clear now. Rule of law guy has a good point. How do they raise capital with this ruling? What happens in a housing market down turn in the future?

 

Maybe there is a hidden silver lining to this? I doubt it. If there was/is anything to read from what mnuchin said back in  December. 

 

"Mnuchin also alluded to a case heard by the Supreme Court on Wednesday in which legacy shareholders of Fannie and Freddie are suing in an attempt to reclaim profits they say the government illegally directed to the Treasury. Mnuchin said that case and other issues must be resolved before Fannie and Freddie could raise capital in private markets, which they would need to endure losses outside of government control.

 

“If they rule in Treasury’s favor it simplifies things,” he said. “If they rule against, it’s still going to end up in litigation.”

 

This maybe simplifies things for the gov. 

 

And in the 4th letter agreement:

IX  Commitment to develop Proposal to resolve conservatorships

 

Treasury is supposed to deliver a proposal to congress on how to resolve the treasury stake and raise third party capital by 9/30/21.  But dont hold your fucking breath that these scumbags wont push this off. 

 

 

I did think that this does technically mean the litigation is resolved. Something is coming to mind regarding there being <$6b of claims outstanding to raise capital. But where that is coming from I don't know. If the plan is the plan and now the litigation is resolved the prefs are good if the plan isn't liquidation. Maybe!

 

Also, yes I fully expect them to push this past September. 

Edited June 23, 2021 by DRValue

[Mephistopheles]

I know everyone is shocked and upset, but I think the prefs may be a good bet now if you treat them like call options. Right now you can get about 11:1 return (selling for about 8.4% of par). There are still a couple of cases in appeals from my understanding - Lamberth and the Court of Claims. My non-lawyer understanding is that neither of these are related to the SCOTUS ruling today. Meanwhile the companies remain profitable. What's the chance of the call option, with no expiration date, going to zero with outstanding litigation and underlying profitability? Very unlikely IMO.

 

I'm not saying buy today necessarily, but if they drop further, then at some point you're buying a really undervalued call option that may re-rate to a fairer price. Furthermore, you can do it in a taxable account and if it drops, swap out from Fannie to Freddie or vice versa, and take the tax loss while avoiding wash sale. 

Edited June 23, 2021 by Mephistopheles

[Gregmal]

4 minutes ago, Mephistopheles said:

I know everyone is shocked and upset, but I think the prefs may be a good bet now if you treat them like call options. Right now you can get about 11:1 return (selling for about 8.4% of par). There are still a couple of cases in appeals from my understanding - Lamberth and the Court of Claims. My non-lawyer understanding is that neither of these are related to the SCOTUS ruling today. Meanwhile the companies remain profitable. What's the chance of the call option, with no expiration date, going to zero with outstanding litigation and underlying profitability? Very unlikely IMO.

 

I'm not saying buy today necessarily, but if they drop further, then at some point you're buying a really undervalued call option that may re-rate to a fairer price. Furthermore, you can do it in a taxable account and if it drops, swap out from Fannie to Freddie or vice versa, and take the tax loss while avoiding wash sale. So not only is it unlikely to go to zero, but you can consistently use it as a vehicle for after-tax losses if needed.

Yea that's where my trading instinct is leaning a little. These are the type of "all hope is lost" setups where fortunes can be made. 3:1 or 4:1 from previous levels didnt really seem all that appealing....again, note to self, I was basically just asleep on this here because "so much upside eventually"....definitely should have been more active but yea from current levels you dont need a whole lot to get a pretty wicked return and downside is probably muted a bit. My problem is that I dont see any resolution that changes the overall bind shareholders are currently in. And that this has been a waste of time for a decade and theres better ideas out there. 

[COBFInfinity]

6 minutes ago, Mephistopheles said:

I know everyone is shocked and upset, but I think the prefs may be a good bet now if you treat them like call options. Right now you can get about 11:1 return (selling for about 8.4% of par). There are still a couple of cases in appeals from my understanding - Lamberth and the Court of Claims. My non-lawyer understanding is that neither of these are related to the SCOTUS ruling today. Meanwhile the companies remain profitable. What's the chance of the call option, with no expiration date, going to zero with outstanding litigation and underlying profitability? Very unlikely IMO.

 

I'm not saying buy today necessarily, but if they drop further, then at some point you're buying a really undervalued call option that may re-rate to a fairer price. Furthermore, you can do it in a taxable account and if it drops, swap out from Fannie to Freddie or vice versa, and take the tax loss while avoiding wash sale. So not only is it unlikely to go to zero, but you can consistently use it as a vehicle for after-tax losses if needed.

Lol, it was already a call option at 20% of par. Sure, it's cheaper now, but dramatically worse odds of payoff. Even if plaintiffs win another trial, it will end up in front of SCOTUS again in 3-4 years and they can smash it down again.

[orthopa]

Now that Calabria is on the way out if there is any positive from that a new FHFA director would of course be one to work with Yellen. He/she could work with Yellen for 3.5 years and get no where so who cares right? 

 

A year ago FHFA was hiring financial advisors for a public offering and today the preferred trade at 8% of pa. WTF huh?

 

I still cant get pass the ruling and how this meshes with new capital if the gov wants to do that. 

 

Paulson and Berkowitz even as billionaires must be smashing their heads on 100k dollar fine future tables asking WTF happened too. Remember Moelis lol?

 

What a mess...but for the stubborn or new to the investment what a better time then now to buy lol!

[muscleman]

30 minutes ago, Gregmal said:

https://seekingalpha.com/author/glen-bradford#regular_articles

 

You wanna start the gofundme or should I?

 

I enjoyed his analysis from time to time but holy risk management. 

 

Back in 2011, I was following Glen Bradford into a few US listed Chinese reverse mergers and they turned out to be frauds one by one. Glen became quiet for a few years and then became a GSE preferred's cheerleader. Now he has a perfect record that 100% of what he touches turns into crap.

[Castanza]

2 minutes ago, orthopa said:

Now that Calabria is on the way out if there is any positive from that a new FHFA director would of course be one to work with Yellen. He/she could work with Yellen for 3.5 years and get no where so who cares right? 

 

A year ago FHFA was hiring financial advisors for a public offering and today the preferred trade at 8% of pa. WTF huh?

 

I still cant get pass the ruling and how this meshes with new capital if the gov wants to do that. 

 

Paulson and Berkowitz even as billionaires must be smashing their heads on 100k dollar fine future tables asking WTF happened too. Remember Moelis lol?

 

What a mess...but for the stubborn or new to the investment what a better time then now to buy lol!

I recognized the decision at hand and was hoping to hold this a few weeks and get out with a fist full of cash....Looks like I'm holding for the grandkids 

[Mephistopheles]

17 minutes ago, COBFInfinity said:

Lol, it was already a call option at 20% of par. Sure, it's cheaper now, but dramatically worse odds of payoff. Even if plaintiffs win another trial, it will end up in front of SCOTUS again in 3-4 years and they can smash it down again.

 

Well, having a legal background may help assess the odds but it seems like the lawyers got Collins wrong too. I guess people see it based on what they want the result to be. That WSJ journalist John Carney turned out to be right so far, few years ago I remember everyone making fun of him.

 

So, I have no idea what the odds are, and I don't think most people do. So you just have to buy when the sentiment is awful and hope for a reversal. What is that buying point? 11:1? 20:1? 30:1? The profitability, litigation, and lack of expiration date ensures that the option value remains, whatever it may be. 

Edited June 23, 2021 by Mephistopheles