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

[Gregmal]

8 minutes ago, Castanza said:

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 

Yea well thats why investing is awesome. It can only cost you what you put into it. It can go up multiples of that. Too many people treat buying a stock like theyre shorting a call option. If you size it correctly and the worst case is only 100% loss, thats a huge advantage over time, assuming your selection process is semi competent. 

[Castanza]

26 minutes ago, Gregmal said:

Yea well thats why investing is awesome. It can only cost you what you put into it. It can go up multiples of that. Too many people treat buying a stock like theyre shorting a call option. If you size it correctly and the worst case is only 100% loss, thats a huge advantage over time, assuming your selection process is semi competent. 

Agreed! Had good risk vs reward for such a short timeframe. 

 

Edited June 23, 2021 by Castanza

[james22]

Gorsuch:

 

Today, the Court sounds the call to arms and declares a constitutional violation only to head for the hills as soon as it’s faced with a request for meaningful relief. But as we have seen, the Court has in the past consistently vindicated Article II both in reasoning and in remedy. These cases—involving appointment and removal defects alike—remain good law. So what are lower courts faced with future removal defect cases to make of all this? The only lesson I can divine is that the
Court’s opinion today is a product of its unique context—a retreat prompted by the prospect that affording a more traditional remedy here could mean unwinding or disgorging hundreds of millions of dollars that have already changed
hands. The Court may blanch at authorizing such relief today, but nothing it says undoes our prior guidance authorizing more meaningful relief in other situations.
 

For my part, rather than carve out some suit-specific, removal-only, money-in-the-bank exception to our normal
rules for Article II violations, I would take a simpler and more familiar path. Whether unconstitutionally installed
or improperly unsupervised, officials cannot wield executive power except as Article II provides. Attempts to do so
are void; speculation about alternate universes is neither necessary nor appropriate. In the world we inhabit, where
individuals are burdened by unconstitutional executive action, they are “entitled to relief.”

[orthopa]

14 minutes ago, Castanza said:

Agreed! Had good risk vs reward for such a short timeframe. 

 

 

Susan Watchner is the new appointee 

Was Watchner announced as the new candidate?

[Mephistopheles]

36 minutes ago, Gregmal said:

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. 

 

36 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.

 

 

So I am looking at long term chart. It appears that after the third amendment profit sweep, the prefs bottomed at about 1% of par within that month. That's when there was no litigation momentum or anything. I'd say that's the apparent floor for the option value. Now if all cases get tossed out then the floor can break, but it seems like a good measure for now.

[orthopa]

21 minutes ago, Mephistopheles said:

 

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. 

 FWIW why have so many people been wrong not just on this case but the investment in general? No need to list them individually but the list is a wide swatch from billionaires, government and non government people, private and public people, lawyers, en banc judges, independent regulators and even SCOTUS justices.  Outside of purposeful contrarian opinions how are all of those people so wrong, and wrong for so long about the legality of what happened and what is right vs wrong?

 

John Carney was right all along. Mind blowing. 

[Castanza]

5 minutes ago, orthopa said:

Was Watchner announced as the new candidate?

Read the post wrong....just speculation 

[DRValue]

21 minutes ago, james22 said:

Gorsuch:

 

Today, the Court sounds the call to arms and declares a constitutional violation only to head for the hills as soon as it’s faced with a request for meaningful relief. But as we have seen, the Court has in the past consistently vindicated Article II both in reasoning and in remedy. These cases—involving appointment and removal defects alike—remain good law. So what are lower courts faced with future removal defect cases to make of all this? The only lesson I can divine is that the
Court’s opinion today is a product of its unique context—a retreat prompted by the prospect that affording a more traditional remedy here could mean unwinding or disgorging hundreds of millions of dollars that have already changed
hands. The Court may blanch at authorizing such relief today, but nothing it says undoes our prior guidance authorizing more meaningful relief in other situations.
 

For my part, rather than carve out some suit-specific, removal-only, money-in-the-bank exception to our normal
rules for Article II violations, I would take a simpler and more familiar path. Whether unconstitutionally installed
or improperly unsupervised, officials cannot wield executive power except as Article II provides. Attempts to do so
are void; speculation about alternate universes is neither necessary nor appropriate. In the world we inhabit, where
individuals are burdened by unconstitutional executive action, they are “entitled to relief.”

This is fucking mental. Even if they should, we can't make the crooks give the money back for some reason. Oh and by the way, we'll rule differently in the exact same situation in the future.

 

The government made a law to protect itself, dealt with itself, and ruled for itself.

 

The courts ain't independent. 

[TwoCitiesCapital]

13 minutes ago, orthopa said:

Outside of purposeful contrarian opinions how are all of those people so wrong, and wrong for so long about the legality of what happened and what is right vs wrong?

 

 

Probably assumed United States wasn't a banana republic and respected property rights and not strong-armed gov't confiscations. The U.S. has changed and none of us recognized it. 

[cameronfen]

17 minutes ago, orthopa said:

 FWIW why have so many people been wrong not just on this case but the investment in general? No need to list them individually but the list is a wide swatch from billionaires, government and non government people, private and public people, lawyers, en banc judges, independent regulators and even SCOTUS justices.  Outside of purposeful contrarian opinions how are all of those people so wrong, and wrong for so long about the legality of what happened and what is right vs wrong?

 

John Carney was right all along. Mind blowing. 

I think investment in the stock clouded people's judgement.  You could argue logically for either side, but ask most well educated non-financially involved person who did a little research and this is likely what they would say: Fannie and Freddie were going bankrupt in 2008.  Investors would have lost everything.  Government bailed them out.  Looked like government would never recoup all their investment so they initiated a profit sweep taking all profits from Fannie and Freddie. 

 

I think most people would question

 

1.  why can't the government ever make a profit when they invest? 

2.  Why does the government always have to act like a put for investors, isn't that anti-free market in its own right? 

3.  It just doesn't seem fair for the government to renege on a contract that makes billionaires wealthy. 

 

For the people that said government compelled Fannie and Freddie,

 

1.  Government is entitled to their money back especially considering these firms would have gone bankrupt 

2. this bruhaha didn't become a huge deal until it was obvious Fannie and Freddie would be enormously profitable. 

 

I imagine this emotional argument (which I'm very partial too if you read my occasional earlier posts here) influenced justices as well, but not sure.  

 

I was long the preferred for a short time, but was honest to myself that this was a trade that was somewhat taking advantage of the political weaknesses of the US government.  I feel like people's investment have clouded their judgement and how bad the optics would be.   

 

Just thinking of this thread, it became impossible in this thread to offer a dissenting opinion, because people would accuse you of not knowing anything (which is definitely a little true, but I'm not going long so I'm not going to do your DD for you) or being contrarian for it's own sake rather than engaging in thoughtful discussion.  

 

 

Edited June 23, 2021 by cameronfen
(edited for formatting)

[orthopa]

2 minutes ago, DRValue said:

This is fucking mental. Even if they should, we can't make the crooks give the money back for some reason. Oh and by the way, we'll rule differently in the exact same situation in the future.

 

The government made a law to protect itself, dealt with itself, and ruled for itself.

 

The courts ain't independent. 

Throw in enough words and you can make it whatever round and round reasoning that you want. I just thank god Im not on trial for a criminal offense watching this and its only money at stake. Any judge/jury can come to any reasoning they want and decide that even though your innocent you should be punished and vice versa. Mind blowing. 

[Mephistopheles]

14 minutes ago, orthopa said:

 FWIW why have so many people been wrong not just on this case but the investment in general? No need to list them individually but the list is a wide swatch from billionaires, government and non government people, private and public people, lawyers, en banc judges, independent regulators and even SCOTUS justices.  Outside of purposeful contrarian opinions how are all of those people so wrong, and wrong for so long about the legality of what happened and what is right vs wrong?

 

John Carney was right all along. Mind blowing. 

 

It may appear that way because the loudest ones opining are the ones with a vested interest in a shareholder friendly outcome. Those not invested don't care as much. So you only hear one side of it. I don't even know if Carney was right or just lucky. His vested interest was to create a stir as the lone voice on the other side.

 

And while things have been bad, it's not a total banana republic either. The DC case that got appealed went back to Lamberth as opposed to being tossed out, that is something right? 

[Castanza]

6 minutes ago, Mephistopheles said:

 

It may appear that way because the loudest ones opining are the ones with a vested interest in a shareholder friendly outcome. Those not invested don't care as much. So you only hear one side of it. I don't even know if Carney was right or just lucky. His vested interest was to create a stir as the lone voice on the other side.

 

And while things have been bad, it's not a total banana republic either. The DC case that got appealed went back to Lamberth as opposed to being tossed out, that is something right? 

Yeah, but Lamberth said he was waiting for the Collins case decision. 

[orthopa]

3 minutes ago, Mephistopheles said:

 

It may appear that way because the loudest ones opining are the ones with a vested interest in a shareholder friendly outcome. Those not invested don't care as much. So you only hear one side of it. I don't even know if Carney was right or just lucky. His vested interest was to create a stir as the lone voice on the other side.

 

And while things have been bad, it's not a total banana republic either. The DC case that got appealed went back to Lamberth as opposed to being tossed out, that is something right? 

True its not all a total lost cause but the time horizon certainly became foreseeable longer for shareholders. There may have been many reasons why Mnuchin didnt act but after he didnt I couldnt but help wonder if the shareholders winning cert for the SCOTUS and the enbanc delayed and made what he and Calabria were going to try to do nearly impossible esp from a time stand point. If this decision comes down in summer of 2020 or isnt even argued is the conservatorship over by now. 

 

Apart of me would want plantiffs to just cry uncle, drop the litigation and try to move to an agreement with the gov on a path out of conservatorship. This is unlikely because without the leverage of the lawsuits the plantiffs could get railroaded and there are probably angry shareholders that will never let this rest. 

[Castanza]

7 minutes ago, orthopa said:

True its not all a total lost cause but the time horizon certainly became foreseeable longer for shareholders. There may have been many reasons why Mnuchin didnt act but after he didnt I couldnt but help wonder if the shareholders winning cert for the SCOTUS and the enbanc delayed and made what he and Calabria were going to try to do nearly impossible esp from a time stand point. If this decision comes down in summer of 2020 or isnt even argued is the conservatorship over by now. 

 

Apart of me would want plantiffs to just cry uncle, drop the litigation and try to move to an agreement with the gov on a path out of conservatorship. This is unlikely because without the leverage of the lawsuits the plantiffs could get railroaded and there are probably angry shareholders that will never let this rest. 

How much in damages do shareholders think they would get vs just exiting c-ship and seeing where the stock ends up? To me (late entry) I'd rather just see an exit strategy. 

[allnatural]

Tough day for shareholders / rule of law. What value is left if any is left in the preferred shares?

 

1) Biden Admin optionality: Word is that the Biden admin is against the high capital requirements and footprint shrinking set by Calabria. Why do capital requirements even matter if they are stuck in perpetual conservatorship? Biden will shortly nominate a replacement and that replacement will share his views on the future of housing finance reform (could be bullish or more of the same aka nothing).

 

2) SCOTUS remand for relief: Based off the ruling today, very low likelihood shareholders see any relief here.

 

3) Lambert/contracts case: Probably shareholders best shot at short-term relief in litigation. Set for trial in ~9 months from today. Lamberth already ruled in favor of shareholders that the government allegedly violated our contractual rights with the NWS (whether the NWS is legal or not is irrelevant to his analysis). The crux of his ruling was that no shareholder could have ever expected at a time when the GSEs were about to hit record profitability, for the government to come in and to arrange the contracts so they take everything for themselves while zeroing out the shareholders in exchange for NOTHING. He then went on to list all the facts to support this view. Damages/relief would potentially entail PAR+ interest in damages in the form of a direct monetary check to shareholders.

 

4) Takings case: Another good shot on goal but I think its at least 1-2 years away.

 

5) TINA: As always, GSEs are more stable / reformed than ever before and have ~$40-50b of retained capital on their books. I don't think unwind/replace is a real risk here but being stuck in limbo may be. TINA provides shareholders a perpetual call option either way.

 

Add it all up and you get ~10% of PAR for FNMAS. 

[orthopa]

21 minutes ago, cameronfen said:

I think investment in the stock clouded people's judgement.  You could argue logically for either side, but ask most well educated non-financially involved person who did a little research and this is likely what they would say: Fannie and Freddie were going bankrupt in 2008.  Investors would have lost everything.  Government bailed them out.  Looked like government would never recoup all their investment so they initiated a profit sweep taking all profits from Fannie and Freddie. 

 

I think most people would question

 

1.  why can't the government ever make a profit when they invest? 

2.  Why does the government always have to act like a put for investors, isn't that anti-free market in its own right? 

3.  It just doesn't seem fair for the government to renege on a contract that makes billionaires wealthy. 

 

For the people that said government compelled Fannie and Freddie,

 

1.  Government is entitled to their money back especially considering these firms would have gone bankrupt 

2. this bruhaha didn't become a huge deal until it was obvious Fannie and Freddie would be enormously profitable. 

 

I imagine this emotional argument (which I'm very partial too if you read my occasional earlier posts here) influenced justices as well, but not sure.  

 

I was long the preferred for a short time, but was honest to myself that this was a trade that was somewhat taking advantage of the political weaknesses of the US government.  I feel like people's investment have clouded their judgement and how bad the optics would be.   

 

Just thinking of this thread, it became impossible in this thread to offer a dissenting opinion, because people would accuse you of not knowing anything (which is definitely a little true, but I'm not going long so I'm not going to do your DD for you) or being contrarian for it's own sake rather than engaging in thoughtful discussion.  

 

 

Anchor bias certainly has played a role, especially for anyone holding for a long time. One would think the due diligence was done on an investors end before even investing but sure. Once your involved and moneys at stake its easy to believe. 

 

I think there has been a lot of people who have relied on "common sense" such as TINA, the US has property rights, the emails show that the assets were never meant to be conserved, the govt didnt want to show documents, the accounting didnt add up, on and on. 

 

Lamberths court and the takings case may allow some more of the common sense aspect of the investment come to light as the actual process of the conservatorship and the documents the govt come to light. Im no where near a legal expert enough to know if this case matters to any large extent in those realms. 

[DRValue]

5 minutes ago, allnatural said:

Tough day for shareholders / rule of law. What value is left if any is left in the preferred shares?

 

1) Biden Admin optionality: Word is that the Biden admin is against the high capital requirements and footprint shrinking set by Calabria. Why do capital requirements even matter if they are stuck in perpetual conservatorship? Biden will shortly nominate a replacement and that replacement will share his views on the future of housing finance reform (could be bullish or more of the same aka nothing).

 

2) SCOTUS remand for relief: Based off the ruling today, very low likelihood shareholders see any relief here.

 

3) Lambert/contracts case: Probably shareholders best shot at short-term relief in litigation. Set for trial in ~9 months from today. Lamberth already ruled in favor of shareholders that the government allegedly violated our contractual rights with the NWS (whether the NWS is legal or not is irrelevant to his analysis). The crux of his ruling was that no shareholder could have ever expected at a time when the GSEs were about to hit record profitability, for the government to come in and to arrange the contracts so they take everything for themselves while zeroing out the shareholders in exchange for NOTHING. He then went on to list all the facts to support this view. Damages/relief would potentially entail PAR+ interest in damages in the form of a direct monetary check to shareholders.

 

4) Takings case: Another good shot on goal but I think its at least 1-2 years away.

 

5) TINA: As always, GSEs are more stable / reformed than ever before and have ~$40-50b of retained capital on their books. I don't think unwind/replace is a real risk here but being stuck in limbo may be. TINA provides shareholders a perpetual call option either way.

 

Add it all up and you get ~10% of PAR for FNMAS. 

I'm going to DCA aren't I...

[orthopa]

10 minutes ago, Castanza said:

How much in damages do shareholders think they would get vs just exiting c-ship and seeing where the stock ends up? To me (late entry) I'd rather just see an exit strategy. 

The damages matter much more to common and for absolute best case scenario for preferred. If the gov wants to recap FnF the preferred need to be dealt with. The size of the govts stake also makes a recap very hard and the latest amendment does not let the gov actually touch the cash at FnF ever. Their liquidation preference is a paper gain at this point as the cash has stopped flowing to treasury.  If gov wants to monetize they need to restructure the capital stack. The likely hood of a hair cut to par seems much more likely now for preferred holders absent a favorable ruling from lamberth or the takings court. 

 

Treasury has already "committed" to restructuring the Sr Preferred and realizes it has to make changes to its ownership to raise 3rd party capital. Its in the last Amendment, last section. But until it happens at this point call me a doubter. 

 

https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf

[orthopa]

Apparently per Twitter Calabria has resigned effective today. New Director should be nominated at some point or atleast interm.

[TwoCitiesCapital]

45 minutes ago, orthopa said:

The damages matter much more to common and for absolute best case scenario for preferred. If the gov wants to recap FnF the preferred need to be dealt with. The size of the govts stake also makes a recap very hard and the latest amendment does not let the gov actually touch the cash at FnF ever. Their liquidation preference is a paper gain at this point as the cash has stopped flowing to treasury.  If gov wants to monetize they need to restructure the capital stack. The likely hood of a hair cut to par seems much more likely now for preferred holders absent a favorable ruling from lamberth or the takings court. 

 

Treasury has already "committed" to restructuring the Sr Preferred and realizes it has to make changes to its ownership to raise 3rd party capital. Its in the last Amendment, last section. But until it happens at this point call me a doubter. 

 

https://home.treasury.gov/system/files/136/Executed-Letter-Agreement-for-Fannie-Mae.pdf

 

So what is driving this forward? What is to say these companies don't just continue to exist in quasi-zombie state where shareholders still own them but are entitled to 0 economic value and everything accrues to the gov't for its future benefit?

 

What is the motivating factor that will push the Biden administration to avoid the status quo, which is easiest path forward, and get them to continue along the path to recapitalization that isn't strictly necessary? Democrats don't mind the government being on the hook for Fannie & Freddie as long as they can use them as a policy tool and a piggy bank which seems likely once they reinstate the new head of the FHFA and come to a new agreement as to how to sweep money back to the Treasury. 

[orthopa]

7 minutes ago, TwoCitiesCapital said:

 

So what is driving this forward? What is to say these companies don't just continue to exist in quasi-zombie state where shareholders still own them but are entitled to 0 economic value and everything accrues to the gov't for its future benefit?

 

What is the motivating factor that will push the Biden administration to avoid the status quo, which is easiest path forward, and get them to continue along the path to recapitalization that isn't strictly necessary? Democrats don't mind the government being on the hook for Fannie & Freddie as long as they can use them as a policy tool and a piggy bank which seems likely once they reinstate the new head of the FHFA and come to a new agreement as to how to sweep money back to the Treasury. 

Great question. It appears there is a minimum of 3 options. 1. Keep the status quo forever and just keep building the liquidation preference and hope there is enough capital one day to sustain a down turn. This puts gov at risk but do they care?  2. Write down the governments stake, recap FnF and move on. Doing this we are right back to last summer and political cover and all that bullshit. 3. They do a new amendment and try to wind down FnF. This obviously is the least desirable option and I believe least likely. Winding down was tried once and reversed but do it again would take some pretty strong will. 

 

I think the most likely option for the near to medium term future is 1. Number 2. would be nice and it seems it would be a utility model but you need a new FHFA director confirmed, new capital rule, etc. I think even if number 2 happens it isnt for before 12-18 at a minimum looking at Calabrias time line of what he did. 

 

Something positive will likely come at max pessimism. I cant imagine we are that far from that other then a Lamberth loss to add. 

[Wiggins]

1 hour ago, orthopa said:

Great question. It appears there is a minimum of 3 options. 1. Keep the status quo forever and just keep building the liquidation preference and hope there is enough capital one day to sustain a down turn. This puts gov at risk but do they care?  2. Write down the governments stake, recap FnF and move on. Doing this we are right back to last summer and political cover and all that bullshit. 3. They do a new amendment and try to wind down FnF. This obviously is the least desirable option and I believe least likely. Winding down was tried once and reversed but do it again would take some pretty strong will. 

 

I think the most likely option for the near to medium term future is 1. Number 2. would be nice and it seems it would be a utility model but you need a new FHFA director confirmed, new capital rule, etc. I think even if number 2 happens it isnt for before 12-18 at a minimum looking at Calabrias time line of what he did. 

 

Something positive will likely come at max pessimism. I cant imagine we are that far from that other then a Lamberth loss to add. 

I don't see how the GSEs could be released in any form similar to before conservatorship after that ruling. SCOTUS has defined HERA to be highly averse to investors. Who would invest? There are two huge problems: 1) your capital is not safe and 2) the director is now a politician. I see the only way to save anything like the old system, utility or otherwise, is new legislation that changes HERA. That's obviously a hard lift. Fortunately there are still lawsuits, so some hope.

Edited June 23, 2021 by Wiggins

[ValueMaven]

Given todays ruling even $2.50 is rich for FNMAS.  Talk anchoring and time value of money.  Brutal.  

[investorG]

Hello everyone, long time.

 

I'm not sure if I'm more surprised by today's APA ruling or the share price reaction.

For the conservative justices (at a minimum) to hide behind a non-precedent setting anti injunction call on FHFA's powers to allow blatant stealing from shareholders (initially to bypass Congress and fund Obamacare extras) is outrageous at best and very likely many worse descriptions.

 

Yet trading the jr pref down to 8% of par with Lamberth, takings, and potential Congressional 2023-24 action still on the plate also seems extreme to me.     Unless someone was expecting a miracle on the constitutional claim, this event was not a 21-22 resolution after Mnuchin punted even if we received a remand on the APA.

 

What a mess this turned into.  Good luck to you all.