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

[Sunrider]

Yes, that's what the bottom of page 17 says ' rights to dividends and liquidation inhere in the security '

 

Page 19, second para from bottom 'For an investor contract the time of contracting for the purpose of the implied covenant inquiry must be the time of the most recent change in contract ...' also read the rest of that page and start of the following page, which basically say that the court will look to Hera to determine what investors' reasonable expectations should have been. This may set up a split between those shareholders who bought pre and post, if the conclusion is that investors should've expected on the basis of HERA that the government will take actions which lead to their liquidation preference to be worth very little. 

 

(for clarity: That might then mean that whilst as a post shareholder you have the liquidation preference as it travelled with the security, you should've expected for it to be worth very little ... )

 

What am I missing? By the way, is cherzeca still active here?

Thanks!

 

 

Edited June 25, 2021 by Sunrider

[Sunrider]

1 minute ago, Sunrider said:

Yes, that's what the bottom of page 17 says ' rights to dividends and liquidation inhere in the security '

 

Page 19, second para from bottom 'For an investor contract the time of contracting for the purpose of the implied covenant inquiry must be the time of the most recent change in contract ...' also read the rest of that page and start of the following page, which basically say that the court will look to Hera to determine what investors' reasonable expectations should have been. This may set up a split between those shareholders who bought pre and post, if the conclusion is that investors should've expected on the basis of HERA that the government will take actions which lead to their liquidation preference to be worth very little. 

 

(for clarity: That might then mean that whilst as a post shareholder you have the liquidation preference as it travelled with the security, you should've expected for it to be worth very little ... )

 

What am I missing? By the way, is cherzeca still active here?

Thanks!

 

 

 

Of course looking at the glass somewhat full, one could also argue that the FHFA announcing that it will conserve, stabilise and operate only until that's done, one might not reasonably expect to be expropriated... but given court's views on this so far, I'm afraid that this is just wishful thinking ...

[ValueMaven]

Factor in the time value of money, the fact that nothing is happening here for YEARS, and I fail to see why FNMAS should be trading for anything over $1

[allnatural]

It seems like your concern is addressed in Section A of page 26 "HERA does not require dismissal of Plaintiffs' implied covenant claims" that even if shareholders should have expected the government via HERA/FHFA to act in its own best interest, shareholders contract breach takes place in the fact that the GSEs themselves (whom PFD shareholders are contracted with) breached our contracts as they accepted these terms in exchange for nothing. 

Edited June 25, 2021 by allnatural

[DRValue]

Putting a pin in this until September. And more than likely another pin until 2027...

[Wiggins]

4 hours ago, Sunrider said:

Yes, that's what the bottom of page 17 says ' rights to dividends and liquidation inhere in the security '

 

Page 19, second para from bottom 'For an investor contract the time of contracting for the purpose of the implied covenant inquiry must be the time of the most recent change in contract ...' also read the rest of that page and start of the following page, which basically say that the court will look to Hera to determine what investors' reasonable expectations should have been. This may set up a split between those shareholders who bought pre and post, if the conclusion is that investors should've expected on the basis of HERA that the government will take actions which lead to their liquidation preference to be worth very little. 

 

(for clarity: That might then mean that whilst as a post shareholder you have the liquidation preference as it travelled with the security, you should've expected for it to be worth very little ... )

 

What am I missing? By the way, is cherzeca still active here?

Thanks!

 

 

Sunrider, when Lamberth writes "the court will look to Hera to determine what investors' reasonable expectations should have been", I believe he is merely introducing the topic before discussing it immediately below in the same document. I don't think he is referring to some future trial or something else, because he goes on to answer the question. allnatural references part of it in his post subsequent to yours. In sum, he concludes that if the facts plaintiffs allege are true, then FHFA/GSEs DID violate the implied covenant. The only purpose of the trial is to assess facts and damages. At the stage Lamberth wrote this document, he was dealing with the law (not facts or damages), and his conclusion is firm that the law supports plaintiffs here.

Edited June 25, 2021 by Wiggins

[DRValue]

Big brain legal experts opinion on the below please. 

 

 

Any truth? 

 

Would it even matter if no one is watching? 

Would Republicans use it to negotiate? 

 

I don't even know anymore. How can the court agree its unconstitutional but deny the remedy? 

 

I knew the game was rigged but there was hope. What little hope there was. Gone. 

[DRValue]

9 minutes ago, DRValue said:

Big brain legal experts opinion on the below please. 

 

 

Any truth? 

 

Would it even matter if no one is watching? 

Would Republicans use it to negotiate? 

 

I don't even know anymore. How can the court agree its unconstitutional but deny the remedy? 

 

I knew the game was rigged but there was hope. What little hope there was. Gone. 

I guess the government had a plan to get rid of the GSEs and all three branches are aligned to allow it. 

[orthopa]

This surely has been a brutal couple of days and a positive SCOTUS ruling would have been a much different situation then now but excuse my ignorance but I don't remember any thinking along the line of this SCOTUS ruling was the end all be all. Lamberth already ruled that the APA  was not violated. SCOTUS affirmed this and although no where near ideal in the next court case it changes nothing. I hate the position shareholders are in but it is what is. 

 

From a preferred standpoint the takings claims are more beneficial then as interest is added back. I am no means hanging my hat on this outcome but it is what it is. My belief for the outcome for par was a restructuring in which preferred was converted. This of course assumes that the will is there to restructure them at some point. Sure they could stay in conservatorship for ever being undercapitalized for years. Logic could get you to the point where you would believe that the next housing crisis comes before retained earnings reach a high enough point. So what the end game? Just limp these along under capitalized knowing there will be problem? Maybe. 

 

Until we get a new director and a handle on their views its a toss up. Watchter and Calhoun seem reasonable and want a utility model. I think any director who wants anything for the GSEs out of conservatorship will work out reasonably for the preferred as that implies capital is raised and placed in front of gov. Outside of the most left and right in congress I don't think anyone wants to get rid of the GSEs. In fact it was tried but they were unable to. The legislation went no where and capital was supposed to wind down to $0 and then $3B and they couldn't kill them then.

 

I have no idea if Biden will act but if they do they surely should go after affordable housing during his tenure as that is clearly what the dems want. What's stopping them outside of inertia? If there was one time that raiding the piggy bank might be welcomed its maybe now. The political climate is much different now when the wind downs and bailouts were everywhere. G fees will be lower and GSE return will be lower but legacy preferred shares in that situation are worth way more then 8 cents on the dollar. 

 

Reading the white papers from Watcher and Calhoun do set your mind a little more at ease. Who knows what happens to shareholders in a restructuring under either as a FHFA head but a utility model can only happen if they are released. Zandi has been floated as a nominee but fears with him will be winding them down. Many in the housing community believe the GSEs have been reformed and are rebuilding capital. Do you wind them down again for a second time? That takes some will power and wouldn't a utility model with lots of affordable housing initiatives make for a much sounder housing system then winding them down?

 

The notion of a quick settlement has been thwarted for sure. Next on my radar is the new FHFA head and their confirmation testimony. Next then lamberth for those who feel strongly about the legal cases. Hamish Hume plans to vigorously defend the case so god bless him. No way Berkowitz is out now as he is bringing that and the sweeney case. As for selling now in how many situations are the preferred worth 8-9 cents on the dollar? They are worth 0 on a pure nationalization (not liquidation preference) scenario but is that really an option in DC now vs 10 years ago?

 

The preferred traded up to 50% of par leading up to the lamberth trial decision with the NWS and wind down to 0 capital in place.  Undoubtedly we will fluctuate heavily going forward. That should give some opportunity to take some off the table if one chooses vs adding now and digging in more. 

[sholland]

5th Amendment Takings claim is 1-2 years away. On the eve of that case does anyone think the preferred shares will not be trading much higher than 8-9 cents on the dollar?  This seems like the point of maximum pessimism. 

[muscleman]

3 hours ago, sholland said:

5th Amendment Takings claim is 1-2 years away. On the eve of that case does anyone think the preferred shares will not be trading much higher than 8-9 cents on the dollar?  This seems like the point of maximum pessimism. 

 

Buying a falling knife is the last thing you want to do. You don't know how many funds are being liquidated because of this. FAIRX could be facing big redemption pressure for example. 

I think the long term buy and hold investing mentality for a traditional high moat growth stock simply does not apply to FNMAS. You can't just buy every dip and expect great results from it.

 

[Mephistopheles]

https://www.npr.org/2021/06/24/1009858617/britney-spears-transcript-court-hearing-conservatorship

 

First Fannie and Freddie, now Britney Spears. Slippery slope

[DRValue]

The pspa benefited the fhfa as regulator because it was the only deal available, and without it receivership was the only option. It had to take it to avoid receivership. Prove me wrong.

 

On the flip side a truly independent regulator should of used that as leverage to negotiate a workable deal. And also not entered into the 3rd amendment. 

[investorG]

I was impressed with the decisiveness of replacing Calabria, it was refreshing.  The Biden admin has 3.5 years to implement a plan, likely with Congress.   They probably have a motivation for a permanent solution in 2022-2024 rather than just run FnF loose for 3.5 years and risk a new administration reversing everything.   Some chance the filibuster goes away in 2023 if Democrats win next year, which would smooth the way for a party line reform vote in 23-24.   And if not a bipartisan deal isn't impossible, Toomey could actually push for a deal in 2022 as his pre-retirement finale.   

 

At 15 up to par and 1 down to 0, I disagree with the market and its pessimism at current levels.

[JRM]

https://www.msn.com/en-us/money/markets/a-scheme-to-blow-up-the-housing-market-backfired-spectacularly-at-the-supreme-court/ar-AALp6EM

 

Not biased at all.

[Castanza]

9 minutes ago, JRM said:

https://www.msn.com/en-us/money/markets/a-scheme-to-blow-up-the-housing-market-backfired-spectacularly-at-the-supreme-court/ar-AALp6EM

 

Not biased at all.

LOL wow what a hack of a job hit piece. Not worth reading past the first sentence. Mark Joseph Stern….you sir are a pos “journalist”
 

“dislodge from the treasury”

 

”scheme backfired” 

 

“claw back billions” 

“previous arrangements” 

 

 

 

[muscleman]

1 hour ago, Castanza said:

LOL wow what a hack of a job hit piece. Not worth reading past the first sentence. Mark Joseph Stern….you sir are a pos “journalist”
 

“dislodge from the treasury”

 

”scheme backfired” 

 

“claw back billions” 

“previous arrangements” 

 

 

 

 

Well.... I think the most important lesson is to pick the right fight. Yes I am equally disgusted with these access journalists. But sometimes you have to recognize the shift in tide.

Since Obama came in power in 2009, there has been this massive shift from investigative journalists to access journalists, and the whole country is becoming more and more like China, with no law, no freedom of speech, and the government is becoming more totalitarian, and being politically correct is more important than having common sense and having the rule of law.

I don't see any sign that this trend is going to shift back right now, and I am disgusted by that.

From that point of view, we should be grateful of these access journalists because they are telling us what WILL happen next.

 

[thepupil]

this may have already been mentioned, but isn't the biggest lesson here one of time allocation.

 

Feel like a lot of people have made/lost money on this, but there's a big difference b/w "I'll wager 200 bps on this and read the updates and see how it works" and "I spent a decade reading about legal/politival stuff and then lost X%" 

[Spekulatius]

59 minutes ago, thepupil said:

this may have already been mentioned, but isn't the biggest lesson here one of time allocation.

 

Feel like a lot of people have made/lost money on this, but there's a big difference b/w "I'll wager 200 bps on this and read the updates and see how it works" and "I spent a decade reading about legal/politival stuff and then lost X%" 

I agree on this. Especially if reading about these things likely just increases an inherent bias that exists to begin with and sucks people even more into this bet.

 

I hate binary bets like this and I followed several other ones like BMYRT. In the end,  they all seem to be crapshots and it turns out the “experts” didn’t really have an advantage over the average Joe.

 

If you treat it like crapshoot and put in your bets and accept the outcome, it’s probably OK to bet on this within risk limits. Beyond that, it is just poor investing and no better than those folks gambling on weekly options on WSB.

Edited June 26, 2021 by Spekulatius

[investorG]

Just because something hasn't worked out so far doesn't mean it was a bad bet.  We have certainly lost the battle the last 6 months.  Yet we had many chances for things to go our way with decently high probabilities but sometimes things like erratic / uninformed judges, weak administrations, coronaviruses, and Capitol riots etc come up.   

 

And, unless we sell, there's still decent odds in front of us from these levels if we step back from this week's disappointment.   The 2012 NWS was done in an environment of much less scrutiny and goodwill towards the GSEs -- things are different than a decade ago.    Better court cases remain, capital is building (reducing not eliminating odds of receivership), and a legislative solution in 22-24 isn't unimaginable.

[Mephistopheles]

2 hours ago, Spekulatius said:

I agree on this. Especially if reading about these things likely just increases an inherent bias that exists to begin with and sucks people even more into this bet.

 

I hate binary bets like this and I followed several other ones like BMYRT. In the end,  they all seem to be crapshots and it turns out the “experts” didn’t really have an advantage over the average Joe.

 

If you treat it like crapshoot and put in your bets and accept the outcome, it’s probably OK to bet on this within risk limits. Beyond that, it is just poor investing and no better than those folks gambling on weekly options on WSB.

 

Is it really binary though? There's a different between a crapshoot that pays even vs. one that pays 10:1, assuming the risk is the same.

 

I agree with your overall point that most of the legal "analysis" is just brain damage with no return. I used to be that way, and frankly I love constitutional law, so I did enjoy it, but it failed to pay off.

 

Now I just see the big picture. I think they are definitely worth >0% of par given the possibilities in the remaining litigation and the remote possibility of reform. More so the implied volatility attached to those possibilities is what makes it exciting. I've only nibbled thus far and would love to see it go down further to like 1% of par.

[Spekulatius]

There is always not her court case, but we are now 9 years past the NWS, so I think the chances of any dramatic reversal through courts are very very small. Not worth betting on, imo.

 

I think the remaining bet is mainly a political one on the chance is that the landscape changes with the next administration will do things differently as far as GSE’s are concerned. Again, we had a couple of administrations - the GSE were quasi nationalized under Bush, NWS under Obama, pretty much nothing under Trump and now a few changes with Biden. I think the chances of anything happening with the next administration are slim, but not non-existent. The LT call option value is there, it’s just not worth much because the odds of it happening are pretty small, imo.

[Mephistopheles]

I hold the reverse view. I think the chances with political action are much worse than the optionality of a court ruling. Politicians will be politicians - kick the can down the road and do nothing. If John Paulson's friend Steve Mnuchin couldn't get it done, nobody will, at least that's my cynical view. 

 

The Courts on the other hand are less politically motivated, IMO. I think the APA issue is quite different than the 5th Amendment one which is different than the breach of implied covenant.

 

I'm not betting on legislative/court action as much as I am on the higher option value for the action happening. Without an expiration date, there is plenty of room for change in valuation. But a still cheaper price would be nicer. If you buy at 2 cents of par, than 20 cents is a 10 bagger. Just a fun little bet, nothing big.

Edited June 27, 2021 by Mephistopheles

[Parsad]

To me it seems as though there were a few opportunities where investors could have walked away with the elusive 10-bagger or better return...to blame political machinations or an irrational court decision is silly.  An outlier event has now changed the nature of the investment bet...shit happens!  Cheers!

[Castanza]

If you’re approaching this bet from the angle of a favorable court ruling then I think the time to exit is here. You could t have had a more favorable SCOTUS to rule in a constitutional manner. They basically said they recognize the unconstitutional structure yet they can’t do anything about it. The SCOTUS and expected ruling were the main reason I entered this trade a few weeks ago. It’s a small position so I’ll probably let it ride, but if I had any significant portion of my portfolio in this I would most definitely cut ties and chase yields elsewhere. 5-10 more years of flatlining sounds terrible. I’d rather put it in BTI or MO and chase dividend yields hoping to get it back over the long term. There are a multitude of bets with optionality out there that are far less risky imo. As Parsad said….shit changes. A lesson has been learned and I’ll apply it moving forward.