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Thoughts on FNMA and FMCC


moore_capital54
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Fellow board members, after reviewing FMCC's figures today I can't help but ask for your opinion on buying FNMA and FMCC here. These two may be 10-20 baggers if we have more quarters like reported today by FMCC.

 

FMCC is now back to positive net worth and could be in a position to fully repay the treasury by 2013 on the outstanding $50B~ due.

 

 

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Plan has posted some good resources.  Here's one manager's take on the preferreds:

 

http://www.gatorcapital.com/Assets/PDFs/2011_Q4_GFP_Letter.pdf

 

I think I have a presentation comparing them to the railroad bonds of the 1940s - will check once I get back to my main computer.

 

Keep in mind when looking at different preferred classes that some are $25 par, some $50 par.  The most liquid Freddie's are the FMCKJ series at .10/dollar, but you pay a slight premium for that liquidity.

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Here's one manager's take on the preferreds:

 

http://www.gatorcapital.com/Assets/PDFs/2011_Q4_GFP_Letter.pdf

 

I think I have a presentation comparing them to the railroad bonds of the 1940s - will check once I get back to my main computer.

 

Derek Pilecki (Gator Capital) is a good manager to follow. Specialized in financials. I like his letters too.

 

This presentation?

 

http://www.scribd.com/doc/57456508/Akanthos-Capital-Management-A-Treasure-Chest-Beneath-a-House-of-Cards-2011-05-4?secret_password=r7q7w3htk0v4wuivarm

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The preferreds are an interesting position.  The net income now being produced with normalized losses is quite substantial about $2 to $3 billion after 10% gov't preferred dividend.  The PTPP profit is on the order of $9 to $10 billion per year.  The total non-gov't preferreds have a FV of $14.1 billion adn are selling ofr 6 to 7% of FV.

 

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The preferreds are an interesting position.  The net income now being produced with normalized losses is quite substantial about $2 to $3 billion after 10% gov't preferred dividend.  The PTPP profit is on the order of $9 to $10 billion per year.  The total non-gov't preferreds have a FV of $14.1 billion adn are selling ofr 6 to 7% of FV.

 

Packer

 

 

A large portion of GSE earnings comes from their legacy mortgage investment portfolios, which in the case of FMCC is shrinking at a rate of 20% annually.  There is no plausible scenario which includes the GSEs being allowed to maintain an investment portfolio so this source cannot be included in long-term normalized earnings.  The other source of earnings is guarantee fees.  These were raised by 10bp in December, but the proceeds for the next ten years went to fund a two month payroll tax cut.  The upside here is that this goes a long way to ensure the survival of the GSEs for ten years or longer as congress will likely come back to the same well again.

 

 

With the 10% dividend in place, the GSEs will likely never be able to climb out of their hole without a recapitalization.  But a recap with some kind of govt support or ownership is very likely (in my mind) since there is a huge benefit and demand for a large, liquid and generic MBS security market like we have had for 40 years.  (Remember, the GSE operated without problems for 30 years and ran into trouble only when they loaded up their investment portfolios.)  Under this scenario, the preferred coupons could be reinstated or converted to equity.

 

 

If you want a deep understanding about the GSEs and preferreds as potential 10-14 baggers, I highly recommend a 7-part blog post written a few years ago.

 

 

http://brontecapital.blogspot.com/2009/08/modelling-fannie-mae-and-freddie-mac.html 

 

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I wonder how the board view this news. If one becomes a shareholder, how can he be sure that the government is not out to "get" him?

http://www.reuters.com/article/2012/08/17/usa-housing-idUSL2E8JH3J420120817?feedType=RSS&feedName=marketsNews&rpc=43

Aug 17 (Reuters) - The U.S. Treasury said on Friday it is changing the way Fannie Mae and Freddie Mac will repay taxpayers in a move the Obama administration said would accelerate the winding down of the government-owned mortgage financiers.

 

The finance companies, which buy mortgages from lenders and repackage them as securities for investors, will now be required to hand over all their profits to the U.S. Treasury instead of the 10 percent dividend repayment required under the terms of their government bailout.

 

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I wonder how the board view this news. If one becomes a shareholder, how can he be sure that the government is not out to "get" him?

http://www.reuters.com/article/2012/08/17/usa-housing-idUSL2E8JH3J420120817?feedType=RSS&feedName=marketsNews&rpc=43

 

Exactly, and I don't even think it is a smart move in terms of the US government recovering its investment. In those terms, I think the Millstein plan based on the AIG blueprint was MUCH better but it was under the assumption that F&F were worth saving. It was better even if the US Government thought the preferred holders should be wiped out.

 

This wind down and bloodsucking was always a possibility. It looks as if the plan is to cripple any potential F&F future. Preferreds down 75%.

 

Now, I have a question that I could not answer from the public statements. If the 10% dividend is being suspended, how all this is being accounted in terms of repaying the US government. Just as a dividend? Also the timing just before the elections looks strange.

 

The Treasury Department on Friday announced a set of steps to expedite the winding-down of government-controlled housing giants Fannie Mae and Freddie Mac including a measure that would require that their massive mortgage portfolios be wound down at an annual rate of 15%. The agency previously required that the portfolios be wound down by 10%a year. The Treasury said that the change will allow Fannie and Freddie to have its investment portfolios cut back to $250 billion four years earlier than previously scheduled.

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The removal of the 10% dividend avoids the circularity nonsense, good news.  The payment of all profits as a dividend, not so good. 

 

 

My question is how will the Treasury ever get its principal back?  As currently agreed, never.  However, the beltway logic doesn't seem to make much of a distinction between principal lent and dollars received in return.  What will happen happen on the day that the GSEs have returned as many dollars to the UST as was borrowed? Will someone with an agenda of recapitalizing/selling be able to make an argument that the UST has been repaid?  Lots of questions that won't be answered for years.

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I wonder whether from the political point of view, saving an insurance company, return it back to the private sector, and make some money for tax payers is acceptable; while saving FNMA and FMCC and returning them to private sector, and making some money for tax payers is not acceptable because some people believe that "government should not be in the mortage business in the first place?"

 

 

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We bought fmcc common as we felt that was the best "perpetuity option" luckily we only started building our position a few days before I posted moreover we averaged down today buying some common at .16 or nearly 400mm equity valuation. The thesis is impaired but some would say this way the treasury gets paid even quicker...

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I was wrong on this one and in effect today Treasury has nationalized FRE and FNM with no residual to anyone but itself.  I thought a restucturung plan was more reasonable but Treasury thought otherwise.  It will be interesting to see the political ramifications of this.  (Note: I was able to run out the door with about 32% of my investment of a few weeks ago and feel lucky to have gotten that amount.)

 

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I was wrong on this one and in effect today Treasury has nationalized FRE and FNM with no residual to anyone but itself.  I thought a restucturung plan was more reasonable but Treasury thought otherwise.  It will be interesting to see the political ramifications of this.  (Note: I was able to run out the door with about 32% of my investment of a few weeks ago and feel lucky to have gotten that amount.)

 

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I don't understand can you explain ?

 

no position

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I was wrong in purchasing the preferreds as in essence the Treasury has removed all the incentives for restructuring (the only scenario were the equity has value).  FNMA and FMCC will decline as an entity in size and continue to provide guarentees but all the earnings will go to the gov't.  At some point this may be privatized but not to existing shareholders and IMHO not with current administration.  Treasury's objective is not to restructure but to have a pool of money to pay out for the guarentee claims.  However, I don't see the point of the gov't having pools of cash around to pay-out on claims unless they want to get into the insurance business.

 

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Kyle Bass sold near the "top" apparently:

 

http://www.thestreet.com/story/11667835/1/bass-cuts-bait-on-dead-fannie-and-freddie.html?cm_ven=GOOGLEN

 

"We no longer have a position in the Fannie and Freddie preferreds. Earlier this year, we elected to sell them when we determined that both sides of the isle wanted them dead. That's all I have to comment on," Bass wrote.

 

Another investor in the preferred shares, who spoke on the condition that he not be identified, said he reduced his position in GSE preferred shares following the selloff Friday because they caused "too much volatility" in his portfolio. The investor still believes the mortgage giants will fully repay the Treasury on its loans, and that excess profits could be paid out to preferred shareholders.

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Munger wrote a piece years ago about why the two companies were such great businesses. Too bad they didn't put Charlie in charge. He would have boosted the price of the insurance to market rates then issued equity and raised debt to repay the government.

 

It seems that Geithner does not care that the government is using their power to take all the gain instead of letting the companies pay down the senior preferred shareholder so that the private preferred shareholders and the commons could benefit. Management is supposed to be in the best interest of the company, not one class of shareholders.

 

If Treasury ever allows capitalism back into the US the recovery could get started.

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It seems that Geithner does not care that the government is using their power to take all the gain instead of letting the companies pay down the senior preferred shareholder so that the private preferred shareholders and the commons could benefit. Management is supposed to be in the best interest of the company, not one class of shareholders.

 

If Treasury ever allows capitalism back into the US the recovery could get started.

 

I remember an old CNBC interview where one of the Freddie Mac directors stated that the BOD held fiduciary responsibility to the conservator. Bill Ackman sat next to him, and received confirmation that the director would subordinate equity and preferred interests.

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It seems that Geithner does not care that the government is using their power to take all the gain instead of letting the companies pay down the senior preferred shareholder so that the private preferred shareholders and the commons could benefit. Management is supposed to be in the best interest of the company, not one class of shareholders.

 

If Treasury ever allows capitalism back into the US the recovery could get started.

 

I remember an old CNBC interview where one of the Freddie Mac directors stated that the BOD held fiduciary responsibility to the conservator. Bill Ackman sat next to him, and received confirmation that the director would subordinate equity and preferred interests.

 

http://dealbook.nytimes.com/2011/02/09/freddie-director-no-fiduciary-duty-to-shareholders/

 

 

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Munger wrote a piece years ago about why the two companies were such great businesses. Too bad they didn't put Charlie in charge. He would have boosted the price of the insurance to market rates then issued equity and raised debt to repay the government.

 

It seems that Geithner does not care that the government is using their power to take all the gain instead of letting the companies pay down the senior preferred shareholder so that the private preferred shareholders and the commons could benefit. Management is supposed to be in the best interest of the company, not one class of shareholders.

 

If Treasury ever allows capitalism back into the US the recovery could get started.

 

Can u link me the article that you are talking about ?

Or give me some context so i can find it ?

 

Thanks

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