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

[TwoCitiesCapital]

Everyone check to make sure your safety's on...

 

Poor Cheddar Bob...

[Guest cherzeca]

clearly i have been too busy reading GSE briefs and not attending to popular culture...

[hardincap]

http://www.businessinsider.com/bruce-berkowitz-on-fannie-mae-and-freddie-mac-2016-3

 

A conservator is someone who is supposed to conserve and preserve and take care of an estate the same way that a doctor is supposed to build a healthy patient. And the government has argued, 'No, no, no. We can do whatever we want as a conservator. We can take the money, we can give it to our cousin, we can put it in a pile, we can light it on fire, we have dictatorial powers ... You cannot stop us from doing anything.' Our argument is, 'You're supposed to be a conservator, right, you're supposed to be like a doctor who's supposed to help the patient, and you're saying, oh, you're a doctor and you can kill the patient, and that's OK because you have the right to kill the patient. You have the right to take the patient's organs and sell them to somebody else for money. That's fine. That's pretty stupid, OK. It's illogical. It doesn't work that way. That's a big part of the fight.

 

This part makes me think he's being disingenuous when he says fannie is not a binary investment:

 

If we don't win, what does it mean for the ownership of any security?" he said.

"I mean ownership become an illusion. If some type of regulated entity can be taken over by a few misguided narcissists in the government in order to help somebody do something for their own personal gain, what does it mean to own a bank stock?"

 

Theres no chance these "narcissists" would voluntarily restore fannie commons and preferreds after going through legal war with the hedge funds. when it comes time to recap they'll spin it and/or do just enough reform to get dumb money to invest

[Guest cherzeca]

http://www.businessinsider.com/bruce-berkowitz-on-fannie-mae-and-freddie-mac-2016-3

 

A conservator is someone who is supposed to conserve and preserve and take care of an estate the same way that a doctor is supposed to build a healthy patient. And the government has argued, 'No, no, no. We can do whatever we want as a conservator. We can take the money, we can give it to our cousin, we can put it in a pile, we can light it on fire, we have dictatorial powers ... You cannot stop us from doing anything.' Our argument is, 'You're supposed to be a conservator, right, you're supposed to be like a doctor who's supposed to help the patient, and you're saying, oh, you're a doctor and you can kill the patient, and that's OK because you have the right to kill the patient. You have the right to take the patient's organs and sell them to somebody else for money. That's fine. That's pretty stupid, OK. It's illogical. It doesn't work that way. That's a big part of the fight.

 

This part makes me think he's being disingenuous when he says fannie is not a binary investment:

 

If we don't win, what does it mean for the ownership of any security?" he said.

"I mean ownership become an illusion. If some type of regulated entity can be taken over by a few misguided narcissists in the government in order to help somebody do something for their own personal gain, what does it mean to own a bank stock?"

 

Theres no chance these "narcissists" would voluntarily restore fannie commons and preferreds after going through legal war with the hedge funds. when it comes time to recap they'll spin it and/or do just enough reform to get dumb money to invest

 

not sure what you mean by voluntarily.

 

if NWS is invalidated, then winding down GSEs would require alot of claims payments to jr pref and common.  dont see the govt making those payments.

 

so GSEs stay and if treasury wants to increase value of warrants GSEs are recapped.

 

now how govt goes about this is fraught with risk, both of stupidity and venality, but that is a separate matter.

 

if NWS is valid, berk may think there is a third option, but i dont see it

 

[hardincap]

I was referring to the scenario where shareholders lose all cases and nws is valid

[Guest cherzeca]

I was referring to the scenario where shareholders lose all cases and nws is valid

 

agreed. no berk third option. what ever the govt "solution" eventually is, it wont involve GSE holders if NWS is valid.

[colinwalt]

I was referring to the scenario where shareholders lose all cases and nws is valid

 

agreed. no berk third option. what ever the govt "solution" eventually is, it wont involve GSE holders if NWS is valid.

 

He keeps saying there's no alternative to Freddie + Fannie - which seems to be the case - still no valid alternative has been proposed AFAIK, so even if the NWS isn't overturned, where does that leave the Government?

 

They'll have effectively nationalized them and taken 7 trillion onto the Gov's balance sheet - maybe his theory is (maybe not the current Admin) but the next Admin will realize this isn't sustainable and they have to be released, in which case (to have anyone willing to invest) current shareholders have to be seen to be treated fairly...

 

And the next admin would probably get a huge windfall selling off their stake... and not have any face to save in back-tracking...

 

And maybe that's why he's willing to let the proceedings drag out for now... waiting for the next admin...

 

Or is that way too simplistic?

 

Would the Gov be able to wipe out current owners and then turn-around and get new investors?

[hardincap]

which makes it all the more curious how he has the confidence to bet >16% of his mutual fund on fannie mae.

 

I think its clear from his public comments that he underestimated the political obstacles to freeing fannie. bethany mclean had this great line in her book: "what makes sense using New York financial logic is borderline insane when you apply a Washington political calculus." will financial logic eventually win over washington politics? i think the chances of that are next to nil if we lose all legal cases

 

 

[doughishere]

@hardincap

 

Great quote by bethany

[colinwalt]

which makes it all the more curious how he has the confidence to bet >16% of his mutual fund on fannie mae.

 

I think its clear from his public comments that he underestimated the political obstacles to freeing fannie. bethany mclean had this great line in her book: "what makes sense using New York financial logic is borderline insane when you apply a Washington political calculus." will financial logic eventually win over washington politics? i think the chances of that are next to nil if we lose all legal cases

 

He may have underestimated, but none-the-less he's still increasing his stake... he wasn't at 16% last time I checked - I think it was about 11%

[merkhet]

which makes it all the more curious how he has the confidence to bet >16% of his mutual fund on fannie mae.

 

I think its clear from his public comments that he underestimated the political obstacles to freeing fannie. bethany mclean had this great line in her book: "what makes sense using New York financial logic is borderline insane when you apply a Washington political calculus." will financial logic eventually win over washington politics? i think the chances of that are next to nil if we lose all legal cases

 

I think colinwalt has the gist of the reason why Berkowitz thinks that there is a way out if the shareholders lose all the NWS cases. (As unlikely as I think that is to occur.)

 

Remember, also, Berkowitz likely has more information than we do behind the scenes. There was an (as yet) unsubstantiated rumor that the government was looking to settle during the summer of 2014. Up until February of this year, most of us didn't know that there was a bit of back and forth (albeit only a very little bit) between the plaintiffs and the government concerning what a settlement would look like.

[merkhet]

which makes it all the more curious how he has the confidence to bet >16% of his mutual fund on fannie mae.

 

I think its clear from his public comments that he underestimated the political obstacles to freeing fannie. bethany mclean had this great line in her book: "what makes sense using New York financial logic is borderline insane when you apply a Washington political calculus." will financial logic eventually win over washington politics? i think the chances of that are next to nil if we lose all legal cases

 

He may have underestimated, but none-the-less he's still increasing his stake... he wasn't at 16% last time I checked - I think it was about 11%

 

He's at 15.1% including common & preferred. Check the most recent report.

[ZenaidaMacroura]

 

 

Would the Gov be able to wipe out current owners and then turn-around and get new investors?

I wonder though isn't this the case with some soverigns -who keeps lending argentina money?  :o

[hardincap]

@colin will the government be able to wipe out current shareholders and get new ones? absolutely yes. they'll do some combo of spin and reform, and say something to the effect of "the previous model was broken. it has now been fixed"

 

fairholme has 16.4 as of end of last year. check his facts sheet.

[colinwalt]

which makes it all the more curious how he has the confidence to bet >16% of his mutual fund on fannie mae.

 

I think its clear from his public comments that he underestimated the political obstacles to freeing fannie. bethany mclean had this great line in her book: "what makes sense using New York financial logic is borderline insane when you apply a Washington political calculus." will financial logic eventually win over washington politics? i think the chances of that are next to nil if we lose all legal cases

 

He may have underestimated, but none-the-less he's still increasing his stake... he wasn't at 16% last time I checked - I think it was about 11%

 

He's at 15.1% including common & preferred. Check the most recent report.

 

Now that you mention it, I noticed that in the "Schedule of Investments" it comes to 15.1%, but in the letter he says 16.4% - not sure why the difference...

[merkhet]

@hardincap is correct in the percentage. The report was 11/30 & the fact sheet is 12/31. I wonder if he added or if that's the same absolute shares w/ redemption payouts.

 

I would be surprised to see people rush in to buy equities of the new companies w/ the NWS intact, but Zenaida makes a good point on Argentina. No warships for new Fannie shareholders to impound though...

 

And then there are some issues with respect to how do you spin the companies and give the investors nothing. Think about the structure of how that would work. Who would you spin it out to? And if you IPO it, where does the money go?

[hardincap]

@merkhet that reasoning ("he must know something we dont") is a form of grasping at straws and has gotten investors into ALOT of trouble in the past

[merkhet]

@merkhet that reasoning ("he must know something we dont") is a form of grasping at straws and has gotten investors into ALOT of trouble in the past

 

That's actually not what I was saying. Or rather, it's an unjustified extension of what I was saying.

 

You asked why Berkowtiz would increase his holdings. I proffered a reason that he has more access to information than we do, which is true & evidenced by the fact that none of us knew there was a back and forth in fall of last year. You assumed that I mean that to mean we should just trust him by buying because he did. Except I was just answering your question.

[hardincap]

I didnt assume you meant that, just calling it out bc it seems to be abundantly used in this thread (and many others)

[merkhet]

I didnt assume you meant that, just calling it out bc it seems to be abundantly used in this thread (and many others)

 

Then, I don't understand what you mean? Berkowitz did know something we didn't... as confirmed by Jon Prior @ Politico. I mean, he could be wrong. The tête-à-tête from last fall could be part of a delay strategy. Is that what you meant? I'm just confused.

[Guest cherzeca]

i believe berk knows alot that we dont know.  are you kidding me, his counsel has access to all discovery under seal. you better believe with real scratch on the line, some of that has leaked through to berk.  it  would be hard to prove and it certainly is hard to trace unless NSC is alot better than i already think it is.

 

i for one have less % of my invested assets in fnma than berk has in fnma/fmcc, but i take comfort in that fact...even though my position size still discomforts me from time to time.

 

i would agree with hardincap that it is not smart to follow others, certainly w/o own DD, but i think berk is in a situation where he has a valuable asymmetry of information.  i just dont see how that can be denied.

[hardincap]

sure, theres plenty berkowitz knows that we don't. those settlement "communications" may or may not have been the driving factor in his decision to add. he could have been just rebalancing his portfolio to pre-lamberth for all we know. its tempting and seductive to speculate on what kind of settlement communications transpired, given our long bias, but personally I try to avoid going there altogether bc i find it futile to speculate on things we have so little reliable information on, not to mention info that could be construed in ways that are both favorable and unforable to our position

[merkhet]

sure, theres plenty berkowitz knows that we don't. those settlement "communications" may or may not have been the driving factor in his decision to add. he could have been just rebalancing his portfolio to pre-lamberth for all we know. its tempting and seductive to speculate on what kind of settlement communications transpired, given our long bias, but personally I try to avoid going there altogether bc i find it futile to speculate on things we have so little reliable information on, and info which could be construed in many different ways that are both favorable and unforable to the long thesis

 

But that speculation is sort of embedded in asking the question of how Berkowtiz could put 16% of his fund into the GSEs? The content of the question itself is asking for speculation...

 

I don't know. Maybe this sub-topic has run its course.

 

In any case, I agree with everyone saying that people shouldn't just outsource their DD. I actually think a lot of people who don't really understand the legal elements of this case by definition are outsourcing their DD! But c'est la vie, and I'm happy to continue providing opinions of how I see the legal aspects of the case... just remember that, by definition, again, my opinions are likely incorporating personal biases...

[hardincap]

my point was he put 16% of his assets in what I believe to be a binary bet. he claims it isn't binary, and his position size suggests he isn't  fibbing about that, but that creates a riddle as to how he sees the light at the end of the tunnel if litigation fails. settlement is obviously not the answer, post litigation losses.

[Jurgis]

Somebody asked if Bruce was crazy to put 16% into this. OK, I will answer without resorting to Eminem: IMO, he is crazy. That's somewhat based on his other positions too, BTW.

 

The counterargument to the "Bruce knows sh17, so he increases position" is "Bruce is blinded by his positions and biases and so he increases position". I'm in the second camp, but I don't give a crap about Bruce, his motivation, his performance and his fund, so I'm not gonna argue about it here.

 

You can do anything you set your mind to, man

Yo