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

[valuecfa]

since Pacer doesn't link: Fairholme will keep track of its case here: http://fairholmefunds.com/news

 

 

Though since Pacer is practically free so might as well follow it there.

[muscleman]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.

 

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.

Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.

I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

[valuecfa]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.

 

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.

Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.

I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

 

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

 

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

 

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

 

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

[muscleman]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.

 

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.

Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.

I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

 

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

 

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

 

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

 

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

 

I see. I just don't like the votality of what Kelly formula suggests. I think it all depends on how confident you are.  :)

[valuecfa]

I don't use the Kelly formula either. This is the first time i have ever used it out of curiosity, and only used it after i made the investment, not prior. It will certainly be an extremely volatile investment.

 

I get the impression that the market is valuing the company more on whether the politicians will change their minds, as opposed to the legal aspect. At least from talking to colleagues, that is their focal point, and it was my original focal point.  I just don't see how they can argue what they did was legal, but we shall see when the government responds to the complaint.

[jay21]

I don't use the Kelly formula either. This is the first time i have ever used it out of curiosity, and only used it after i made the investment, not prior. It will certainly be an extremely volatile investment.

 

I get the impression that the market is valuing the company more on whether the politicians will change their minds, as opposed to the legal aspect. At least from talking to colleagues, that is their focal point, and it was my original focal point.  I just don't see how they can argue what they did was legal, but we shall see when the government responds to the complaint.

 

One other benefit of this idea and another reason why Kelly is more applicable than in other investment cases is that the outcome should largely be uncorrelated to the market/economy/etc.

[Guest Dazel]

 

 

Valuecfa,

 

 

I know that The the Fairholme response date is supposed to be nov 7th...when are the Paulson, Perry deadlines?

Do you know?

 

Dazel.

[Guest Dazel]

 

 

As we know the Kelly formula or anything that suggests it will produce any out come to F&F is like having the tooth fairy put shares under your pillow.

 

I have one question ValueCFA...you are betting on the lawsuit succeeding...correct?

 

Dazel

[valuecfa]

 

 

As we know the Kelly formula or anything that suggests it will produce any out come to F&F is like having the tooth fairy put shares under your pillow.

 

I have one question ValueCFA...you are betting on the lawsuit succeeding...correct?

 

Dazel

 

Yes. But I suspect that the price will rally significantly more long before the conclusion of the litigation because they are priced so incredibly incorrectly in my view.

[merkhet]

That's interesting, valuecfa.

 

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

 

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.

[nkp007]

That's interesting, valuecfa.

 

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

 

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.

 

I hope you're right. I would love to buy more at a much cheaper price even though I already bought a significant position.

 

Who knows if it'll get cheaper.

[Yours Truly]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

[nkp007]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

 

I went through the whole list and picked the cheapest ones. Illiquidity isn't a concern for me. The most liquid traded at a 20% premium when I bought the prefs.

[tombgrt]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

 

Read the last few pages for the answer. ;D

 

Buy the cheapest ones regardless of yield.

[JRH]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

 

Read the last few pages for the answer. ;D

 

Buy the cheapest ones regardless of yield.

 

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

 

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

 

- Coupon: dividend reinstated

- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

 

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

 

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

 

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.

[valuecfa]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

 

Read the last few pages for the answer. ;D

 

Buy the cheapest ones regardless of yield.

 

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

 

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

 

- Coupon: dividend reinstated

- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

 

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

 

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

 

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.

 

I was reluctant to pay up for ones like FNMAT and FNMAS b/c the price differential relative to others is so significant. However, I paid a slight premium for FNMAK and FNMAM with relatively high coupons. All depends on the price. Those coupons have the potential to be a massive part of the return, if they don't get redeemed at par.

[muscleman]

Quick question: how do you guys decide as to what series of the preferreds to purchase?

 

Read the last few pages for the answer. ;D

 

Buy the cheapest ones regardless of yield.

 

A theory of market price information on Fannie/Freddie preferreds - please correct if you disagree or interpret anything differently:

 

This is a debate, really, over the probability that coupon matters or par value matters as the eventual "anchor" to relative price among preferred issues.  You can imagine situations where either is possible:

 

- Coupon: dividend reinstated

- Par: restructuring (conversion to common?), liquidation/runoff with principal return relative to par

 

Looking at the RELATIVE price of the various preferred issues, the market seems to be pricing on coupon.  As in, essentially saying the probability is 100% coupon, 0% restructuring/liquidation.  Maybe that's right, maybe not.  There is also a liquidity discount in some preferreds but it appears to me to be rather small as the prices orbit around the relative coupons.

 

Looking at the ABSOLUTE price of the various preferred issues tells you about the probability of value flowing to preferreds at all (let's say, success of the lawsuit, and whether the companies will make enough money to make the preferreds whole), and probably a bit about market interest rates, too.

 

Just some thoughts.  I've bought a position in the issues with the biggest % discount to par since, relative to the others, they appear to be a free call option on the market being wrong about that 0% probability of restructuring/liquidation.

 

I was reluctant to pay up for ones like FNMAT and FNMAS b/c the price differential relative to others is so significant. However, I paid a slight premium for FNMAK and FNMAM with relatively high coupons. All depends on the price. Those coupons have the potential to be a massive part of the return, if they don't get redeemed at par.

 

I thought about your Kelly formula suggestion, and increased my holdings in the 401k to 17%. I think that is the max I can afford to lose. Since I add money to my 401k every half month, I can withstand a higher volatility than my main taxable account, which has barely any new money to add to. I have a 7% position in my taxable account.

 

Regarding the series, I have FNMAK for its discount to par, and I also have the most liquid ones(FNMAS, FMCKJ), which have higher yields if divident is resumed.

[value-is-what-you-get]

That's interesting, valuecfa.

 

My guess is that a response from the government will provide both (a) more information and (b) a better entry price. Therefore, I'm waiting to see what they have to say.

 

While I believe that the preferred shareholders will win in the end, it's likely that the government will put up, at the very least, a superficially appealing argument for their action. That could cause the Johnny-come-lately buyers to depart for calmer seas.

 

Very sensible, and likely to occur.

[no_free_lunch]

I have been trying to find a legal precedent case for this.  I mostly just see cases regarding govennment seizure/acquisition of people's properties, nothing that really fits with this situation.  It would be nice to see that someone has taken this type of case up before, and won.  Has anyone come across any good precedent's?

[deadspace]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.

 

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.

Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.

I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

 

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

 

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

 

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

 

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

 

I'm new to the board and dont know the history but what does it mean to "pull an Ericopoly"?

[valuecfa]

It's not so much the government shutting them down, but saying that these entities as they are, are broken.  We will move the assets and liabilities into a new entity, recap it with some taxpayer money, and it will take over...unfortunately, we will make the debt-holders whole, but not the common or preferred.  What are the odds of that happening...you have to weigh that in your analysis and scenario for returns?  And then how long do the lawsuits take before you are given restitution...if you win...2 years, 5 years, 10 years?  Time value of money comes into play.  I think this one is in the too hard pile, along with all my 9-foot hurdles...sometimes there are easier ways to make money over time.  Cheers!

 

How about this.

 

Assume you thought this was a coin flip with $1,000 on the line that is put in escrow today.

 

Would you bet someone today on a coin flip that may take place several years from now, with the following outcomes:

 

A) Heads you win $6,000, plus $330 per year upon completion of the flip.

 

B) Tails you lose your $1,000.

 

I don't think Vegas would stay in business very long with those payoffs/probabilities.

And I think the odds are better than 50/50 they win the litigation.

 

This is definitely true. I am very impressed with your MBIA trade. You put so much money into that single bet.

Do you feel comfortable with Freddie/Fannie preferreds at that kind of concentration, or do you feel like it is just a coin flip type of bet with real downside if bad things happen? I followed you with a 7% position today.

I noticed that in Fairholme's smaller fund, Bruce put in 6% for each of these two companies. So that is a total of 12%. The fact that he holds 27% cash in that fund tells me that he has already bought his max limit.

 

I think this is likely to be a very, very binary event. Either a 0x or a 6x-7x plus huge promised yields, with little likelihood of any middle ground unless you sell before the catalyst. I really can't believe that the prefs are still trading at such massive promised returns. At a minimum, i think they should be trading at 33cents on the dollar with facts as they stand today for the prefs with between 5-6% coupons. The implied probability of a legal victory (as is implied by the current market price) is just way off in my judgement.

 

There was mention of the Kelly formula in a prior thread. If you believe in the Kelly formula...even after you adjust it for time value, if you plug in the stats you will see that it warrants a large concentration, if you believe as i do that the probability is greater than 50% that they have a legal victory.

 

I guess you have to ask yourself how many X's do i need in order to warrant a position given an probability of Y.

 

If these prefs ever hit par or higher, i have a large enough concentration in them to pull an Ericopoly.

 

I'm new to the board and dont know the history but what does it mean to "pull an Ericopoly"?

 

Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.

[onyx1]

Judge Sweeney yesterday ruled against USA's motion to stay the 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.

 

1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.  These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.

 

2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

[merkhet]

 

Ericopoly: 1. the state of being able to  retire comfortably in one's 30's; to own a Tesla.

 

 

+1

[muscleman]

Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.

 

1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.  These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.

 

2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

 

Thank you!

Just to clarify, what do you mean by "Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims."?

I think Fairholme sued USA for violation of the 5th amendment, but if this is a favorable ruling, it should be that the judge ruled against USA's motion to stay away from 5th amendment?

[onyx1]

Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims.  We now have two different legal arguments in two different courts, either of which could provide a favorable ruling and a subsequent windfall to the private preferreds.

 

1)  Court of Federal Claims.  Fairholme and more than three other cases have been filed and some may be consolidated.  These cases argue that the Third Amendment to the Senior Preferred Stock Agreement (the Sweep) is an uncompensated taking under the 5th Amendment to the US Constitution.  Next key date:  11/7/2013, government response due on all cases.

 

2)  US District Court.  Fairholme and Perry Capital have each filed cases that are largely the same.  Both argue the validity of the Third Amendment to the Senior Preferred Stock Agreement (the sweep) under the Administrative Procedures Act.  Basically they argue that the Treasury and FHFA exceeded their statutory authority as conservator by agreeing to the Sweep.  Next key date:  10/28/2013, deadline for Treasury and FHFA motions (likely for summary judgment).

 

Thank you!

Just to clarify, what do you mean by "Judge Sweeney yesterday ruled against USA's motion to stay 5th Amendment cases in the Court of Claims."?

I think Fairholme sued USA for violation of the 5th amendment, but if this is a favorable ruling, it should be that the judge ruled against USA's motion to stay away from 5th amendment?

 

"Stay" is legal parlance for putting something on hold.  The US wanted all the Court of Claims cases (those claiming an illegal taking under the 5th Amendment) to be put on hold until the completion of the District Court cases (those cases that question the validity of the Sweep).  This could have resulted in years of delay.  The judge correctly ruled (IMO) that the 5th Amdendment cases are not path dependent on the DC cases.  In other words,  the judge implicitly agreed that even if the Sweep is ruled to be valid (the USA wins in DC court), the plaintiffs can still successfully claim an uncompensated taking under the 5th Amendment in the Court of Claims.