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

[merkhet]

When the GSEs transferred the possibility of any residual away from common & junior preferred to the government preferred, that is a breach. As Hamish Hume said, the issue is the economic situation shifted. They foreclosed the possibility of ever paying either group their par/residual.

[onyx1]

You may want to rethink this entirely ...

 

It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation.

 

So ... we are ultimately really looking at an eventual federally guaranteed perpetual.

 

Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond.

The big difference is just a dividend guaranteed by a much better creditor.

 

SD 

 

 

What does this have to do with any ruling by any court?

 

Even if you win, you just get paper - not cash.

And if you can actually sell it - its at cents on the $

 

SD

 

 

If I expect the UST defease my 6.4% coupon to perpetuity, I won't let it go for cents on the dollar.  Neither will anyone else, because it will be worth 160% of par at a 4% government rate.

[merkhet]

When the GSEs transferred the possibility of any residual away from common & junior preferred to the government preferred, that is a breach. As Hamish Hume said, the issue is the economic situation shifted. They foreclosed the possibility of ever paying either group their par/residual.

 

Let's put it another way. If the Q is what would the junior preferred have received after the government preferred has been paid off, the answer isn't zero/very little.

 

Why? Because the government has very graciously argued that they are not insolvent because under 4623(d), the line of credit from Treausry counts as capital. That's fine by me to draw from Treasury to pay me off.

[Guest cherzeca]

When the GSEs transferred the possibility of any residual away from common & junior preferred to the government preferred, that is a breach. As Hamish Hume said, the issue is the economic situation shifted. They foreclosed the possibility of ever paying either group their par/residual.

 

agreed that there was a breach of both covenants contained in preferred certificate of designations and fiduciary duty to common, but the damage remedy is not to pay liquidation value of preferred since there is no liquidation, so the common would argue (convincingly imo since there has been no liquidation). so if you allow damages for breach of dividend payment obligations, then common would do far better than jun pref under that scenario.

 

see my comment re cert of desig on prior page.  where am i wrong?

[Guest cherzeca]

When the GSEs transferred the possibility of any residual away from common & junior preferred to the government preferred, that is a breach. As Hamish Hume said, the issue is the economic situation shifted. They foreclosed the possibility of ever paying either group their par/residual.

 

agreed that there was a breach of both covenants contained in preferred certificate of designations and fiduciary duty to common, but the damage remedy is not to pay liquidation value of preferred since there is no liquidation, so the common would argue (convincingly imo since there has been no liquidation). so if you allow damages for breach of dividend payment obligations, then common would do far better than jun pref under that scenario.

 

see my comment re cert of desig on prior page.  where am i wrong?

 

@merkhet, let's play the damages scenario out

 

let's say Ps win on breach claims.  common will argue that the rights of common and junior pref were acquired by senior pref against their will, and that a constructive trust (injunctive relief) should be imposed on senior pref, such that if anything is distributed to senior pref that should have gone to junior pref or common, then senior pref would hold those amounts in trust for benefit of junior pref and common.

 

so you play out what happened.  if GSEs were liquidated and junior pref/common got nothing, then absolutely junior pref would get full pref at par.

 

but that didnt happen. 

 

what happened was that dividends were distributed that should have gone to junior pref and common.  so you look to the dividend rights of junior pref to see what they should have gotten, and the rest goes to common (perhaps 80% to govt in respect of warrants, though since warrants weren't exercised, i would say 100% to public common).

 

under this scenario, junior pref would get divs (say 8% on $20B for four years=$6.4B), and common gets rest.

[merkhet]

I would point you to Ginsburg's comment on salting the earth as to whether a liquidation has/is occurred/occurring.

[doughishere]

Has Rep. Capuano been pro GSEs or Pro shareholders......what kind of weight does he carry around Washington..... Was his comments really all that noteworthy at all?

[Guest cherzeca]

I would point you to Ginsburg's comment on salting the earth as to whether a liquidation has/is occurred/occurring.

 

well, all perry appeals court will do is reinstate the breach claims. how the district court will deal with it (assuming no other claims are reinstated) is another matter.

 

my only point was that the breach claims are not a "junior preferred friendly" claim, at least no more so than an invalidation of NWS claim

[Guest cherzeca]

@SD

 

"Even if you win, you just get paper - not cash.

And if you can actually sell it - its at cents on the $"

 

as a legal matter, not sure why this is so (to put it kindly).  care to elaborate?  btw, are you short?

 

[rros]

Even if you win, you just get paper - not cash.

And if you can actually sell it - its at cents on the $

SD

 

I am not too versed in legal matters. But I do have a bit of common sense.

 

The whole point of this appeal and by far the biggest and largest of all the pictures is to ratify that the investment done by investors has been a legitimate investment opportunity that has been artificially cut short. Appeals judges can most likely understand this and may also understand that issuing a ruling favorable to plaintiff that is devoid of any financial return invalidates the whole exercise. Therefore, the only reason to rule in favor of plaintiff will be to confer them a valid, legitimate financial return.

[SharperDingaan]

You may want to rethink this entirely ...

 

It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation.

 

So ... we are ultimately really looking at an eventual federally guaranteed perpetual.

 

Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond.

The big difference is just a dividend guaranteed by a much better creditor.

 

SD 

 

 

What does this have to do with any ruling by any court?

 

Even if you win, you just get paper - not cash.

And if you can actually sell it - its at cents on the $

 

SD

 

 

If I expect the UST defease my 6.4% coupon to perpetuity, I won't let it go for cents on the dollar.  Neither will anyone else, because it will be worth 160% of par at a 4% government rate.

 

 

A UST defeasance payment is not a 'guarantee' that the UST will defease all future payments  - there will not be a 160% of PAR value, & you will not be able to borrow against an 'implied' versus 'explicit' guarantee.

 

There is also nothing to prevent a UST intervention from simply calling/buying in everything > the 4% government rate, issuing new UST debt at a fixed 4% to pay for it, & then having FNMA/FMCC defease that newly issued UST debt. Defeasance works both ways, at most you might get 105-110% of PAR on a forced redemption.

 

But if at any point in the extended life of this new UST (50-100 year) debt, the market rate significantly rises > coupon rate - these things will trade at a steep discount. A simple swap of new FNMA/FMCC debt for old UST debt; will produce a healthy gain on the FNMA/FMCC books.

 

It's just a different POV.

 

SD 

 

Relevance to legal. Agreed, the best legal result is a 'win' and a recompense of some kind.

But that recompense could be in the form of an immediate cash payment, or in the form of an annual interest payment at the prevailing rate on the value due, or even in the form of a series of zero coupon instruments redeemable many years from now - AND THE PAYER MAKES THE CHOICE. Sure, the receiver is better off in 'value' than they were - but that 'value' is not necessarily cash.

 

SD

 

 

[onyx1]

There is also nothing to prevent a UST intervention from simply calling/buying in everything > the 4% government rate

 

SD

 

 

Under what legal authority would this be allowed?

[merkhet]

There is also nothing to prevent a UST intervention from simply calling/buying in everything > the 4% government rate

 

SD

 

 

Under what legal authority would this be allowed?

 

I mean, if the Treasury wants to "intervene" by tendering for my junior preferred shares at or above par, then I'm happy to sell them to Treasury.

[Guest cherzeca]

@SD

 

"AND THE PAYER MAKES THE CHOICE"

 

that's a bit like obama saying i have a phone and i have a pen.  this is a legal case, not a political choice.

[Eye4Valu]

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf

 

Did Bruce unload all of his common shares? Looks that way based on semiannual report.

[SharperDingaan]

There is no disagreement this a legal case.

There will be an outcome - the speculation is a recompense. It may/may not happen.

 

We just point out that even if there is recompense - it doesn't mean that you will actually get paid. Many a parent successfully suing for child support has found out that ultimately they couldn't collect, despite having a legal judgement in their favor. Hence its not the legal judgement itself, its the collectability on it. Related.

 

Not too sure what the legal authority was for rescuing banks, forcing bank mergers, and re-writing MTM/regulatory requirements during the 'crisis' - but it occurred, & continues to this day. We put it to you that this type of 'arrangement' would follow similar lines. Of course, it may never happen.

 

Our point is that predicting outcome isn't enough.

 

SD     

[morningstar]

No, I mean the breach of K on the private preferreds should result in payments to holders of the private preferred shareholders of the par amount.

 

The moment that the government implemented the Net Worth Sweep, they breached the K for the private preferred shareholders with respect to their liquidation preference. That should come immediately due. It is irrespective of the fact that there is $117 billion of government preferred in Fannie Mae that sits ahead of the private preferred and/or the logistics of the 10% government preferred yield.

 

Imagine if you have $100,000 in the bank, you make $50,000 a year and you spend all of your after-tax income. If you get into a car wreck, and there's a judgment against you, you don't get to just not pay it. Recall that the government has spent some not inconsiderable amount of time arguing that they are not insolvent because of the fact that they have a line of credit from Treasury that they can draw on for losses. Well, that's great. They can draw on that line of credit to pay out the private preferred for their par.

 

Supposing that a court agreed with this argument and gave preferred holders a damages claim for their liquidation value, and the FHFA responded by putting the GSEs into receivership rather than paying out in cash - where would that claim stand in ranking as that receivership carried on?

[merkhet]

That depends. In general, you'd be an unsecured claimant, but there are ways to get some priority through attaching a lien pre-petition.

[Eye4Valu]

Seems to me that if you win in the U.S. Court of Federal Claims, you're getting paid. Can you all point to an example(s) where a successful monetary judgment in the Court of Claims wasn't paid?

[hardincap]

fairholme sold out of fannie and freddie commons and added a bit to preferreds

 

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf

[Guest cherzeca]

fairholme sold out of fannie and freddie commons and added a bit to preferreds

 

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf

 

where does bruce report that change of holdings?

[Guest cherzeca]

Seems to me that if you win in the U.S. Court of Federal Claims, you're getting paid. Can you all point to an example(s) where a successful monetary judgment in the Court of Claims wasn't paid?

 

you will get paid if you have a judgement that is not overturned on appeal.  the fear in fed court of claims is that there will be a finding of liability but little or no damages a la Starr (AIG)

[hardincap]

fairholme sold out of fannie and freddie commons and added a bit to preferreds

 

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf

 

where does bruce report that change of holdings?

 

it would be listed under "SCHEDULE OF INVESTMENTS" if it was still a part of his portfolio, as it was in previous years' reports

[Guest cherzeca]

fairholme sold out of fannie and freddie commons and added a bit to preferreds

 

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf

 

where does bruce report that change of holdings?

 

it would be listed under "SCHEDULE OF INVESTMENTS" if it was still a part of his portfolio, as it was in previous years' reports

 

thx

[Steve_Berk]

thanks for the info--to those of you who don't know, Berkowitz has always been mainly invested in preferreds--he only dipped his toe in the commons. Ackman, on the other hand, is more heavily invested in commons. Not that that gives you any reassurance, but an interesting factoid.

 

fairholme sold out of fannie and freddie commons and added a bit to preferreds

 

http://www.fairholmefundsinc.com/Reports/Funds2016SemiAnnual.pdf