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


twacowfca

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The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.

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It will be interesting to see if the government will just re-instate the preferred and common shareholders and sell there warrants to prevent more of this coming out.  It appears if they do not they may lose the takings case and be penalized for misleading disclosures which may cost them more than re-instating the shareholders.  It nice to have Ralph Nader on your side.

 

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The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.

 

This was an internal document in Treasury, so Fannie and Freddie may not have known about the policy until later.

 

The full income sweep policy was certainly disclosed in the 2012 PSPA revisions.

 

http://www.treasury.gov/press-center/press-releases/Pages/tg1684.aspx

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The administration had a policy since 2010 to shut out the common shareholders from all earnings but it was never disclosed to the common shareholders?    Who decided this was not a disclosure item!  I look forward to the discovery process.  We will very likely find more examples where the administrations public statements (or overt omissions) that are at odds their internal dialogue.  If that happens, the government's case will move closer to indefensible.

 

This was an internal document in Treasury, so Fannie and Freddie may not have known about the policy until later.

 

 

Yet in their 12/9/13 Motion to Dismiss, the government claims the FHFA, acting as conservator, acted alone in entering into the Third Amendment.  They claim the FHFA acted without any coercion from the Treasury and entered into an agreement where the Treasury gets all earnings from the GSEs forever.  They would have us believe that it's all one crazy coincidence that in 2012, the FHFA formalized an undisclosed internal Treasury policy that had been in place since 2010!  I am not gullible enough to believe it, and I don't think Judge Sweeney will either.  Discovery will get to the truth.

 

 

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There's no coercion required, since FHFA and the Fannie and Freddie boards think that their duty in conservatorship is to deliver value to Treasury.

 

 

Fasinating!  Could you provide a source for your claim?  Plaintiff attorneys would love to have a smoking gun like that.  Or maybe it's just another of their "undisclosed" policies?  Either way, don't waste your time, there is no such "duty" to Treasury. 

 

The goal of the conservatorship is "to perserve and conserve the Company's assets and property and put the Company in a sound and solvent condition".  Source: FHFA, page 1

 

http://www.treasury.gov/press-center/press-releases/Documents/fhfa_consrv_faq_090708hp1128.pdf

 

Nothing is mentioned about a "duty" to Treasury.  Rather, on page 3, discussing rights during the conservatorship:  "Stockholders will continue to retain all rights in the stock's financial worth;". 

 

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Funny how the increasing prices of the preferred and common shares give holders of those shares even more incentive to fight harder. What a virtuous cycle.

 

And it's not like the rewards (cash flow) are shrinking as time passes. Every day, the pie gets bigger and the stakes get a little bit higher.

 

It's like a bully stole your pet rabbit and put it in his pocket.  He's going to look a little foolish when it turns out it was pregnant and ten end up scurrying out of his pants.

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Nothing is mentioned about a "duty" to Treasury.

 

The point of the preferred stock agreements is that FNMA and FMCC have a duty to pay interest and principal on the senior preferred. They have a higher priority to company value than public shareholders do.

 

What a lot of people don't understand is that public shareholder equity has been deeply negative since 2008, and it still is. The balance sheet and income statement are deceptive if you ignore the role preferred equity plays.

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FNMA and FMCC's lack of fiduciary duty to shareholders has been disclosed. From the latest FNMA 10K:

 

"Our directors do not have any fiduciary duties to any person or entity except to the conservator"

"we are no longer managed with a strategy to maximize shareholder returns"

 

This has no bearing on shareholder rights.  The conservator is appointed to conserve and perserve the asset of the institutions, which are owned by all shareholders.

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By the way, do you really think Treasury had to coerce FHFA to sign the PSPAs? Isn't it more plausible that FHFA believes they are doing what they're supposed to do?

 

I do think Treasury coerced the FHFA into violating its charter as conservator.  The FHFA director has no incentive to hand the keys to Treasury.  The Treasury, on the other hand,  has billions and billions of reasons to enter the Third Amendment.

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By the way, do you really think Treasury had to coerce FHFA to sign the PSPAs? Isn't it more plausible that FHFA believes they are doing what they're supposed to do?

 

I do think Treasury coerced the FHFA into violating its charter as conservator.  The FHFA director has no incentive to hand the keys to Treasury.  The Treasury, on the other hand,  has billions and billions of reasons to enter the Third Amendment.

 

The problem is when you have to go to court to exercise shareholder rights.  That makes it hard to estimate the time required for payoff. Even if the courts agree with the shareholders then it can be a long time before all avenues of appeal are exhausted and you see any money from it. For a good example, look at several of the lawsuits against the US Govt for their actions during the Savings and Loan crisis.  Some of those cases dragged on for over 10-15 years.  I think some are still ongoing.

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Part of the appeal here to me is this is a wager in the Administration's over reach and reflective of an approach to law enforcement of do what I think is right in spite of the law/rules.  You see this in most of the issues the administration has had with courts and Congress.  What is even more incredible is that they see what they are doing is "correct" and those who disagree are political enemies.  I think folks have had enough of this way of combative government and whoever is the next President will have a less my way or the highway approach to governing.  In fact they have used the tea party as a scapegoat/rationale for there own very similar approach for dealing with issues.  With this in mind, I think the Freddie/Fannie issue will probably be resolved post 2017 unless the courts rule earlier on the over reach.

 

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can someone boil down for me why this would be a good investment? And not be thrown on the too hard pile. At first sight it looks pretty complex

 

I can summarize the bear case.

 

FNMA and FMCC were put into conservatorship because they were insolvent.  The book value of public shares (equity value minus senior preferred) has been deeply negative since 2008. Equity and profits in the last few years are an illusion - they belong entirely to the government according to the terms of the senior preferred shares.

 

The status quo is negative because they are currently shrinking and paying billions of dollars to Treasury. FNMA and FMCC shareholders need political action, or more likely court action, to recover any value.

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