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

[Mephistopheles]

 

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

 

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.

[morningstar]

Seems like there are several ways the preferreds could wind up being exchanged for common... either something like the Fairholme plan where the preferreds wind up with fair value or better, or a coercive exchange stripping the dividend blockers for the benefit of the common.

[Guest wellmont]

 

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

 

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.

you're right he isn't specific. But he does say there are "several" ways in which Fannie and Freddie could become fully capitalized "more quickly". On the same slide he says treasury could allow f&f to "raise more capital". I don't believe that Fairholme is holding so much preferred in the hopes it trades at 95% of par and starts paying it's dividends. I believe his plan is to create a large stake in the common equity of the company. Ackman has different incentives. I believe the hedge fund holders of the preferred will play a significant role in how to restructure f&f. btw I participated in a plan (post crisis) that allowed a holder of Citigroup preferred/trups to exchange into common stock at a discount to then prevailing prices. the preferred do not have to be convertible to be exchanged for common stock.

 

even if an exchange offer never materializes, the pref could be a great investment. If there is a favorable court ruling or a negotiated compromise in the next year or so, the preferred could double almost overnight. Depending on your holding period that's not a bad outcome.

[phil_Buffett]

 

holders of the preferred could swap for common shares. this is essentially the fairholme plan in a nutshell. it's also mentioned in the Ackman slide deck.

 

Can you point to where in the Ackman slides it says preferred could swap for common? On slide 109 he talks about the Treasury converting their preferred, but I don't see anything about the publicly trade ones. Also, from looking at some of the prospectuses I can see they are non-convertible. So am just curious to see how the preferred can be converted, absent Fairholme's plan not being implemented.

you're right he isn't specific. But he does say there are "several" ways in which Fannie and Freddie could become fully capitalized "more quickly". On the same slide he says treasury could allow f&f to "raise more capital". I don't believe that Fairholme is holding so much preferred in the hopes it trades at 95% of par and starts paying it's dividends. I believe his plan is to create a large stake in the common equity of the company. Ackman has different incentives. I believe the hedge fund holders of the preferred will play a significant role in how to restructure f&f. btw I participated in a plan (post crisis) that allowed a holder of Citigroup preferred/trups to exchange into common stock at a discount to then prevailing prices. the preferred do not have to be convertible to be exchanged for common stock.

 

even if an exchange offer never materializes, the pref could be a great investment. If there is a favorable court ruling or a negotiated compromise in the next year or so, the preferred could double almost overnight. Depending on your holding period that's not a bad outcome.

 

wellmont would be nice to hear from you. ackman has almost only common stock. what is his incentive? what will happen to common in your opinion?

[Guest wellmont]

I think it's about size of the bet. he will invest a little in the hopes of getting a lot, similar to his bet on the HK dollar. I think it's a bet which he believes strongly in but doesn't want to put up as much capital as he would do if he bet on the pref. The fairholme plan would dilute him, which is why he opposes it. just conjecture and guesswork and could be way off base. interested in other takes...

[phil_Buffett]

I think it's about size of the bet. he will invest a little in the hopes of getting a lot, similar to his bet on the HK dollar. I think it's a bet which he believes strongly in but doesn't want to put up as much capital as he would do if he bet on the pref. The fairholme plan would dilute him, which is why he opposes it. just conjecture and guesswork and could be way off base. interested in other takes...

 

thanks wellmont very much for your answer  :)

[fareastwarriors]

Fannie, Freddie: Can't Purge 'Em? Merge 'Em

 

 

http://online.wsj.com/articles/fannie-freddie-cant-purge-em-merge-em-heard-on-the-street-1399842482?mod=Markets_newsreel_2

[Grenville]

two good short videos from Mel Watt.

 

http://www.brookings.edu/blogs/brookings-now/posts/2014/05/fhfa-mel-watt-fannie-mae-freddie-mac-current-statutory-mandate

[fareastwarriors]

 

U.S. Backs Off Tight Mortgage Rules

 

In Reversal, Administration and Fannie, Freddie Regulator Push to Make More Credit Available to Boost Housing Recovery

 

 

 

http://online.wsj.com/news/articles/SB10001424052702303851804579559673037406670

[BargainValueHunter]

Excellent discussion on the FNMA/FMCC litigation that makes it seem as if Berkowitz may lose this one...

 

http://media.bloomberg.com/bb/avfile/Politics/Law/v9l4rApHubQE.mp3

[Guest wellmont]

disagree. I thought it was good, albeit superficial, rehash of the background of the situation by bloomberg reporters, not lawyers. There is a recording of Ted Olson floating around that I think does a much better job of discussing the legal questions involved in the cases.

[merkhet]

Agree with wellmont. It's a pretty bad summary of the Fannie & Freddie issues. "Emily," who tries to describe takings law completely misses the fact that there's such a thing as regulatory taking that doesn't require physical taking.

[Packer16]

What I find interesting is there are multiple jurisdictions this is being tried at so the possibility of one ruling in the plantiff's favor is higher.  If this happens then this would be a catalyst for a higher stock price.

 

Packer

[fareastwarriors]

Carl Icahn acquired Fannie, Freddie shares from Fairholme: Filing

 

Activist investor Carl Icahn acquired 6.8 million common shares of Fannie Mae and 5.7 million common shares of Freddie Mac from Fairholme Funds, a court filing showed Tuesday.

 

 

Icahn, a billionaire investor known for taking big stakes in companies and pushing for management change, bought the shares in the major mortgage financiers in March, the filing showed.

 

 

 

http://www.cnbc.com/id/101727329

[fareastwarriors]

Icahn Bought $50 Million in Fannie, Freddie Shares From Fairholme Fund

 

Icahn Bought 6.8 Million Fannie Shares and 5.7 Million Freddie Shares in March, Court Filing Says

 

 

http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

 

 

Mr. Icahn bought 6.8 million shares of Fannie and 5.7 million shares of Freddie from Mr. Berkowitz's Fairholme Capital Management LLC, the court document states.

 

He paid $4.03 a share for the Fannie stake for a total of $27.5 million, and $4.04 a share for the Freddie shares for a total of $23.2 million, the document says. Mr. Icahn's deals would give him about 0.6% of Fannie shares outstanding, and 0.9% of Freddie.

 

...

Both of Mr. Icahn's transactions took place on March 11, a day when Fannie's common stock fell 31% and Freddie's tumbled 27%.

 

As of March 31, Fairholme Capital Management held 17.2 million shares of Freddie Mac's common stock, or 2.4% of the company, according to Morningstar Inc. MORN -0.83% The company owned 19.2 million shares of Fannie Mae, or 1.7% of the company, according to Morningstar. Fairholme also has large positions in Fannie and Freddie preferred stock.

 

 

 

I wonder why Bruce sold on That day. Am I reading this right? He sold on a huge down day?

[TwoCitiesCapital]

Icahn Bought $50 Million in Fannie, Freddie Shares From Fairholme Fund

 

Icahn Bought 6.8 Million Fannie Shares and 5.7 Million Freddie Shares in March, Court Filing Says

 

 

http://online.wsj.com/articles/icahn-bought-50-million-in-fannie-freddie-shares-from-fairholme-fund-1401805004?mod=WSJ_hp_LEFTWhatsNewsCollection

 

 

 

 

Mr. Icahn bought 6.8 million shares of Fannie and 5.7 million shares of Freddie from Mr. Berkowitz's Fairholme Capital Management LLC, the court document states.

 

He paid $4.03 a share for the Fannie stake for a total of $27.5 million, and $4.04 a share for the Freddie shares for a total of $23.2 million, the document says. Mr. Icahn's deals would give him about 0.6% of Fannie shares outstanding, and 0.9% of Freddie.

 

...

Both of Mr. Icahn's transactions took place on March 11, a day when Fannie's common stock fell 31% and Freddie's tumbled 27%.

 

As of March 31, Fairholme Capital Management held 17.2 million shares of Freddie Mac's common stock, or 2.4% of the company, according to Morningstar Inc. MORN -0.83% The company owned 19.2 million shares of Fannie Mae, or 1.7% of the company, according to Morningstar. Fairholme also has large positions in Fannie and Freddie preferred stock.

 

 

 

I wonder why Bruce sold on That day. Am I reading this right? He sold on a huge down day?

 

Is it possible he got lucky? With such large transactions I can sear the counterparties agreeing to terms and fixing dates etc in advance. Maybe it just happened to coincide with the major down day.

[Eye4Valu]

Doesn't the sale by Fairholme at approx. $4 still represent a large gain for Fairholme? I believe Uncle Bruce got in much lower, but correct me if I'm wrong.

[onyx1]

 

By the end of this month, FHFA, charged by statute with a mandate of conserving and

preserving the assets of Fannie Mae and Freddie Mac, will have sent $158 billion from the

Companies’ treasuries to the government’s Treasury pursuant to the Net Worth Sweep—$130

billion more than Treasury previously would have received under the 10 percent fixed dividend

provided in its stock agreements. Treasury and FHFA would have this Court believe that they

had no idea the Net Worth Sweep would give Treasury such a windfall. The Net Worth Sweep

was needed, the agencies say, to save the Companies from a “downward spiral” caused by

borrowing money from Treasury to pay Treasury a cash dividend that could have been paid inkind,

without any borrowing. In their view, the massive transfer of wealth to Treasury is just a

happy (for the government) coincidence.

 

Of course, FHFA and Treasury are desperate to prevent this Court from looking too

closely at this narrative. And for good reason, as the contemporaneous statements from the

agencies in 2012 reveal a very different rationale for the Sweep Amendment: to prevent the

Companies from “retain[ing] profits” or “rebuild[ing] capital,” to begin the “winding up” of the

Companies’ affairs, and to “ensure [that] existing common equity holders will not have access to

any positive earnings from the [Companies] in the future.”

 

The agencies had no authority to embark on that course in 2012. Accordingly, Plaintiffs

ask this Court to vacate the illegal Sweep Amendment.

 

 

From the cross-motion for summary judgement filed two days ago by Perry/Fairholme/others in the APA complaint currently being held in DC District court.  (Document attached)  Good reading.

 

cross_motion_1053.pdf

[Guest wellmont]

Doesn't the sale by Fairholme at approx. $4 still represent a large gain for Fairholme? I believe Uncle Bruce got in much lower, but correct me if I'm wrong.

 

sometimes these guys like to sell and buy in one big chunk. that was valuable to fairholme. in addition, the strategic value of having Icahn engaged is helpful to fairholme objectives.

[onyx1]

Meanwhile the noose tightens in the takings case in Federal Court.  It is coming to a head with the Govt's desperate attempt to avoid handing over discovery materials relevant to the background and current thinking of the sweep amendment by offering a Motion for Protective Order.   

 

 

http://timhoward717.com/2014/05/30/motion-for-protective-order-filed-53014/

 

 

http://timhoward717.com/2014/06/01/last-gasp/

 

 

What do they have to hide?  Apparently a lot as they claim disclosure will destabilize the world economy! The length and weakness of the govt's argument against supplying discovery materials is a strong indication the information is devastating to the govt's claim that sweep amendment was effected to "stabilize" the GSEs. 

 

 

Judge Sweeney has ordered a joint status conference for tomorrow.  A ruling against the govt here may force the end game to come much sooner than the market has estimated. 

 

 

Preferreds trading at 36-40 cents on the dollar.

 

 

 

[onyx1]

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.

 

Packer

 

With both cases at a critical juncture the spring is wound tight.  Informed speculation that either/both case(s) could be blow open any day can be found on this site:

 

http://timhoward717.com/2014/06/25/order-fairholme-case/#comments

 

I am sure both teams of attorneys follow this site as is is the best source of commentary about case developments.

 

Preferreds are still trading at 35-40 cents on the dollar.

[phil_Buffett]

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.

 

Packer

 

With both cases at a critical juncture the spring is wound tight.  Informed speculation that either/both case(s) could be blow open any day can be found on this site:

 

http://timhoward717.com/2014/06/25/order-fairholme-case/#comments

 

I am sure both teams of attorneys follow this site as is is the best source of commentary about case developments.

 

Preferreds are still trading at 35-40 cents on the dollar.

 

thanks onyx1 for the site.  :) hopefully we will win

[merkhet]

I have recently flipped from thinking that this case won't be won to thinking that the case can be won. About two months ago, I started thinking that the allowance of discovery would prove to be the downfall of the Sweep Amendment. Page 26 of the Perry Injunction seems to agree:

 

Separately, this Court cannot uphold the Sweep Amendment as within FHFA’s statutory authority because FHFA has not submitted an administrative record explaining its decisionmaking process. The APA’s requirement that review of agency action be on the “whole record,” 5 U.S.C. § 706, applies not only to arbitrary-and-capricious review, but also to whether an agency “acted within the scope of [its] authority.” Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971). FHFA has refused to compile or file an administrative record in this case, despite its tacit concession that it was required to do so by the Federal Records Act. Compare APA Br. 47-48, with FHFA Reply 52-53. It instead submitted a “Document Compilation” with cherry-picked documents and a declaration created for this litigation that FHFA self-servingly contends “reflect[] the considerations that FHFA as Conservator took into account in executing the [sweep] Amendment.” FHFA Reply 52; see also Dkt. No. 27, at 2. This submission is not an administrative record. See APA Br. 46-51. When the APA says the “whole record,” that means, “neither more nor less than what was before the agency at the time it made its decision.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010).

 

FHFA tries to shift the burden to Plaintiffs, saying they have failed to overcome the “strong presumption of regularity” for FHFA’s Document Compilation. FHFA Reply 53. But “t is the agency’s responsibility to compile” an administrative record in the first instance. Marcum, 751 F. Supp. 2d at 78. Only after the agency submits an administrative record can the “presumption of regularity” apply. See id. Here, however, FHFA admits that it never created an administrative record. See Dkt. No. 27, at 2 (“Defendants FHFA and DeMarco are not required to—and have not—created or maintained an administrative record relating to the execution of the Third Amendment.” (emphasis added)). No presumption of agency “regularity” can make the Court pretend that a “document compilation” is an administrative record, when the Agency admits that no such record exists. See Safe Extensions, Inc. v. FAA, 509 F.3d 593, 600 (D.C. Cir. 2007) (“If the [agency’s] documents fail to demonstrate the reasonableness of its decision, it means that the agency either has chosen not to write down the reasons for its decision or is unable to do so. Neither possibility is acceptable under the [APA].”).

 

The interesting thing is that under the APA and the Chevron doctrine, administrative agencies can do almost whatever they want so long as they have a rational reason to do so -- except that they have to show that they had a rational reason, and here they cannot establish an evidentiary record showing that they have done that.

 

IMHO, that's pretty damning.

 

I suspect that a court would give them leeway had this happened in the middle of the crisis (circa 2008-2009) where speed was of the essence, but 2012 is a completely different story.

[onyx1]

I have recently flipped from thinking that this case won't be won to thinking that the case can be won. About two months ago, I started thinking that the allowance of discovery would prove to be the downfall of the Sweep Amendment. Page 26 of the Perry Injunction seems to agree:

 

 

    The cross motion for summary judgement (linked below) is one damning argument after another against the government's defense that basically amounts to "we are the government, we can do as we please". Choose your weapon:  exceeding authority, violations of the APA, failure to consider required alternatives, violations of fiduciary duties, to name just a few.  A judgement could happen anytime by Reagan-appointed Judge Lamberth that would have the dramatic effect of tossing out the entire 2012 sweep amendment.

 

    Apply a 20% discount to the preferred shares for appeal risk and the current holders would still enjoy a double from today's prices.

 

 

http://timhoward717.files.wordpress.com/2014/06/6214-perry-reply-in-support-of-summar-judgement.pdf

[merkhet]

Well, briefs are written to be persuasive...

 

A ruling on most of the other things will seem to go a little further than is necessary. Most judges dislike making rulings that are too far beyond necessity because it opens them up to reverse on appeal, and judges, having egos like the rest of us, dislike being told that they are wrong.

 

My sense is that a ruling, if it comes to that, will come on the fact that the government has failed to satisfy the burden of proving that it had a rational reason for its decision given that there is no evidentiary trail. So the most likely outcome, IMO, is that they will rule on the lack of meeting this burden of proof without necessarily ruling on any of the other claims.