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

[allnatural]

I wouldn't call it the shortest or easiest path. Issues with flat out nationalization- in no specific order of importance:

1) Which politician wants to go on stage and declare, great news, we just added ~5t to our national deficit.

2) It permanently puts the taxpayers on the hook.

3) It crystalizes the takings. It is no longer a question whether private property was taken or not. Shareholders should be owed monetary compensation for this.

4) Side point- completely inconsistent with everything Mnuchin has said to date, and he holds the keys to the outcome here.

 

Report from CBO out yesterday...

 

Transitioning to Alternative Structures for Housing Finance: An Update August 23, 2018 Report

https://www.cbo.gov/publication/54218

CBO analyzes four alternative structures for the secondary mortgage market, in which the government would play varying roles in guaranteeing mortgage-backed securities, and provides estimates of federal costs under each approach.

So one of the options is nationalization, a status quo from today and the shortest and easiest path. All they need to do is cancel our shares and voila.

[rros]

In TH's blog someone mentioned the 'Chevron deference' and the 'Skidmore deference' as the basis for one of the opinions in the ruling. I found this bit of information in relation to Skidmore.

 

The Trump administration has been open about its desire to nominate judicial appointees who are, according to a March 2018 New York Times article, "devoted to a legal doctrine that challenges the broad power federal agencies have to interpret laws and enforce regulations, often without being subject to judicial oversight." The criteria were first applied when nominating Justice Neil Gorsuch to the Supreme Court. In his opinions, Gorsuch has been critical of another type of deference, known as Chevron deference, and has been held up by the administration as the model for judicial appointments.

 

May be there's hope if we get to SCOTUS?

[rros]

I wouldn't call it the shortest or easiest path. Issues with flat out nationalization- in no specific order of importance:

1) Which politician wants to go on stage and declare, great news, we just added ~5t to our national deficit.

2) It permanently puts the taxpayers on the hook.

3) It crystalizes the takings. It is no longer a question whether private property was taken or not. Shareholders should be owed monetary compensation for this.

4) Side point- completely inconsistent with everything Mnuchin has said to date, and he holds the keys to the outcome here.

 

Report from CBO out yesterday...

 

Transitioning to Alternative Structures for Housing Finance: An Update August 23, 2018 Report

https://www.cbo.gov/publication/54218

CBO analyzes four alternative structures for the secondary mortgage market, in which the government would play varying roles in guaranteeing mortgage-backed securities, and provides estimates of federal costs under each approach.

So one of the options is nationalization, a status quo from today and the shortest and easiest path. All they need to do is cancel our shares and voila.

The CBO report states that the advantage of that model, fully federal -carefully avoiding the negative impact of the word nationalization- gets all the benefits to the taxpayers. Sounds familiar? The groundwork has been laid out already, since 2012 (nws). Six full years of the same narrative. As the nws becomes validated, 'fully federal' starts to look better in everybody's eyes. And as long as the word nationalization is avoided, the public at large will ignore the issue. And we cannot rely on politicians.

 

As court cases go and as we are discovering, it appears the government was legally allowed to do what it did without having to compensate anybody. This is a monster, remember? Courts won't even get close to compensation and all we are getting from them is 'tough luck'. So yes, it is the shortest and fastest path from where we are today. But I agree with you, I give the fully federal model little chance. Not because a shocking Mnuchin's about-face but because there is too much money involved and greed will make its way to set the companies free.

[allnatural]

The federal court of claims is an interesting one because its saying even if the government was allowed to implement the NWS as the other courts have ruled, it still took private property for public use aka nationalization and we should be compensated. No court has ruled on that specific issue yet. And a formal nationalization (whether they use the word nationalization or not)- would crystalize this event. This would also require them to cancel all outstanding shares and require the government to consolidate the liabilities onto the national deficit, which is currently over $20t, by another $5t (this is a non-starter imo). Remember the only reason the government isnt required to consolidate the balance sheets today is because private shareholders still exist and they technically only own 79.99% of the equity (crossing 80 would require consolidation). And what happens in the next market downturn, who is on the hook? I just don't ever see that flying.

 

I wouldn't call it the shortest or easiest path. Issues with flat out nationalization- in no specific order of importance:

1) Which politician wants to go on stage and declare, great news, we just added ~5t to our national deficit.

2) It permanently puts the taxpayers on the hook.

3) It crystalizes the takings. It is no longer a question whether private property was taken or not. Shareholders should be owed monetary compensation for this.

4) Side point- completely inconsistent with everything Mnuchin has said to date, and he holds the keys to the outcome here.

 

Report from CBO out yesterday...

 

Transitioning to Alternative Structures for Housing Finance: An Update August 23, 2018 Report

https://www.cbo.gov/publication/54218

CBO analyzes four alternative structures for the secondary mortgage market, in which the government would play varying roles in guaranteeing mortgage-backed securities, and provides estimates of federal costs under each approach.

So one of the options is nationalization, a status quo from today and the shortest and easiest path. All they need to do is cancel our shares and voila.

The CBO report states that the advantage of that model, fully federal -carefully avoiding the negative impact of the word nationalization- gets all the benefits to the taxpayers. Sounds familiar? The groundwork has been laid out already, since 2012 (nws). Six full years of the same narrative. As the nws becomes validated, 'fully federal' starts to look better in everybody's eyes. And as long as the word nationalization is avoided, the public at large will ignore the issue. And we cannot rely on politicians.

 

As court cases go and as we are discovering, it appears the government was legally allowed to do what it did without having to compensate anybody. This is a monster, remember? Courts won't even get close to compensation and all we are getting from them is 'tough luck'. So yes, it is the shortest and fastest path from where we are today. But I agree with you, I give the fully federal model little chance. Not because a shocking Mnuchin's about-face but because there is too much money involved and greed will make its way to set the companies free.

[Luke 532]

CBO report...

 

From Peter A. Chapman

The entire "Effects of the Transitions on Fannie Mae’s and Freddie Mac’s Existing Operations" section in the Dec. 2014 report is gone.

 

The third paragraph on the last page says, "Helpful comments were also provided by . . . Edward Golding of the Urban Institute. . . ."  Urban Institute wasn't consulted in connection with the Dec. 2014 report. 

[DocSnowball]

Report from CBO out yesterday...

 

Transitioning to Alternative Structures for Housing Finance: An Update August 23, 2018 Report

https://www.cbo.gov/publication/54218

CBO analyzes four alternative structures for the secondary mortgage market, in which the government would play varying roles in guaranteeing mortgage-backed securities, and provides estimates of federal costs under each approach.

So one of the options is nationalization, a status quo from today and the shortest and easiest path. All they need to do is cancel our shares and voila.

 

Fully federal option places maximum risk to taxpayer.

 

Hybrid public private market, or fully private market are coming out best after 5 years on the principle of not putting the taxpayer at risk. Hybrid would also maintain liquidity in the mortgage market well and be less disruptive.

[locutusoftexas]

There has been mention several times of the cancellation of shares by the government. Only the companies can cancel shares and then only shares that they own. The shareholders would have to tender shares to the companies, which would have to purchase them first. In a nationalization, according to the 5th Amendment, the process would consist of the government compensating the shareholders for their shares (ownership), which would at that time be tendered to the companies, which would then cancel the shares. The government would then own the companies through nationalization.

 

Currently the government does not own the companies, even though it has taken the companies' net value and is continuing to take the earnings.  This has rendered the privately held shares to have a current value of $0 by standard valuation formulas. However, the shareholders still technically own the companies. The existence of privately held shares and the existence of the 5th Amendment prevent the government from doing absolutely whatever it wants with the companies without considering shareholders, who are the owners.

[Guest cherzeca]

There has been mention several times of the cancellation of shares by the government. Only the companies can cancel shares and then only shares that they own. The shareholders would have to tender shares to the companies, which would have to purchase them first. In a nationalization, according to the 5th Amendment, the process would consist of the government compensating the shareholders for their shares (ownership), which would at that time be tendered to the companies, which would then cancel the shares. The government would then own the companies through nationalization.

 

Currently the government does not own the companies, even though it has taken the companies' net value and is continuing to take the earnings.  This has rendered the privately held shares to have a current value of $0 by standard valuation formulas. However, the shareholders still technically own the companies. The existence of privately held shares and the existence of the 5th Amendment prevent the government from doing absolutely whatever it wants with the companies without considering shareholders, who are the owners.

 

I agree with this.  also, if there is any serious contemplation of an administrative solution, the prospect of the 5thA case (j. Sweeney) and any ongoing constitutional separation powers/appnt clause and APA claims means that some resolution of these claims requires a global settlement...and the reason why you saw a flurry of cases filed before the lapse of the 6 years statute of limitations expired was precisely to make sure that investors had as many seats at the table as possible...the more cranky Ps the more likely a global settlement will have to approach a moelis-type solution.

[rros]

There has been mention several times of the cancellation of shares by the government. Only the companies can cancel shares and then only shares that they own. The shareholders would have to tender shares to the companies, which would have to purchase them first. In a nationalization, according to the 5th Amendment, the process would consist of the government compensating the shareholders for their shares (ownership), which would at that time be tendered to the companies, which would then cancel the shares. The government would then own the companies through nationalization.

 

Currently the government does not own the companies, even though it has taken the companies' net value and is continuing to take the earnings.  This has rendered the privately held shares to have a current value of $0 by standard valuation formulas. However, the shareholders still technically own the companies. The existence of privately held shares and the existence of the 5th Amendment prevent the government from doing absolutely whatever it wants with the companies without considering shareholders, who are the owners.

 

I agree with this.  also, if there is any serious contemplation of an administrative solution, the prospect of the 5thA case (j. Sweeney) and any ongoing constitutional separation powers/appnt clause and APA claims means that some resolution of these claims requires a global settlement...and the reason why you saw a flurry of cases filed before the lapse of the 6 years statute of limitations expired was precisely to make sure that investors had as many seats at the table as possible...the more cranky Ps the more likely a global settlement will have to approach a moelis-type solution.

Thank you for adding color.

 

 

[Luke 532]

Mnuchin hung out with John Paulson and Bill Ackman, among others, this weekend: https://www.bloomberg.com/news/articles/2018-08-27/milken-mnuchin-in-the-hamptons-with-blankfein-to-fix-the-world

 

Edit: they were at the same event, no idea if they "hung out" or not.

[Luke 532]

FWIW, Trump seems to like Sweeney.

 

http://uscfc.uscourts.gov/announcements

 

President Trump designates Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

 

On July 12, 2018, President Donald J. Trump designated Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

For Chief Judge Sweeney’s biography, please click here.

 

[colinwalt]

FWIW, Trump seems to like Sweeney.

 

http://uscfc.uscourts.gov/announcements

 

President Trump designates Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

 

On July 12, 2018, President Donald J. Trump designated Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

For Chief Judge Sweeney’s biography, please click here.

 

Hmmm.... if I were a cynic I'd be wondering about this... I mean, isn't there some big claim in progress against the government...? but no, no way... a US President as honorable as "The Donald" would never try to influence the outcome, would he?

[blackcoffee]

Would she go against the current admin and ask them to give billions to Plaintiffs? I don't think so. Public will soon forget that the judgment is result of bad deeds of prior admin and judgment will look bad on current admin, unless she berates the prior admin. Why is our justice system political?

 

FWIW, Trump seems to like Sweeney.

 

http://uscfc.uscourts.gov/announcements

 

President Trump designates Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

 

On July 12, 2018, President Donald J. Trump designated Margaret M. Sweeney as Chief Judge of the United States Court of Federal Claims.

For Chief Judge Sweeney’s biography, please click here.

 

because it's made up of fallible humans like any other institution.

[Luke 532]

Given what Muchin has said in the past I'm glad to read this (if true)...

 

https://www.insidemortgagefinance.com/imfnews/1_1429/daily/-1000047390-1.html

 

As for GSE matters, who Trump might pick to succeed Mel Watt as director of the Federal Housing Finance Agency continues to be a topic of speculation. Then again, it’s highly unlikely that Trump will be personally involved in the choice. The pick – from what we’ve been told the past 12 months – is clearly in the hands of Treasury Secretary Steven Mnuchin…

[Midas79]

Given what Muchin has said in the past I'm glad to read this (if true)...

 

https://www.insidemortgagefinance.com/imfnews/1_1429/daily/-1000047390-1.html

 

As for GSE matters, who Trump might pick to succeed Mel Watt as director of the Federal Housing Finance Agency continues to be a topic of speculation. Then again, it’s highly unlikely that Trump will be personally involved in the choice. The pick – from what we’ve been told the past 12 months – is clearly in the hands of Treasury Secretary Steven Mnuchin…

 

No surprise here, naturally. Treasury has had control of the situation dating back to 2008.

 

I wonder if and whether Trump can pick a nominee soon to get the confirmation process going so that he or she could be confirmed soon after Watt's term ends.

[Guest cherzeca]

Given what Muchin has said in the past I'm glad to read this (if true)...

 

https://www.insidemortgagefinance.com/imfnews/1_1429/daily/-1000047390-1.html

 

As for GSE matters, who Trump might pick to succeed Mel Watt as director of the Federal Housing Finance Agency continues to be a topic of speculation. Then again, it’s highly unlikely that Trump will be personally involved in the choice. The pick – from what we’ve been told the past 12 months – is clearly in the hands of Treasury Secretary Steven Mnuchin…

 

No surprise here, naturally. Treasury has had control of the situation dating back to 2008.

 

I wonder if and whether Trump can pick a nominee soon to get the confirmation process going so that he or she could be confirmed soon after Watt's term ends.

 

the attraction of mulvaney is that he wouldn't need senate confirmation, as he already received it as OMB...and he proved with cfpb that he can do two jobs at once. 

[allnatural]

Do you guys think Watt actually steps down ahead of his term expiring? Not that it changes much (4 month difference).

[blackcoffee]

http://www.delawarebayllc.com/images/10_Years_After_Henry_Paulson_s_Colossal_Blunder.pdf

[allnatural]

Great recap. Seems like he believes Mnuchin should resolve this prior to Sweeney's decision. Wishful thinking...

 

"If, as Treasury Secretary Steven

Mnuchin has said repeatedly, the administration

really is committed to getting Fannie and Freddie out

of conservatorship, Trump & Co. could end up taking

credit for making the best deal for America since the

Louisiana Purchase. On the other hand, the

opportunity is significantly diminished if Judge

Sweeney allows the shareholders their day in court. "

 

http://www.delawarebayllc.com/images/10_Years_After_Henry_Paulson_s_Colossal_Blunder.pdf

[allnatural]

Gary Hindes @ 1:40 mark.

[Luke 532]

Gary Hindes @ 1:40 mark.

 

Just FYI, that was from the Bethany McLean/Bill Ackman event 2 or 3 years ago.

[rros]

Gary Hindes @ 1:40 mark.

C'mn, Mr. Hindes... if Treasury/FHFA does it, it's not illegal. Haven't you learned anything from 'tricky Dick'?

 

Hindes lawsuit is a bit esoteric... judging by past rulings, a bit not-going-to-happen.

[blackcoffee]

Why does everyone hate Fannie Mae and Freddie Mac? They are most important institutions providing housing and are responsible for economic recovery to debacle caused by large banks.

 

 

Gasparino is really smart.

[Luke 532]

Why does everyone hate Fannie Mae and Freddie Mac? They are most important institutions providing housing and are responsible for economic recovery to debacle caused by large banks.

 

 

Gasparino is really smart.

 

Probably the smartest guy ever.

[rros]

Are we putting our hopes for justice on the same treasury to do the right thing? We are up for huge disappointment, we have watched it for last 2 years with no action and just talk. They have been vehemently defending in courts that expropriation of private property is their right and refusing to release 10,000 documents even after 10 years. As soon as mid-terms are over and mission achieved, shareholders may be shafted for good and expropriation of private property to continue till 2028.  It is not politically feasible to enrich preferred shareholders like Paulson with the whole media against Fannie and Freddie.

 

 

“On August 15, 2012, a Treasury official wrote in an email to White House officials that, “by taking all of their profits going forward, we are making clear that the [Enterprises] will not ever be allowed to return to profitable entities at the center of our housing finance system,” and he confirmed that “taxpayers will receive every dollar of profit the [Enterprises] make.”

 

http://gselinks.com/wp-content/uploads/2018/08/18-01150-0001-Complaint-Filed-8-8-18.pdf

Unfortunately, the 2012 Treasury statement is impersonal. Meaning, whether it is Geithner, Lew, Mnuchin or someone else down the road warming up the Secretary's seat this policy stands. Mnuchin has only issued statements regarding the government owning the companies. But nobody from the WH or Treasury has spoken regarding this policy or, in general, the nws.

 

Perhaps, investorG is correct in his assumption that the most we can hope for is an across-the-board settlement whereby Jrs. receive 50-75% of face value. And after the last court loss I am inclined to think 50% is more realistic. Unlike Hindes and Tim Howard, I have little faith on any Sweeney's court favorable ruling. Other than a small payout, if at that. Trump's appointment should only be seen under the light of an exchange. What will Sweeney's reciprocal action be we do not know. But this will be unveiled soon.

 

I cannot envision an administrative solution that will reward all shares and provide -as per Moelis- full face value to the Jrs. after all the loses we have taken. Why would Treasury defend itself so hard or join FHFA in its defense only to let shareholders have it? Whereas a settlement will pave the way for terminating all lawsuits and perhaps retiring shares at a lesser cost. So I share Emily's feelings here.

 

And on the same line of thought I equally cannot see Treasury leaving shareholders out in the cold zeroing all shares. So while no reward, some reward. My one sure bet is that both John Paulson and Bruce Berkowitz (and perhaps Ackman) already know what is coming.

 

In the end, I think Treasury will be happy to see investors go away with the feeling the fight was not worth the money, time and effort. Even if in the process some money was made. Final goal being to deter future litigation, related or unrelated.