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

[onyx1]

To see a video of yesterday's oral argument for the motion to dismiss in the Continental Western Case, go here:

 

http://www.uscourts.gov/Multimedia/Cameras/SouthernDistrictofIowa.aspx

 

 

[tede02]

One thing that doesn't seem clear to me is if Berkowitz is in-fact getting out.  All the reporting seems to indicate he is selling but I've also read that somehow he doesn't have to report his ownership?  Has this been confirmed one way or the other?

[Philip Morris IV]

It's been confirmed he does not have to report the holdings and no longer is.  It states this on his latest 13F cover page.  If you look back a few pages here there is some talk on it.

 

Ackman was just on Bloomberg TV and spoke a bit about FNMA.  Nothing new if you've listened to the latest Pershing call, but always good to see strong resolve.  Clip will probably be on their website in the next few hours.

[Mephistopheles]

Some of the preferreds traded at $.10 on the dollar today and one even went below. I managed to do a few tax swaps. I hope that Berkowitz is not getting out based on information (or lack thereof) that he is seeing in discovery.

 

Many of the non-FNMAS have always traded at a significant discount to FNMAS, and FNMAS is at around $3.50 per preferred share. I don't know if anything of use can be gleaned from the price action the last few days -- I suspect there is some tax selling going on.

 

At today's price of $2.07, the common is up 37% from the bottom tick of $1.51 after Lamberth threw out the DC case. Most of the preferreds are just about flat since the same time.

 

Actually, most of the preferreds are down -- I believe my prefs were trading at around $4 a share on 10/1.

 

Are you talking about FNMAS being at $4 on 10/1?

 

I looked at the charts for a handful of them and I seem to recall that they fell to close to ten cents on the dollar lowest tick, after 10/1, which is right where they are now. But that would be something if they are down while the common has rebounded so much. The only reasons I can imagine is that the length of time that the market expected this to stay in Court increased after the Lamberth brief and/or simply liquidity dried up since fear increased.

 

Yes, FNMAS is trading higher than the others at a little over 14 cents on the dollar. But the highest traded one I see is FNMAT, which is going for $5.15, or 21% of its $25 par value. So it's valued at twice the other ones. The highest that FNMAT sold for in the past year was 57% of par whereas the highest most of the others sold for were 44%. So there was a discount throughout most of the year but not as substantial as we see now.

 

This is for the same reason as the spread has increased so much between the common and most of the preferreds - because in times of fear, the market is valuing the liquidity of the common and of FNMAT/FNMAS at a higher premium than before.

 

That being said I've managed to build my portfolio with the most iliquid ones, taking advantage of the major discount between common/preferred, and taking advantage of tax losses.

[merkhet]

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html

 

And yes, I hold FNMAS

[muscleman]

To see a video of yesterday's oral argument for the motion to dismiss in the Continental Western Case, go here:

 

http://www.uscourts.gov/Multimedia/Cameras/SouthernDistrictofIowa.aspx

 

Any legal experts find anything interesting here?

I watched for about 30 minutes but had not much clue which side the judge seemed to favor.  :P

[merkhet]

Lynchpin seems to be the "control" issue for claim preclusion. Hard to tell which way that falls.

[merkhet]

http://www.schumer.senate.gov/newsroom/press-releases/schumer-applauds-fhfa-director-mel-watt-for-ordering-the-capitalization-of-the-national-housing-trust-fund

 

The requirement that Fannie Mae and Freddie Mac contribute to the two funds was suspended when the companies were taken into conservatorship in September 2008 during the financial crisis. Fannie Mae and Freddie Mac have since fully repaid the taxpayers.

 

Well that's interesting...

[phil_Buffett]

http://timhoward717.com/2014/12/17/the-continuation-of-the-sweeps-through-the-conservatorships-is-a-violation-of-every-principle-established-in-bankruptcy-and-in-the-more-than-80-years-of-fdic-bank-resolutions-michael-krimminger/

[phil_Buffett]

merkhet would be great to hear from you and from the other members of this board, what are your General thoughts about fair value of fannie and Freddie of the common shares?

 

ackman says 40-50$.

 

i think if some things go right (court case and so on) we certainly can have a share Price around 13-20$ for the beginning.

 

[merkhet]

merkhet would be great to hear from you and from the other members of this board, what are your General thoughts about fair value of fannie and Freddie of the common shares?

 

ackman says 40-50$.

 

i think if some things go right (court case and so on) we certainly can have a share Price around 13-20$ for the beginning.

 

I think the preferred might be the better bet.

[colinwalt]

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html

 

"The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA."

 

Michael H. Krimminger is a partner at Cleary Gottlieb in Washington, D.C. and a former general counsel to the FDIC.

[Mephistopheles]

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html

 

"The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA."

 

Michael H. Krimminger is a partner at Cleary Gottlieb in Washington, D.C. and a former general counsel to the FDIC.

 

Same link was posted 7 posts up by merkhet.

[colinwalt]

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html

 

"The perpetual conservatorships and Treasury sweeps are a violation of every principle of insolvency law. I do not make this statement lightly. After more than twenty years at the Federal Deposit Insurance Corp., and frequent participation in domestic and international efforts to improve insolvency laws, I provided technical advice to Congress on HERA."

 

Michael H. Krimminger is a partner at Cleary Gottlieb in Washington, D.C. and a former general counsel to the FDIC.

 

Same link was posted 7 posts up by merkhet.

 

Ooops, that's very likely how I found it but didn't remember :-[

I guess one advantage of going senile is not remembering my losses  ::)

[muscleman]

merkhet, I remember you said there was some deadline for whether to set oral arguments on the Sweeney court on 12/19/2014, right? It seems like the day has passed and she didn't decide to hold oral arguments? Will she just rule next week that the motion to stay is valid or invalid?

[merkhet]

I don't remember seeing a decision on whether they'd have oral arguments today or after the holidays. It's likely that she'll hear oral arguments after the holidays, IMO.

[merkhet]

So I was finally able to find time to read the redacted response from Fairholme in the Court of Federal Appeals, and I found a few things to be rather interesting.

 

(1) It looks like discovery production will be ending sooner rather than later.

 

The Government has represented to the Court that it estimates that it will be able to com- plete the production of responsive, non-privileged documents by mid-January. See Joint Status Report Regarding Proposed Discovery Completion Date (Sept. 5, 2014), Doc. 90. Thus, presum- ably, the Government has already performed the bulk of the work that is necessary to fulfill the document production obligations it undertook when the Court authorized discovery (and that it subsequently agreed to fulfill when the parties reached an amicable resolution of their dispute over the scope of authorized discovery). These facts, none of which are disputed and all of which are ignored or glossed over by the Government in its motion, substantially undermine any suggestion that the Government would suffer significant prejudice if the discovery authorized by the Court were allowed to run its course.

 

(2) As I stated before, the Takings Clause discussion in the Lamberth opinion was dicta, and Fairholme rightly points out that there's no reason to give it any weight.

 

Furthermore, the D.D.C. held that the class plaintiffs’ pleading of a takings claim in that case was inadequate for jurisdiction under the Little Tucker Act because the class plaintiffs had failed “to clearly and adequately waive claims exceeding $10,000 in either their pleadings or subsequent opposition brief.” Perry, 2014 WL 4829559, at *20 (emphasis added). Under D.C. Circuit precedent this meant that “the class plaintiffs’ takings claims belong[ed] in the Court of Federal Claims rather than in” the D.D.C. Id. While the D.D.C. went on to opine on what it would have done if the class plaintiffs had moved to amend their complaint to make the necessary jurisdictional allegations, the class plaintiffs did not do so, and the D.D.C. lacked jurisdiction to make any binding pronouncements on the merits. This Court should not allow the D.D.C.’s dicta on the merits of an issue that the D.D.C.’s reasoning itself admitted belonged in this Court to color its determination of that issue.

 

(3) There is, suspiciously, some pretty material evidence that has not been turned over.

 

One of the topics as to which the Court authorized discovery concerns the parties’ assessments of the expected profitability of Fannie and Freddie. In connection with this issue, which is critical to several of the jurisdictional arguments made by the Government in its motion to dismiss, Plaintiffs have requested the production of various financial projections prepared by or provided to the Government. The Government has agreed, subject only to a privilege review, to produce these projections, specifically including projections that were provided to the Government by Grant Thornton, which were reviewed by the Government in connection with the decision to enter into the Net Worth Sweep, see, e.g., GSE Preferred Stock Purchase Agreements: Summary Review and Key Considerations, at T3786 (May 23, 2012) (attached as Ex. A) (“[T]he . . . Grant Thornton analysis [was] used to generate the forecast estimates on the subsequent pages.”). The Government has thus far not produced them. These projections speak directly to the Government’s expectations regarding Fannie’s and Freddie’s future profitability, and their production will not burden the Government in the slightest.

 

Along similar lines, the cornerstone of the Government’s defense of its decision to enter into the Third Amendment to the PSPAs and to implement the Net Worth Sweep is its factual claim that at the time of that decision, the Government did not expect Fannie or Freddie to be able to generate sufficient net income to cover their dividend obligation to Treasury under the original PSPAs. See Defendant’s Motion to Dismiss at 9-10, 39-40, Doc. 20 (Dec. 9, 2013); Plaintiffs’ Motion for a Continuance to Permit Discovery at 9-12, Doc. 22 (Dec. 20, 2013). While documents produced by the Government include materials referring to and summarizing some of these projections, they do not include all of the documents (such as the Grant Thornton projections) which are specifically identified as providing the basis for many of the projections. Thus, in addition to the Grant Thornton materials discussed above, Treasury documents refer to financial analyses that were based on “scenarios developed by Treasury Staff,” see, e.g., T3887, T3894 (at- tached in Ex. B), but we do not believe that the Government has produced all responsive documents explaining or describing such Treasury scenarios. And these Treasury “scenarios” played a particularly critical role in the decision to enter into the Third Amendment, since they supported new and much lower projections of the Companies’ future profitability than had been previously prepared. For exam- ple, analyses that were prepared in July 2012 on the basis of the Treasury “scenarios” projected, inexplicably and suspiciously, much lower net income for Fannie in subsequent years—approximately a 50% reduction for most years—than had internal Treasury analyses that had been prepared only a month earlier, in June 2012. Compare T3847 (June analysis) (attached as Ex. C) with T3889 (July 2012 Treasury analysis) (attached as Ex. B). Again, documents produced thus far by the Government do not purport to explain or justify all of the differences between the scenarios. The production of such critically important documents will cause little if any burden to the Government.

2014-12-18_Fairholme_Redacted_Response.pdf

[Matson125]

Mayopoulos: Fannie Mae’s rebound means taxpayers have been repaid in full

 

http://www.bizjournals.com/atlanta/news/2015/01/05/mayopoulos-fannie-mae-s-rebound-means-taxpayers.html

 

[merkhet]

Mayopoulos: Fannie Mae’s rebound means taxpayers have been repaid in full

 

http://www.bizjournals.com/atlanta/news/2015/01/05/mayopoulos-fannie-mae-s-rebound-means-taxpayers.html

 

"Fannie Mae was able to repay the taxpayer within five years. It is sustainable," Mayopoulos continued. "The system works. Any new system being discussed would involve a lot of change and would have a huge amount of risk. It's important for policymakers to consider how much change do you want to introduce after the crisis when things have stabilized."

 

The luncheon served as an opportunity for Perry to thank local Fannie Mae employees for their service. There was a time when employees didn't even want to acknowledge they worked for the agency. Now that public sentiment is beginning to change, Perry and Mayopoulos said.

 

Public sentiment changing, indeed. Thanks Matson.

 

That makes two high-profile individuals who have both said that Fannie has paid back the taxpayers. (Mayopoulos & Schumer)

[Mephistopheles]

So I was finally able to find time to read the redacted response from Fairholme in the Court of Federal Appeals, and I found a few things to be rather interesting.

 

(1) It looks like discovery production will be ending sooner rather than later.

 

The Government has represented to the Court that it estimates that it will be able to com- plete the production of responsive, non-privileged documents by mid-January. See Joint Status Report Regarding Proposed Discovery Completion Date (Sept. 5, 2014), Doc. 90. Thus, presum- ably, the Government has already performed the bulk of the work that is necessary to fulfill the document production obligations it undertook when the Court authorized discovery (and that it subsequently agreed to fulfill when the parties reached an amicable resolution of their dispute over the scope of authorized discovery). These facts, none of which are disputed and all of which are ignored or glossed over by the Government in its motion, substantially undermine any suggestion that the Government would suffer significant prejudice if the discovery authorized by the Court were allowed to run its course.

 

(2) As I stated before, the Takings Clause discussion in the Lamberth opinion was dicta, and Fairholme rightly points out that there's no reason to give it any weight.

 

Furthermore, the D.D.C. held that the class plaintiffs’ pleading of a takings claim in that case was inadequate for jurisdiction under the Little Tucker Act because the class plaintiffs had failed “to clearly and adequately waive claims exceeding $10,000 in either their pleadings or subsequent opposition brief.” Perry, 2014 WL 4829559, at *20 (emphasis added). Under D.C. Circuit precedent this meant that “the class plaintiffs’ takings claims belong[ed] in the Court of Federal Claims rather than in” the D.D.C. Id. While the D.D.C. went on to opine on what it would have done if the class plaintiffs had moved to amend their complaint to make the necessary jurisdictional allegations, the class plaintiffs did not do so, and the D.D.C. lacked jurisdiction to make any binding pronouncements on the merits. This Court should not allow the D.D.C.’s dicta on the merits of an issue that the D.D.C.’s reasoning itself admitted belonged in this Court to color its determination of that issue.

 

(3) There is, suspiciously, some pretty material evidence that has not been turned over.

 

One of the topics as to which the Court authorized discovery concerns the parties’ assessments of the expected profitability of Fannie and Freddie. In connection with this issue, which is critical to several of the jurisdictional arguments made by the Government in its motion to dismiss, Plaintiffs have requested the production of various financial projections prepared by or provided to the Government. The Government has agreed, subject only to a privilege review, to produce these projections, specifically including projections that were provided to the Government by Grant Thornton, which were reviewed by the Government in connection with the decision to enter into the Net Worth Sweep, see, e.g., GSE Preferred Stock Purchase Agreements: Summary Review and Key Considerations, at T3786 (May 23, 2012) (attached as Ex. A) (“[T]he . . . Grant Thornton analysis [was] used to generate the forecast estimates on the subsequent pages.”). The Government has thus far not produced them. These projections speak directly to the Government’s expectations regarding Fannie’s and Freddie’s future profitability, and their production will not burden the Government in the slightest.

 

Along similar lines, the cornerstone of the Government’s defense of its decision to enter into the Third Amendment to the PSPAs and to implement the Net Worth Sweep is its factual claim that at the time of that decision, the Government did not expect Fannie or Freddie to be able to generate sufficient net income to cover their dividend obligation to Treasury under the original PSPAs. See Defendant’s Motion to Dismiss at 9-10, 39-40, Doc. 20 (Dec. 9, 2013); Plaintiffs’ Motion for a Continuance to Permit Discovery at 9-12, Doc. 22 (Dec. 20, 2013). While documents produced by the Government include materials referring to and summarizing some of these projections, they do not include all of the documents (such as the Grant Thornton projections) which are specifically identified as providing the basis for many of the projections. Thus, in addition to the Grant Thornton materials discussed above, Treasury documents refer to financial analyses that were based on “scenarios developed by Treasury Staff,” see, e.g., T3887, T3894 (at- tached in Ex. B), but we do not believe that the Government has produced all responsive documents explaining or describing such Treasury scenarios. And these Treasury “scenarios” played a particularly critical role in the decision to enter into the Third Amendment, since they supported new and much lower projections of the Companies’ future profitability than had been previously prepared. For exam- ple, analyses that were prepared in July 2012 on the basis of the Treasury “scenarios” projected, inexplicably and suspiciously, much lower net income for Fannie in subsequent years—approximately a 50% reduction for most years—than had internal Treasury analyses that had been prepared only a month earlier, in June 2012. Compare T3847 (June analysis) (attached as Ex. C) with T3889 (July 2012 Treasury analysis) (attached as Ex. B). Again, documents produced thus far by the Government do not purport to explain or justify all of the differences between the scenarios. The production of such critically important documents will cause little if any burden to the Government.

 

I wonder how Judge Sweeney is going to decide on the Government's motion, now given that Discovery is presumably almost finished. Common sense makes it seem highly unlikely to me now that she would grant the motion at this point. Merkhet, any thoughts?

[merkhet]

I don't see Sweeney stopping discovery.

 

Joint status report filed today that indicates no need for a conference, so it seems like discovery is still chugging along.

[Mephistopheles]

Where can you get updates and access to new transcripts/reports from the court cases?

 

Also, yes seems unlikely she'll stop discovery, but it's odd that she's taking so long if this truly were the case.

 

Anyway, I'm excited yet nervous that discovery is about to end any day now.

[merkhet]

You sign up for a PACER account to read the court filings.

[muscleman]

I don't see Sweeney stopping discovery.

 

Joint status report filed today that indicates no need for a conference, so it seems like discovery is still chugging along.

 

On one hand, there was the filing that says discovery may conclude in mid-January. On the other hand, the filing also says there were still significant documents not turned in yet. Is it really possible to conclude in mid-January?

 

Anyway, if discover concludes now, it seems to make no more sense to either grant or deny the Government's motion to stay, right?

[brker_guy]

Interesting SA article:

 

http://seekingalpha.com/article/2812755-why-a-fannie-and-freddie-wind-down-could-benefit-shareholders