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

[merkhet]

So, looks like Democrats have moved quickly to oppose the bill. (http://thehill.com/policy/finance/241486-democrats-threaten-to-oppose-shelbys-financial-services-bill)

 

Additionally, the DOJ has responded to Grassley. (http://www.grassley.senate.gov/news/news-releases/lack-transparency-over-administration-decisions-fannie-freddie-earnings)

 

The Justice Department responded to Grassley that a number of documents are included in provisional privilege logs because they may fall within the scope of the presidential communications privilege. However, the Justice Department stated that an actual assertion has not been authorized by the President and indicated that no decision about whether actually asserting the privilege would be needed “unless and until plaintiffs file a motion to compel” production. Grassley made the following comment on this provisional privilege.

 

“You have to wonder if the provisional privilege is brinkmanship or bluster by Justice Department lawyers rather than a legitimate signal that the President would actually assert the privilege to keep the records secret. The public’s business generally ought to be public, especially when the American people’s money is involved. The government needs to justify its rationale for keeping the public in the dark.”

 

What's interesting in the actual reply is the following:

 

Unless and until the plaintiffs move to compel the production of particular documents listed on the log, there is no need for the government to actually assert privilege over any of the documents by filing a declaration by the appropriate government official. In such a motion, plaintiffs would be required to explain why they believe they have sufficient need for the documents to overcome the applicable privileges. At this time, our production of documents is not complete, our privilege logs are not final, and the plaintiffs have not moved to compel. Accordingly, there has not yet been an assertion of the presidential communications privilege in this case.

 

If I remember correctly, at the last status conference, the government seemed to be pretty adamant in stating that the document production would be done by the end of April except for the documents that require privilege -- so I'm surprised that Cooper et. al. did not raise a stink this week by asking for a status conference when they had a chance.

 

It feels like something is up, but it could just be that we had a rash of Fannie & Freddie news today when it's been rather quiet for a few weeks.

2015-05-06_DOJ_response_to_Grassley.pdf

[merkhet]

Curiously, Shelby stated in January that he "would like to get Fannie and Freddie up and running on their own without government help," but that it would require bipartisan support. See 5:24 in the following clip http://www.bloomberg.com/news/videos/2015-01-29/iran-nuclear-talks-is-survival-question-shelby-says

 

And now he's advancing a bill that makes it so that Treasury (and by implication FHFA) can't do anything on its own to release and/or reform Fannie and Freddie...

[Mephistopheles]

Thanks for your continued brilliant analysis, merkhet.

[merkhet]

Thanks for your continued brilliant analysis, merkhet.

 

Let's hope this isn't just me putting on a tin-foil hat. :)

[jawn619]

http://www.urbandictionary.com/define.php?term=tinfoil+hat

[Mephistopheles]

lol

 

Speaking of conspiracy theories, I've mentioned before that I make sure to read John Carney's tweets just so that I can hold a balanced opinion. A few days ago he kept raving about how the current dividend is now only 6% of the Senior Preferred, implying that the third amendment is proving to be beneficial to shareholders. Of course, he conveniently failed to mention that under this logic the dividend in 2013 was 70%.

 

It's really hard to believe that this guy is playing the role of an unbiased reporter.

 

In fairness, there are crazy people on both sides of the issue. I used to read the timhoward717 site, which seems to be authored by a very informed person, but he holds no credibility to me because of his melodramatic conspiracy theories.

 

Yet somehow the blog gets hundreds of comments with each post, many of them from manic-depressive investors. It's concerning that there is so much untamed emotion out there with this investment.

 

I try to look past all of this and just focus on the facts and the odds. Certainly one of the most fascinating investments I've made. Whatever happens, it will for sure be a great learning experience.

[merkhet]

Yes, some of the commenters on TH717 are well beyond the pale.

[merkhet]

Looks like the government is getting an extension of time to reply to Fairholme's Motion to Remove the "Protected Information" Designation from the Government's March 20, 2015 Provisional Privilege Log. Originally, the government was supposed to respond by May 11th, 2015 (tomorrow).

 

Two interesting things to note:

 

The Government’s response is currently due on May 11, 2015. On May 8, 2015, counsel for Fairholme advised counsel for the Government that Fairholme does not oppose the requested enlargement of time.

 

Again, surprising to me that Fairholme is not fighting with the government more aggressively on the delays given that they expressed dismay at the March 30, 2015 status conference that things were dragging so long.

 

Fairholme’s motion to remove the “Protected Information” designation requests two forms of relief: (1) an order requiring the Government to produce a version of its March 20, 2015 provisional privilege log without a legend indicating that it constitutes Protected Information pursuant to the Court’s protective order; and (2) an order instructing the Government to provide redacted, non-protected versions of any subsequent privilege logs. As this Court is aware, we agreed to provide Fairholme with provisional privilege logs on a periodic basis. Although the initial, provisional privilege logs provided to Fairholme did not bear the legend “Protected Information” permitted by the protective order, implicit in this arrangement was an understanding that our assertions were preliminary and subject to reconsideration pending the preparation of a final privilege log to Fairholme after document production is complete. After Fairholme published excerpts from the provisional logs in a letter to shareholders, the Government designated subsequent provisional privilege logs as Protected Information to prevent the release of confidential information.

 

Looks like Fairholme's shareholder letter (attached) made some folks unhappy.

2015-05-08_Unopposed_Motion_for_an_Enlargement_of_Time_to_Respond.pdf

2015-01-28_Fairholme_Fund_Letter_to_Shareholders.pdf

[merkhet]

Order granted for an extension to May 18th. Not surprising since it was uncontested.

2015-05-11_Order_Granting_Extension.pdf

[merkhet]

I'm hoping that we get more information on this soon, but here's what the WSJ is saying about Shelby's draft bill that will be released at noon today:

 

Changes related to mortgage finance:

• The government would be prohibited from selling stock in Fannie Mae and Freddie Mac unless directed to do so by Congress.
  
• The government would be prohibited from using increased guarantee fees charged by Fannie and Freddie for purposes outside housing finance.
  
• The bill would require Fannie and Freddie to meet minimum levels of risk sharing.
  

 

http://blogs.wsj.com/washwire/2015/05/12/heres-whats-in-the-shelby-regulatory-relief-bill/

[merkhet]

http://www.banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=d870ced1-d075-f8a0-0641-2c1f7d6f3c13

 

The section dealing with the GSEs starts under Title VII. Important sections are listed here:

 

Section 702. Prohibition on Use of Guarantee Fees to Offset Other Government Spending.

This section prohibits the uses of increases in a guarantee fee charged by Fannie Mae and Freddie Mac to offset outlays or reductions in revenues for any purpose other than enterprise business functions or housing finance reform as passed by the Congress in the future.

 

Section 703. Limitation on Sale of Preferred Stock.

This section prohibits the sale, or other disposition, of preferred stock in Fannie Mae or Freddie Mac, by the U.S. Treasury, unless it is directed to do so by Congress.

 

...

 

Section 705. Common Securitization Platform.

This section directs the FHFA Director to: (1) report to Congress annually on the development of the Common Securitization Platform (CSP); (2) establish a board of directors of CSP to advise on the development and transition of the CSP, and gradually increase the number of CSP board members who do not work for Fannie or Freddie; and (3) after five years, transition the CSP to a non-profit entity available to approved issuers other than Fannie and Freddie.

[merkhet]

The redacted Fairholme motion has been posted. Attached.

2015-05-12_Fairholme_Redacted_Motion_to_Remove_Protected_Information_Designation.pdf

[doughishere]

what is the may 18th extension for? what was the motion on it?

[merkhet]

The government wanted an extension on its reply to Fairholme concerning Fairholme's motion to remove the protected information designation from the March 20th privilege logs and all future logs as well.

[Eye4Valu]

Does anybody know what Ackman said on his Q1 conference call on FNMA/FMCC? Saw brief tweets from ValueWalk, but was looking for clarity.

[gfp]

Does anybody know what Ackman said on his Q1 conference call on FNMA/FMCC? Saw brief tweets from ValueWalk, but was looking for clarity.

 

He didn't say much, but his analyst did an update on Freddie and Fannie.  This is the gist of it:

 

* Continues to believe that F/F are vital to the 30 yr. mtg and market share has continued to grow

 

* There is a growing acceptance that they are vital and here to stay

 

* It was an unlawful taking, and the current situation is both legally and economically untenable.

 

* Stuff coming out of Sweeny case suggests the Government hasn't turned over all the documents it was required to

 

* Plaintiffs are making progress in moving forward towards a trial

 

* Believes the market misinterpreted the dismissed case in Iowa as being a material event (it was dismissed because of it's similarity to laberth case)  Lamberth case is on appeal, so there are still two cases going, with sweeny progressing nicely.

 

* Core credit guarantee business of F/F continues to be strong.

 

* Government profit sweep is on reported earnings, so the Gov. has taken less recently even though the core business continues to improve.  Reported earnings are bing depressed by mark-to-market losses on derivatives to hedge a fixed income arbitrage porfolio.  The underlying assets that are hedged have increased in value, but the hedges depress current reported earnings.

 

* As the fixed income arbitrage portfolio shrinks, he thinks that the underlying strength in the core business will show through

 

---

 

Then in the Q&A section:

 

* Estimates it will take at least through the end of the year to get through discovery, with the government attempting to withhold documents it can take awhile.  Believes the judge will be harsh on attempts to withhold documents

 

* Estimates a year, year and a half before a trial begins

 

* Analyst throws out wild-ass-guess on date of a final decision from the trial:  May 12th 2017.  Gets some giggles, but the analyst stands by his number..

 

* They believe some positive decisions in court will help to spur parties to the negotiating table, "we'd love to help if we can."

 

* Says their average cost on Fannie and Freddie is around $2 and they hold above 10% of each (of the float, i assume)

 

* In response to a question on the applicability of the Starr/AIG case decision, he says a decision in favor of Greenberg would be a slight positive for the F/F cases, but not directly applicable since the plaintiffs in the F/F litigation are not challenging the expensive preferreds, etc...

 

* Question was how likely are plaintiffs to succeed vs Fannie and Freddie and what type of upside do you see in that situation - Bill answered that they believe they are "much more likely than not" to win in the court of claims or on appeal and that he envisions "very significant upside in fannie and freddie"

 

* says F&F combined are around 3% of consolidated assets

[brker_guy]

Did anyone see this today?

 

http://www.urban.org/sites/default/files/2000229-privatizing-fannie-and-freddie.pdf

 

 

[merkhet]

Yup. I think 10% is way too high of a capital requirement. Also, they assume that none of the "dividends paid" are used as principal repayment, which is highly unlikely, IMHO.

[merkhet]

Government's response to the motion to remove the "Protected Information" designation has been posted. Attached.

2015-05-18_Government_Response_to_Plaintiffs_Motion_to_Remove_the_Proteted_Information_Designation.pdf

[doughishere]

Ackmans Call

 

http://www.valuewalk.com/2015/05/bill-ackman-q1-conference-call/

[doughishere]

After the Government filed its motion to dismiss Fairholme’s complaint pursuant to

Rules 12(b)(1) and 12(b)(6) of the Rules of the Court of Federal Claims (RCFC), Fairholme

requested limited, jurisdictional discovery regarding three issues for the purpose of responding to

the Government’s motion. The Court granted Fairholme’s request. To date, the Government has

produced over 600,000 pages of documents, and the parties have completed two depositions.

[Luke 532]

...and the parties have completed two depositions.

 

That's the part I like.  Get this thing moving along.

[TwoCitiesCapital]

Merkhet,

 

Any thoughts on Ackman's timeline of 12-18 months for a trial? Was that in line with your own expectations?

[doughishere]

http://www.minnpost.com/business/2015/05/journalist-gretchen-morgensons-remarks-2015-spj-page-one-awards

 

Journalist Gretchen Morgenson's remarks at the 2015 SPJ Page One Awards

By Gretchen Morgenson | 05/20/15

[Mephistopheles]

Merkhet,

 

Any thoughts on Ackman's timeline of 12-18 months for a trial? Was that in line with your own expectations?

 

I'm surprised that Ackman's analyst said discovery will take until the end of the year to complete. I was under the impression that all of the parties agreed to a hard deadline of July, after already postponing it once. The analyst's reasoning was that the government is holding back documents which will take time to get released and therefore we'll see another extension.

 

If they are holding back documents (which is a violation already), which then causes a delay in discovery completion, would that not be another violation? Seems like this would only help the plaintiffs case.