FNMAS - Fannie mae /preferred stock series S

[snowball82]

The recent purchase of Berkowitz caught my attention (2.4 G with F. MAC). I am studying the purchase ($ 5.13) and I would appreciate having your perception of this investment.

 

I try to see the real value of the company and if there really is a margin of safety, despite the uncertainty of the future decision of the congress. Here are my assumptions:

 

1) The U.S. govt will be repaid in full by the end of the year for the money invested in Fannie Mae;

2) The majority of the shares of the U.S. govt will be sold on the market (eg AIG) by 1-2 years;

3) Fannie generate $ 25 G profits during the next 12 months;

4) A dividend will be restored to the preferred shares;

5) Adjustment as debt rating and trade on NYSE again.

 

I know this is an unusual but investment earnings power seems to be back. Do you think these preferred shares offer a real margin of safety (without relying on future growth)? Do you think the liquidation value of Fannie Mae is greater than its market value ?

 

Any comment or assessment of the value will be greatly appreciated

 

Thanks

[Packer16]

I do not think there is a quantifiable margin of safety because the value is dependent upon what the gov't does with Freddie/Fannie.  If the gov't keeps Freddie and Fannie as is then yes there is considerable upside.  If they close them down and develop a new entity that provides the guarantee behind some private equity then the value is impaired all the way to zero based upon the current plan (all dividends go to gov't).  A third alternative is to develop the new entity and once the gov't is paid back from the run-off entity allow the preferreds to get the residual.  Clearly the market has put odds of 6:1 in favor of new entity and the gov't keeping all proceeds.  The question is that fair odds.  Berkowitz has been successful in the past in these types of situations.  One note however is that Berkowitz's stake is small compared to AIG, MBI and BAC stakes so his confidence may not be as high as in the other situations. 

 

Packer

[snowball82]

I do not think there is a quantifiable margin of safety because the value is dependent upon what the gov't does with Freddie/Fannie.  If the gov't keeps Freddie and Fannie as is then yes there is considerable upside.  If they close them down and develop a new entity that provides the guarantee behind some private equity then the value is impaired all the way to zero based upon the current plan (all dividends go to gov't).  A third alternative is to develop the new entity and once the gov't is paid back from the run-off entity allow the preferreds to get the residual.  Clearly the market has put odds of 6:1 in favor of new entity and the gov't keeping all proceeds.  The question is that fair odds.  Berkowitz has been successful in the past in these types of situations.  One note however is that Berkowitz's stake is small compared to AIG, MBI and BAC stakes so his confidence may not be as high as in the other situations. 

 

Packer

 

Thank you very much Packer. What I do not understand is why Berkowitz made ​​these purchases this time. He often used the expression he would never play his life Russian roulette and always invests with a wide margin of safety. I try to see why he does not see the risk of total capital loss in FNMAS. Is it because that the liquidation value is higher than the market value?

[BargainValueHunter]

For this to work out for BB he is going to have to head to D.C. and open his checkbook WIDE while visiting a few key Congressional offices.

[snowball82]

http://www.businessweek.com/articles/2013-06-13/fannie-and-freddie-are-super-profitable-but-congress-doesnt-care

 

http://blogs.wsj.com/moneybeat/2013/06/05/fannie-freddie-bill-leaves-little-for-shareholders/

 

Is it really logical to think that Fannie and Freddie can be liquidated? How to sell the majority mortgages insure of the United States without creating disturbances in the markets?

[ERICOPOLY]

For this to work out for BB he is going to have to head to D.C. and open his checkbook WIDE while visiting a few key Congressional offices.

 

Ralph Nader owns Fannie Mae.

[twacowfca]

For this to work out for BB he is going to have to head to D.C. and open his checkbook WIDE while visiting a few key Congressional offices.

 

Ralph Nader owns Fannie Mae.

 

from his remarks a couple of years ago, I thought he may have owned the preferred before Fannie went into receivership.  Is that the case? If not, when did he buy the common?

[ERICOPOLY]

For this to work out for BB he is going to have to head to D.C. and open his checkbook WIDE while visiting a few key Congressional offices.

 

Ralph Nader owns Fannie Mae.

 

from his remarks a couple of years ago, I thought he may have owned the preferred before Fannie went into receivership.  Is that the case? If not, when did he buy the common?

 

I couldn't tell either way, but it sounds like he is invested in both Fannie and Freddie. 

[ScottHall]

There is no margin of safety in a security that the government can wipe out with the stroke of a pen. It may have a margin of safety later on, but after changing the rules to make all the profits the company makes go to the government in dividends, it's not there today.

 

I will be keeping an eye on this, though.

[Luke 532]

Fannie Mae Q2 net income nearly doubles to $10.1B.

 

www.streetinsider.com/Earnings/Fannie+Mae+(FNMA)+Q2+Net+Income+Nearly+Doubles+to+%2410.1+Billion/8580477.html

[Olmsted]

Thank you very much Packer. What I do not understand is why Berkowitz made ​​these purchases this time. He often used the expression he would never play his life Russian roulette and always invests with a wide margin of safety. I try to see why he does not see the risk of total capital loss in FNMAS. Is it because that the liquidation value is higher than the market value?

 

There is no margin of safety in a security that the government can wipe out with the stroke of a pen. It may have a margin of safety later on, but after changing the rules to make all the profits the company makes go to the government in dividends, it's not there today.

 

You can only lose Russian Roulette once.  You can lose regular roulette many times.  Or better yet, repeatedly play a game with positive expected value (but still a chance of a zero).  Berkowitz must believe that is the situation here.  The margin of safety is not in each single game - the margin of safety is the ability to play repeatedly.  Well, assuming you can assess probabilities somewhat accurately.

[Luke 532]

Excellent read: http://www.pointoflaw.com/archives/2013/07/the-bipartisan-attack-on-fannie-and-freddie-how-the-treasury-and-congress-are-working-overtime-to-st.php

[JRH]

Excellent read: http://www.pointoflaw.com/archives/2013/07/the-bipartisan-attack-on-fannie-and-freddie-how-the-treasury-and-congress-are-working-overtime-to-st.php

 

What I wouldn't give to hear an experienced corporate law attorney brainstorm and discuss viable defendant rebuttals to each of these accusations.

 

We have the elevator pitch for this investment - just needs some stress testing now! :)

[Luke 532]

THE Plans for Privatizing Fannie Mae and Freddie Mac

http://www.restorefanniemae.us/aei

 

"By requiring that these assets be spun off to independent companies owned by their shareholders, the plan intends to give the shareholders of Fannie and Freddie an opportunity to realize the value of these assets."

[Luke 532]

Excellent read: http://www.pointoflaw.com/archives/2013/07/the-bipartisan-attack-on-fannie-and-freddie-how-the-treasury-and-congress-are-working-overtime-to-st.php

 

What I wouldn't give to hear an experienced corporate law attorney brainstorm and discuss viable defendant rebuttals to each of these accusations.

 

We have the elevator pitch for this investment - just needs some stress testing now! :)

 

A lawyer friend of mine said...

"I'm not sure that what is needed is a corporate lawyer. Its more a constitutional lawyer.  The good thing here is that Richard epstein is a legal authority of the highest order. Among other things, he wrote a casebook on torts, which is used in law schools nationwide. But in order to evaluate this case properly, I feel like we need to see the government's response to the complaints or what both sides say in motion papers.  One thing that kind of worries me is that Obama was a constitutional law professor.  Say what you will about him but he is no joke and is extremely smart when it comes to these matters.  If he is supportive of the legislation, I worry that he and his team have already done a pretty thorough analysis of the potential legislation's constitutionality and feel comfortable with it.  But these are all guesses.  I am going to stand pat for now.  But when the government answers or when we get to the argument stage on the motion to dismiss then I will be paying close attention.  Btw this case only really presents matters of law.  There are really no facts in dispute from what I can tell.  That should mean that it can go through the court system more quickly than some other cases that sit for years and years."

[Guest rwmcpar]

Same guy.

 

http://www.hoover.org/publications/defining-ideas/article/151966

[nkp007]

Imagine a pyramid of champagne glasses. I'm imagining the preferreds are one of the glasses on the bottom.

 

And someone just decided to start pouring a 24 pack of champagne.

 

The cash flow hopefully will eventually force a decision.

[Luke 532]

Imagine a pyramid of champagne glasses. I'm imagining the preferreds are one of the glasses on the bottom.

 

And someone just decided to start pouring a 24 pack of champagne.

 

The cash flow hopefully will eventually force a decision.

 

I hope there are only a few glasses in that pyramid :-)  As a preferred holder that would make me happy to have a nice full glass of champagne.

[Guest rwmcpar]

nkp007 put this up in the other message board.

[Luke 532]

Same guy.

 

http://www.hoover.org/publications/defining-ideas/article/151966

 

Great article!  I especially enjoyed seeing the following...

"Full Disclosure: within the past several months, I been hired by several hedge funds to advise them privately on the legal issues surrounding these events."

[Guest rwmcpar]

Anyone know the case number for the paulson suit?

[JRH]

A lawyer friend of mine said...

 

Very interesting thoughts, makes sense regarding "Constitutional" vs. "Corporate" law.

 

Berkowitz usually chooses his words carefully - especially in the Fairholme letters.  "There is no alternative".  Very similar to his comments on health insurers in 2008. 

 

Is it possible that legislators can get rid of Fannie/Freddie but go forward with a very similar alternative?  Why would they want to?  It's almost like whitewashing - pandering to public outrage.  "Look what these evil organizations did - let's kill them... Then replace them with something that does substantially the same thing."

[Luke 532]

The facts seem to be on the side of Fannie... there's not much question about that.  They are profitable and will have paid every penny (plus some) back by the end of 2013.  Justice means that those that are shareholders should benefit from the resurrection of the company.  However, with a stroke of the pen will the gov't be able to change the law and get away with it?  It's up to the courts and whether the spirit of the law (justice) will prevail.  It reminds me of the following movie clip from the movie The Hurricane in which Denzel Washington is pleading his case based on justice being the heart of the law.

[worldaccordingtoGARP]

So this is my first post here.  Hello all!  I think everyone who has been visiting this thread are here for the same reason: if you look at the numbers, the value seems immensely attractive.  My problem so far is that I have yet to be swayed by any of the legal arguments as to why there should be an obligation to shareholders at this point.  There are several issues I have yet to be seen addressed here that I would like to open up for discussion:

 

1) Someone above said this case is more Constitutional than corporate law, and I completely agree.  Here is the Constitution: "nor shall private property be taken for public use, without just compensation."  This is the 5th Amendment clause pertaining to eminent domain.  The government is absolutely allowed to take private property, this is without question.  Where the questions lie are in a) what kind of property can the gov't take (it's universally accepted that real property is within this domain, and many kinds of intangible property), b) when can the government take said property (aka what exactly is a public use) and most importantly, c) how to compensate the aggrieved property owner. 

 

What constitutes a valid cause for public use is very broad, and courts have consistently deferred to Congressional judgment on these matters.  The answer to this case lies in point c and this remains a dynamic and evolving are within the law.  "Just compensation" is often considered the "fair market value" of the time of taking.  Fair market value in the case of a publicly traded company is easy to ascertain.  In some cases, fair market value isn't the appropriate standard and just compensation is not necessary "when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public. (emphasis added)" 

 

So part 1 of the government's case would argue that "were it not for the government's taking ownership of Freddie and Fannie, the two would have most definitely gone bankrupt, and there was no value there, thus the taking of a worthless asset need not be compensated.  Further, even if the asset were not entirely worthless, the only value left in the market was reflective of the belief that the government would backstop assets, and thus, this particular case warrants an entirely different perspective on fair market value."

 

Part 2 of the argument would rely on the public interest exemption to fair market value.  Democrats and Republicans alike, including Senator Bob Corker who is known as "business friendly" have emphasized the profits from Freddie and Fannie will be used for the public benefit.  This quote from Corker is telling: “We are not in the habit of or in a position to give any investment advice whatsoever, but our bill–when finished–will make every effort to ensure that taxpayers get all of the upside that comes with the risks they were asked to assume in 2008.”  Many out there would argue that justice means the public SHOULD get all of the profits from Freddie and Fannie here, and that it is completely consistent with both the Constitution and subsequent case law on the matter.  This is especially true given we are talking about GSEs here, where the G stands for government, making Fannie and Freddie anything but your typical private form of property.

 

Please someone explain to me a) what fair market value would be, should the courts rule this a "taking" and b) why the private interests here should be tantamount to the public interests given the nature of the GSEs as an atypical form of private property.

 

2) The Hank Greenberg/AIG lawsuit will inevitably be key precedent in the Fannie/Freddie case.  AIG itself refused to even acknowledge the merits of the suit after a superficial "review" of the case.  And public backlash was swift and severe against AIG for even giving the complaint a minute of time.  How do people translate the actions w/r/t this case into consequences for Freddie/Fannie?

 

3) This is inherently an area where ideological beliefs influence what one thinks is a "just" outcome.  Often times, when ideology is involved, it's difficult to decipher what one thinks is just verse what one thinks is the most likely outcome in a given case.  As investors, we should disregard entirely any argument about what would be just and focus entirely on what is most probable, or in the alternative, discounting the probabilities to reflect the true wager.  Several have applauded Richard Epstein's perspective, though I honestly can't trust his opinions here.  He is a libertarian, writing in libertarian forums, and while he is an accomplished legal mind, I really can't tell whether his interests lie in influencing the outcome vs gaming the outcome.  It bugs me how hollow his argument is on the "takings" issue in the hoover.org piece.

 

Curious to hear others' thoughts.

[Luke 532]

Please someone explain to me a) what fair market value would be, should the courts rule this a "taking"

 

Great info, GARP!  Please post more often as I believe you'll be a valuable asset to this board.

 

Berkowitz recently stated that the prefs he bought were at 1/5 of liquidation value.  Fair market value and liquidation value, I would imagine, are synonyms.  If he indeed bought the FNMAS that would mean the fair value/liquidation is par, $25.