FNMAS - Fannie mae /preferred stock series S

[Aberhound]

1. Can the conservatorship last forever? No. These businesses are extremely profitable as discussed by Munger. The "dividends" will grow to multiples of the 10% dividend which will be increasingly difficult to defend in Court.

 

2. Once the monies "advanced" are repaid will that be the end of it? No. The 2008 issuance of the pref shares with a 10% first ranked dividend and the issuance of the 79.9% interest in the common shares is can be defended in Court. At the time the financial sector was melting down so values were difficult to estimate. The pricing does not seem unfair because otherwise the companies were bankrupt with nothing left for any of the commons or preferred. It was a mistake for the government at the time to fail to hold a special meeting and get shareholder approval of all share classes.

 

But the 2012 amendment is a clear taking. The huge cash flows where known and the "sweep" appears to be politically motivated to delay hitting the debt ceiling. Because the two companies are so vital to the housing market I suspect the Court will order a remedy rather than to declare that the companies are expropriated. Either the Courts will force the government to undo the sweep or the government will do it voluntarily. Reversing the sweep would mean that the amount of the dividend above the 10% would be deemed to be a redemption of some of the preferred shares. The Conservatorship will then continue until the entire principal amount is repaid together with all dividends. Over time the pay-off becomes more rapid as the preferred shares are redeemed.

 

Before the conservatorship is ended I predict the government will impose a fee for the guarantee. This will reduce the future profitability. It was unfair in the past that the taxpayers provided a guarantee for free. Such a fee will likely be required to obtain the votes in Congress as the companies are so intensely hated. I read estimates of the implicit subsidy which were in the range of 0.25% to 0.75% of the interest rate of the agency debt. That would be a good price for the guarantee fee and would create a large permanent income which would slow the growth of the debt and leave room for competition from the financial sector.

 

Watch for reports of congressmen and employees loading up on the shares. Once greed kicks in the votes will reverse.

 

 

 

[MYDemaray]

Someone tweeted this video (crowdturtle?) and I thought it was excellent! though I don't think Adler did a good job representing the dissenting view.  Would be interested in hearing other people's sources on the best case AGAINST restoration of preferreds -- hopefully a well reasoned legal argument.

 

[nkp007]

I thought Adler was just missing the whole point until he said:

 

"I don't necessarily disagree with you, I'm just trying to take the other side here since no one would do it"

 

 

[onyx1]

I thought Adler was just missing the whole point until he said:

 

"I don't necessarily disagree with you, I'm just trying to take the other side here since no one would do it"

 

I liked this also, at 1:15:30:

Adler (who was charged with taking the governments position, refering to the 3rd amendment sweep) :  "..what happend in 2012 is a lot harder to defend.."

 

In about a month we will get a better sense of the government's case when their responses are due.

[valuecfa]

FHFA press release:

 

http://www.fhfa.gov/webfiles/25553/JointVentureRelease100713final.pdf

 

Interesting part of the press release: This establishes CSS as a legally recognized entity and marks an important step in

creating the joint venture, which is an equally-owned subsidiary of Fannie Mae and Freddie Mac.

[muscleman]

FHFA press release:

 

http://www.fhfa.gov/webfiles/25553/JointVentureRelease100713final.pdf

 

Interesting part of the press release: This establishes CSS as a legally recognized entity and marks an important step in

creating the joint venture, which is an equally-owned subsidiary of Fannie Mae and Freddie Mac.

 

Sounds good. This implies that if there is any housing reform, it is more likely than not to be a subsidiary owned by Fannie and Freddie. :)

 

[snowball82]

When I started the FNMAS topic I was hesitant to buy shares because growth opportunities were limited, so I finally decided to buy shares of Smart Employees benefits (SEB-V). I paid 0.32 to 0.36.SEB shares are to monitor within 2-3 years.  This small cap is very little known but has terrific potential, probably sales of more than $ 200-250 million in the next few years... This choice can seem surprising for a value investor like me but after analyzing the business I think it is a game changer. I started another topic for SEB if you're interested.

[Luke 532]

Fannie/Freddie Reform Rolls Forward

 

http://nreionline.com/multifamily/fanniefreddie-reform-rolls-forward?NL=NREI-11&Issue=NREI-11_20131012_NREI-11_912&YM_RID=larson777@gmail.com&YM_MID=1427098&sfvc4enews=42

[Luke 532]

Lawmakers are reconsidering whether they want to replace Fannie Mae and Freddie Mac with a new company.

 

http://www.valuewalk.com/2013/10/fannie-mae-freddie-mac-plan/

[fareastwarriors]

Fannie Mae Survival is Back on the Table in Washington

 

 

 

http://www.bloomberg.com/news/2013-10-15/fannie-mae-survival-is-back-on-the-table-in-washington.html

[valuecfa]

While the article is short on specifics to back up its title, the implication that some political headway is being made on conserving Fannie is a welcomed sign.

[nkp007]

While the article is short on specifics to back up its title, the implication that some political headway is being made on conserving Fannie is a welcomed sign.

 

There's been talk of a silent, sizable group that supports the status quo (with more restrictions) but doesn't want to put themselves out there yet. Maybe once F+F repay the entire loan amount they'll start talking.

[Luke 532]

Quite a run lately for FNMAS.  At $8.33 it's essentially a risk $1, profit $2 proposition of the preferred returning to par (not counting the dividend) vs. going to zero.

[muscleman]

Quite a run lately for FNMAS.  At $8.33 it's essentially a risk $1, profit $2 proposition of the preferred returning to par (not counting the dividend) vs. going to zero.

 

I think people are betting that the US government reply tomorrow will have no legal grounds to stand on.

[merkhet]

 

 

Quite a run lately for FNMAS.  At $8.33 it's essentially a risk $1, profit $2 proposition of the preferred returning to par (not counting the dividend) vs. going to zero.

 

 

I think people are betting that the US government reply tomorrow will have no legal grounds to stand on.

 

 

I'm surprised at the run. I doubt that the reply will be on its face terrible. The government's lawyers aren't stupid even though they're up against a wall on this one. I'm incredibly interested to see what we get for the reply.

[Luke 532]

I loathe CNBC, but the contents of this article are very interesting to holders of FNMAS...

 

http://www.cnbc.com/id/101193820

 

Excerpt: 

A group of hedge funds and private equity companies is preparing a proposal to take over large parts of Fannie Mae and Freddie Mac, in an attempt to end a bitter dispute with the Treasury, which has controlled the US housing finance agencies for five years.

 

The plan is being pitched as a way to bring tens of billions of dollars of private capital into the US mortgage market and to speed housing finance reforms that remain bogged down in Congress.

 

The investor group includes holders of more than half the $34.6 billion of preferred shares in Fannie and Freddie, who have been fighting to restore some value to the shares after the terms of the government conservatorship rendered them worthless.

 

 

[Luke 532]

Part of Berkowitz's plan is to convert preferred to common.  He also mentions the deal he is presenting could be completed by mid-2014.  Wow!

 

Berkowitz letter attached.

FNMAS_Berkowitz_11-13-2013.pdf

[LC]

Thanks Luke.

[Vish_ram]

What is the total value (at par) of Fannie and Freddie preferred ? I thought it should be more than what BB is converting (35BB) to common for newco.

[morningstar]

What is the total value (at par) of Fannie and Freddie preferred ? I thought it should be more than what BB is converting (35BB) to common for newco.

 

Once you eliminate the government's preferreds, it's about $19 bn for Fannie and $14 bn for Freddie.

[constructive]

What is the total value (at par) of Fannie and Freddie preferred ? I thought it should be more than what BB is converting (35BB) to common for newco.

 

No, he is proposing all preferred get converted at par into newco equity. Basically a $35B spinoff at the expense of the government and common shareholders.

[jrallen81]

Just wanted to ask the board -

 

It would seem Congress is not incentivized (republicans or democrats) to undertake any kind of privatization that would be favorable to shareholders/preferred holders. Is the court case the only hope, or do these hedge funds know something we don't? momentum looks to be reversing, as well.

[valuecfa]

Just wanted to ask the board -

 

It would seem Congress is not incentivized (republicans or democrats) to undertake any kind of privatization that would be favorable to shareholders/preferred holders. Is the court case the only hope, or do these hedge funds know something we don't? momentum looks to be reversing, as well.

 

I would say no,the courts are not the last resort. There is no logical viable alternative. If there were one, then the government would pursue it. The government wants an impossible proposal, and I think the smart money realizes the practicalities of the situation and it's various alternatives.

[jrallen81]

so even if we agree that there is no alternative, it doesn't mean the current securities have to be worth anything. Wouldn't either Democrats or Republicans risk getting tarred with "oh you are just helping Wall Street" if the preferreds or common are worth anything?

[valuecfa]

so even if we agree that there is no alternative, it doesn't mean the current securities have to be worth anything. Wouldn't either Democrats or Republicans risk getting tarred with "oh you are just helping Wall Street" if the preferreds or common are worth anything?

 

They can't keep the conservatirship forever and they can't wipe out stake holders at will if they later decide to keep the GSEs alive