Long FNMA/FMCC Discussion

Apricots's picture
Rank: Gorilla | 590

Just wanted to start a discussion on FNMA/FMCC. For those who have not followed... here's a brief history (taken from a linked article):

"Since 2008 the government has taken over $108B from Fannie Mae and Freddie Mac through a process known as conservatorship where FHFA and Treasury enter into and modify government contracts.

Private shareholders are contesting the legality of the government's actions and the government is making various defenses in various courts.

If shareholders prevail, the securities have value because profits would accrue to their operating entities, but if they don't the shares are worthless."

Shareholders (including Perry & Bruce Berkowitz among others) are in litigation claiming the sweep amounts to a breach of contract and illegally taking of property. Additionally Bill Ackman is (was?) bullish on FNMA and believes it could be worth between $23-$47 apiece if the agencies are allowed to recapitalize and operate as independent entities. "It's Time to Get off our Fannie" - Pershing Square presentation attached.

I'm personally long a little over a thousands shares of FNMA, pretty much as a lotto.

Some interesting and more detailed insight:

http://www.wallstreetdaily.com/2016/01/15/fannie-m... http://seekingalpha.com/article/3828746-fannie-mae...
http://seekingalpha.com/article/3878586-new-eviden... http://seekingalpha.com/article/3766266-fannie-fre...
http://dealbreaker.com/2015/09/bill-ackman-is-this...
Article released today:
http://seekingalpha.com/article/3891416-freddie-fa...
Following blog:
http://timhoward717.com/

Comments (6)

Feb 12, 2016

Correct me if I'm wrong, but isn't the justification that if the government didn't step in, the shares would be worth absolutely nothing - zero - and so they shouldn't be entitled to any of the spoils?

Feb 12, 2016
sigan7:

Correct me if I'm wrong, but isn't the justification that if the government didn't step in, the shares would be worth absolutely nothing - zero - and so they shouldn't be entitled to any of the spoils?

The government is probably violating the law. FHFA and the Treasury Department unilaterally--without force of law--just decided to amend the actual law of the land and decreed that all profits from FNMA and FRE would be returned to the Treasury. Investors purchased FNMA and FRE stock under the belief that conservatorship was meant to save the companies and preserve profits for investors (the actual law states that the Treasury is supposed to act toward returning the GSEs to private, share-holder owned companies). The federal government had no legal authority to declare all profits its own. In essence, the federal government essentially confiscated private property without compensation (because the shares are essentially worthless without access to dividends) and without mandate of law.

We still live in a country of laws, governed by the U.S. Constitution as the highest law of the land. The 5th Amendment states the following: "No person shall be...deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation."

Feb 12, 2016

Exactly, well stated.

Feb 12, 2016

Some say that Fannie and Freddie were never in serious trouble at the start of the recession/crisis... stocks still dropped drastically. "In 2008, Fannie Mae and Freddie Mac were adequately capitalized when they were put into conservatorship. Immediately upon entering conservatorship, U.S. Treasury and the Federal Housing Finance Agency (FHFA) entered into an agreement issuing 80% warrant coverage and a senior preferred security with a cumulative 10% cash dividend" (Gov invested $180B in senior preferred stock at 10% div)... but in 2012 (once fannie and freddie become profitable) they altered the plan and initiated the sweep... taking all profits to the U.S. Treasury as repayment for the bailout it received in 2008. And since this time, the sweeped profits have more than covered the amount of the total bailout.

This issue is that rather than "conserving and preserving" the GSEs' assets for their eventual restoration to a "safe and solvent" condition... they have "illegally?" taken 100% of the profits.

I'm clearly no expert on this and what you stated makes sense (there's mixed reports/beliefs on the financial strengths of the GSE's in 2008), but I guess it just how one looks at it. I've just been following this for a little over a year, while trying to stay informed. I can easily see it going either way, hence my lotto ticket view.

Feb 12, 2016

The OP's idea about buying $1,000 of FNMA stock isn't a totally ridiculous idea. The lawsuit, in my view, is on sound footing. What the Treasury is doing is literally violating the specific language of the HERA law. If the investors win, the stock could go up by 15-30 times. On the other hand, the courts have had an amazing history of simply ignoring the specific language of a law (see recent ruling on the ACA). So, that move isn't a total gamble but it's a calculated risk. But think about this--if the lawsuit is dismissed, FNMA's stock could go from $1.36 to $0.01 (basically nothing). So about $1,000 is as much as I'd want to risk.

Feb 13, 2016
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