Fannie Mae-No Politics (FNMA)

[IL Padrino]

Ackman Bets On $100+ For Fannie And Freddie - New All-Time Highs

Oct. 20, 2014 8:13 AM ET | 2 comments | About: Fannie Mae (FNMA), FMCC



Disclosure: The author is long FNMA, FMCC. (More...)






Summary
•If Fannie Mae and Freddie Mac were not bailed out, their book value starts at $31/share.
•Treasury takeover forced Fannie and Freddie to pay interest on accounting losses that Treasury triggered that were not necessary as evidenced by reversals.
•Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds to bail out America.
•Ackman says that he expects the share value to be $23-$47, but opportunity cost with preferreds and risk profile demonstrate otherwise.

Let's pretend that I am the government and you are Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC).



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1.How would you feel if I told you that I am forcing you into a situation where you are forced to borrow money from me because me placing you into said situation casts doubt on your future viability just so that you can return the same money to me in a few years and oh by the way I am charging you 10% interest for the privilege?
2.What if I told you that I control the money supply and that if I want to, I can restrict it to the extent that I can virtually do this whenever I feel like it?
3.What if I told you that I can, after forcing you to borrow as much money as I feel is necessary to demonstrate dominance, decide to take not only everything you have, but everything you will ever have?

Seems fair right? The reality is that the US government, if the third amendment net worth sweep becomes a precedent, can do this to take control of any business that borrows other people's money to make money in America. Take a look at page 50 from the Washington Federal complaint.




Fannie and Freddie would be better off without the forced bailout

David Sims does an excellent job illustrating this point. David goes on to show that the government's actions brought doubt and uncertainty into the picture, more than otherwise would be, and that if you undid them, Fannie and Freddie would have book values of $31/share, which is more than adequately capitalized.

Fannie and Freddie bailed out America

Fannie and Freddie were forced to buy lots of whatever the government told them to buy. The problem in 2008-2009 was liquidity. Fannie and Freddie provided the liquidity backstop required to stabilize the economy. The government used them to do this. They did not need to do this. Fannie and Freddie are not the government, although some people have argued otherwise:



Think Like A Billionaire

It does not make sense to play the game of monopoly if the banker can take over your property by forcing you to take a loan of a size of their choosing and pay exorbitant interest on it while they wait for you to return the money to them but still treat you like you've never paid down what you owe them when you return their money plus interest. Fortunately, this is real life, and there is established authority and common sense as outlined in the Washington Federal response.




The truth is that it is impossible to wind down Fannie and Freddie without seriously damaging the global economy. This is a question of private property rights. Is it legal or not for the US government, which controls the supply of US dollars, to take advantage and void private property rights during points in time when the supply of US dollars is lower than it should be? If it is legal, then that would undermine my willingness to own businesses at valuations that are based on discounted cash flows at low interest rates, because money could always be restricted and property rights trampled. This would suggest that businesses are valued more than they ought to be. This would have a seriously destabilizing effect that would reverberate around the world because the US economy plays such a large part.

Things are changing and people are figuring it out

Have no fear, this will all be reversed. Fannie and Freddie are looking at a $400B risk-sharing deal. Watt is making a better life more affordable for people who have been hard pressed. They will soar higher than some are expecting if you are willing to entertain their original disposition.

“
The Treasury also will receive warrants representing 79.9 percent ownership share of each firm, but the officials said the government has no plans to exercise those warrants, which carry a nominal exercise cost of less than $1 a share.

Let's take a look at the Ackman lawsuits. Here is the first in the District Court. Here is the second in the United States Court of Federal Claims. Referencing the second, below are four choice excerpts. Note that Ackman makes it clear that Treasury's authority to purchase securities until the end of 2009 has expired.










Fannie and Freddie will soar again, to new all time highs

The courts will enforce the fifth amendment. Doing the opposite is diametrically opposed to the health of the economy because it is a prerequisite for American businesses to have any positive market value. In time, this will become history. Let's take a look at the Washington Federal's response to the defendant's motion dismiss.




Ackman's ahead of you

Now, Ackman says that the shares are worth $23-$47. The truth is that he knows that other people are fighting for the warrants to be canceled so that he does not need to. He is pushing to promote the common view that returning the business to the shareholders is in the best interest of the government.

Ackman's argument that owning the commons over the preferreds is a better investment with his public metrics doesn't hold much water. Right now, the return from present value to par value is 7.23x. The return from common to $23-$47 is 10x-21.7x. At those multiples, you might as well sit in preferreds. They are the safer investment, especially if you are entertaining the possibility of a recapitalization transaction (AIG style).

When Ackman got involved in the commons, the return was even more comparable. He knows the warrants are going to be canceled. So, he gets another 5x margin of safety by going to the common, because let's face it, Fannie and Freddie aren't going anywhere but up.


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http://seekingalpha.com/article/2574415-ackman-bets-on-100-plus-for-fannie-and-freddie-new-all-time-highs?uprof=45&dr=1