I have enjoyed reading the messages on this board and got good info from it, really appreciate it. Here is my contribution to this board.
The scare of winding down FNF is past now IMO. It was not to be taken lightly; the politicians and government were certainly making an effort to do some serious changes to FnF. President Obama used the term “flawed business” model. This term was already used in 2008 by Bernanke and Geithner and it was already used in 2003 after the 2002 recession. In 2002/2003 under the Bush administration the government tried to reform FnF, but was unsuccessful. In 2008, when FnF were in trouble, Hank Paulson wanted advice from Bernanke and Geithner on FnF and their first reaction was to put them in receivership and get rid of this “flawed business” model. Someone else got involved, I think it was James Lockhart, who said that receivership was not possible, because FnF were not bankrupt; FnF were paying their bills. The problem was liquidity and credit rating, which made it very difficult for FnF to raise money. A lot of the money came from China and Russia. Without FnF being able to raise money it would make the housing recovery very difficult. Thus the government stepped in, restored the liquidity problem and FnF were able to raise the funds needed for housing recovery. FnF played an important role in the economic recovery, but they could not have done this without the government backstop.
Now, after several years FNF made a fantastic turnaround and became very profitable. In 2012 the government changed the conservatorship agreement to take all the profits in the form of dividends, leaving nothing for other shareholders and nothing for capital re-building. I believe this move was made to accelerate the re-payment of the investment in FnF, but also to help the U.S. budget, one of those extra-ordinary measures Jacob Lew is currently talking about.
Earlier this year talks revived to re-form FnF, because if it was not handled quickly then it may not happen, due to the profitability of FnF. So, Corker/Warner bill and others got drafted quickly. New FHFA director, Mell Watt, was nominated. President Obama made a speech and talked about the “flawed business” model and winding down FnF; put a real scare into the investors. President’s speech 2 days before the earnings report was not co-incidental IMO. The government was trying to pull off a fast one to make drastic changes to FnF. The stock price got set back accordingly.
In the meantime lawsuits were filed by large institutions, claiming the profit sweep in 2012 was illegal, depriving other preferred shareholders of their fair share and depriving any capital re-building for FnF. The government cannot proceed with drastic changes to FnF without addressing the lawsuits first; it would draw major protesting from institutions and politicians too and would look very bad to the government putting themselves above the law. It is a good thing those lawsuits are in place.
IMO this scare for major re-form is now past. The government actions show that. The re-form bills are put off, new FHFA director is no longer urgent, the government request for stay of the lawsuits has not been granted. Hank Paulson mentions in his book that FnF cannot remain in conservatorship; he does insinuate changes needed to avoid repeat of the crisis. FHFA and FnF are proceeding with their own re-form, demanding more private capital in the secondary housing market and reducing the exposure of FnF. So, I believe FnF is back on track. It appears that DeMarco can finish the job he started with FnF; when FnF meets his scorecard he will release them from conservatorship. When?
I have held a pretty good position in FnF since April. I did not sell any shares since that time, despite of this re-form scare. Common sense tells me that it does not make sense to make drastic changes to profitable companies; certainly not a wind-down.
This stock has the potential to make a large jump overnight, upon the right news.
So, be on the FnF train or the FnF express could leave home without you.
IMHO.
AI
