Replies to post #296921 on Fannie Mae-No Politics (FNMA)

[Blushing green]

wanna give a hint ? =)

[3antar]

Why 9.11 not 9.12?

[Mikey Mike]

Are you referring to this one mysterious Glen? ;-)

Fannie And Freddie's 100% Tax Gets The Spotlight
Apr. 15, 2015 9:11 AM ET | by Glen Bradford | about: fnma | includes: fmcc

Summary

Charles Grassley has, as Chairman of the United States Senate Committee on the Judiciary, asked the Attorney General & Treasury: "Under what legal authority was the Third Amendment authorized?".
The running profit at par value for US Treasury is $246B on an investment of $189B, over 100% return for the US Treasury, a tax collector, not a taxpayer.
The Fed says Fannie and Freddie have not repaid taxpayers and they are absolutely correct. Fannie, Freddie and myself are taxpayers and we are next in line after US Treasury.
Combined Fannie and Freddie make over $20B per year, a fraction of their current market capitalization, leaving huge potential upside for shareholders.

The reason it makes sense to buy Fannie Mae (OTCQB:FNMA) or Freddie Mac (OTCQB:FMCC) publicly traded securities is because now both the legislative branch and the judiciary branch are looking to better understand how the executive branch effectively is taxing two private companies at 100% when the power to set taxes belongs to the legislative branch. As long as Federal Finance Housing Agency (FHFA) Director Melvin L. Watt continues to abide by the agreement that prior US Treasury Director Ed Demarco signed with US Treasury over 100% of the per annum profits of Fannie Mae and Freddie Mac go directly to US Treasury. For all other private businesses, the money that they send to the US Treasury is called taxes and the taxes that they pay are a fraction of their profits, not all of them.

Fannie Mae And Freddie Mac

Fannie Mae and Freddie Mac are in the business of making the housing finance system safer and more efficient by providing liquidity, stability and affordability. Both operate under a conservatorship that began in 2008 under the direction of the Federal Housing Finance Agency (FHFA). Melvin L. Watt is acting Director of the FHFA and he has remarked that, "the law was trumped," but that was before he got there.



Combined, Fannie and Freddie are set to make more than $21B per year according to Fairholme's Bruce Berkowitz. Last year's best performer in the hedge fund space William Ackman has this to say about the common shares of Fannie Mae and Freddie Mac. They are "the most interesting risk-reward that I'm aware of in the capital markets right now." Based on my reverse engineering of Richard X. Bove's recent notes, he has them earning a combined $26.1B in 2016. Right now, Fannie Mae has a market capitalization of around $3B and Freddie Mac has a market capitalization of around $1.63B. Needless to say, their market capitalization is a fraction of their future potential earnings in a scenario where the US Treasury is not permitted to take everything the two companies work hard to make.

The Legislative Branch Shines The Spotlight

Last week on April 7, Grassley joined my list of congressional offices that are willing to publicize their quest for truth and fairness including Blackburn (R-Tenn.), Toomey (R-Pa.) and Capuano (D-Mass.).

Charles Grassley sent letters seeking a response from the US Treasury and the Attorney General by April 20th to the following questions:

Has the President personally invoked executive privilege over documents related to the Fannie Mae, Freddie Mac and Treasury Third Amendment agreement? If so, when? If not, why are DOJ attorneys citing that privilege as a reason to withhold those documents?
Does the Third Amendment cause a breach of any of FHFA's statutory duties to ensure that each regulated entity operates in a safe and sound manner? Please explain.
During the negotiation of the Third Amendment between Treasury and FHFA, did DOJ communicate with any of the entities involved regarding its legality? If so, please describe those communications in detail.
Under what legal authority was the Third Amendment authorized?
Prior to litigation, did DOJ discuss with Treasury and/or FHFA the need to assert privileges, including executive privilege, over certain documents?

The most in depth discussion on Grassley's letters that I've seen is by CRT Capital's senior analyst, Kevin Starke, and can be found here. John Carney over at the Wall Street Journal says that Grassley's letters should not be interpreted as support for shareholders who have been fighting for years to get access to internal government documents. This is a legal issue and Congress can pursue the legality of the net worth sweep and Grassley's letter seems like it might be the beginning of something greater.



Judicial Branch - Documents Are Coming In

Common and junior preferred shareholders are in multiple courts and in Judge Sweeney's court of claims, documents are rolling in. The most recent status conference notes are here. The government has now hired and brought in experts that they are letting review their documents, so I guess you could say they are getting more serious about preparing a defense instead of merely dismissing claims. This is good news and only reflects their acceptance of Judge Sweeney's words that the plaintiffs will have their day in court.

Depositions of former FHFA directors and others are scheduled for April 17th and 29th but it is subject to change to several dates in May. More importantly, it is not expected to be rescheduled beyond the end of May, which tells us that the plaintiff has enough evidence to move forward.

Fannie And Freddie Have Not (Re)Paid Taxpayers

When it comes to taxes, either you're a taxpayer or a tax collector. The US Treasury is a tax collector. Taxpayers include Fannie, Freddie, and myself. Under normal circumstances, taxes are a fraction of the annual profits of private businesses. The corporate tax rate in America is 35%, but in the case of Fannie Mae and Freddie Mac because the net worth sweep includes a depletion clause that exhausts their net worth to $0, the effective tax rate that they face is over 100% per annum. With all of Fannie and Freddie's money going only to tax collectors, it should not be a surprise that so far they haven't been able to:

Retain capital to become adequately capitalized
Pay taxpayers
Set aside money for affordable housing

Administrative Reform Continues To Make Progress

FHFA has been doing an excellent job overseeing the process of administrative reform. David H. Stevens, President and CEO at Mortgage Bankers Association put together some words that he suggests offer clarification on GSE reform.

David H. Stevens says that shareholders who are interested in making money have interests that should be superceded by a system that protects what Fannie Mae and Freddie Mac do in support of the housing market and protecting taxpayers. I just wanted to thank David for looking out for taxpayers like me to make sure that I am protected from profit-focused motives of the shareholder(s) of these two companies. One such shareholder comes to mind and this shareholder is the US Treasury.

US Treasury Has Returned Over 100% On Its Over 100% Per Annum Sweep

As Richard X. Bove has outlined in the simple table below, the returns Treasury has achieved are over 100%.



The Community Home Lenders Association has recently weighed in and is concerned that the current structure with US Treasury collecting all the money will likely lead to a situation where they might have funding issues. Instead of requesting a capital buffer at Fannie and Freddie, they are asking Treasury to set aside funds at the government level. It would seem that the CHLA and taxpayers both have the common interest of US Treasury setting aside some portion.

Normalized Earnings Valuation

You might have heard that Fannie and Freddie profits aren't as strong as they used to be because a lot of them recently are a result of one-time events. The reality is that people who make that argument are purposely overlooking the cause of these one-time events. The cause was one-time losses for the most part. If you look at this holistically, Fannie and Freddie were forced to borrow and pay interest based on accounting rules that made it seem like they needed money when they actually didn't for a brief period of time. In fact, Fannie and Freddie are making more on a normalized basis than they ever have because the fees that they are charging are greater and their share of the market is greater than they used to be.

If you look at normalized earnings of somewhere between $15-$25B for the combined enterprises, at 15x earnings they are worth between $225B and $375B. Right now they are valued at less than $5B, leaving lots of upside on the table. Ackman seems to think that the commons are worth between $40-$50 if the government is allowed to take 80% of the equity by way of exercising its warrants and undoing the third amendment sweep. Dick Bove has said that these stocks are worth over $20 in the long run but right now has a price target of $4.75.

Summary

The question here isn't whether or not the executive branch can take everything from Fannie Mae and Freddie Mac. That is what they are doing. The question is whether they can keep doing it. What isn't sustainable to me is a situation where the tax rate imposed on any private company is 100%.

An investment in the common shares or the junior preferreds, both of which are publicly traded is a bet that at least some of the actions that the government has taken will be reversed by other branches of government. If there is a reversal, the price is worth many multiples more. If there is not, then the stocks are worth $0.

Disclosure: The author is long FNMA.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

http://m.seekingalpha.com/article/3068816-fannie-and-freddies-100-percent-tax-gets-the-spotlight

[acousticbull]

9:11am on the dot!