Fannie And Freddie: Was There A Big Buyer Yesterday?
Feb 22 2017, 16:14
About: FNMA • Includes: FMCC
Summary
D.C. Circuit court rejects some shareholder claims, remands others to district court. Plaintiffs also have the option to appeal the ruling & send it to SCOTUS.
Shares of Fannie and Freddie common and preferred shares fall between 25% and 40%.
There appeared to be a motivated buyer in the common mid-day as shown by the stock's move off lows and well over $3 in a short period of time.
With Mnuchin in the drivers seat now, a bet against Fannie and Freddie is a bet that Mnuchin will slaughter hedge fund allies like Bruce Berkowitz.
Shareholders of the common and preferred shares still have ways to win.
By Parke Shall
With Clinton as President, yesterday's Fannie and Freddie ruling may have been a much worse body blow than 35% to 40% for shareholders. But with a pro-business Trump administration and Treasury secretary Steve Mnuchin in place, yesterday's legal stalemate for plaintiffs may wind up meaning very little for Fannie and Freddie going forward.
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Somebody was buying Fannie Mae (OTCQB:FNMA) common shares yesterday during the middle of the day, the question is who and for what purpose. The assumed buying opportunity came when shares fell mid day after a D.C. Circuit court rejected some shareholder claims and remanded additional arguments regarding liquidation preferences and dividend rights to district courts. Some say it was a profound loss for Fannie and Freddie (OTCQB:FMCC) shareholders, others think this was just a way for the courts to hand the heavy lifting back to the Treasury Secretary Steve Mnuchin.
(click to enlarge)
No doubt there was a bid during the middle of the day after shares came crashing down more than 30% on the news that a court ruling determined that hedge funds could not sue to try and claim a share of Fannie Mae and Freddie Mac's profits since the government sponsored entities have been in conservatorship. Both the common shares and the preferred shares of both entities were down between 25% and 40% yesterday depending on the class of shares.
FNMA Chart
FNMA data by YCharts
No matter which angle you looked at it from, it was definitely a bloodbath and it looked to be a relatively unexpected one that drove a primarily retail shareholder base to begin unloading shares at the bid mid day. Shares finally stabilized, but only toward the end of the day and they remained lower.
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The only class of share that we saw any real action in were the common shares of Fannie Mae and Freddie Mac, both of which saw incredible volume. For instance, Fannie Mae traded over 78 million shares yesterday and there was a period, after the stock hit $2.50, where significant buying came into the picture. This pushed shares back up over $3 before they faded back to the $2.70 range toward the end of the day. It appeared to us that the size of this buying may have been significantly more than just retail, but we won't know for sure until we hear otherwise.
The decision yesterday wasn't all negative, however. It determined that some issues would be remanded to district courts and it also doesn't stand in the way of treasury secretary Steve Mnuchin following through on his plans to make Fannie and Freddie reforms a "priority" for his office. The legal route to a solution has had a wrench thrown in its gears, but the billions of dollars in both common and preferred shares owned by extremely high profile, high net worth investors leads us to believe that this story is still anything but over. It has simply drifted from being more of a legal story to more of a political story now.
From the Washington Post,
In a 2-to-1 decision, the U.S. Court of Appeals for the District of Columbia affirmed an earlier ruling by U.S. District Judge Royce Lamberth.
"We hold that the stockholders' statutory claims are barred by the Recovery Act's [the 2009 American Recovery and Reinvestment Act] strict limitation on judicial review," Senior Circuit Judge Douglas H. Ginsburg and Circuit Judge Patricia Millett wrote in the majority opinion. "We also reject most of the stockholders' common-law claims."
The decision was a setback for hedge funds and other investors who were challenging the Third Amendment, a decision by the federal government to confiscate the GSE's profits.
"The Perry decision is undeniably a body blow for GSE shareholders, but this ruling does not constitute a knockout, as there are still both legal and administrative avenues for shareholders," said Isaac Boltansky, an analyst at Compass Point, an investment bank, in a research report on Tuesday.
The dissent of Judge Brown is fascinating to read and we recommend that all investors do so.
Circuit Judge Janice Rogers Brown dissented, accusing the FHFA of improperly exercising a "stunningly broad view of its own power" as a conservator.
While it doesn't change the outcome, it certainly makes it clear that Brown was not satisfied with the legal outcome that the judges had arrived at. Plaintiff counsel Hamish Hume also seemed "cautiously optimistic" with the new administration in place,
"The damages that we could recover could be very substantial, though undoubtedly the amount will be hotly disputed," said Hamish Hume, a partner at Boies Schiller Flexner who represented shareholders in this case.
The ultimate decision of the court is somewhat disturbing from a business owners standpoint, as it almost makes it possible for the government to simply seize the assets of any failing business, but that is another discussion for another day. For the purpose of this article, just know that the conservatorship was an Obama backed idea and that President Trump doesn't exactly agree with the Obama administration's policy decisions across the board. Just last week, he continued signing bills that overturned Obama administration rules.
Also this is an administration that is already at war with the judicial branch of the government and so it wouldn't surprise us if Treasury Secretary Steve Mnuchin just simply decides to impose his will with the government sponsored entities, a situation that is still completely plausible.
We wait now to hear additional information from large Fannie and Freddie shareholders, as well as the US government. While the turn was not a card that Fannie Mae and Freddie Mac shareholders liked, somebody has possibly raised the pot meaningfully and all investors still have outs on the river.
We will update our readers with more information as it becomes available.
Disclosure: I am/we are long FNMA FMCC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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