Replies to post #532489 on Fannie Mae-No Politics (FNMA)

[401kobessive]

I put on a set of head phones and listened several times.
I almost had a buddy of mine who is into audio files clean it up and digitally review it.
At one point during the exchange that got heated, it almost sounded like the defense attorney said under his breath, "we have no case".
He was frustrated and I thought I heard a hot mic pick up on it.
Anyhow, Im not selling anything.
However, Im not buying anymore as well.
It would be past my comfort level.
thanks for your input.

[chessmaster315]

Agree.
Preferreds are not a good buy, for the following reasons:
1. They are overpriced, especially, when you can buy about 4 commons to every preferred.
2. The have similar risk exposure. Considering that Fannie is very profitable, and has been, its "highly unlikely" that a dividend will be paid to preferred and not the commons. Remember, the preferreds are all "non cumulative preferreds", which means the prefereds wont be getting "retro" dividends even if the government is forced to return monies they confiscated over the past 10 years.
3. The preferreds are non voting. This can be a very big deal in some circumstances, not so much in others. Remember, once returned to private ownership the common shareholders will elect a Board of Directors to represent common shareholder interests. The BOD will be held accountable to shareholders; if the BOD acts in interests "other than that of common shareholders", the board member(s) can be voted out. This happens quite frequently in the corportate world.
4. Simple common sense. Would you rather pay 3 bucks or 13 bucks for a share? You control many more shares with commons, (with the same number of dollars) and the potential is greater.
5. Preferreds have a "cap:" at par value, while commons can/have traded at more than 15 times the present value. You can see this if you look at the price history back to prior to the cship mess..say 2004, 2005, 2006, etc.
6. Given that commons have 15 x potential (based on historical prices) while the preferreds have 2x potential, the commons are, by far, the better buy.

The hypothetical senarios where preferreds come out on top involve "far fetched" senarios inconsitent with reality. The preferreds seem to think the judge will magically "extend" the preference. The preference for the preferred comes in 2 cases only:
1. Dividend preference. If there is only enough profit for some dividends, in the current quarter, then preferreds get paid and commons do not. (Unlikely, because fannie is very, very profitable, and there is more than enough earnings to carry a dividend for both common and preferreds)

2. Liquidation preference. In the unlikely event fannie is put into bankruptcy, the preferreds would have preference on liquidation funds, "up to" par value, but no more.

Since neither the liquidation preference, nor the dividend preference are an issue here, the smart buy is the commons. What is the issue is fannie getting released from cship, the Net Worth Swipe ended, and the FHA compliance with its duties to "preserve and protect" the assets of FNMA.
If a conservotor "other than the government" did something similar by confiscating all the funds held by consevatorship, he would be put in jail. The conservator has a fiduciary resposibility to the company, this does not mean they can rape and pillage the earnings for the benefit of the conservator.