It's Independence Day For Fannie And Freddie

Jul. 6.14 | About: Freddie Mac (FMCC)

Summary

The Delaney-Carney-Himes housing reform finance proposal is intractable.

The Johnson-Crapo revised Corker-Warner bill is dead.

The prevailing risk is summary judgment coming from Judge Lambert.

Do not fear. The system is working. Yes, there have been what some claim are illegal amendments. Yes, there are proposals out there and there are proposals that will continue to come forward as they have in the past that appear to have broad and far-reaching support across all influential parties at the table where decisions are made.

There is no better day than the 238th anniversary of the day that the United States of America declared independence from the Kingdom of Great Britain. This is a call to action, an adoption, a Declaration of Independence from seeing things as you are told to see things by people who are trying to deter you from taking full advantage of your inalienable rights as an American.

Three Reasons To Continue Reading

There are two prevailing reasons why better understanding this situation as well as you can are of importance. The first is the most personal to me is to profit. The second and most revealing is the consequences of what is going to happen, why it is going to happen, and what would otherwise happen if some people had their way. The third reason to continue reading is because the best way to learn anything is to learn from someone who has been more successful in understanding and doing what you would like to be able to understand and do better.

Whether or not you agree to disagree with my previous assertions that the businesses can be released from conservatorship and that the way things are structured leaves them undercapitalized, there are many things that are all happening in unison that will likely lead to a seemingly profound outcome that from where I sit is practically guaranteed. Below are the details of my forecast for of all of the above.

Never Underestimate the Predictability of Stupidity

Government officials and all of the supporters of the hoopla around demonizing the businesses that in fact led us out of recession will continue to spit their game. Given that it isn't worth investing the mental energy trying to figure out what proposals are going to be brought to the table if these proposals are not going to stop there because they are cruising directly for the garbage bin.

Nevertheless, it is entertaining to poke holes at the insanity that is self-immolating in front of me. In DC, the conversation has changed as evidenced by the Delaney-Carney-Himes bill, hereafter referred to as the-three-amigos bill. In full transparency, I do believe that there is political value in signing onto proposals that are complete nonsense and then promoting them as a well thought out and tractable solution. The reality of what just happened is far from what you would be led to believe if you actually believed what they say and it takes real talent to put this all together.

It is or it is not. Is it not?

The truth is binary. Either the government is trying to end the GSEs or they aren't. What the amigos have done is further Harry Reid's efforts to return Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC) back to private investors when he installed Watt to head the FHFA. Demarco was the winddown king. Instead of winding the two down, now the government is coolly talking about keeping things going.

This is a substantial about-face from the plan of 2013. Here is where we are:

  1. Reform talk has shifted from shutting them down to keeping them going.
  2. Legal battles against the third amendment net worth sweep are progressing their way through the court system.
  3. The companies have returned to profitability.
  4. Activist investors are piling on board.

Taking out the trash

With all of these things in motion, people like Senator Corker are going to have a substantially more difficult time proclaiming the utter demise of Fannie and Freddie on public outlets as if it is certainty. As this water continues to further itself from the under the bridge where it was a few months ago, time is on our side as long Fannie and Freddie common shareholders. Speaking to the specifics of the proposal by the-three-amigos, there are more holes in it than I have bullets that are worth firing. I'll let Tim take the reins with his bazooka here and here.

The Relevant Risks Are Sub-Substantial

  1. If the government wins the court cases, the equity in the two businesses is worth $0.
  2. If the government winds the two companies down somehow magically using some method that at present is unknown and somehow benefits more people than resolving the issues in their current system and releasing them, then Fannie and Freddie common stock will be worth significantly less than what they would be otherwise.
  3. The market could turn down and the two businesses could start losing money again and the whole economy could enter a great depression.

The Risk of Not Participating

If you are willing to conclude, as I have, that the dominant risk here is not being involved, then you'd be delighted to know that at any moment there could come a summary judgment in the Perry case. By my rough estimations, this would be a great month for it. In that case, given how things are playing out, the businesses are worth more than $20, each.

Disclosure: The author is long FMCC, 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.

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