Seeking Alpha

Kyle Bass sees preferred stock in Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) as a potential...

Kyle Bass sees preferred stock in Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) as a potential "eight- to 10-bagger," trading at just $0.08 on the dollar. He says the GSEs are making money on debt they owe the U.S. government, big tax-related assets could be brought back onto balance sheets, and mortgage fees eventually should rise from 20 bps to 60 bps.
Comments (9)
  • The Honest Trader
    , contributor
    Comments (19) | Send Message
     
    how do you trade these things?
    12 May 2011, 04:48 PM Reply Like
  • nfantis
    , contributor
    Comments (84) | Send Message
     
    Short :)
    12 May 2011, 05:10 PM Reply Like
  • Capt Herlock
    , contributor
    Comments (59) | Send Message
     
    Try these symbols for Fanny Mae preferreds:

     

    quantumonline.com/Pare...

     

    My question is why they are still selling for .08 cents on the dollar? Seems expensive to me for non-cumulative preferreds who's payouts have been suspended and never likely to return - ever. Just worthless paper at this stage.
    12 May 2011, 07:16 PM Reply Like
  • Joe Eifrid
    , contributor
    Comments (342) | Send Message
     
    If you could buy something today for 8 cents on the dollar and in 5-10 years it could be worth 80 to 100 cents, that would be a nice speculative trade. The vision is that the govt will not bankrupt fannie or freddie. That each day their portfolio gets better as one bad loan is replaced by a good one. Hopefully in 5 to 10 years the bad loans will be history. There are about $36 billion in trust preferreds outstanding. Most were held by banks as the govt made it attractive for them to hold as tier one capital. I do not know what the current status is but Secretary Paulson at the time of conservatorship said the Fed would work with the banks in valuating them. A federal reserve memo says that GSE stock can be valued for bank capital concerns at 65% of market value. Problem is that there is no definition what market value is. The thinking is eventually the govt won't make the banks take a bath on these since they were marketed to the banks by the govt as safe and secure paper nearly on par with treasuries.

     

    Of course there is risk involved. I was fortunate enough to by some at less than 2 cents on the dollar and sold enough recently to cover my original cost. Beware that when researching them there are some with a $25 face value and some at $50. The strategy if interested is not to buy on possible future yield but just buy the cheapest ones regardless of dividend rate.

     

    Kind of a neat hail mary trade. Only invest as much as you can afford to lose. Beware that preferred stock symbols can be different from broker to broker. However, now that THESE issues are on the pink sheets the new symbols should be the same from broker to broker.
    12 May 2011, 08:24 PM Reply Like
  • thomas j. flaherty
    , contributor
    Comments (121) | Send Message
     
    True the government gave capital relief to banks that hold GSE preferred but this is not the same as allowing them to Value the securities at that price. It only allows them capital relief. The value trades every day in the market and is 8 cents on the dollar. The value is telling you that recovery of principle is very unlikely ie. close to zero but not zero.
    14 May 2011, 11:49 PM Reply Like
  • Joe Eifrid
    , contributor
    Comments (342) | Send Message
     
    The Federal Reserve Discount Window & Payment risk collateral and margin table
    www.frbdiscountwindow....

     

    Shows 65% for GSE stock of market value ...or, INTERNAL fair market value estimate.

     

    Surprised they show any value as collateral for GSE stock.

     

    Yes Thomas, it is risky. Kinda like buying Lehman bros bonds at 10 cents on the dollar and recently letting them go 24. Or, Lear when they were in BK at 25 and selling for 65 just a couple months later. But then again when dealing with these distressed securities you can take some big losses too.
    15 May 2011, 08:50 AM Reply Like
  • thomas j. flaherty
    , contributor
    Comments (121) | Send Message
     
    Joe,
    These are not "fair market value estimates" at all. Call the Fed and ask them!
    That is flatly wrong. They are collateral magin tables for use by the banks EXTERNALLY!. This is why they are a percent of par even if they are treasury bonds trading at huge premiums in the market...
    The 65 cents on GSE stock IS the capital relief I mentioned in my previous note. You are correct...otherwise it should be zero.
    You must surely know this is not a market value. You are too smart to think otherwise. You should not use bonds in your examples to analyse recovery on stock. You surelyknow better. If this were like lehman the value would be zero. Lehman stock and preferred is zero!
    15 May 2011, 01:32 PM Reply Like
  • JimRandomUsername
    , contributor
    Comments (2) | Send Message
     
    Thomas,
    I think comparing the preferreds to a bond trade is reasonable. I know what you're probably thinking - you won't recover anything if they go to bankrupcy. I bet you're right there. (don't mean to put words in your mouth. Let me know if I'm wrong.) However, in Fannie Mae and Freddie Mac survive in any form, they should recapitalize themselves through normal operations. If that happens (longshot), the dividends on the preferreds would resume. If the dividends are being paid, the price comes back somewhat. Its a longshot. But its better than a lot of penny stock trades I see people fall for.

     

    Jim
    7 Jul 2011, 12:04 PM Reply Like
  • thomas j. flaherty
    , contributor
    Comments (121) | Send Message
     
    The comparison to penny stocks is apt. The trade in Fannie and Freddie preferred is a classic pump and dump.
    8 Jul 2011, 04:38 PM Reply Like
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