Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two companies in conservatorship where the government has been taking all of their money since 2008. Mark Calabria wrote a paper as part of the Cato institute arguing that the government has broken the law. He has also pointed out that as a he wrote HERA, that government support was intended to be debt and as such a never ending conservatorship like this wouldn't have been possible. This conservatorship is 10 years old and counting. It will either end in receivership or the companies exiting after FHFA declares that they are adequately capitalized.
Investment Thesis: There are three major legal avenues (court of federal claims, lamberth remand, collins en banc) and administrative reform that could lead to shareholders in Fannie and Freddie not being zeroed out. I think all are good, but some are faster than others. The next major avenue is administrative reform. According to Fox news Charlie Gasparino, the administration is pushing for the next two weeks to get Calabria confirmed. It is possible for Calabria to become director before the end of March and stop the March net worth sweep. In any recapitalization, preferred should have upside. The common have upside if the preferred get par. The White House G-fee forecasts support Moelis style g-fees and stock returns that may roughly double that of preferreds.
The Fox News Timeline
Charlie Gasparino says the White House is pushing expedited senate confirmation of Mark Calabria in the next two weeks:
The senate is out next week. As such, the White House wants Calabria in as FHFA director before the end of the month, McConnell has to file Cloture or Executive Calendar #87 Mark Calabria this Thursday. Then, the senate would confirm him the week of the 25th. On twitter, Senate Cloakroom is the best resource to follow to watch this process unfold. When I watched the Senate floor live, sometimes the twitter announcements came out faster than the audio from the senate floor.
The Legal Timelines
The lawsuits would start rolling in after this.
The collins en banc ruling will be next. If you study en banc rulings, they tend to rarely accept them and then when they do they tend to turn them over. In this case, the oral arguments went well for plaintiffs. A ruling here should be this summer if this case isn't settled by then as I expect the administrative timeline to take center stage.
After this, it's really a toss up between the court of federal claims and lamberth's remand in terms of timeline. Lamberth will be ruling on a breach of implied covenant of good faith and that's going to trial. Judge Sweeney will be ruling on takings and those rulings are at least a year off.
Summary and Conclusion
It is possible for Calabria to become FHFA director and stop the sweep by the end of the month. Charlie Gasparino reported that Calabria was being fast tracked and that the net worth sweep is going to be stopped and the companies will be recapitalized. This is fantastic news because he has historically hasn't cast shareholders in the most positive light. I appreciate the guy because he's at least trying to report the facts as he gathers them and his quotes so far are getting better as I believe his sources are getting better. You have to start somewhere and I think he's figured it out.
I will be watching the senate floor live Thursday and the twitter stream for the senate cloakroom. If Charlie Gasparino is right about the next two weeks, my life is going to change this week in a big way. I currently only own preferred shares as I have simply been betting on a recapitalization. That said, the commons may outperform preferred from here and that's great for them if that's the case.
Disclosure: I am/we are long FMCCH, FMCCI, FMCCL, FMCCN, FMCCP, FMCCS, FMCCT, FMCKP, FNMAM, FNMFN, FNMFO. 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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