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My Fannie Valentine - The Seila Sequel

The Other Street profile picture
The Other Street


  • Seila Law vs. CFPB was heard by SCOTUS on March 3. Focus was on the unconstitutionality of the single Director removal clause, which is also at stake for FHFA.
  • CFPB's removal clause stipulates "inefficiency, neglect of duty or malfeasance in office."
  • FHFA's removal clause, HERA Sec. 1312 (b) (2), only stipulates "for cause."
  • While Frank-Dodd, CFPB's Father, includes a severability clause, i.e. the Act remains valid even if one Section is not, HERA, FHFA's Mother, does not. Hence the likely consequences below.

Don't ask me why Frank-Dodd is a Father, and HERA a Mother. Let's stick to gender-neutral. But ask me about severability clauses. This means an Act can stand even if part of it is stricken as unconstitutional. Very important here.

First off, what does the CFPB have to do with the GSEs, which is our main subject? Well, this particular court case. Both agencies, CFPB and FHFA, have one single Director, who is very difficult to fire by the President, a violation of Executive Power. This article by Amy Howe on SCOTUSblog.com will help you understand, and many of my comments are derived from it.

Obviously, if SCOTUS rules that CFPB is unconstitutionally structured because of the current Director removal clause, this will set precedent for FHFA, among others "independent" agencies, to include Social Security Administration, the Office of Special Counsel, the Fed... The remedy will differ in all cases, but let's stay with the basics - is this clause unconstitutional?

Let's see what the Justices had to say in Seila, and let's try to anticipate what will happen when SCOTUS hears Collins. In that case, Collins' December 2019 brief reply is clear (p.4):

If the Court concludes in Seila Law that the CFPB-and, by necessary implication, FHFA-are unconstitutionally structured, the legal status of everything these agencies have ever done will be cast into doubt. [...] Thus, while Defendants raise questions that are idiosyncratic to the Net Worth Sweep litigation, Plaintiffs ask the Court to decide issues with broader significance." [emphasis added]

In reading Amy's account, which I found excellent, it seems that Justices agreed on the unconstitutionality, except for Sotomayor and Ginsburg who went "next." Then, the debate was on the remedy. I paraphrase, "Can we find a way to keep the CFPB alive while striking down the "inefficiency, neglect of duty or malfeasance in office?"

This article was written by

The Other Street profile picture
Going on forty years of salt mine experience as an institutional investment advisor, both on the Buy and Sell side. A graduate of Columbia Business School (MBA) and Chimie Paris Tech (MSChe), I started my Wall Street career with Brown Brothers Harriman & co, went West with Montgomery Securities and then founded my own advisory firm Capital Max in 1998, named after my first son. I could rename it "Max Brothers" but I am told to hold back. In 2009, with a second edition in 2011, I published my first adult book, titled "Anatomy of the Meltdown - 1998-2008. The Worst Decade in Stock Investing, or Was It?". Let me be clear: "Anatomy" has nothing to do with Sports Illustrated, except when the tide goes out. Published my second book in 2018, titled "Between Obama's Lines - How We Almost Lost The Middle East, The Cold War, and The Atlantic Alliance." This is serious stuff, you know - that's why they call us "The Other Street".

Analyst’s Disclosure: I am/we are long FNMA, FNMAT, S, VECO, HL, PHM, CDNA, AGM, EA. 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.

FNMA, FMCC and related securities do not trade on major exchanges and are not marginable.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (136)

ziaakbari profile picture
long fnma
Well at Least they Can't Get The Money From F&F This Time...LOL...But Not Funny...
Don't bridle a mkt - It produces unexpected consequences that'll blow you away later
And The Wheels on the Bus Go Round and Round...
I Just Hope They Don't Fall OFF...
I Think that this Just Made a Hugely Complicated,( according to the GVMT...anyone else would have Solved this Years Ago)...situation and Give's Further Excuse Why They Can't Move Forward...I bet Court's Postpone any Further Decisions...More Delays...
ziaakbari profile picture
long long rad
FED buying mortgage backed securities. Will they be buying from Fannie and Freddie or the big banks that also package mortgages?
Fed announcement stated the commitment is to agency-backed MBS. As of this morning there are reports elsewhere of non-agency MBS benefiting as sellers seek liquidity. Example:
No matter what your position on FNMA, if every one of the 165 million investors in the United States would purchase 10 shares tomorrow, all shares will trade tomorrow, the price would soar beyond all imagination, and the US treasury would be forced to settle. Make that go viral. If you’re greedy, buy 100 shares.
gdacostap profile picture
South Korea to ban short sales for 6 months. Should this happen in the USA, FNMA and FMCC go to $10 immediately.


Maiden35 profile picture
South Korea does not have the capital flows of a suburb of Dallas. Think it through.
gdacostap profile picture
What does that have to do with anything? South Korea took wise action till the market stabilizes. Otherwise, we'll probably have another recession like 2008.

If another country is taking action that is right, why shouldn't the USA? Last week the Dow Jones had it's biggest one-day drop since 1987.

If you're short, better cover.
Maiden35 profile picture
World leaders already calling for full nationalization of critical businesses. This is the excuse Congress needs to pass overnight legislation to fully Nationalize the GSEs.
Does it means financial accounting and shareholders status will be reinstated to pre-co conservative era?!
Maiden35 profile picture
Why do my posts always get taken as short selling? Why aren’t they taken as sober advice? Seriously I don’t understand.
We see clearly that you don’t understand. It’s a TAKING!!! Read up.
With the drop in Treasury rates mortgage volume has doubled if not more. That means more and more guarantee fees for FNMA. As a mortgage underwriter I can speak confidently that FNMA will be a strong performer in the months to come, which will hopefully give some reassurance to those panicking and wanting to hit the sell button.
Thats true. House prices arent affected due to this, they are generally safer than bond or gold. The drop in FNMA is just due to everything else thats dropping. THough I dont know when it will bottom. I am waiting for the dollar
@Trojanworley @karondongotbanned

I outline my thoughts on what the drivers are in depth right below your comments here. fwiw, i don't think it's the fundamentals of the businesses that are driving it's share price at the moment. you could argue that business fundamentals aren't driving ANY share price movement right now, and that it's all just a guessing game, but with F&F it's that times a billion imo. Makes no sense to consider what interest rates or anything is else doing, because that's not why people own shares in this. not yet at least... it's just noise until they're released back to the public markets. THEN we can talk about such things being a factor.
The Other Street profile picture
Spot on! More retained earnings, no pick in delinquencies. Add to this my own belief that we are at peak emotional crisis, which will fade faster than generally believed.
Maiden35 profile picture
You can still get out. Long way back to .10 cents. Do it now while you have something left.

go find a bridge to crawl under, troll. Preferably one in china... one that was built by the same engineers who oversaw the construction of that hotel that collapsed late last week.

Seriously, if you wanna short the market do your thing, but seriously... people who short and then try to induce panic in everyone else so they can profit from it are the most despicable among us. They're the sort of people i'd be perfectly fine with getting a virus and becoming a statistic in the history books.

good luck to all.
Maiden35 profile picture
I’m not short a penny stock that trades OTC.
Maiden35 profile picture
Smashing below 2$ as we speak. Worst decision ever to own this stock.
lol there were so many other LONGs saying they are not throwing away the stock. They are very optimistic about it being back up to 5 dollar. lol. Where were those people now?

i have no problem saying that i'm still here. and i'll be buying if it gets down to lower levels. same as always. buy low, sell high. I've actually been feeling underweight since I sold about half my position in the high 3$ range. so i'm perfectly happy for another opportunity to further reduce my cost basis.

My thoughts are this:
fannie and freddie have always (at least since 2008 and 2012) traded off of news of either a political or a judicial solution happening. this investment thesis has not changed because of the economy crashing or because of a virus outbreak. i view these names as selling off as evidence that 1) people are selling everything, 2) selling their most speculative things first so they can redeploy cash into "better deals," 3) selling in order to adjust their portfolio beta, since attention to risk exposure now "actually matters," 4) selling because of rock bottom interest rate fears, 5) selling because they're worried about defaults of mortgages with a crashing economy, 6) selling because they seem to think that the government will not "not be able" to recap the GSEs via the stock market in any timely fashion now that the whole thing has exploded, or 7) selling because they now fear that the government will just send the GSEs into bankruptcy / receivership proceedings, wiping out current shareholders. I'll explain here, why these things aren't really issues for me, and why I've (largely) yawned and ignored the change in the gse share price.

1) If people are just selling everything. so what? fnma and fmcc can and often do rebound quicker than most typical stocks. Them being down 50% isn't really even that unusual. It's far easier to hold on (comparatively) imo when everything is crashing an burning, because you don't have "fomo" of "man... if i'd only deployed my capital elsewhere, i'd be doing so much better."

Rating: pretty easy to handle emotionally.

2) This factor is somewhat more concerning than the first one. part of why i liked investing in the GSEs is that they're so unhinged and uncorrelated with the market. to the extent that we've wandered into an area where they have gained either positive or negative correlation with the market, that concerns me, as i think we're in the prologue of this global panic right now. we haven't even seen any of the derivative ripples / effects yet. and there will be many. But. at the same time, i think this is effect is very small (at least for now). there's hardly any buying pressure in the market at all right now... so the idea that people are selling FNMA in order to buy PG is less concerning than some of these other factors. because we're just not really seeing a lot of capital being deployed. For all we know, the people who sell the GSEs, are just sitting in cash, waiting to buy back into them once things settle down.

Rating: moderately easy to handle emotionally.

3) People who sell F&F because they're thinking they have too much risk right now, is potentially more of an issue than the first 2 things, because those people aren't likely to return any time soon to the investment. They've likely changed their outlook to a much more conservative / bearish one. And that won't change overnight. It'll take a fairly sustained recovery for these people to risk going back into speculative investments in any meaningful way. That's a concern. And how much of the sell off in F&F is driven by these types is rather difficult / impossible to know.

Rating: moderately difficult to handle emotionally.

4) Interest rates hitting all time lows have rattled a lot of investors of financial institutions (which use interest rate spreads to make money). problem with that is... banks and lenders use whatever spreads they need to use in order to make money. the fed dropping rates to 0 doesn't mean that any bank or financial institution MUST lend money at close to 0%. In many cases, people looking to refinance are actually finding it difficult to do so. and at the very least, difficult to find rates which are any more attractive than what they could've gotten 2-3 weeks ago. Why? Because banks are smart enough to realize that lending to anyone right now may come back to haunt them. so they're largely freezing lending and sort of waiting / watching / seeing. Makes no sense for a bank to lend money at a low rate when they can't quantify / estimate risk in any meaningful way. Granted, that's terrible for the economy, but it's a smart thing for banks and for fannie mae and freddie mac.

Rating: moderately easy to handle emotionally.

5) Due to the years of government hand-holding, the GSEs are probably safer now than they've been since before the dot.com bubble. I don't anticipate household foreclosures as being as significant as 2008 even if we have a downturn / recession. But if they are, F&F are substantially less leveraged now than they were then. To me, most homeowners these days are gonna be fine. It's the apartment dwellers that are the real risk. Remember, the GSEs own housing not really commercial real estate (which is more REITS and such). CE is gonna get spanked like a freaking red-headed step child this time around if you ask me. Granted, everything is interconnected. But have you noticed? REITs have been one of the most resilient categories in the market since the crash started. So I don't think people are selling the GSEs off because of rates. Also. at the end of the day... fannie and freddie's share price don't trade on fundamentals as it is anyways. (when has their balance sheet ever really mattered as long as they're in conservatorship?). To me, this reason for selling is a stretch. The companies need to be out of the government's hands before I start worrying about their net interest margins and such.

Rating: pretty easy to handle emotionally.

6) Now the last bit. That the government may not be able to do a secondary public offering now. Booo fucking hooo. The only reason, ONLY REASON to do a secondary offering in the first place, was because people were too freaking impatient to wait for them to just recapitalize themselves naturally. So I view this not happening as an ABSOLUTE WIN. given the choice of 90% dilution and a fast release versus the companies just retaining earnings every quarter over the next 5-7 years until they have enough money retained to meet capital requirements, I'll choose the latter scenario EVERY FREAKING TIME. especially since while we wait, we still have court cases working their way through that could potentially come up with another solution. To me, the rush to recap benefits no one other than the government. prove me wrong. why are shareholders benefited? you could say, "oh well we might not have a friendly president the next time." Bitch, this president hasn't been friendly either. No president has been friendly to GSE shareholders since the start of this. So there's no difference there. meanwhile, a quick recap basically ensures that commons get smashed and even preferreds would be forced into a deal that maybe some are unhappy with. Quick recap was an idea that short term traders were more obsessed with than anyone. This to me, is the single largest reason (of all listed) that the stock has sold off so much in the past couple of weeks. Short term traders are exiting the trade. And that's fine. When short term traders give up on things, that's generally an excellent opportunity for long term investors with different time horizons to step in.

Rating: super easy to handle emotionally.

7) sure this is now more of a risk maybe than before. by like... the tiniest of factors. Mainly because, the government could have (at any point) decided to put them into receivership. The reason they didn't (and won't now that the economy is tanking) is who would buy the assets? who out there would "replace" the current status quo? who would hold all of the nations mortgages? The big banks are way way way too concerned about the economy now to stockpile trillions of dollars of mortgages onto their balance sheets (which they don't like owning ANYWAYS). Plus. Who really wants the banks to be 2-5x bigger than they already are? And the whole point of the government not nationalizing them (officially) is because they didn't want all that debt added to the national debt. So the government won't just take them over. Because that could cause massive ripples through the economy, as treasury bonds would likely have to be totally repriced. Receivership has just never really been a realistic option. Because if they go and screw over all the existing shareholders in that fashion, there'd be EVEN LESS interest in investing in whatever "new company" they create to replace the status quo than there is in a secondary offering in the current ones right now. Not to mention, i think we all know how this plays out in court if the government puts these things into receivership after sucking out tens of billions of dollars more than they were owed from the entities.

Rating: pretty easy to deal with emotionally.

To me, these sort of moves are things fannie and freddie investors have become accustomed to. Longs see them as buying / entry opportunities. Swing traders see them as re-entry points. Nothing really fundamental has changed about the investment thesis with this crash, EXCEPT that maybe now they won't be rushed into a very punitive secondary offering (because everyone knows it would be a pointless waste of time, since NO ONE is buying into anything right now)... and that's A GOOD THING. Because as more time goes on, more capital is retained, and the GSEs get closer and closer to self sustainability (as long as no one re-establishes b.s. like the NWS, but with courts watching this now, that's unlikely imo). So shorts like you can try to rattle people all you want, but you'd probably have better luck in the tesla or boeing sections of seeking alpha with that sort of trolling tbh.

my $0.02

Very good post. I agree with all points except #6, which I strongly disagree with. Nothing is ever easy, right?

All indications I have heard is that Calabria and Mnuchin fully intend to go the fast recap route and get as much done as possible by the end of the year. The coronavirus outbreak doesn't change this.

Trump has been far friendlier to GSE shareholders than Obama in terms of actually taking steps to get the GSEs out of conservatorship. If Trump really wanted the NWS status quo he could have done so easily.

Under Calabria, the slow recap and eventual release without a highly dilutive capital raise is dead. Calabria already said that shareholders will be heavily diluted by the capital raise, which is in addition to heavy dilution by the warrants.
Maiden35 profile picture
Fear and panic have gripped this Country from the top down. Not a wing and a prayer they do anything with the GSEs during this administration. Courts will slow beyond a snails pace. Sell and limit your losses.
Arkham profile picture
There is no election risk in GSE's with Biden. Biden is backed by Gary Hindes. If anything this moves faster and smoother with Biden. There is no election risk here, whoever advises Trump on holding it post election will cost him votes of GSE's shareholders.
Maiden35 profile picture
Nothing will happen with the GSEs beyond this point. The Supreme Court will drag its feet Sweeny style and they will become wards of the state via congressional action. It’s over.
Why the big drop in share price? Did something come out that I’m not aware of?
Valuemonster profile picture
Yeah, the world is coming to an end, and F&F with it. LOL....Looks like ANOTHER in a LONG LIST of very nice opportunities to accumulate before she is finally settled. Of course I have said that multiple times over the years. None of us are getting ANY younger, F&F should have been meaningfully addressed by now! All JMO.

Great luck to all...Victory or Death...VM
yup... just bought more, great opportunity!
there is 1 more drop coming before it settles. How big/soon the drop will be? god knows. but certainly right now FNMA is affected by Trump's stupid policy from 3/9 about protecting small companies, which FNMA now is not protected. My estimation is that itll reach somewhere between 1.4 - 1.6 before it goes back up again.
ziaakbari profile picture
no worries will hit 7 long fnma
What's your price target?
The Other Street profile picture
Double on common. From $7 to ten bagger on common.
Thank you for the great article and updated news.
I would love to see a article about the real numbers of shareholders who lost they investments in the Fs
I believe the government attorneys are trying to spotlight the greedy evil hedge funds who will make millions and millions of dollars off the poor backs of the American taxpayers...... this has to stop, you and all others who post on SA have a fiduciary responsively to the real owners of Fannie and Freddie.
I know one person who lost her life savings and now her life never to see justice. I am sure there are now thousands of people who trusted and thought there investment in F&F was the safest thing on the planet, how sad to be cheated by your own government.
Please keep the truth alive.
Cheers and thanks again for your great article.
The Other Street profile picture
@raindoyle06 Thank you. I have tried to get to that number as well, but it is impossible since most of holdings are in Street name. However, I suspect the number to be quite large, tens of thousands, for the reasons you cite. And while Treasury pretends to be the taxpayers' guardian, fact of the matter no taxes were cut or not raised because of these excess payments, so they did not end in taxpayers' pockets. Now, these taxpayers happen to be the same shareholders who did lose their capital.

That said, I am pretty sure the Obama Administration viewed this as a windfall to fund their otherwise fake stimuli and healthcare fiascos.
thank you for the reply
Do keep the story on track and not let this be about the greedy investors
It should focus on how the little guys have suffered
Thanks again
There are 11,000 Investors... That's ALL.
Not a Very Big Number...That's Why This Get's Very Little Press...Unless it Negative Press.
In case no one has said it yet: Great title for this article seres! Just curious- was it a reference to the 80s horror film My Bloody Valentine?
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