Rory Stock Values

Stock values for the value investor

[Rory Stock Values @IV_Index]

@HorsemanCountry @realDonaldTrump @pulte Would have been better if Trump said, 'We're taking it public' instead of 'We're thinking about taking it public'.

[FW @firewill65]

@realDonaldTrump @SecScottBessent @pulte
$FNMA $FMCC

[Rory Stock Values @IV_Index]

“To execute quantitative easing a trader at the NY Fed would call up one of the primary dealers, like JPMorgan, and offer to buy Billion of treasury bonds from the bank. The bonds would be sold to the Fed trader, then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila, the Fed had instantly created Billion out of thin air.” – Lords of Easy Money

[Pulte @pulte]

“Fannie Mae, Freddie Mac may sell shares to investors in 2025” https://t.co/kT25qqd57a

[Rory Stock Values @IV_Index]

“All intelligent investing is value investing, acquiring more than you are paying for. You must value the business in order to value the stock.” – Charlie Munger

[Rory Stock Values @IV_Index]

@pulte Founder of a great company 🙏

[Bill Ackman @BillAckman]

One way to reduce mortgage rates would be to merge Fannie and Freddie. A merger would enable them to achieve huge synergies both in their operations and in the trading price and spreads of their MBS, savings which could be passed along to consumers in the form of reduced mortgage rates.

A merger would also reduce the cost and risks of government oversight as there would be only one institution that would require FHFA oversight.

I suspect that this is @realDonaldTrump’s idea as implied by his post below. It’s a really good one.

LFG!

[Rory Stock Values @IV_Index]

@pulte Waiting for you to post that $FNMA and $FMCC are being listed on the NYSE.

[Rory Stock Values @IV_Index]

$FMCC $FNMA Maybe soon 🤞
https://t.co/dffkcTof0i

[Rory Stock Values @IV_Index]

@deividfleims @pulte Haha, they enjoy seeing us build up hope only to be let down again

[Rory Stock Values @IV_Index]

$FNMA was hoping for a little more than rebranding ‘financial supplement’ to ‘financial earnings presentation’, but I guess it’s the most positive sign we got since Trump posted about taking FnF public. @pulte

[Rory Stock Values @IV_Index]

@pulte I like the maximizing value for the American people, but any thought on trying to bring some value back to the common and Junior shareholders?

[Rory Stock Values @IV_Index]

$FMCC $FNMA Hoping the release of Freddie and Fannie doesn’t go down the same path as the release of the Epstein list @pulte

[Rory Stock Values @IV_Index]

$FNAM $FMCC Long before the 2008 financial meltdown, Berkshire Hathaway made a bold move dumping nearly all its positions in Fannie and Freddie in 2000. At the 2001 annual meeting, Buffett/Munger were asked about this decision. While they did not provide specific details, they indicated discomfort with the change in FnF’s risk profile.

During the 1990s and early 2000s, HUD set and progressively raised housing goals for FnF requiring them to purchase subprime and Alt-A loans. These targets grew to 50% in 2001 and to reach 56% by 2008 (ironically). Buffett/Munger likely factored these growing risks into their decision to exit their positions.

When the 2008 Financial Crisis occurred FnF risky mortgages (partly fueled by HUD’s goals, and some might argue mostly driven) came to light. The Govt never owned up to their role for what happened, instead pointed fingers at Wall Street. Acting clueless on how the crisis could have happened and portraying themselves as being the heroic rescuers. Swooping in with the bailouts (≈$190B) of FnF through the purchase of Senior Preferred Stock. In return the Treasury received warrants for 79.9% of FnF common stock, and placing FnF into conservatorship.

Then in 2012 the Treasury amended the bailout agreement by imposing the controversial Net Worth Sweep, which required FnF to pay nearly all their profits to the Treasury as dividends. Limiting FnF ability to build their capital structure. All while having no regard to the common shareholder for the problem the Govt’s policies helped cause. This amendment has provided the Treasury with payments of ≈$301B, far exceeding the original bailout terms for the Treasury to recoup its capital plus a 10% annual dividend. Though during Trump’s first term tweaks to the Net Worth Sweep allowed the GSEs to start rebuilding some capital.

Since FnF delisting from the NYSE in 2010 their stocks have been relegated to the OTC pink sheet market, trading at depressed valuations under the shadow of conservatorship. But hopefully Trump is successful in paving a way for their reappearance to the NYSE and return to trading at their fair market valuations.

While FnF bear some blame for their 2008 downfall, HUD’s lofty housing goals played a starring role in setting the stage for the crisis.
Sources:
https://t.co/8txZWrxN8v
https://t.co/n2Em0xozVf
https://t.co/dNL6P5qrdh

[Rory Stock Values @IV_Index]

https://t.co/lVDTnqQFB4

[Bill Ackman @BillAckman]

Recently, there have been a number of media stories suggesting that Fannie Mae and Freddie Mac (together referred herein as “F2”) shareholders are seeking forgiveness of money that is ostensibly owed by F2 to the government in connection with their potential release from conservatorship. The subtext of the media stories is that F2 shareholders, which include many supporters of @realDonaldTrump, are looking for a gift from the President. Nothing could be further from the truth.

As the largest common stockholders of both companies for the last 13 years, we have been leading the charge on behalf of all F2 shareholders to help them to exit from conservatorship. We believe that doing so will enable F2 to maximize the benefits to the U.S. government and the housing finance system while respecting the rule of law and longstanding basic principles of conservatorship.

F2 shareholders don’t have their hands out. The opposite is the case. Hundreds of billions of dollars of funds that belonged to F2 were unilaterally taken by the government years ago, and the companies never received credit for these payments.

F2 shareholders are simply seeking credit for payments that have already been made to the government so that a release from conservatorship can occur. Credit for these payments through the elimination of the accounting balance of the government's senior preferred stock will enable F2 to achieve their full values in the stock market, maximizing recoveries for the government and minority shareholders. Furthermore, we believe that F2's exit from conservatorship will enable the GSEs to operate more successfully and efficiently, with more stable management and at lower cost, greatly benefiting our housing finance system.

The facts around the government’s involvement in F2 are best understood by reviewing their history since the Great Financial Crisis (GFC).

F2 History Since the GFC
As with other financial institutions that required capital during the GFC, F2 received injections of capital from the government in the form of senior preferred stock (SPS). The government funds were invested in F2 on highly onerous terms compared to other financial institutions at the time (other than AIG whose terms were similar).

The terms of the government SPS provided for F2 to pay 10% cash interest, or alternatively paid in kind at a 12% interest rate. The government also received $2 billion in commitment fees and 79.9% of the common stock of both companies in the form of penny warrants.

On August 12, 2012, more than three years after the financial crisis, the Obama administration unilaterally revised the terms of the SPS to provide that the government would receive 100% of the profits of both companies, the so-called Net Worth Sweep.

At the time, the government explained that it had modified the SPS terms because F2 would never be able to repay the SPS under its original terms. At the time this statement was made by the government, the record (revealed during discovery) shows that the government knew that F2 were about to become massively profitable and would therefore be able to repay the SPS, and be in a position to emerge from conservatorship and return value to shareholders. The SPS terms were modified by the Obama administration in an attempt to prevent this eventuality and to expropriate cash that could be directed toward other favored administration priorities.

Months after the Net Worth Sweep was implemented, F2 began generating massive profits as their accountants required them to reverse the large accounting reserves that the companies had taken during the GFC in anticipation of losses that did not occur. In other words, both companies over reserved for losses during the GFC, and when those losses did not occur, their accountants required the reserves to be reversed, generating massive profits for both companies.

As a result of the Net Worth Sweep and the massive profits and cash flows generated by both companies, F2 repaid $301 billion of the original $191 billion invested by the government. As a result, the government has received an 11.6% return on its investment in F2 SPS, 160 basis points more per annum, $25 billion more than the original contractual terms of the SPS.

Despite the $301 billion in payments, F2 did not reduce the SPS liabilities on their balance sheets. Put simply, $301 billion left the companies and there was no accounting for any of the interest or principal payments to the government. The SPS liabilities have therefore remained outstanding as if no payments had been made.

If the payments to the government were not accounted for as interest and/or a payments of principal, what were they and how were they accounted for?

Money can leave a company in only a few ways: as a payment for goods or services to suppliers, rent, wages for employees, interest to creditors, or dividends to shareholders. Each of the above require one or more accounting entries under GAAP accounting. If the Net Worth Sweep payments were indeed payments to the SPS under their revised terms, why were they not accounted for as such?

The fact that F2 never received accounting credit for making $301 billion in payments to the government does not mean that the payments did not take place. While in this conservatorship, the government chose not to account for payments to the SPS, that does not change the economic reality as to what transpired here.

Never before or since has a company in conservatorship made payments to a creditor or preferred stockholder, whether to the government or to a private party, that were not accounted for. All previous conservatorships before or since have accounted for all payments made to creditors. In fact, respecting the hierarchy of claims in a conservatorship is critically important to the ability of financial institutions to raise capital during periods of market stress as no investor will invest in a distressed financial institution if the government can simply steal money from a conservatorship, leaving creditors, preferred stockholders, and common stockholders high and dry.

Here, $301 billion left F2 and went to the government for the benefit of taxpayers, and the liability under the SPS remained outstanding, and has continued to increase substantially.

While Treasury Secretary Mnuchin ended the Net Worth Sweeps in 2017 allowing F2 to build capital, the terms of the SPS were again amended so that their balances would increase with each dollar of capital retained by the companies. As a result, the SPS balances on F2’s balance sheets now total $348.2 billion.

Secretary Mnuchin modified the terms of the SPS in this manner to preserve the government’s control over F2, maintain a strong negotiating position in light of outstanding litigation, and to keep the government in the driver seat in connection with any negotiations in connection with their release from conservatorship. As we have seen previously, under government control, F2 can apparently use whatever accounting it wants for its SPS, but the economic reality is that F2 have built substantial capital of $161 billion since the termination of the Net Worth Sweep, approaching what is required for their emergence.

The press has referred to the potential cancellation of the $348.2 billion balance as a gift from the government to the shareholders of F2. This is not an accurate reflection of the facts. As previously explained, the government has been paid more than it was contractually owed under the extremely onerous terms of the SPS.

The fact that Fannie and Freddie never received credit for these payments, and the SPS balances have increased under Mnuchin’s revised accounting do not change the economic reality on what has transpired here.

Why Is It in the Best Interest of the Government to Cancel the SPS Balance Sheet Liability?

Putting aside the economic reality of the SPS repayment by F2, it is in the best interests of the government to remove this liability from F2's balance sheets for a number of reasons:

First, no private sector investor will invest in F2 in the future if the government can unilaterally revise the terms of F2’s liabilities at will. This will effectively eliminate F2's ability to raise capital to emerge from conservatorship while also impairing the companies trading values, and the value of the government's investment in both companies.

Second, the 'cost' to the government for cancelling the SPS balance is only 20.1 cents on the dollar because the government owns 79.9% of the common stock of F2 through the exercise of its penny warrants, and reductions in a company's liabilities increase the residual value to its common stockholders. In other words, for each dollar of SPS that is cancelled, the government recovers 79.9 cents of replacement value through its warrant ownership in both companies.

Third, while the government could attempt to convert the SPS into common stock thereby massively diluting common stockholders, the cost and risk of the resulting litigation, delay to the exit from conservatorship, and the impairment to the trading value of F2 common stock held by the government would vastly overwhelm the benefit of doing so when compared with cancelling the SPS accounting balance and consummating a release from conservatorship with support from the institutional and retail investment communities.

F2 stock is held by millions of small shareholders and by major institutions that manage money for retail investors such as Capital Group. While the media often depicts Pershing Square as having wealthy investors, our funds are held by thousands of small shareholders as well as pension funds and other fiduciaries that invest on behalf of retirees and other small investors. While the press and some politicians attempt to portray the F2 release from conservatorship as a windfall for the rich, the vast majority of the value created here will go to small investors.

The notion that the Trump administration would act in a manner to wipe out F2 investors for an uncertain and likely suboptimal outcome is extremely unlikely in our view.

For all of the above reasons, we believe that F2 common stock will be an excellent investment for the government, the junior preferred stockholders, and the common shareholders, but the usual precautions remain. Caveat emptor.

[Rory Stock Values @IV_Index]

Positive release news in that it’s in Trump’s control, even if not released from conservatorship but still taking them to the public market. Though traded on the OTC they are not valued like other stocks. With Trump’s recent comments it appears he wants these to trade at fair market value, whether released from conservatorship or not
CC: @pulte @realDonaldTrump

[Rory Stock Values @IV_Index]

$FMCC $FNMA Freddie and Fannie net profit margins over the past 10years, not too many companies have can maintain these levels. And finally, some positive news regarding their release.

[Rory Stock Values @IV_Index]

Coincidentally three of my largest positions $FMCC $FNMA $PLTR