Adios Fannie Pref

Bruce Krasting's picture


I first wrote about (and got invested in) the Fannie and Freddie Preferred stock back in the summer of 2009, Link. As of today, the last of those shares have been sold. For those who followed my path, an explanation for my exit.

By pure luck I sold the Fannie T before 3/11 (The day that the Senate voted for an unwind of Fannie and Freddie, AKA The SHTF Day). At $13+ FNMAT was trading at 65% of original par - that's a rich price for busted pref. It was also a rich price relative to all of the other Agency Pref stock. Alas, the Ts were a small portion on my sheet. The bulk went off on SHTF day - down 15%+ from the prior close. Today was the clean up.

So I bailed on the Senate vote. But there was more than just that.

- The F/F story was getting to be a very crowded trade. Too many hedge funds had gotten involved late in the game. The 'easy money' had been made.

- You had guys like Dick Bove saying FNMA was an $18 stock and the pref was money good - That kind of optimism is always a sign of trouble (and of talking one's book)

- The common stock (I never owned a share) was being dominated by day traders and robots.

- This is (and always has been) a story where the outcome will be determined in the courts. The value of the Fannie Pref will be established by the SCOTUS. (An unbelievable outcome) I'm troubled by rolling the dice with the Supreemes.

- The calendar is 'not right':

The Senate Bill will not get acted on by the House until (at least) the November elections.

The legal cases being brought by the hedge funds could be delayed for years.

I don't see a catalyst that would reinvigorate market interest.


- There is also the question of Mel Watt. Mel is, as of today, the Director of FHFA. Now that he has his fingers on the button is Mel going to say anything that would swing markets? Because of the law suits he shouldn't; but he still might. Could he say:


I believe in shareholder's rights!


No, Mel's not going to say anything of the sort. The risk is he says:


I Support the Senate plan - wind em down - kill the speculators!



1) Over (too) many years of messing with story stocks I've called the top exactly zero times. So for those who like the F/F story, don't read this to be a bearish view. I was looking at at a 10 bagger, and a very cloudy crystal ball. Should the Pref trade cheaper (below $5) I would reload. If it blasts up to par ($25), I'll still be smiling.


2) If the Senate deal happens:

A: The US taxpayers will lose $189B (the Senior Preferreds).

B: Say goodbye to the 30 year mortgage.

C: Look forward to prepayment penalties on mortgages (2-3% over the first 36 months). The embedded option in the current 30 year mortgage will be stripped out by the new mortgage lenders. Those new lenders will reside on Wall Street. (Where else?)

D: The Taxpayers will lose out on the chance to own 80% of F/F at a zero cost. That stake could be worth a fair bit. As much as $100b could be thrown out the door.


The Bull case for the F/F Preferreds is in A-D above. Those are compelling arguments against the Senate plan. But this is Washington, where nothing makes sense, so I'm moving on. I'm sure I'll find some other worthwhile trash.



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teslaberry's picture

the idea of 'killing the speculators' who bought just a hundred million worth of fannie stock in order to provide a multi-trillion dollar insurance guarantee to those speculating in the entire strucuture of banks that rely on contuing debt issuance into a market unwilling to bear more housing debt is a joke. 


you are not killing speculators. this regime is incapable of operating against the major players. vaporizing a few hundred million of hedge fund money isn't going to kill anyone. 


smoke and mirrors isn't about killing fannie and freddie mae, it's about propping up the asset baccked securities market which is the entire debt structure of the united states.


you want to kill speculators, you can only do it one way----killing the debt strucutre as a whole.

personally i say keeping fnm and freddie alive is a way better option than creating another form of fdic insurance for 'investors' in abs. why? because eventually there will be another 2008 collapse. the idea of making an insurance guarantee just delays the collapse by giving the market the false security that such a guarantee can and will be honored after the next collapse. 

i saw bring the collapse on bigger. the only thing to cure the unfinished buseinss of 2008 is a collapse that is 50 times worse, a collapse destroying the treasury of the united states, and placing tens of millions of americans into actual starvation. that is the only way a beginning to the solution of problems can start. note, that is the beginning. 


we are not even at the beginning yet.

I_Am_'s picture

why would someone drop trash in such pristine surroundings ? 

Bruce Krasting's picture

You referring to the pic in the piece? That's a Banksy. It's a knock off of Monet's 'Water Lilies'. Banksy did the pic and then sneaked it into a museum. People were confused, it caused a stir.

Not sure if this pic still exists. If it does, it's worth a million bucks. Go figure.

I_Am_'s picture

Thanks Bruce, some things one can never understand.....:-)

Lonewar's picture

Interesting to note Bruce, I am still on this roller coaster though =)

And you also called the top on Molycorp at $72.00, which was a story stock when you did.

Where I disagree with you though is that once FF leave the news cycle, the bumps will come with the quarterly reports, where the two firms report profits... so for some gambling, try buying back in about 04/30/2014 which is prior to the next quarterly report which should come out ~05/09/2014. I do think we will get a jump in price then, as we have for the last 4 years...

And thank you for the update

Bruce Krasting's picture

You remember MCP? Tks... That was July 2011. That POS last at 5.

My latest fad stock is PLUG, up a modest 50% on the day.

It's crazy, but fun.


Lonewar's picture

Oh, I almost forgot, I am starting to hear rumblings about  Rare Earths again... About supply, and shortages, and national military stockpiles... Me thinks that maybe in a year or so that prices may start to rise if these grumblings take off. MCPs problem is that they overbuilt and used too much capital to do it, so they did several follow ons that killed their stock price. but, they have shelved Phoenix Phase 2, and they may have just enough cash left to allow them to become profitable prior to going broke. I hope so.

Lonewar's picture

Of course I remember MCP, I have ridden it ALL the way down =)

This was the post I was afraid to see on Zero Hedge, you bailing on FF...

But, my cost basis for FF is effectively free, and it still has a chance to let me retire, so I will probably ride this one into the ground too...

I just hope that I am right on this one, as I am a lazy SOB, and I do NOT like working =)

Good Luck in ALL that you do Bruce, and thank you for the contributions here over the years...

Big Ben's picture

One thing I know: sometimes you've got to roll the hard six. (I just wish I knew what that means.)

If I were playing in this area (which I am not) my inclination would be to figure out the worst possible thing that Congress could do from the standpoint of the US taxpayer, and bet that on that. Easy money!

Lonewar's picture

One thing I know: sometimes you've got to roll the hard six. (I just wish I knew what that means.)

Big Ben, if you are serious, the answer is that the Hard Six is a Craps (Gambling Game) Term. I means rolling two dice so that their total on the top side of the dice is 6, but ONLY gotten by having each of the dice showing a 3. Its a 1 in 36 chance to happen (1 in 6 for the first 3, and 1 in 6 for the second 3), and most of the time, you will roll a 6 (Tied for the second most rolled number on a pair of dice with 8) via a 1 and 5, or 2 and 4 (Those ways of rolling a 6 have a 1 in 18 chance, 2 in 6 for the first die, and 1 in 6 for the second). Your chances of rolling a 6 with any combination of 2 6 sided dice are 1 in 7.2 (5 in 6 for the first die, and 1 in 6 for the second). The most common number to roll on 2 six sided dice is a 7 with a 1 in 6 chance (6 in 6 for the first die and 1 in 6 for the second one).

By the way, "Hard" 4, 6, 8, and 10 are all terms that mean rolling that number by having the same result show up on both die (2, 3, 4, 5). The reason there isnt a hard 2 or 12 is that there is ONLY one way to roll those two numbers, two 1s or 2 6s.

machineh's picture

Shouldn't we extend FNMA mortgage guarantees to our beloved compatriots in the Ukraine?

It is the very least we can do for these heroic people, who have stood beside us in our struggles for as long as anyone can remember.

ebworthen's picture

"Put it all on 30-1 for double six's."

Glad you got out in time Bruce, but you do realize it is all a corrupt casino, don't you?

And I mean the entire Wall Street/Washington construct -an immoral Ponzi.

That is the real problem.

kaiserhoff's picture

Sounds like the bear market in housing has only begun.

Thanks Bruce.  Nice summary of the likely effects.

pitz's picture

Sounds an awful lot like Canada.  Mortgages with terms greater than 5 years are pretty much non-existent.