Quick & Easy on Fannie Mae & Freddie Mac – All You Need To Know In 3 Slides by Regal Point Capital
Fannie Mae & Freddie Mac – The Background
Before the Subprime Meltdown (1980-2006)
- Fannie Mae & Freddie Mac (GSEs) were created to make mortgage financing affordable and encourage home ownership
- With private shareholders and a government backstop, Fannie & Freddie were known as “quasi-governmental agencies”
- The perverse incentive structure (Heads: I Win / Tails: You lose) that resulted from the quasi-government structure allowed the GSEs to take on much more risk than intended. Any attempts to reign in the agencies were met with anger by an ignorant and incompetent Congress—you will not believe what you see in this short video
During the Subprime Meltdown (2006-2009)
- On the verge of failure, the government bailed out the GSEs placing them into conservatorship
- The federal government gained ownership of approx. 80% of the companies
- The remaining 20% is still owned by private shareholders
After the Subprime Meltdown (2009-Present)
- Although the GSEs were provided $187 billion in the bailout, they have since sent back more than $213 billion
- FHFA entered into the Preferred Stock Purchase Agreement (PSPA) with the US Treasury. After being amended for the third time it now allows Treasury to take 100% of the profits forever.
- The latest modification to the agreement has been called unconstitutional by more than a dozen private investors and citizens that have since filed suit against Treasury. (See: Perry Capital, Fairholme Funds )
Bulls vs Bears
Bullish Bullets
- Smart Money recognizes a profit potential of >100%
- Legal experts say the third amendment to the PSPA will be rejected as it qualifies as “Self Dealing”
- No feasible ideas available to replace GSEs
- Fannie & Freddie should be able to recapitalize ahead of schedule based on the math
Bearish Bullets
- Diverted profits makes shares look worthless
- Third amendment to bailout deal allows Treasury to take all profits…
- Rumors of a wind down / Bill to replace GSEs
- Fannie & Freddie may take up to 20 years to recapitalize based on claims from Treasury
One of these gentlemen knows the GSEs like the back of his hand.
The other has been placed in charge of them.
RPC Investment Thesis
Regal Point Capital is long
Fannie Mae Common & Preferred Stock
Factual Underpinnings & Legal Contentions
It all comes down to the third amendment to the PSPAwhich we believe will be rejectedfor the following reasons:
- It is unconstitutional as it violates the 5th Amendment
- FHFA breached its duties to “conserve” & “preserve”
- Treasury exceeded investment authorization (pg. 51 of Pershing Square’s presentation) – For a more detailed explanation see Bill Ackman’s 110 slide report “It’s Time to Get off Our Fannie”
- Rationale given for the third amendment is without merit (PIK option)
- The government’s recent attempt to dismiss the pending lawsuits was thrown out
See full PDF below.