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Re Bruce Berkowitz Discusses His Financial Investments
Posted by: batbeer2 (IP Logged)
Date: September 18, 2013 04:28PM

>> Do you have an understanding if the preferreds would need to be bought back eventually or is there a risk that preferred shareholders could get wiped out?

The short answer:

Only in the stock market are people willing to bet tens of billions of dollars that a politician can be trusted to to do precisely as he says.

The long answer:

I can come up with three scenarios.

1) Nothing changes. The treasury continues to sweep all the cash forever and fund all deficits forever too. Fannie and Freddie's employees are in effect now civil servants and tax payers now own the company outright as well as any risk that comes with that.

There is no political, economic or legal driver for this scenario. I can see why it needed to be done but it seems equally inevitable to me that it will stop.

2) Congress revokes the mandates of Fannie and Freddie.

The banks won' t be able to sell their loans to Fannie or Freddie and immediately run out of cash to originate new mortgages because no one is buying the old ones. That would create problems that are orders of magnitude worse than the problems of 08/09..... Unless of course the banks are allowed to lever up a few trillion dollars to do it. This would serve to postpone armageddon a few years.

OK, let's assume they avoid this by first creating some new Fannies and Freddies before killing the old ones.

You are then left with the mountain of very long-term loans that Fannie and Freddie already own. That portfolio is growing rapidly as we speak. Is the government of the USA going to confiscate all mortgages that were originated in recent years?

No. If this comes to pass, Fannie and Freddie will be returned to shareholders minus their former mandate. Politicians get to declare victory and lawyers won't have much of a case.

3) Obama announces some very tough new regulations (akin to what the ED did to the for-profit education) that he says will rule out housing bubbles and credit crunches forever. The treasury subsequently exercises their warrants (thereby retaining control) and Fannie and Freddie are released from conservatorship.

If the treasury ever exercises those warrants to take control of the common, are they likely to take care of the preferreds first?

Under all three scenarios, someone is going to have the job of reducing the leverage of Fannie and Freddie. Redeeming those pesky preferred shares is a start. It can be done in weeks without legal hassle and has an immediate positive impact on complexity of the situation and the leverage as reported under the latest Basell rules.

Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Stocks Discussed: AIG, SHLD, BAC, FMCC, FNMA,
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Re Bruce Berkowitz Discusses His Financial Investments
Posted by: John Huber (IP Logged)
Date: September 21, 2013 10:03AM

Batbeer, great comments. Thanks for your input on this. It's a very interesting situation. A lot of variables and a lot of game theory here. Will be interesting to see how this shakes out eventually.

Guru Discussed: Bruce Berkowitz: Current Portfolio, Stock Picks
Stocks Discussed: AIG, SHLD, BAC, FMCC, FNMA,
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