Washington Goes To Fannie Mae & Freddie Mac
The Ugly, the Bad & the Good that Investors Need to Know Michael Burry
The GSEs’ investors have seen enough unfulfilled grand promises over enough years to try the patience of Job.
Since President Trump’s election to a second term, the shares of both GSEs have marched upward toward the mid-teens and then fallen dramatically to the mid-single digits.
Amidst the ups and downs, one truth remains. By far the largest driver of value of the shares stems neither from an IPO nor from an exchange listing.
Shareholders’ Sisyphean saga comes down to the Senior Preferred Stock (SPS) Liquidation Preference (LP), which grows largely in line with the Twins’ retained earnings.
For now, Fannie and Freddie retain those earnings and keep that capital.
Fannie and Freddie as enterprises benefit from improved capital position, but common shareholders do not see it and today have no claim to it.
The Twins have paid far more to the Treasury than was ever provided to them, but if the SPS LP is affirmed by Treasury, the Twins’ stocks will fall straight to the low single digits.
If the SPS LP is instead deemed to have been paid off, then all those retained earnings indeed belong to the Twins.
The stocks would then run straight up, perhaps 3-4 times today’s price.
I am fairly confident that clarification on the SPS will precede the IPO, as marketing for the IPO likely cannot proceed without such.
Freddie Mac’s event map looks almost exactly the same as Fannie’s, above, with the very same events. The shares remain up hundreds of percent since before Trump’s election.
The stair step up and stair step back down appears to be a prototypical head and shoulders pattern, typically a reflection of investors’ tortured psychology and relatively agnostic as to underlying business fundamentals.
The map nevertheless suggests the stock moved in line with a number of fundamental news items. That is, to the extent hopes, dreams and disappointments count as news.
Believe it or not, this is the ugly. The ugly truth is that the end result is in the Trump Administration’s hands...