Originally Posted by BoredSocial
Dude I've basically never asked this of anyone... But show your ****ing work. Your assertion here that 50B is a conservative amount left over is a pretty bold statement.
EDIT: I'm mean you're basically telling us that fundamentally worst case this is a 4 bagger. If you can make any kind of convincing argument it'll be one of the better stock picks posted on 2p2. I suspect you're just pulling it out of your ass though.
Well I'll start off by saying that a liquidation of the GSE's as proposed contains a number of unknown factors. Those factors while unknown can be predicted within the range of possible choices that would exist at the time the choices had to be made.
Legislation to liquidate the holdings of the GSE's without adhering to the agreement, or spirit of the agreements entered into at the initiation of the conservatorship, would almost certainly result in legal action. That legal action would probably be successful to some degree. Depending upon how successful it could result in significant liability for the government.
The liability to the government would not just be contained within potential judgements that might happen on a monetary level. It might result in unforeseen and unintended consequences for the housing market and the greater economy. It could even affect the credit rating of the United States itself if instability in the housing market were to resume as a consequence of the effects of the actions.
The disposition of the default insurance(guarantee fee's) contracts at the end of the wind down would probably create significant disruption and uncertainty in the markets if handled poorly. Just logistically the completion of the end phase of the process would probably add another 2 years delay minimum on top of the proposed five year timeframe for the wind down.
Realized market values for assets might become a potential problem for the government if they are below market value and affect the potential recovery of the classes of shareholders that remain.
If determined to do so, a lower risk wind down would probably require 7-10 years with explicit signals to the market at each step of the process in order to minimize the tail-risks mentioned.
Assuming interest rates are increased sometime in early or mid 2014 I can guess that would rein in housing market appreciation to comfortable and sustainable levels that would probably correspond to just above the rate of inflation. This is assuming gradual increases in interest rates and a continuation of the currently strong underwriting standards on mortgage originations.
I estimate unemployment between 5.8-8 percent throughout the entire period of time. Although elevated it is probably the most reasonable range for monetary policy to target considering potential inflation risks.
In such a scenerio with good realized prices in the markets Fannie Mae should have the potential to generate 30-50 billion in free cash flow per year over the next five years. This assumes lawsuit settlements at 40 percent of the potential recovery with the 16 remaining banks it has pending litigation with/against. That 80 billion dollars will be remitted to the company potentially over a number of years and some of that recovery could even exceed the wind down time frame that has been proposed in Corker's bill.
The current liquidation preference for Fannie Mae is 117 billion. They just made an 8.1 billion dollar profit just coming out of this thing. So let's be real conservative and say that won't continue and they will only average 5 billion dollars a quarter from now on even with the lawsuits.
That's 4x5x5=100 billion. The profit comes when they sell off the guarantee fee contracts. They are currently charging an average of .48 basis points to guarantee a mortgage. Those contracts would have to be sold as a form of Treasury bond because the Treasury would be assuming the liability for a mortgage default. A .48 guarantee amount over a 3 trillion dollar portfolio generates abouts 15 billion per year in income annually. At current interest rates on a 30 year treasury bond it would cost a buyer about 100 billion to assure themselves 3-4 billion in income. To assure 15 billion income those contracts would have a market value of 400 billion at current 30 year interest rates. But let's be conservative and say they can only sell them for 100 billion.
17 to the senior preferred
10 billion to the junior
73 billion to the common
Even if they can't or do not want to market them that way they have to offer fair compensation for them.
So in reality a liquidation is an awful deal for the taxpayers because they end up having to give back as much as 3x the amount of money they just got back and on top of it they have to assume the risk of the entire mortgage market.