GSE Preferreds
We continue to hold a position in GSE preferreds. Although the return from the GSE Preferred position
was disappointing in 2014, we believe from these levels (~13% of par value) that the GSE preferred
position has an attractive risk/reward profile. As mentioned above, the GSE preferreds declined when
Judge Lambreath ruled against Perry Capital’s request for an injunction to stop the Third Amendment
Sweep of the GSEs’ net income to the U.S. Treasury. While this decision was disappointing, we think the
GSE preferred shares overshot to the downside. We think the more important legal case is the
Fairholme Funds lawsuit in Judge Sweeney’s court. Although we strongly believe that preferred shareholders will prevail in the Fairholme case, we also do not think the GSE preferred position is
completely dependent on the courts.
With the companies having paid more cash back to the Treasury than they borrowed, we believe there
is an ongoing political shift that is favorable for the companies. We saw signs of this political shift during
a Senate Banking Committee meeting in mid-November where then Senate Banking Committee
Chairman Tim Johnson (D-SD) asked FHFA Director Watt to release the companies from
Conservatorship. New Senate Banking Committee Chairman Richard Shelby (R-AL) said in a recent
interview that we should get Fannie and Freddie “up and running on their own”2 as soon as possible.
We think this is a material change in Sen. Shelby’s thinking on the GSEs as he opened the door to the
continued existence of the companies. From here, we think a potential scenario is a GSE privatization
similar to the Sallie Mae privatization from ten years ago where Fannie and Freddie start doing non-GSE
business in a new subsidiary and the existing GSE guarantees are run-off overtime as they mature. In
this scenario, the existing capital structures will remain in place and preferred holder may eventually
receive par. We believe the status quo with the GSEs forwarding all of their profits to the U.S. Treasury
is not sustainable.
http://www.gatorcapital.com/Assets/2014%20H2%20GFP%20Letter.pdf