Graham, Applied to a Live Position

Graham Applied to GSE Preferreds

A step-by-step margin-of-safety valuation of FNMAS, FMCKJ, FMCCT and the other Fannie/Freddie junior preferreds

Par value, liquidation value, contract rights, Mr. Market pricing. A textbook Graham setup — applied to the position I actually own.

$25–$50

Par value per share

70%+

Typical margin of safety

Binary

Outcome distribution

2008

Conservatorship began

The Thesis in One Paragraph

Fannie Mae and Freddie Mac junior preferreds are contractual securities with a fixed par value ($25 or $50). The underlying enterprises generate tens of billions of dollars in annual earnings. The preferreds trade at a steep discount to par because Mr. Market is pricing political and legal uncertainty, not business impairment. Benjamin Graham wrote entire chapters of Security Analysis about exactly this kind of security — a senior contractual claim, trading at a deep discount, for reasons unrelated to the underlying economics. The margin of safety is the gap between par and price. At a 70%+ discount, the gap is in exactly the range Graham prescribed for binary legal outcomes. This page walks through his framework, step by step, on the actual tickers.

Why GSE Preferreds Fit Graham Perfectly

Graham wrote Security Analysis in 1934 in the aftermath of the 1929 crash. A huge portion of the book is devoted not to common stocks but to senior securities — bonds, preferred stock, convertibles. Graham believed these instruments were inherently more analyzable than common equity because they had contractual terms you could read off a piece of paper. Par value. Coupon. Seniority. Cumulative or non-cumulative. Call features. These are facts, not forecasts.

Graham's entire framework for senior securities rests on the same insight: if you can define the contractual claim, and if you can estimate the issuer's ability to pay it (liquidation value, earnings coverage, asset protection), then you can calculate intrinsic value with far less guesswork than you can for common stock. A preferred share is closer to a bond than to an equity. You are not forecasting growth. You are pricing a claim.

Now look at the Fannie Mae and Freddie Mac junior preferred stock situation. These are cumulative preferreds, issued between the late 1990s and 2008, with stated par values of $25 or $50 per share. They sit in the capital stack above common stock and below Treasury's senior preferred and senior debt. The dividends were suspended in September 2008 when the enterprises entered conservatorship. The contracts themselves were not extinguished. The claim to par survives.

Graham would have recognized this situation immediately. Railroad preferreds during the 1930s reorganizations. Utility holding company preferreds during the 1940s forced breakups under the Public Utility Holding Company Act. In every cycle, he saw senior securities with clear contractual terms trading at fractions of par because of political or regulatory uncertainty — not because the underlying businesses were impaired. His framework handled those situations beautifully. The same framework handles GSE preferreds.

The thesis is not exotic. The thesis is literally a textbook example from a 1934 book.

The Preferred Series That Matter

There are dozens of junior preferred series across Fannie and Freddie. A few of the largest and most-traded are below. All sit at the same level of the capital stack and share the same contractual par-value claim — they differ mainly in coupon structure and absolute dollar par.

Ticker	Issuer	Par	Coupon	Notes
FNMAS	Fannie Mae	$25	Series S — 8.25% fixed-to-floating	One of the largest, most liquid junior preferreds. Cumulative dividend suspended in conservatorship. Claim to par survives.
FNMAT	Fannie Mae	$25	Series T — 8.75%	Similar structure to FNMAS. Both trade as discount-to-par bets on conservatorship exit.
FMCKJ	Freddie Mac	$25	Series Z — 8.375% variable	One of the largest Freddie junior preferreds. Liquid. Treated by investors as a proxy for the whole capital stack.
FMCCT	Freddie Mac	$25	Series T — 6.42%	Lower coupon, same contractual par. Shows how the market prices yield versus terminal value recovery.
FNMFN	Fannie Mae	$50	Series N — 5.375%	$50 par preferred. A recovery to par implies a different absolute dollar upside than the $25-par series, even if percentage discount is similar.
FMCKP	Freddie Mac	$50	Series P — 6%	Another $50 par series. Glen owns a meaningful piece of the $50-par sleeve because the absolute recovery target is larger per share.

The key point: these are not abstractions. They are real OTC tickers you can look up at any broker. Coupon rates, par values, and offering terms are all in the original offering circulars, all publicly filed. This is Graham's “read the contract” discipline applied to a modern OTC market.

For a friendlier explainer of each major series and what happened to the dividend in conservatorship, see Fannie Mae Preferred Shares Explained.

The Five-Step Graham Valuation

This is the same checklist Graham laid out in Security Analysis, adapted to the specific facts of the GSE situation. No creative adaptation required — the framework fits as written.

Establish the Contractual Claim (Par)

Graham's first move on any senior security is to define its contract. Par value, coupon rate, cumulative vs non-cumulative, seniority in the capital stack. GSE junior preferreds have $25 or $50 par values, cumulative dividends (meaning unpaid dividends accrue even when suspended), and sit junior only to Treasury's senior preferred and senior debt. This is a fixed, documented terminal value. You don't have to forecast it — you read it off the offering circular.

Estimate Liquidation Value

Graham taught that the floor for any senior security is its claim in liquidation. Fannie and Freddie are among the most profitable financial institutions on Earth, generating $15–25B of annual earnings at a combined capital base of hundreds of billions. If the enterprises were wound down, the junior preferreds would almost certainly be paid in full. If they exit conservatorship as going concerns, the preferreds get paid to reinstate equity. The downside case isn't business failure — it's political confiscation of the contractual claim. Graham would call that a political discount, not a credit discount, and those discounts have closed historically.

Apply the Margin-of-Safety Formula

Standard formula: Margin of Safety = (Intrinsic Value − Market Price) / Intrinsic Value. For a $25 par preferred trading at $7, MOS = (25 − 7) / 25 = 72%. For a $50 par trading at $12, MOS = (50 − 12) / 50 = 76%. Graham's 30–50% cushion is the typical equity range. For binary, litigation-dependent situations he explicitly recommended 70%+. GSE junior preferreds have traded in exactly that Graham-mandated deep-discount band for much of the post-2008 period.

Treat Mr. Market as a Servant

Mr. Market's pricing of GSE preferreds has swung wildly: below $2 in the despair of 2013, north of $15 during 2018's Trump-era optimism, back into the single digits on legal setbacks, then recovering on the 2022 Berkley jury verdict. Graham's framework says the intrinsic value didn't oscillate that much — the contract didn't change. Mr. Market's mood did. You buy when he's panicking, you sell when he's manic, and you ignore him the other 350 days a year.

Size Position for Binary Outcomes

Even with a 70% margin of safety, the outcome distribution for GSE preferreds is bimodal. Plaintiffs win, par or near-par is restored, the thesis returns 3–10x. Plaintiffs lose comprehensively, the preferreds approach zero. Graham's guidance on binary situations: smaller position sizes, held to a wider range of outcomes, with enough diversification that a total loss on one position doesn't compromise your long-term plan. That's the discipline. A 90% margin of safety is not a license to put 50% of net worth into a single lawsuit.

I Document Every Trade — Even the Losses

Options record: 1W-8L. Net worth: 100% GSE preferred. Get the unfiltered updates.

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Mr. Market's Mood Swings on GSE Preferreds

Chapter 8 of The Intelligent Investor introduces Mr. Market — the manic-depressive business partner who shows up every day with a different price. Some days he feels good and offers to buy your share cheap. Other days he panics and offers to sell you his share at a steep discount. Graham's lesson: the prices don't reflect any underlying change in the business. They reflect Mr. Market's mood.

Since 2008, GSE junior preferreds have traded across an enormous range. In the depths of 2013, with the Net Worth Sweep imposed and legal challenges looking bleak, $25-par series traded below $2. In 2014 after initial court losses, even lower. In 2018 during the Trump administration's first signals about GSE reform, prices pushed into the mid- teens. In 2019–2020, back down on political shifts. In 2022, the Berkley Insurance jury verdict pushed them up again. And so on.

Did the contracts change during any of these swings? No. The $25 par is still $25. The cumulative dividend is still cumulative. The seniority is still the same. What changed was Mr. Market's assessment of the probability and timing of the contract being honored. Mr. Market is a brilliant sentiment aggregator and a terrible valuer of legal contingencies.

Graham's advice: buy when Mr. Market is panicking, hold through the mood swings, and never let him talk you into forgetting what the contract actually says. I bought a substantial portion of my GSE preferred position in the 2013–2014 despair window, have held for over a decade through every mood swing, and have been adding opportunistically during the panic dips. That is the Mr. Market allegory in action, with real capital.

Graham Quotes That Fit This Trade

Five Graham quotes that read as if written for the GSE preferred setup specifically. For 50+ more sourced quotes, see Benjamin Graham Quotes.

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

Security Analysis (1934), Part I

Graham's foundational definition. GSE preferreds meet the first test through par value and contractual seniority if the contract is honored.

“The market is a voting machine in the short run and a weighing machine in the long run.”

Security Analysis (1934)

The entire GSE preferred thesis is a bet on the weighing machine eventually catching up to the contract.

“The function of analysis is not so much to establish exact value as to protect against paying too much or to show where undervaluation exists.”

Security Analysis (1934), Chapter 1

You do not need to know whether FNMAS is worth $23 or $25. You need to know it's worth substantially more than the $7 you can buy it for.

“The margin of safety is always dependent on the price paid.”

The Intelligent Investor (1949), Chapter 20

Same contract, same litigation, same par. A $7 entry and a $15 entry are different trades. Price is the variable you control.

“Investment is most intelligent when it is most businesslike.”

The Intelligent Investor, Chapter 20 (Graham called this the most important sentence in the book)

Approach GSE preferreds as a businessman evaluating a contract, not a trader chasing headlines.

Honest Risks

Graham was direct about the risks of the securities he analyzed. He would have had no patience for a page that only listed the upside. Here is the honest downside of the GSE preferred trade — the things that could break the thesis, stated plainly.

Political confiscation

Congress or Treasury could structure an exit from conservatorship that zeros out the junior preferreds even though their contractual claim survives. This has happened to senior securities in other reorganizations. It would require legislation or an administrative action that withstands judicial review.

Indefinite status quo

Nothing forces a resolution. The conservatorship could drag on for another decade with no formal exit. Preferreds would continue to trade at a discount, and opportunity cost on locked capital would rise. This is a real scenario and why position sizing matters.

Adverse court rulings

Shareholder suits can lose. The Berkley jury verdict was important but not final. The DC Circuit appeal in April 2026 could narrow or reverse it. A comprehensive defeat in courts doesn't legally extinguish the preferred claims, but it removes a major catalyst.

Dilutive recapitalization

Even a favorable exit can involve an exchange offer at less-than-par terms, or a massive common equity raise that dilutes the effective recovery. The terms of any recapitalization are a negotiated outcome, not a contractual guarantee.

This is why Graham demanded 70%+ margin of safety for binary situations. The cushion is not arbitrary — it is the compensation the investor earns for absorbing exactly these kinds of risks. Without the cushion, you are not an investor, you are a speculator.

How I Actually Hold This Position

I started buying GSE preferreds in the early 2010s while I was still working as a hedge fund analyst. The Graham framework was what convinced me the trade was sound. Net Worth Sweep looked legally indefensible. The underlying enterprises were generating massive earnings. Preferreds were trading at 4–10% of par. That is a 90–96% margin of safety if the claim is honored. Even with a 50% probability of ultimate recovery, the expected value math was overwhelmingly favorable.

I held through every swing. The despair of 2014 when Sweeney's ruling went badly at the district court level. The optimism of 2018 when reform discussions accelerated. The reversal of 2020. The jury verdict of 2022. I'm still holding. The position is concentrated enough to matter but sized to survive a zero outcome without catastrophe. That is the Graham discipline.

My full running record of the situation — the litigation, the politics, the court filings, the legal reasoning, the hearings — lives at the Fanniegate hub. This page is the pure Graham valuation. Fanniegate is where I write the chronicle.

If you're new to the trade, start with /fanniegate for the story, /fannie-mae-preferred-shares-explained for the primer on the tickers, and /margin-of-safety-explained for the Graham concept this whole page rests on.

None of this is investment advice. I own the securities discussed. I have been wrong before. Graham would tell you to do your own work.

Frequently Asked Questions

What does it mean to apply Graham's framework to GSE preferreds?

It means using Benjamin Graham's rules for analyzing senior securities — par value, contractual claim, liquidation value, coverage of dividends by earnings, margin of safety against intrinsic value — on Fannie Mae and Freddie Mac junior preferred shares (tickers like FNMAS, FNMAT, FMCKJ, FMCCT). Graham devoted substantial chapters of Security Analysis to preferred stock because preferreds have defined terminal values and contractual rights that let you calculate intrinsic value more precisely than common stock. GSE preferreds trading at steep discounts to par because of litigation and political uncertainty are almost a textbook setup from those chapters — a contractual $25 or $50 claim trading at 15–40% of par because Mr. Market is pricing political risk, not business risk.

What is the margin of safety on a GSE preferred at a typical price?

At a $25 par and a market price around $7, the margin of safety is roughly 72% — meaning your intrinsic-value estimate could be off by 72% and you would still break even. At a $50 par trading around $12, MOS is roughly 76%. Graham explicitly recommended 70%+ margin of safety for binary, litigation-dependent situations — exactly the profile of GSE preferreds. The large cushion is not a bug of the asset class; it is the correct response to binary outcomes where recovery is either near-par or near-zero.

Are FNMAS, FMCKJ, and FMCCT actual tickers?

Yes, these are real OTC tickers. FNMAS is Fannie Mae Series S (8.25% coupon, $25 par). FMCKJ is Freddie Mac Series Z (8.375% variable, $25 par). FMCCT is Freddie Mac Series T (6.42%, $25 par). There are dozens of junior preferred series across both enterprises issued between the 1990s and 2008. They differ in coupon rate, fixed-vs-floating structure, and some technical terms, but all sit at the same level of the capital stack and share the same contractual par-value claim. A detailed primer on the major series lives on my page at /fannie-mae-preferred-shares-explained.

What does liquidation value mean for a GSE preferred?

Liquidation value is the amount the preferred holder would receive if the enterprise were wound down. For junior preferreds, that means after senior debt and Treasury's senior preferred are paid but before common stock. Because Fannie and Freddie are structurally profitable (net of the guarantee fee business model), a true liquidation would likely pay junior preferreds in full. In practice, the GSEs will not be liquidated — they'll either exit conservatorship as going concerns (in which case preferreds must be reinstated to raise the required capital), or remain in conservatorship indefinitely (the current status quo, which leaves the claim unresolved). Either way, the liquidation analysis gives you a floor: the contractual par value is legally recoverable if the political equation clears.

How is the contractual claim actually enforced?

Two paths. Path one: the government ends the conservatorship, in which case the enterprises must raise equity capital and the existing junior preferreds get reinstated (or exchanged for new preferreds at par or near-par) as part of that recapitalization. Otherwise the enterprises can't exit. Path two: shareholder litigation forces a judicial remedy. The Berkley Insurance case produced a jury verdict against FHFA and Treasury on shareholder claims in 2022 — a landmark moment that established the claims have legal weight. The DC Circuit heard oral argument on appeal in April 2026. Graham would have recognized both paths — political resolution and judicial remedy — from the railroad reorganizations and holding company breakups he lived through in the 1930s and 40s.

Why haven't GSE preferreds closed the gap to par yet?

The core Graham reason: Mr. Market is pricing political uncertainty, not business fundamentals. The underlying companies generate tens of billions in annual earnings. The discount exists because no one can predict exactly when the conservatorship will end or how courts will ultimately rule. Graham explicitly wrote about situations where 'the price reflects the unfavorable public opinion and not the real worth of the security.' He thought those situations were precisely where intelligent analysis created an edge. They also tend to resolve on timelines the investor can't predict — which is why position sizing and patience are as important as the valuation math.

What's the difference between this page and /fanniegate or /security-analysis-modern-application?

My /fanniegate hub is the running chronicle of the legal and political situation — the latest court filings, hearing dates, news coverage, and my running commentary. /security-analysis-modern-application is about whether Graham's 1934 framework applies to modern markets in general, with the GSE preferred thesis as one case study among others. This page is the focused Graham-valuation deep dive: the specific math, the specific preferred series, the Graham quotes that fit, and the step-by-step application of his framework to this exact trade. Different purposes — and I recommend reading all three.

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