Monday, February 24, 2014

Stocks DD Cites: Bill Ackman comments on legal outcome and value of Fannie Mae shares for the 1st time


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Bill Ackman is an activist, value investor with a knack for in-depth research to uncover asymmetric risk-reward bets and putting the thesis in public domain. I have personally tracked Ackman's investments for about 7-8 years. I have walked away from his investments in mediocre or even bad businesses (commodity businesses-JC Penney, Target or businesses with secular headwinds as in Borders), and of course risky short bet on Herbalife. However, I followed closely his GGP thesis (although I never got the balls to bet heavily), HKD  thesis. Please note, Bill Ackman does make bold comments in the public and some have been famously wrong including his JCP thesis. So as an investor one needs to do his/her own due diligence to be comfortable with the thesis or investment. In the case of GSE, it is my belief that everything rests on how the court case on Aug 2012 amendment goes.

Bill Ackman on GSE shares -> Link
Mr. Ackman predicted the Supreme Court would side with the plaintiffs if the suit reaches the court. He said the common shares upon a legal victory would then be worth about 10 to 15 times their current value, according to the people who were there.Mr. Ackman also said that despite various legislative proposals in Congress that would create new mortgage guarantors, he believed Fannie and Freddie would escape liquidation and instead be revamped, perhaps with increased capital requirements and other protections.Mr. Ackman made his comments at the annual meeting of Entrust Capital, a New York firm that invests billions of client money in hedge funds. The event was closed to the press.
General Growth Investment by Bill Ackman in 2009 where Ackman predicted several legal outcomes many of which were legal precedents 
- Is this somewhat of a parallel for his GSE investment ?
Landmark legal and regulatory decisions were made in GGP to thwart mass liquidation(the ordinary course) of defaulted properties in CRE sector and favor consensual loan extensions. Ackman predicted these in his famous 68-page thesis "The Buck's Rebound Begins here". I would like to highlight a few of those precedents below:

1. Bankruptcy court says "Bankruptcy remoteness of SPE does not mean it is bankruptcy proof"
GGP the parent company dragged a number of so called Special Purpose Entities/those were the collateral behind the CMBS securities (even those where loans were not due for number of years and where they had not defaulted). The SPE subsidiaries were set up expressly to protect the collateral of investors of mortgage backed securities from any bankruptcy event at the parent. And after dragging all properties under chapter 11, plaintiffs then were able to argue that the court should follow plaintiff's reorg plan vs 100's of rival plans from the individual property CMBS owners. The reorg plan simply included extending maturity of the loans by a few years.

2.  Treasury eases restructuring of CMBS or Loan modification of CMBS securities -  Removal of tax implication for CMBS work outs
 “The Treasury, responding to the growing pain in the commercial real-estate industry, released new tax rules that make it easier for distressed property owners to restructure loans that were packaged by Wall Street firms and sold as securities.”

3. Federal Reserve says - Secured loans don't need to be written down solely based on decline in collateral value, if the borrowers can meet mortgage payments.
It incentivized banks to modify loans with borrowers instead of trying take possession of properties and having to deal with writing down that asset.
All the above paved the way for consensual loan modifications in lieu of piece meal liquidation of properties.

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