To my way of thinking, if Donald Trump becomes the Republican candidate in the 2016 presidential election, shares of Fannie Mae (FNMA) rise; if Trump wins the presidency, FNMA soars.
Not much has been written about the connection between billionaire real estate magnate Donald Trump’s bid for the presidency and FNMA, but the growing prospect of a President Trump suggests to me a most fortuitous catalyst to unlock the market value of FNMA common shares.
Though not ideologically of the Barry Goldwater school of conservatism, Trump knows the corrosive effects of a Soviet Union-style institutionalization of entities such as Fannie Mae and Freddie Mac. I glean this from Trump’s emphatic stand about the importance of not watering down the Second Amendment, especially via Executive Branch fiat. During the debates, anyone observing the tone of his response when asked about a citizen’s Constitutional right to bear arms may sense a Reaganesque quality to Trump’s devotion to family, economics and defense, a uniquely Reagan signature that’s been slyly intimated by Trump.
As a quintessential American-style businessman, I strongly believe his proclivities for pointing to the US Constitution when it’s time to deal with the domestic quagmire of Fannie Mae will overhaul the blatantly un-Constitutional arguments set forth by the US government in defense of the Third Amendment to the Senior Preferred Shareholder Purchase Agreement (SPSPA) of Aug. 12, 2012.
I cannot fathom how a pro-business Trump would take a blind eye to allowing a government confiscation of investor rights. In fact, The Donald has/had taken a stake in FNMA, as of March 2014. (See page 43 of D. Trump’s presidential campaign disclosure, filed with the Federal Election Commission.) Please note the date, March 2014; that’s approximately 18 months after the signing of the SPSPA. Why would Trump invest in a company that’s slated for a Washington confiscation?
For those not familiar with the Third Amendment to the SPSPA of Fannie Mae and Freddie Mac, drafted by the Federal Housing Financing Agency FHFA and US Treasury, the best article I could find that discusses the salient points to the lawsuits filed against the FHFA and US Treasury can be found at Forbes Magazine, with a good update to the legal proceedings at Seeking Alpha.
So, what’s the bottom line?
Simply put: if Donald Trump becomes President of the United States, the implication is that the Republicans will maintain control of both houses of Congress, handing Trump a mandate by the people to square the “mess,” as bank analyst Dick Bove puts it, and restore property rights to Fannie and Freddie shareholders. In which case, a Constitutional slap-down to the Obama Administration’s attempted hijack of a legacy GSE may unlock as much as a $21 per common share value to investors by 2019, according to Bove (one of the best bank analysts on Wall Street). My estimate calculates to $24. Close enough.
At today’s price of approximately $1.50 per share, Bove’s estimate of FNMA implies a possibility of a compounded annual rate of return of 143% for each of the three years. That’s the quality of returns I look for from a stock.
Disclosure: I bought 5,000 shares of FNMA and will buy 5,000 more soon.
What happens if Trump does not win?
Still a good chance they eventually get released from the conservatorship. Lots of big money (Bill Ackman of Perishing Square) in this trade lobbying for that http://www.businessinsider.com/bill-ackman-on-fannie-mae-and-freddie-mac-2015-9
The earnings of a combined Fannie Mae / Freddie Mac are approx. $15 Billion per annum. At a 12 to 1 P/E ratio, the value of 15 Billion times 12 equals $180 Billion. Multiply this 180 number times 79.9% and the result is $143 Billion dollars in equity value recovery through the sale of equity warrants for the US Government. If the US Government closes the GSE’s this amount is lost to the US Treasury. If the US Government creates another entity from scratch to support the mortgage market, they would have to raise several hundred billion in private capital so that the US Government would not have capital exposure in the future and the US Government could walk away from the current implicit / explicit backstop. This $143 Billion number does not take into account additional tax revenue from gains that current private capital / shareholders would realize which could also be recovered by the treasury. The alternative of capitalizing on the value of the warrants would value the remaining equity of the company at a value not less than $37 Billion amount. This $37 Billion could be used to satisfy preferred and / or common equity stock holders. Also, the cost the US Government may incur for selling new securities in order to capitalize a new entity may be as much as 1% to 3% of the funds raised charged by the Investment Banks selling the new securities as well. Sooner or later, I believe the US Government and Congress will need to sign off on this solution, either through court victory for plaintiffs or US Congress taking advantage of equity markets to gradually ‘sell’ their 79.9% stake. If you remove all the lawsuits from the equation and remember the US Government needs private capital for mortgages to be funded and liquid in the US market, the need for the GSE’s is substantial and thus private capital should be valued. Also, if you can get past the statements by Senate members against Hedge Funds profits and simply accept that the preferred stock and common stock would need to be honored as part of the corporate balance sheets, some hedge funds would make money but the US Government would recover multiples above any of these amounts recovered by shareholders. The value of the $143 Billion is well above total amount of the junior preferred securities face amount of $33 Billion; the exercise of these warrants may need to be done sooner rather than later in order to avoid declining US stock market valuations.
Whether the US Government chooses to continue to support or leave their involvement in the mortgage market, a market valuation of the equity stake at a 12-1 multiple provides significant return to both the US Government and private capital (common shareholders and preferred shareholders) and could go a long way towards the companies recapitalization. If treated fairly, the current private capital shareholders would most likely put additional funds up to assist with a necessary recapitalization for future ongoing operation of Fannie Mae / Freddie Mac. I don’t believe that the US Government will walk away from their stake and neither should you.
FNMA may be ok if Trumps wins but rest of country goes to hell. Don’t be a one issue voter JB,
Wall street loves Trump, anyone who does not trade maybe not.
Trump won
FNMA also won
should I buy more?
Nice call.
Thanks Ron. Jb
You called it. My investment has doubled 3 days after the election. It’s obvious to say that coal is going to make a comeback, but fnma was some quality insight!
Trump knows how the “GSE Business Model” works ( Trump University ). Without the subsidy of the government guarantee placing the taxpayers in harms way there is no business.