What's going on with FMCC / Freddie Mac's stock? Rebound possible?

[fuzzybabybunny]

So the situation is that my parents have access to my retirement accounts - Roth IRA and that stuff, since he was the one who opened them for me years ago.

My dad went in and bought a bunch of Freddie Mac stock for both myself and my mom/dad, without consulting anyone. His thinking, which was very simple, is that FMCC was going up at the time and that the mortgage market was getting stronger.

He bought it at $4.22 on 05/29/2013. Then it dropped and is now at $1.45. Parents lost $200k+. I lost quite a bit too, and didn't even know he was doing this until I logged in later and saw I had bought and held onto this stock for a month or so.

Well... what's done is done. I'm trying to get a grasp on the situation. My losses aren't realized yet because I haven't sold off anything. I'm not sure what their situation is. It goes without saying that my dad, now 66 years old, is pretty distraught (thoughts of essentially wiping out an entire year's worth of work income in a couple days, etc) and plans to retire later. The stupidity of what he did (buying so much stock while having no real idea why it would reasonably go up) aside, what's the situation on FMCC?

From what I read, since the government owns this, none of the profits go to investors. Instead, all of them go directly into the treasury. Unless the government changes this for some reason, which could be the case for a long time, or forever. But I don't understand why FMCC was going up in the first place when my dad was buying it at $4.22? Why did people buy it in the first place then?

 

[mshan]

From what I've read, Fannie and Freddie are cash cows now, but Treasury is taking all profits to repay for their bailout (which may be complete by mid-year 2014).

There are apparently lawsuits from other investors saying what Treasury is doing (diverting all profits) is against rule of law.


http://online.wsj.com/article/BT-CO-20130729-709434.html

http://rt.com/business/fannie-freddy-sue-us-768/


(if the stock is held in taxable accounts, you can tax loss sell to offset capital gains or up to $3000 taxable income per year (remaining tax loss can be carried over to future years). If intent is to re-buy same stock, then wash sale rules apply and you risk stock jumping up in price while you wait out wash sale rule time period. If you use remaining proceeds to buy some other stock, I think you can do it right away, while still retaining tax loss you just harvested. It comes down to what you think rate of return is to continue to hold same stock, vs. tax loss sell and use remaining capital to buy higher quality stock or mutual fund that you hope will go up in value more than if you just held on to Freddie Mac (once Fannie and Freddie paid back government, it is possible, I guess, that government sells all it's stake back to private holders. Government sold GM below bailout cost, but I think that was for political reasons (they sold while stock was just starting to up well), so basically gave upside to private investors after bailout).

 

[SunnyD]

#1 - We already have a thread for stock talk and you know that.

#2 - Your dad is a gullible idiot just like the rest of the lay people that hopped on the FMCC bandwagon late in the game.

#3 - Market manipulation thanks to gullible idiots like your dad.

 

[fuzzybabybunny]

#1 - We already have a thread for stock talk and you know that.

#2 - Your dad is a gullible idiot just like the rest of the lay people that hopped on the FMCC bandwagon late in the game.

#3 - Market manipulation thanks to gullible idiots like your dad.

1. Huh? We do?

2. Thanks for being an asshole.

 

[fuzzybabybunny]

From what I've read, Fannie and Freddie are cash cows now, but Treasury is taking all profits to repay for their bailout (which may be complete by mid-year 2014).

There are apparently lawsuits from other investors saying what Treasury is doing (diverting all profits) is against rule of law.


05/29/2013

http://rt.com/business/fannie-freddy-sue-us-768/

I see. So my train of thought is that the government really should get out of FMCC ownership and let the markets work on their own, after the bailout money has been paid off.

BUT...

In total, Freddie Mac (FMCC) has paid $29.6 billion in dividends to the Treasury since it was taken into conservatorship in 2008. The dividends do not count as repayment of bailout money.

What's going on here?

 

[mshan]

This is just from memory of something I heard on tv, but Treasury basically changed the rules and said all profits of fannie and freddie go to government to pay back bailout. Other investors say that change of rules is unfair and they are contesting in court.

I'd recommend doing some research on when Fannie and Freddie will complete repaying of bailout funds, because I suspect government will dump their shares (at cost) then, and let private investors reap all profits of these cash cows going forward. Also guessing stock price would start to ramp before news becomes official.

"In February 2012, the caretakers of Fannie Mae and Freddie Mac were absolutely sure that the federal government would never recoup the $188 billion it spent to take them over. “The Enterprises’ losses are of such magnitude that the companies cannot repay taxpayers in any foreseeable scenario,” asserted the Federal Housing Finance Agency’s strategic plan.

But then, the housing market came roaring back, and Fannie Mae was able to reverse a write-down of a pile of tax assets, sending money pouring into the Treasury.

Now, Hamilton Place Strategies predicts that the agencies will be all paid up by the end of next year, before starting to generate surpluses."

http://www.washingtonpost.com/blogs...nie-and-freddie-are-paying-pack-the-treasury/

 

[fuzzybabybunny]

This is just from memory of something I heard on tv, but Treasury basically changed the rules and said all profits of fannie and freddie go to government to pay back bailout. Other investors say that change of rules is unfair and they are contesting in court.

I'd recommend doing some research on when Fannie and Freddie will complete repaying of bailout funds, because I suspect government will dump their shares (at cost) then, and let private investors reap all profits of these cash cows going forward. Also guessing stock price would start to ramp before news becomes official.

Well, FMCC is doing great as a business. Problem is that the profits are being insulated form the investors by the government in repayment for the bailout money.

The question is:

Will the government continue to hold onto FMCC forever, or will it dissolve away?

OR

Will the government take its hands off FMCC in the ~2 years that it'll take for the bailout money to be paid off, after which the people who already have a stake will almost assuredly finally get an appreciation on their stock purchase?

I'm thinking that for a host of legal reasons the latter is likely to happy. My parents and I just have to hold onto it until that time comes, which should be in a couple years.

 

[mshan]

My guess (total guess) is that government sells off all of it's stake when it has been paid back it's bailout funds, and leave profit on table for private investors to swoop in.

GM was doing well, stock probably would have gotten back to bailout total, but political pressure to get out of private business meant that government took a moderate loss (though bailout, imo, was still well worth residual bailout cost because of heavy lifting for economy that auto recovery has done last few years. Now housing has to take over and do heavy lifting for economy going forward).

Also do some research on tax loss selling and wash sale rules (only relevant if Freddie Mac is in taxable accounts). Even if tax sheltered accounts, remaining capital is remaining capital with no memories of losses you have unfortunately incurred. You have to look at forward potential rate of return in Freddie Mac vs. selling and buying something else that has higher upside going forward.

It doesn't have to be all or nothing action. Longleaf Partners mutual fund was big advocate of Dell, still thinks it's worth $24, but sold some of it's shares to Carl Icahn for a penny less than Michael Dell's buyout offer ($13.65) to presumably minimize downside loss and possibly also to capture some tax loss selling advantages.

 

[fuzzybabybunny]

My guess (total guess) is that government sells off all of it's stake when it has been paid back it's bailout funds, and leave profit on table for private investors to swoop in.

GM was doing well, stock probably would have gotten back to bailout total, but political pressure to get out of private business meant that government took a moderate loss (though bailout, imo, was still well worth residual bailout cost because of heavy lifting for economy that auto recovery has done last few years. Now housing has to take over and do heavy lifting for economy going forward).

Yeah, that would be my guess too based on the history and data. I think the question would be - would FMCC dissolve and a new hybrid system take its place? If this happened the investors of FMCC would be screwed as well. But I also guess that a business making so much money like FMCC doesn't just dissolve overnight, right? There should be plenty of warning to get out beforehand, I'd hope.

Hybrid System

What I still don't get is WHY there was a spike in FMCC stock prices in May. Before that it had been at a steady $0.30, as it should be. And then it jumped to $4+ in about a month. At that time, all profits were used to pay off the bailout, same as it is now. So why did it suddenly jump? Was there an expectation that the government was going to return it back to the public sector shortly after May?

 

[mshan]

"What I still don't get is WHY there was a spike in FMCC stock prices in May"

Short-covering? (I forgot, but I think market in general was inflicting alot of pain on shorts in general as market was ramping earlier this year).

 

[fuzzybabybunny]

Also do some research on tax loss selling and wash sale rules (only relevant if Freddie Mac is in taxable accounts). Even if tax sheltered accounts, remaining capital is remaining capital with no memories of losses you have unfortunately incurred. You have to look at forward potential rate of return in Freddie Mac vs. selling and buying something else that has higher upside going forward.

It doesn't have to be all or nothing action. Longleaf Partners mutual fund was big advocate of Dell, still thinks it's worth $24, but sold some of it's shares to Carl Icahn for a penny less than Michael Dell's buyout offer ($13.65) to presumably minimize downside loss and possibly also to capture some tax loss selling advantages.

Thanks, I'll check that out. Obviously this is a strategy to partially ameliorate stock losses and tax burden. So maybe sell off a small portion of our FMCC and deduct that loss from our tax burden if it was originally from a taxable account.

But with their situation, there is no capital gains tax, since there were no capital gains, only losses. Looking at the rules, they can only realize enough stock loss to offset $3,000 in personal income taxes.

http://www.investopedia.com/articles/04/122704.asp

there is no limit on the amount of capital losses that can be applied against capital gains. However, only a $3,000 loss can be applied against ordinary income in any given year.

Yeah, I suppose a cascade of Short Covering would continue to drive up the price, but that doesn't really explain why the price drove up in the first place, does it?

 

[mshan]

I don't invest in individual stocks (just mutual funds), so I can only comment in cursory method based upon what I've seen on tv or read on internet.

Remaining capital is remaining capital, irrespective of paper losses you have now unfortunately incurred.

I think you need to get a better gauge of upside potential of FMCC and downside risks (include it going to zero if government somehow eliminated it), then compare to upside and risk of other investments, or more ideally a diversified pool of investments (individual stocks or mutual funds).

If the downside risk of going to zero is really what worries you, then you have to start selling until you can sleep at night. Just use proceeds to invest in other things you are more comfortable with, understand more completely, and hopefully have higher upside potential than Freddie.

Capital loss can offset capital gains distributions from mutual fund on one to one basis without limit, and remaining loss can carry forward to future years. If you offset all capital gains for one year, then you can use some of loss to offset incremental taxes on up to $3000 ordinary income per year.

The short covering was more of a macro market issue because market was ramping without significant pullbacks, and then we had that downturn in June with Bernanke's more explicit taper remarks (Chinese also tightened lending temporarily and I think that cause some sort of margin call / forced liquidation in markets http://video.cnbc.com/gallery/?play=1&video=3000178429; Thursday before that weekend when markets looked like they might be starting to unravel a bit: http://video.cnbc.com/gallery/?play=1&video=3000176107).


Good luck.

 

[brianmanahan]

2. Thanks for being an a**hole.

its the truth though. nobody should put more than a few percent into any single equity without thinking that there's a good possibility that a big % of their investment could get wiped out.

i bet it'll come back eventually. question is, will its rate of return be better or worse than the market from here on out?

 

[mshan]

"As part of the rescue, the common stock and some classes of preferred were rendered worthless, or so the government assumed. It was a punitive act meant to penalize these security holders for failing to properly supervise the two government-sponsored entities.

But as was often the case in the bailouts, the government cherry-picked creditor classes. Senior debt holders went unharmed, mainly because the government thought to impair their investments would further spook markets.

The bailout was borne out of the government’s desperate attempts not to put the two companies’ trillions of debt on its books. Even though the government thought they were worthless, the common stock and preferred stock were left outstanding, so it could be argued that the two government-sponsored enterprises were still independent. At the time, the government likely thought this wouldn’t be a problem because Fannie and Freddie were thought to be insolvent.

...


A lot of money is at stake. Fannie and Freddie are expected to pay tens of billions to the federal government over the coming years as the housing market recovers.

The case also will affect how Congress and the government ultimately restructure these entities, as the government is now more likely to be more considerate of the preferred and common stockholders, if for no other reason than the desire to avoid litigation risk."

http://dealbook.nytimes.com/2013/07...ll-trouble-for-u-s/?partner=yahoofinance&_r=0

 

[JTsyo]

What tanked the stock price was the possibility of Congress getting rid of the GEAs and letting the private companies handle the mortgage risk. That law didn't go anywhere, had it been passed then the common stock wouldn't have been worth much. Right now the profits are being paid to the government as dividends on their shares not a pay back of the bailout. There has been some movement for the last week but I would guess it would be a while before we see $4 again. I take that back seems it went down as much as up.

I had bought some at $2.50 but it's small enough that I can just sit on it and see what happens.

 

[fuzzybabybunny]

Obama just called for a phasing out. From what I understand, both sides are calling for a phasing out of FMCC. But it's going to be a long drawn out process of many many years. They want it to go back to being private, but have the backing of the government like current FDIC backing of bank accounts. The issues they have right now is that they want mortgages to remain low interest rate and widely attainable. Their concern is that if they make it totally private companies will increase interest rates and not many would qualify, stunting growth.

I'm not sure what's going to happen to FMCC. Can the government actually phase out FMCC? So all the investors who have money in FMCC stock will just lose it all?

And I also don't understand why people are investing in a company like this in the first place. It's not a company out in the wild where you can see it fighting for survival and base your investments on that. It's held in some artificially created purgatory.

The stock doesn't pay dividends to the common person, so appreciation is the only way for the stock price to grow. Appreciation is based on supply and demand. Since no new stock is being created, supply is simply a reshuffling of existing stock. So what is fueling demand if it is stuck in purgatory?