The latest pitch from the Oxford Club is all about another change from Trump’s Washington that they think will make you rich — and they’re not at all shy about throwing some hyperbole on the fire, saying that Trump will “unleash the greatest investment of all time.”

So what is this investment they’re hinting at, with 212% “instant” gains and an ongoing 25.7% yield? There’s gotta be a catch, right?

Let’s feed some clues into the Thinkolator and see what we learn…

“You see… in August 2012, as part of so-called financial ‘reform,’ President Obama quietly set a major restriction on this particular investment.

“Now… some might say he did it to ‘protect the American people.’

“But there was something rather peculiar about this restriction.

“In short, the rule made it so the government could profit from this investment…

“But the public could not!”

And many folks in Trump’s camp are apparently interested in changing this — or, in the ad’s words, “lifting the restriction” …

“This is a 2018 issue. We are going to fix it.”
– Treasury Secretary Steve Mnuchin

But this is something that you can apparently invest in without waiting for these “restrictions” to lift… so what’s the deal? Here’s a bit more from the ad:

“[Mnuchin] and Trump declared it a ‘top priority’ and have laid the groundwork to get the profits from this investment back into the hands of everyday investors like you and me.

“But here’s the best part.

“You can already buy into this investment today… for as little as $8….

“If all goes as planned, the moment Trump rolls back Obama’s move… this specific investment will automatically jump in value.

“And overnight, it should climb from $8 to a predetermined new price of $25.

“That’s a 212% gain in a single day!

“But from there… there’s no telling how high it could go.

“PLUS, as long as you get in today, this investment will also begin shoveling out a massive 25.7% payday.

“Imagine collecting a 25.7% annual payout… for the rest of your life.”

Then we get into a long spiel about how this special kind of secret investment has a long record of making people wealth, from the early railroad investors to Warren Buffett…

“America did not yet have the strong financial markets necessary for businesses to raise needed capital.

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“So as a way to entice investors…

“An entirely new type of investment was introduced on a Baltimore and Ohio Railroad project.

“One that offered everyday investors…

“MASSIVE upside
“MASSIVE yields
“And SECURED payouts, on top of a slew of other benefits.

“Investors piled in…

“And the railroad projects flourished…”

And apparently it’s not just this particular investment, but the broad class, that they’re calling “the greatest investment of all time” … more from the ad:

“I Call It ‘the Greatest Investment of All Time’ for a Very Good Reason…

“In short, the basis of the greatest investment of all time is a special class of ownership in a company that gives you a higher claim on assets and earnings than common stockholders.

“With this special class of ownership, you get massive upside.

“PLUS, your risk is much more limited than it is with regular investing.

“And you get huge, safe dividend yields (much bigger than those of common shares) that in almost all cases cannot be cut.

“In fact, Forbes says they ‘tend to be steadier than regular stocks, thanks to their big dividends.’…

“You also get priority over common stockholders when it comes to these payouts… meaning you’re paid first… AND you can be paid monthly.”

OK… so in case that sounds unfamiliar to you, what they’re referring to is preferred stock — a type of equity that is senior to common stock and usually trades more like debt, with a relatively high (but usually fixed) dividend.

Sometimes preferred stock is also convertible, sometimes the dividend is flexible, sometimes it is redeemable or callable, the individual offerings vary… probably the most popular structure is a fixed dividend that’s substantially higher than the dividend yield of the common stock and often also higher than the coupon on any debt the company offers, and these are usually offered in $25 increments and have public listings on the NYSE or other major exchanges, but are generally fairly illiquid and don’t trade a lot. The preferred dividend is ranked above the common dividend, and preferred shareholders also get priority over common stockholders in a liquidation or bankruptcy… but they are behind debtholders, which is one reason why the preferred often trades at a higher yield than the debt.

A lot of the examples you’ll hear of fantastical returns on preferred stock are either from historical fantastic bull market runs, like the more speculative railroad stock preferreds they mention in the ad, or are specific preferred offerings that were not publicly traded — like the hugely lucrative preferred stock deals that Warren Buffett engineered for Berkshire Hathaway when Goldman Sachs and Bank of America and others came to him in need of liquidity during the dark days of 2008 and 2009. Even if you’re very fortunate with your timing and you get a chance to jump in on a forgotten preferred during the next crash, you’re probably not getting deals like those.

So the broader tease is about preferred stock… but clearly the specific hints are about a particular company that’s got some regulatory or government issue that needs to be resolved What is it? More clues:

“U.S. Government’s $251 Billion Profit Stream Would Shift Back Into the Hands of Everyday Investors

“The moment Trump officially rolls back Obama’s anti-American initiative, a flood of riches will instantly pour into the hands of ANYONE who owns one particular set of this special investment.

“Each special share of the investment currently sells for around $8.

“But the moment Trump makes his move… I believe the price MUST immediately jump to $25.

“This could even happen as quickly as within 24 hours.

“It’s not a guess as to whether it will go to $25. It’s a predetermined figure.”

OK, so it’s a preferred stock with a $25 call or liquidation price that has something to do with the “U.S. Government’s $251 billion profit stream.” What the heck does that mean?

Thinkolator sez this is getting back to one of the most talked-about hedge fund speculations of the past five years: Fannie Mae and Freddie Mac, and, particularly, the publicly traded preferred stock of Fannie Mae.

You probably know Fannie Mae (FNMA, trades OTC now) as some sort of government mortgage agency, though they are not officially part of the government (they’re a GSE, a government-sponsored enterprise) — for many years they were used by the government as a way to encourage home ownership, by backstopping and securitizing mortgage loans into bonds that people could invest in, creating easy access to mortgages. The US government never officially promised that they would make sure that all mortgage bonds created by Fannie and Freddie and the other GSEs would never default, but they allowed the “inferred promise” to be top of mind for investors, and so when the housing crisis turned into a crash and those mortgages were defaulting like crazy, the government did step in and provide the capital for Fannie Mae and the others to backstop their guarantees. The alternative would have been a giant wash of bankruptcies.

But as part of the deal to take FNMA into government conservatorship, Fannie Mae and the others were effectively taken out of the “rewarding investors” business in September of 2008. They gave up about 80% of their equity to the government and were forbidden from paying dividends, with all profits from then on going back to the government (their profit comes from a fee on each mortgage, and on whatever they earn by packaging and selling those in-demand mortgage bonds — which still carry that inferred government promise of “no defaults” and yield more than regular government bonds, so they’re still in high demand around the world… with the Federal Reserve being one of the biggest buyers during their quantitative easing program).

But Fannie Mae and Freddie Mac were both publicly traded before the financial crisis, and those stocks remain — though they trade over the counter now and are no longer listed, and the Feds have not allowed them to pay dividends since the financial crisis (other than the preferred dividend they pay to the government, of course). And the preferred stock that they used, lots of different tranches of it, is also still traded and still available, despite the fact that none of the preferreds have paid their required dividends since the government takeover.

So the speculation, from Alexander Green and the Oxford Club folks, is that the Trump administration will fulfill its promise and start to get the government out of the “backing and sponsoring mortgages” business, which would mean getting investors involved in Fannie Mae and the others again to recapitalize them. Which would bring back the legal rights of those preferred and common shareholders, they hope (this has been in court for years as hedge fund guys and other major investors have claimed that the government takeover/rescue/conservatorship of Fannie Mae constitutes an illegal “taking”, but the court cases have not generally gone the investors’ way so far).

For a long time the poster child of the “take back FNMA” movement was Bill Ackman, who presented on that idea many times and still holds a substantial amount of the stock in the GSE’s in his Pershing Square fund — you can see the presentation he gave to the 2014 Ira Sohn Conference here, entitled “It’s Time to Get Off Our Fannie”… he hasn’t had any luck getting traction in Washington or in the courts, or at least that’s what the share price indicates, but Pershing Square is still a major holder of both Fannie and Freddie and he still talks publicly about his expectation of a 5-10X return on those positions.

More prominent recently has been John Paulson, perhaps because he was such an ardent backer of Trump’s presidential campaign, and Paulson and Blackstone floated some proposals last Summer for privatizing Fannie and Freddie. The budget deal that passed recently, with its expected framework for government spending over the next two years, did not address the fate of the GSE’s as far as I know, and President Trump’s proposed budget reportedly raises some money through the GSE’s by increasing the fees that they charge — and the new tax law will actually have a big one-time cost for Fannie, apparently, though I don’t know what that means in the long run.

The government, in the persons of Treasury Secretary Mnuchin and new Fed Chair Powell, at least, has long been committed to re-privatizing Fannie and Freddie, but what form that takes — or if they can do it if Congress objects, or if they have to give up the government’s dividends from Fannie, I don’t know.

So there’s plenty of uncertainty about what will happen — whether the pre-existing shareholders in FNMA get what they want, or whether the preferred shareholders get the payday they’re hoping for, or whether there’s some negotiated deal, or the government throws the hedge fund guys (and their campaign contributions) under the bus. This seems to me like pretty unprecedented stuff, in a legal sense, and I don’t logically see how you can get political cover for a windfall profit for some of the major investment community members who were or are major Trump backers, like John Paulson and Bruce Berkowitz (and even the beaten-down billionaire Bill Ackman), though we have certainly seen that you don’t have to embrace logic or consistency to make a name for yourself in Congress or the White House… and it’s also hard to see the government holding on to Fannie Mae forever.

So yes, those preferred shares still exist… and most of them should be paying out dividends on average of about $1.50 or so per $25 preferred depending on which series you look at, though there are some higher-rate preferred as well so perhaps that’s where the 27% numbers are coming from (there are also some $50 preferred shares — the $25 ones tend to trade just under $8 these days, the $50s trade in the range of $12). So if you bought one of the $25 preferreds for $8 today you could theoretically someday be looking at a huge yield if they start paying dividends again, or a jump up to $25 if the government calls your preferred shares at par. But they might also be worthless, and we’re coming up on the tenth anniversary of the last time these preferred shares paid a dividend. I would be very hesitant about assuming a particular outcome, because even the folks with the most skin in the game, the hedge fund investors who have had armies of lawyers working on the case for at least four years now, have not gotten what they wanted. They might, and I find the case fairly persuasive that Fannie Mae shareholders have gotten a raw deal… but it’s not me they have to persuade.

If you’d like to look into some of these different preferred offerings from Fannie Mae (or, really, any preferred stock) my favorite research source on this is QuantumOnline, which is free and fantastic — their list of FNMA-related securities is here. Read the prospectus, think about the risk you’re taking, and make your own call — just keep in mind that several billionaires have lost a lot of money on this already, and the presence of several champions of their cause in government for the past year has not made much difference… at least, not yet.

The best relatively short and recent commentary I’ve seen on the situation is here, from the folks at Northern Trust, but there are lots of very different prognostications floating around on this point. And yes, the Republican budget proposals in the House last Summer floated FNMA privatization again, though that didn’t get anywhere just yet and there’s almost certainly more than one way to “reprivatize”.

So yes, these crazy securities exist, and some very wealthy people are betting on either the common or preferred shares of the GSEs… but make sure to weigh the risks and probabilities yourself, and think about the possible range of outcomes. Preferred stock is generally a lower-risk investment than common stock, partly because of high dividends and senior status in the ownership structure (often, interest rate risk is the larger concern with preferreds), but don’t imagine that these investments in a quasi-governmental agency that remains in conservatorship are without risk — there are probably a range of possible outcomes, but they certainly aren’t paying those “secured” payouts now and they haven’t for almost a decade, and I’d personally assume that there’s a non-trivial risk of losing 100% of your investment in any of the common or preferred stocks associated with Fannie Mae or Freddie Mac.

Doesn’t mean a speculation here won’t work out, but you don’t generally get the potential for 200-1,000% gains without putting your principal at real risk — if it were obvious and clear that Fannie Mae would return to its former glory and resume paying dividends to preferred stockholders, the shares wouldn’t be trading at these levels, optimism among Fannie Mae investors is lower now than it was a year ago.

With that, dear friends, I’ll leave you to your musings and your moneymaking — what do you think? Ready to jump aboard FNMA common or preferred and bet on that government or legal decision that might let you reap a windfall? Think any of those preferred shares look better than others? Let us know with a comment below.