FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[Steve_Berk]

it's weird--here's what Cayne said during his argument:

 

And I would, I said to my colleagues I

applauded the member of the Panel, or the Clerk who saw

this, but it just supplements what we have said....

 

Investors Unite Amicus Curiae on 4623 & Olson's Institutional Plaintiffs' Supplemental Brief on 4623

 

I am still unclear of Genesis of argument. Isn't it that court asked parties to address it at orals at last moment?  If so it is hard for anyone to criticize this panel if it rules against govt given court went out of its way to raise a possible jurisdictional bar.

 

Having said that it seems the language and structure of stat heavily favors Ps.

[merkhet]

It is rather odd that this comes from the court rather than from the pleadings. In any case, I think the idea that establishing a minimum is in no way inapposite with also putting the companies towards a sound and solvent condition was a clever way to interpret the statute.

[doughishere]

John Yoo is really pounding the drums...posturing for the future of the gop?

 

 

http://www.investors.com/politics/viewpoint/a-nixonian-overreach-by-the-obama-administration/

 

 

The Nixon case certainly would not recognize a right to secrecy in the case between Fannie Mae and Freddie Mac shareholders and the Obama administration.

 

 

Judge Sweeney has raised a high bar to clear for justifying a designation of protected information. This makes it even more implausible that any of the thousands of documents still sealed in the litigation involving Fannie and Freddie will come close to meeting the standard for executive privilege that the court set in the Nixon case.

[muscleman]

http://www.prnewswire.com/news-releases/investors-unite-teleconference-update-on-oral-arguments-and-unsealed-documents-300256761.html

 

Anyone planning to participate?

 

"Pagliara will be joined by Hamish Hume".

[Steve_Berk]

Seems like a lot of you guys are way ahead of me, so feel free to ignore. But many of you seem very comfortable concluding that the FHFA has exceeded its authority and have acted in a capacity that could not be defined as a conservator, based on the statute. I agree that there's no way that its actions could lead the entity to a sound and solvent state, but the statute says the agency MAY, as conservator, take such action as MAY be necessary to put the regulated entity in a sound and solvent condition. The FHFA is arguing that this is permissive, not mandatory. I know the counterargument is that the word MAY is used to communicate the exclusive powers of the conservator, but isn't there at least a chance that the court would rule that it's permissive?

 

And if it's permissive, then the FHFA could just show that it made a reasonable attempt to preserve and conserve. Yes, we know that the decision to create the NWS ultimately wasn't a good deal at all for the GSE's, but then don't they just have to show that there were competing views--some believed that entities were still in trouble (e.g. the 10Q) and some believed they were turning the corner? If they show they honestly believed that the GSE's were in trouble, isn't there still a reasonable argument to be made that they did what they could to preserve the assets by relieving the GSE's from having to pay the 10%? Now, I know that they had other options to avoid paying the 10%, but I want to avoid making arguments about what would have been the best thing for the FHFA to have done, because I don't think that brings us to a per se violation of the statute.

 

I still believe the court will remand for a full record, but am struggling to reach the level of confidence that some of you have on the violation of the statute.

[rros]

... but isn't there at least a chance that the court would rule that it's permissive?

 

Wouldn't the panel at least try to understand that word in the context of FDIA and FDIC actions and history?

[Guest cherzeca]

@steve

 

The IPs reply or final briefs address this. Not uncommon for a statute granting authority and power to use "may" to say what agency can do so that all else not covered by may is what it can't do. At least it seems there was no judicial examination of fhfa's interpretation at orals which indicates judges agreed with FHFA spin

[merkhet]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if there have been any settlement negotiations? That's like the first question you should ask!

[Luke 532]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if ther have been any settlement negotiations? That's like the first question you should ask!

 

Hume hinted at it at least twice during the Q&A when discussing opt-in/opt-out options.

[merkhet]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if ther have been any settlement negotiations? That's like the first question you should ask!

 

Hume hinted at it at least twice during the Q&A when discussing opt-in/opt-out options.

 

I must have missed that. What'd he say? I thought he was just talking about the mechanics of breach of K class versus Takings class.

[Jurgis]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if ther have been any settlement negotiations? That's like the first question you should ask!

 

Settlement negotiations? Who needs settlement negotiations. That's low energy. Listen, GSEs are very successful businesses, they employ thousands of people. Is it a crime to take these low energy profits from them? Well, maybe it is, maybe it isn’t—who knows?  We gonna make GSEs great again. We gonna make Obama administration build the capital and pay for it. They say "how’d you gonna do it? How?” And I say one word: “leadership.”

[Luke 532]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if ther have been any settlement negotiations? That's like the first question you should ask!

 

Hume hinted at it at least twice during the Q&A when discussing opt-in/opt-out options.

 

I must have missed that. What'd he say? I thought he was just talking about the mechanics of breach of K class versus Takings class.

 

I'm probably reading it wrong (I'm biased, after all) but he mentioned one would only want to opt-out of receiving funds directly if, for example, a settlement were reached and you as the shareholder thought you could do better on your own with your own attorney(s).

[merkhet]

Guess I was too far back in the queue, but how is it that no one on the Q&A list bothered to ask if ther have been any settlement negotiations? That's like the first question you should ask!

 

Hume hinted at it at least twice during the Q&A when discussing opt-in/opt-out options.

 

I must have missed that. What'd he say? I thought he was just talking about the mechanics of breach of K class versus Takings class.

 

I'm probably reading it wrong (I'm biased, after all) but he mentioned one would only want to opt-out of receiving funds directly if, for example, a settlement were reached and you as the shareholder thought you could do better on your own with your own attorney(s).

 

Yea, I didn't take that as hinting towards anything. He was just explaining how the mechanics work.

[Luke 532]

Yea, I didn't take that as hinting towards anything. He was just explaining how the mechanics work.

 

I figured as much.  Looking forward to the transcript, if IU produces one.

[Steve_Berk]

I started taking some notes before I got sidetracked with work. Nothing new or terribly interesting in my notes, but I take them to avoid getting distracted:

 

Breach of contract for common and preferred

 

Breach of fiduciary duty

 

Taking of private property under the fifth amendment --- made in the court of federal claims—the takings claim, did not go up on appeal to DC circuit—the only place it's being adjudicated is in the court of federal claims

 

Not bringing an APA claim like Perry capital is.

 

No reason for the APA claim to be in the class action. We think we should win, even if they lose their claim.

 

Big picture—while there was tough questioning from the panel; significant to emphasize we had almost three hours of argument. Sometimes they let us go way over the time limit and spend time. shows they recognize the significance of the case, and it wasn’t a slam dunk case to affirm the district court. Put before them significant arguments. Positive sign for shareholders

 

While there are a lot of technical legal defenses, it was unjust

 

The three judges all seemed to be more preoccupied with the APA claim that Perry is making. Clear with Millet that she had thought a lot about them and had tough questions and some skepticism. When they turned to the common law claims, there was some questioning about the legal obstacles and succession provision, but very little questioning on the core merits of the common law claim. which says they spent less time thinking about them. Lamberth dismissed on the merits. Panel had no questions here. Defendant had no answers to the simple points on the merits of the common law claim. the central point is that under breach of contract claim, when you have an implied covenant claim (duty of both sides to act in good faith and fair dealing), when the court decides breach, court needs to look at the basic economic substance. Should be substance that should be considered over form. Central concept. Here’s what happened. Under the contract as originally structured, the treasury had a right to 10% dividend, and if it wanted dividend about that, the contract said all they had to do is exercise a warrant for 80% of company for 10-15k. August 2012, entities making profits, and instead of Treasury exercising warrant, it does the NWS, and the result of that is that 130 billion paid from the companies to the Treasury in excess of the 10% dividend – they paid that, and another 130 billion paid out. If they exercised the warrant then they would have had to pay the junior preferred their dividend first. Just under 8 billion. The remaining would have been split 80-20 with common shareholders. Instead of honoring those terms, the Treasury breached so 100% would go to treasury and avoid paying dividend to preferred and common shareholders. Judge didn’t ask about this.

 

The key point is that the breach of K is a breach whether or not there is an APA violation—even if they reject everything that Perry argues.

 

Judge millet was very focused on what the FHFA really knew about the future profitability of fannie and Freddie when it agreed to the NWS. Focused on the possibility that if they were not certain of the profits, wasn’t it within their discretion. What if they believed there was no profits? Wouldn’t it be better for the company? Olson said no, whatever they thought, still inconsistent with acting as a conservator. He says that’s not what they thought and they knew it was going to be deferred tax asset write off. They were resistant, and Hume tried to point back to the projections that they knew they would be profitable. Ginsburg focused on

 

If Perry wins, then it’ll benefit all existing shareholders—it’ll make fannie and Freddie more valuable and benefit shareholders. No payment of money directly. But value to the enterprises. If Class wins breach of contract claim or takings claim, that is seeking direct payment of dollars to the shareholders. The benefit of that, you need to be in the class, but you will get plenty of notice opting into the class. If you don’t opt into the class, you could bring a claim on your own. Where money will come directly to the shareholders you have to be in the class. There’s a difference—the takings claim—people who have more than $10,000—not in class unless you decide to opt in (takings claim). For breach of contract claim, you’ll get notice and will automatically be in class unless you say you want to be out of the class.

 

[doughishere]

Dumb question, whats this "K Class"?

[Luke 532]

Dumb question, whats this "K Class"?

 

K = contract, like Breach of K.

[doughishere]

Thats what I thought...thx

[doughishere]

Anyone got the link to the recording of the Investors Unite conference today?

[Steve_Berk]

Re, whether the judges agree with the FHFA's spin.... I've been re-reading the oral argument of Cayne and also getting a sense of where the court stands on the argument related to the scope/boundaries of responsibility of the conservator. It's striking that there are few questions when he says that the only thing a conservator is not allowed to do that a receiver can do is to liquidate. And that otherwise the conservator has broad powers that it shares in common with a receiver. Nobody questions him about whether the conservator had to bring the entity into a sound and solvent state, and nobody challenged his narrative that Congress basically wanted to press pause until 2018, for it to remain in conservatorship, at which point Congress would reserve the right to act. Are others more optimistic about the possibility that the court could reverse on the basis that the FHFA acted beyond its authority as a conservator?

 

In Millet's questioning of Stern, she does raise the question about whether a conservator could take away all future profits and still lead the entity towards a sound a solvent state, but she doesn't even ask a follow up question after the answer.

 

Of course Ginsburg is more aggressive with the questioning and Brown does occasionally chime in with a question about ultra vires. But what do others think about the likelihood of success on reversal on the point that the FHFA exceeded its authority as a conservator. I have no reason to be optimistic, since it's not at all clear what Brown thinks and we don't have Millet, but might have Ginsburg. Maybe I'm misreading other posts in this thread, but I got the sense that some were optimistic about this point based on the oral arguments. I'd like to be more hopeful, but am not sure I see where that hope would come from.

 

@steve

 

The IPs reply or final briefs address this. Not uncommon for a statute granting authority and power to use "may" to say what agency can do so that all else not covered by may is what it can't do. At least it seems there was no judicial examination of fhfa's interpretation at orals which indicates judges agreed with FHFA spin

[Guest cherzeca]

Re, whether the judges agree with the FHFA's spin.... I've been re-reading the oral argument of Cayne and also getting a sense of where the court stands on the argument related to the scope/boundaries of responsibility of the conservator. It's striking that there are few questions when he says that the only thing a conservator is not allowed to do that a receiver can do is to liquidate. And that otherwise the conservator has broad powers that it shares in common with a receiver. Nobody questions him about whether the conservator had to bring the entity into a sound and solvent state, and nobody challenged his narrative that Congress basically wanted to press pause until 2018, for it to remain in conservatorship, at which point Congress would reserve the right to act. Are others more optimistic about the possibility that the court could reverse on the basis that the FHFA acted beyond its authority as a conservator?

 

In Millet's questioning of Stern, she does raise the question about whether a conservator could take away all future profits and still lead the entity towards a sound a solvent state, but she doesn't even ask a follow up question after the answer.

 

Of course Ginsburg is more aggressive with the questioning and Brown does occasionally chime in with a question about ultra vires. But what do others think about the likelihood of success on reversal on the point that the FHFA exceeded its authority as a conservator. I have no reason to be optimistic, since it's not at all clear what Brown thinks and we don't have Millet, but might have Ginsburg. Maybe I'm misreading other posts in this thread, but I got the sense that some were optimistic about this point based on the oral arguments. I'd like to be more hopeful, but am not sure I see where that hope would come from.

 

@steve

 

The IPs reply or final briefs address this. Not uncommon for a statute granting authority and power to use "may" to say what agency can do so that all else not covered by may is what it can't do. At least it seems there was no judicial examination of fhfa's interpretation at orals which indicates judges agreed with FHFA spin

 

if you are looking for reversal based upon ultra vires, the most you really have to hang your hat on is ginsburg's reply to olson, where olson says in response to millett that you cant return company to sound and solvent if you take away every nickel, and ginsberg says well that is certainly true, as well as ginsburg's foray to stern re salting the earth.  as for cayne reading statute to say that C and R powers were essentially the same, ginsburg chimes in with his respectively is implicit comment.  and i thought hume's rebuttal to say how outrageous it was for govt to say shareholders have more rights in R than C was strong.

 

strongest case is for remand for fact finding; but reversal is stronger than affirmance, imo.

 

[Steve_Berk]

The one thing that even has me concerned about Ginsburg is that even though he was skeptical of the FHFA's actions, to me one of the most revealing things that he said in oral arguments came  during the initial questioning Olson. Most of the time when judges are questioning someone there's a good chance that they are simply probing and not revealing their views. However, Ginsburg goes a little farther than that when he says something to the effect of I don't see how it's consistent to say we need a record and to ask for reversal, since the record could show some lawful purpose ("I don't see how that's consistent with saying that the record's inadequate"). That's taking more ownership of the question and expressing it in a way that one can interpret to be his view. Unfortunately at that point Olson all but concedes even though he had a chance to explain why the positions of asking for reversal and a record are consistent.

 

 

[merkhet]

@Steve_Berk, I suspect that some of the optimism that you're seeing is coming from bias due to being long either the preferreds or the common stock. (Myself included.) This is actually why it's helpful to have someone like yourself take a look -- because you're newer to the situation and likely less biased than most of us.

 

FWIW, I think a remand for a full and complete record is the option that has the most support on the panel, followed by breach of K and/or implied convenant, and then reversal on the APA claims.

 

The main optimism from the APA claims is likely coming from (page 109 of the transcript) the idea that Ginsburg at one point says to Mr. Stern, "Well, I think [FHFA] had two alternatives: to act as a conservator, which they didn't want to do, or to act as a receiver, and move towards liquidation." That seems indicative of the idea that Ginsburg specifically does not think that the FHFA is acting as a conservator. From there, you have to decide whether (A) Brown might agree w/ Ginsburg & (B) whether they might back off anyway because they don't have unanimity and/or they don't want to rule aggressively.

[Steve_Berk]

I agree that a remand for a full and complete record is the most likely positive result for us. I just wonder what other things the judge might rule on, e.g. going out of its way to interpret that statute defining a conservator.

 

I'm not at all optimistic about the APA claim after studying it. And as I noted, even if Ginsburg is inclined to believe that the FHFA didn't act as a conservator, I think he has clearly said that he holds the view that notwithstanding the actions of the FHFA that the record may still reveal a lawful motivation. Olson really should have done a better job here to explain that a violation of the statute doesn't require proof of unlawful motivation, just unlawful action outside the scope of the statute. And that a demonstration of bad faith would be another, independent way to show that they weren't acting lawfully as a conservator.

 

With respect to the contract claims, I thought Hume's comments during the investors call was interesting. He said that it's good that the court spent so much time on the argument, because it means that they're really taking it seriously and grappling with it. But they spent the vast majority of time on the APA claim. Now it doesn't logically follow that their not questioning or taking time on the contract claims means they're not taking it seriously, but there's that risk. In my experience with appellate courts, when judges don't aggressively question, that means that they're more likely to affirm the lower court. Because if they're going to overturn, even if they already made up their minds, they're going to want to demonstrate a proper justification for overturning the lower court--I don't think any appellate courts take overturning the lower court lightly. So aggressive questioning would accompany a predisposition to overturn (although aggressive questioning doesn't always mean that). I am more discouraged by their silence on the contract claim than anything.

 

@Steve_Berk, I suspect that some of the optimism that you're seeing is coming from bias due to being long either the preferreds or the common stock. (Myself included.) This is actually why it's helpful to have someone like yourself take a look -- because you're newer to the situation and likely less biased than most of us.

 

FWIW, I think a remand for a full and complete record is the option that has the most support on the panel, followed by breach of K and/or implied convenant, and then reversal on the APA claims.

 

The main optimism from the APA claims is likely coming from (page 109 of the transcript) the idea that Ginsburg at one point says to Mr. Stern, "Well, I think [FHFA] had two alternatives: to act as a conservator, which they didn't want to do, or to act as a receiver, and move towards liquidation." That seems indicative of the idea that Ginsburg specifically does not think that the FHFA is acting as a conservator. From there, you have to decide whether (A) Brown might agree w/ Ginsburg & (B) whether they might back off anyway because they don't have unanimity and/or they don't want to rule aggressively.

[rros]

The one thing that even has me concerned about Ginsburg is that even though he was skeptical of the FHFA's actions, to me one of the most revealing things that he said in oral arguments came  during the initial questioning Olson. Most of the time when judges are questioning someone there's a good chance that they are simply probing and not revealing their views. However, Ginsburg goes a little farther than that when he says something to the effect of I don't see how it's consistent to say we need a record and to ask for reversal, since the record could show some lawful purpose ("I don't see how that's consistent with saying that the record's inadequate"). That's taking more ownership of the question and expressing it in a way that one can interpret to be his view. Unfortunately at that point Olson all but concedes even though he had a chance to explain why the positions of asking for reversal and a record are consistent.

 

But then, Olson takes advantage of the exchange and says something  like 'that is what happens when the record is incomplete, we are here speculating' and the judge says 'that is exactly right, I don't think we need to go further than that'.

 

As for Cayne, that only liquidation is the additional power of the receiver, I am having a hard time seeing how J. Ginsburg would interpret this as a conservator being able to wind down and a receiver being able to rehabilitate since -according to Cayne and liquidation aside- all the powers granted by statute are shared. This is why I think J. Ginsuburg used the *implied* word "respectively". Meaning powers are distinct and separate.