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

[Luke 532]

We may be underestimating the role of Brian Brooks.

 

At some point, his name made the circles as one possible Under Secretary of Treasury. According to Joe Light, he has actually become an unofficial emissary spearheading a specific housing goal straight from the inside. And we already know he is a Mnuchin's man.

 

Even if JL/Bloomberg aim is to undermine administrative action by exposing illegal lobbying, how likely are they to succeed when the most important congress actors are hitting the exit door and the appetite for a new, more stringent Jumpstart is probably missing? If Brian Brooks has really been knocking doors for months now maybe there is some sense of urgency somewhere in the administration. As in "no need to wait for another Congress".

 

"One GSE watcher..." Hah!  Might as well be me, but it wasn't.  Still funny how the narrative at IMF (i.e. David Stevens) has dramatically changed in recent months.  Brooks as CEO?  Yes, please.  Even if it doesn't happen the fact that IMF (Stevens) is testing the waters with this kind of stuff seems like a positive.

 

https://www.insidemortgagefinance.com/imfnews/1_1422/daily/-1000047236-1.html

One GSE watcher told us that Brian Brooks, who currently serves as Fannie Mae’s EVP, general counsel and corporate secretary, would make a good successor to departing company CEO Timothy Mayopoulos. However, this observer added: “He’s not going to take a pay cut.” Congress capped GSE CEO pay at roughly $600,000 per year. Before joining Fannie in November 2014, Brooks was vice chairman of OneWest Bank, a bank Treasury Secretary Steve Mnuchin once owned a stake in.

[allnatural]

What I found interesting about the Collin's decision is that the majority went to the extra effort of distinguishing FHFA from CFPB, claiming that FHFA has less oversight than the CFPB. So while they ruled that the FHFA was unconstitutional, the majority didn't seem to believe the same in regards to CFPB. I am not sure how the All American case is attempting to piggyback on the Collins decision when it might have actually weakened their argument? Regardless, it would be nice to see en banc review on either the separation of powers remedy issue, APA issue, or ideally both. Do you know when we should find out if the 5th circuit will agree to hear these issue(s) or not? Thank you

 

Additionally, I believe the FHFA/Government has until Aug 30 (45 days from the decision) to petition for en banc review or 90 days from the decision for scotus review on the constitutional issues. Will be interesting to see which way the government goes here if any?

 

@cherzeca

 

So as not to clutter up Tim Howard's blog, I'll ask my question about your recent post there regarding the unopposed en banc request in the All American case.

 

Collins will likely ask for a review of the NWS claim that was dismissed in addition to the Article II claim, and FHFA will surely oppose the NWS part of it. In your opinion, how likely is it that the 5th Circuit grants en banc on the NWS claims? I take it a review of the Article II claim can be separated from a review of the NWS claim, as in either separately or both could be reviewed without regard to the other.

 

excellent question.  I think all American's motion makes it incrementally more likely that 5th cir does not hear appeal of APA claim or hears it separately en banc, since that would be the non-common claim of any consolidated appeal.  just guessing though

[rros]

We may be underestimating the role of Brian Brooks.

 

At some point, his name made the circles as one possible Under Secretary of Treasury. According to Joe Light, he has actually become an unofficial emissary spearheading a specific housing goal straight from the inside. And we already know he is a Mnuchin's man.

 

Even if JL/Bloomberg aim is to undermine administrative action by exposing illegal lobbying, how likely are they to succeed when the most important congress actors are hitting the exit door and the appetite for a new, more stringent Jumpstart is probably missing? If Brian Brooks has really been knocking doors for months now maybe there is some sense of urgency somewhere in the administration. As in "no need to wait for another Congress".

 

"One GSE watcher..." Hah!  Might as well be me, but it wasn't.  Still funny how the narrative at IMF (i.e. David Stevens) has dramatically changed in recent months.  Brooks as CEO?  Yes, please.  Even if it doesn't happen the fact that IMF (Stevens) is testing the waters with this kind of stuff seems like a positive.

 

https://www.insidemortgagefinance.com/imfnews/1_1422/daily/-1000047236-1.html

One GSE watcher told us that Brian Brooks, who currently serves as Fannie Mae’s EVP, general counsel and corporate secretary, would make a good successor to departing company CEO Timothy Mayopoulos. However, this observer added: “He’s not going to take a pay cut.” Congress capped GSE CEO pay at roughly $600,000 per year. Before joining Fannie in November 2014, Brooks was vice chairman of OneWest Bank, a bank Treasury Secretary Steve Mnuchin once owned a stake in.

Things are beginning to take shape.

[Guest cherzeca]

@allnatural

 

separate "FHFA/Government".  fhfa will want to appeal/seek en banc rehearing.  not so justice dept.

 

cfpb has not opposed initial en banc hearing in all American.  so seems to me that all American's motion helps collins in seeking rehearing en banc of the relief granted in separation of powers opinion since all parties (except maybe justice dept) will want it.

[allnatural]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

[Midas79]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

 

Good point. If I understand (relevant part of) the SCOTUS Lucia case correctly, plaintiffs have the right to expect some sort of remedy on top of the courts just fixing the agency's structure to make it consitutional. If All American's desires are taken into account, hopefully Collins's wish for the NWS to be unwound is as well.

[investorG]

I admire the board's residual hope that the courts will deliver for the minority shareholders but I don't see it happening.  Perhaps there's some small chance that the claims court rules it was a taking (a long time from now, including appeals) but the preferred shares were trading below $2 when the NWS was implemented and so the payout would likely be modest. 

 

Imo, in the end after all appeals / deals / etc..., no investor windfalls will be allowed by the collective government apparatus, especially given the hedge fund narrative.  The market is saying that loud and clear (and this is not an under-researched / inefficient investment among the smart hf community). 

 

At this point, I believe we're betting on the powers that be coming together offering a fair compromise where all parties get some but not near all of what they believe is fair.  In that hoped-for scenario, the warrants would almost certainly stand (rather than some random subjective sr pref conversion like Tim Rood suggests) and jr preferred would be either surrendered via voluntary tender or converted to common around 50-75pct of par, while the sr pref would be retired in line with the full original 10pct interest + principal payment conclusion.  The warrants can build the wall as Trump's backup plan if Congress doesn't fund it.

 

Good luck to everyone.  This scandal has been a disappointing yet mostly unnoticed blemish on our country and I truly hope that the current administration sees this as a real priority to quickly fix starting in about 3-5 months.  Thousands of Americans are counting on them to do the right thing. 

[allnatural]

I think you are pretty spot on at this point. Owning the GSEs today is a bet that the admin will resolve the situation, not that we will win in court. What's interesting about the litigation is as you highlighted, no one gives it any weight these days and assigning close to zero probability for any favorable result (just look at the last 3 court cases we lost, almost zero price reaction). Meaning we may wake up one morning to a nice surprise (as low as a probability that may be...). There is also no denying that we are beginning to see a shift in the type of questioning the judges are beginning to ask the defendants (see Collins and Saxton). For example, when has a judge in oral argument blatantly concluded that this was a nationalization? That's not to lose focus of the purpose of the litigation. It's to let the government know we aren't going anywhere, and if we win one of these cases, lets do what's best for everyone and settle with a recap release that's beneficial to all parties involved (the government, the shareholders, and most importantly the American people/tax payers).

 

"So you're telling me there's a chance!"

 

 

I admire the board's residual hope that the courts will deliver for the minority shareholders but I don't see it happening.  Perhaps there's some small chance that the claims court rules it was a taking (a long time from now, including appeals) but the preferred shares were trading below $2 when the NWS was implemented and so the payout would likely be modest. 

 

Imo, in the end after all appeals / deals / etc..., no investor windfalls will be allowed by the collective government apparatus, especially given the hedge fund narrative.  The market is saying that loud and clear (and this is not an under-researched / inefficient investment among the smart hf community). 

 

At this point, I believe we're betting on the powers that be coming together offering a fair compromise where all parties get some but not near all of what they believe is fair.  In that hoped-for scenario, the warrants would almost certainly stand (rather than some random subjective sr pref conversion like Tim Rood suggests) and jr preferred would be either surrendered via voluntary tender or converted to common around 50-75pct of par, while the sr pref would be retired in line with the full original 10pct interest + principal payment conclusion.  The warrants can build the wall as Trump's backup plan if Congress doesn't fund it.

 

Good luck to everyone.  This scandal has been a disappointing yet mostly unnoticed blemish on our country and I truly hope that the current administration sees this as a real priority to quickly fix starting in about 3-5 months.  Thousands of Americans are counting on them to do the right thing.

[rros]

I admire the board's residual hope that the courts will deliver for the minority shareholders but I don't see it happening.  Perhaps there's some small chance that the claims court rules it was a taking (a long time from now, including appeals) but the preferred shares were trading below $2 when the NWS was implemented and so the payout would likely be modest. 

 

Imo, in the end after all appeals / deals / etc..., no investor windfalls will be allowed by the collective government apparatus, especially given the hedge fund narrative.  The market is saying that loud and clear (and this is not an under-researched / inefficient investment among the smart hf community). 

 

At this point, I believe we're betting on the powers that be coming together offering a fair compromise where all parties get some but not near all of what they believe is fair.  In that hoped-for scenario, the warrants would almost certainly stand (rather than some random subjective sr pref conversion like Tim Rood suggests) and jr preferred would be either surrendered via voluntary tender or converted to common around 50-75pct of par, while the sr pref would be retired in line with the full original 10pct interest + principal payment conclusion.  The warrants can build the wall as Trump's backup plan if Congress doesn't fund it.

 

Good luck to everyone.  This scandal has been a disappointing yet mostly unnoticed blemish on our country and I truly hope that the current administration sees this as a real priority to quickly fix starting in about 3-5 months.  Thousands of Americans are counting on them to do the right thing.

The public comment period set by FHFA has a November 16th deadline. If the first action to take place -as per Moelis- is for Watt to request the companies to work on a recapitalization program, your hope of a 3 to 5 months resolution falls squarely within this time frame as Watt may not announce anything immediately after the deadline.

[Guest cherzeca]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

 

while I am sure all American is making statutory claims as well in district court, the procedural posture of case is interlocutory appeal, so the statutory claims have not been heard in district court, so this is not a case like PHH where the relief sought could be granted by means other than the constitutional claim.  so AA has to be seeking the same relief as collins

[Guest cherzeca]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

 

Good point. If I understand (relevant part of) the SCOTUS Lucia case correctly, plaintiffs have the right to expect some sort of remedy on top of the courts just fixing the agency's structure to make it consitutional. If All American's desires are taken into account, hopefully Collins's wish for the NWS to be unwound is as well.

 

this is what Lucia says.  even intimated in prior scotus cases.  we shall see

[rros]

http://www.glenbradford.com/wp-content/uploads/2018/08/18-01226-0001.pdf

 

So Perry Capital now seeks compensation and brings up the nationalization issue. On behalf of the funds he represents. Depending on what/how Saxton's court rules this may move forward? And if so, what happens to us that are not represented by Perry as investment manager? What recourse do we have? File a lawsuit?

 

PRAYER FOR RELIEF WHEREFORE,

 

Plaintiff seeks a judgment as follows:

 

A. Awarding Plaintiff just compensation under the Fifth Amendment for the government’s taking of its property;

B. Awarding Fannie and Freddie just compensation under the Fifth Amendment for the government’s taking of their property;

C. Awarding Plaintiff damages for the government’s illegal exaction of its stock;

D. Awarding Fannie and Freddie damages for the government’s illegal exaction of their net worth;

E. Awarding Plaintiff damages for the government’s breach of fiduciary duty;

F. Awarding Fannie and Freddie damages for the government’s breach of fiduciary duty;

G. Awarding Plaintiff damages for the government’s breach of implied-in-fact contract;

H. Awarding Fannie and Freddie damages for the government’s breach of implied in-fact contract;

I. Awarding Plaintiff pre-judgment and post-judgment interest;

J. Awarding Plaintiff the costs and disbursements of this action, including reasonable attorneys’ and experts’ fees, costs and expenses; and

K. Granting such other and further relief as the Court deems just and proper.

 

Interesting everybody is turning towards the nationalization theme.

 

P.S. I have the stock certificates from 2010 for all my preferred shares. Is there such a thing as calling counsel and asking to join?

[Guest cherzeca]

this is total speculation, and I don't even know what the upshot of it might be, but notice that we have two young-ish former state Supreme Court judges, willett and stas, each of whom have been recently appointed to federal circuits and been prominently mentioned as future scotus nominees.

 

willett has come out in collins with a tour de force dissent on the APA claim (NWS outside conservator's authority).  next up is stas in saxton.

 

now, understanding that from a "realist" point of view, judges are indeed concerned with their future prospects and renown, one wonders whether stas will follow willett's path and write a strident opinion or just go along with his panel's trend.

 

will willett's dissent encourage stas to "hold serve" and if so what would be the result?

 

believe me, judges are aware of their press clippings and willett and stas clearly form a cohort of two. if and how that affects stas with respect to his consideration of the APA claim is something unknowable, but I don't doubt that stas has considered it when he reads willett's dissent.

[allnatural]

Although i'm holding out hope, I'm not sure Judge Stras is our man in Saxton. He was the one who thought NWS was a nationalization and that plaintiffs best argument was that FHFA was at the will of the Treasury. He didn't appear to bite on APA violation as he seemed to conclude that a conservator under HERA is a different beast than common law conservatorship, and was the one who pointed out that shall was used in other parts of HERA, so why not here. Unless Willet's dissent is enough to persuade him, his mind might already be made up on APA.

 

I thought Judge Benton was better for us as he highlighted multiple times that the Cedarminn case was plaintiffs best argument and the defendants really had no response to him. Judge Kelly is the wild card I believe. She kept probing at what the outer-limits of the FHFA's powers was, and is there no situation where courts may question the business judgment of the FHFA? But she was appointed by Obama in 2013 and we know how politically driven our justice system is.

[Guest cherzeca]

Although i'm holding out hope, I'm not sure Judge Stras is our man in Saxton. He was the one who thought NWS was a nationalization and that plaintiffs best argument was that FHFA was at the will of the Treasury. He didn't appear to bite on APA violation as he seemed to conclude that a conservator under HERA is a different beast than common law conservatorship, and was the one who pointed out that shall was used in other parts of HERA, so why not here. Unless Willet's dissent is enough to persuade him, his mind might already be made up on APA.

 

I thought Judge Benton was better for us as he highlighted multiple times that the Cedarminn case was plaintiffs best argument and the defendants really had no response to him. Judge Kelly is the wild card I believe. She kept probing at what the outer-limits of the FHFA's powers was, and is there no situation where courts may question the business judgment of the FHFA? But she was appointed by Obama in 2013 and we know how politically driven our justice system is.

 

the other thing I noticed about the collins/saxton willett/stas pas de deux is the effect of the nationalization theme raised prominently in the saxton oral argument.  there is a whole different argument that, apart from considerations of "may" authority re conserve/preserve, congress couldn't have authorized fhfa to nationalize FnF unless it did so explicitly.  this is a nuanced argument that goes beyond the standard conserve/preserve argument.

 

and collins counsel (same as saxton) picked up on this "nationalization" nuance in their notice of appeal for rehearing en banc in 5th circuit.

[blackcoffee]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

 

Good point. If I understand (relevant part of) the SCOTUS Lucia case correctly, plaintiffs have the right to expect some sort of remedy on top of the courts just fixing the agency's structure to make it consitutional. If All American's desires are taken into account, hopefully Collins's wish for the NWS to be unwound is as well.

 

https://howardonmortgagefinance.com/2018/07/10/some-pre-comment-comments/#comment-7492

 

why do we care about the gov't getting paid back on a deal that they negotiated between itself and itself based on lies to everyone?

 

I have a hard time caring.

[Midas79]

Do you know what remedy the All American case is seeking exactly? Is it similar to undoing a previous action while under a unconstitutional regime like the plaintiffs want with the NWS? If so that is indeed positive, assuming the 5th circuit takes up the issue.

 

Good point. If I understand (relevant part of) the SCOTUS Lucia case correctly, plaintiffs have the right to expect some sort of remedy on top of the courts just fixing the agency's structure to make it consitutional. If All American's desires are taken into account, hopefully Collins's wish for the NWS to be unwound is as well.

 

https://howardonmortgagefinance.com/2018/07/10/some-pre-comment-comments/#comment-7492

 

why do we care about the gov't getting paid back on a deal that they negotiated between itself and itself based on lies to everyone?

 

I have a hard time caring.

 

Because Treasury basically holds all the cards here. They have to approve a release from conservatorship and would be the ones that would be giving up the senior liquidation preference and NWS dividends in any administrative reform scenario. Treasury being able to claim victory per the original bailout terms (10%) could be an important point from a political optics perspective.

 

It seems grossly unfair that Treasury has collected over $280B in dividends (almost $100B more than they advanced to FnF), has $193B in liquidation preference, and the right to buy 79.9% of common shares for a pittance. But that's where we stand. Treasury is negotiating from a position of extreme strength, so making it seem like they're winning is the only way to get them to the table. That or a court victory that has so far eluded us.

[undervalued]

Tapes on Watts

https://www.npr.org/2018/08/21/640332792/mel-watts-accusers-tapes

[Wiggins]

re: http://www.glenbradford.com/wp-content/uploads/2018/08/17-3794-0026.pdf

 

Isn't asking whether an award of compensatory damages could restrain the agency's powers as conservator and thus be barred under 12 U.S.C. § 4617(f) like asking whether putting a man in jail for robbing a liquor store deprives him of "life, liberty, and the pursuit of happiness" and is thus barred under the U.S. Constitution? I think if the agencies are liable for compensatory damages then it was their prior (illegal) behavior that restrained their powers as conservator, not the subsequent compensatory damages.  Unless I am misunderstanding this then the court is really off here. Of course, that would not be a great surprise.

[allnatural]

Wiggins... you are spot on. This is a bizarre/hilarious twist. I believe most judges are on the same page, IF (big if) FHFA acts ultra-vires, it violates the statute and plaintiffs are entitled to relief. This question says that any relief might actually prevent FHFA from accomplishing its duties so it could be barred as well. Unbelievable and I don't expect this to stand in any court as crazy as the logic has been to date.

 

I believe Cooper said it best during the Saxton oral argument... to paraphrase, he said of course i have standing because HERA authorized you to hear my plea today IF FHFA acted ultra-vires.

[rros]

re: http://www.glenbradford.com/wp-content/uploads/2018/08/17-3794-0026.pdf

 

Isn't asking whether an award of compensatory damages could restrain the agency's powers as conservator and thus be barred under 12 U.S.C. § 4617(f) like asking whether putting a man in jail for robbing a liquor store deprives him of "life, liberty, and the pursuit of happiness" and is thus barred under the U.S. Constitution? I think if the agencies are liable for compensatory damages then it was their prior (illegal) behavior that restrained their powers as conservator, not the subsequent compensatory damages.  Unless I am misunderstanding this then the court is really off here. Of course, that would not be a great surprise.

Maybe the court is saying awarding damages is a form of judgment -admitting a violation implicitly- and 4617 prevents the court getting there. So the charade goes on.

[Wiggins]

allnatural and rros, then the way we are interpreting this would truly put FHFA outside the law, because of course any settlement could be construed to restrain their powers, either monetarily or to use rros' point via a constraining judgment. And if so, whether this court meant it or not this ridiculous legal Catch-22 could be another avenue toward declaring the agency unconstitutional. And while I do not think that was the court's intention here, I think some other savvy judges like Willet (or SCOTUS) would be able to run with the bizarre nature of this type of logic.

I'm really hoping that Collins was the inflection point and that Saxton is the first that goes our way. With the CedarMinn precedent they should be poised to rule correctly. Or, if that doesn't go our way then Saxton is at least split with another robust dissent and is another chink in the government armor which results in victory for us down the road. In addition to either compensatory damages or preferably RRR, methinks SCOTUS and/or other courts will have to eventually rule to fix the damaging precedents set here. But what do I know...

[rros]

allnatural and rros, then the way we are interpreting this would truly put FHFA outside the law, because of course any settlement could be construed to restrain their powers, either monetarily or to use rros' point via a constraining judgment. And if so, whether this court meant it or not this ridiculous legal Catch-22 could be another avenue toward declaring the agency unconstitutional. And while I do not think that was the court's intention here, I think some other savvy judges like Willet (or SCOTUS) would be able to run with the bizarre nature of this type of logic.

I'm really hoping that Collins was the inflection point and that Saxton is the first that goes our way. With the CedarMinn precedent they should be poised to rule correctly. Or, if that doesn't go our way then Saxton is at least split with another robust dissent and is another chink in the government armor which results in victory for us down the road. In addition to either compensatory damages or preferably RRR, methinks SCOTUS and/or other courts will have to eventually rule to fix the damaging precedents set here. But what do I know...

It appears this court already answered their own question and wants counsel to arrive to the same conclusion. So this, Jacobs, would be a negative chink.

[blackcoffee]

allnatural and rros, then the way we are interpreting this would truly put FHFA outside the law, because of course any settlement could be construed to restrain their powers, either monetarily or to use rros' point via a constraining judgment. And if so, whether this court meant it or not this ridiculous legal Catch-22 could be another avenue toward declaring the agency unconstitutional. And while I do not think that was the court's intention here, I think some other savvy judges like Willet (or SCOTUS) would be able to run with the bizarre nature of this type of logic.

I'm really hoping that Collins was the inflection point and that Saxton is the first that goes our way. With the CedarMinn precedent they should be poised to rule correctly. Or, if that doesn't go our way then Saxton is at least split with another robust dissent and is another chink in the government armor which results in victory for us down the road. In addition to either compensatory damages or preferably RRR, methinks SCOTUS and/or other courts will have to eventually rule to fix the damaging precedents set here. But what do I know...

It appears this court already answered their own question and wants counsel to arrive to the same conclusion. So this, Jacobs, would be a negative chink.

 

So the courts want to fully remove themselves from ever having to enforce anything against the FHFA for any reason? See their backward logic to get to the conclusion that the gov't gets to keep the money, now makes the FHFA the most powerful entity in all the land... ultimate impunity.

[Eye4Valu]

You all make great points. You never know with judges though. It's tough to interpret their questions and comments one way or the other. Case in point..."Salting the Earth" and "Hotel California" comments made you think those judges were sympathetic to the plaintiffs arguments, until they ruled the other way.