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

[SnarkyPuppy]

Also what stops the Judge from finally ruling that only those who purchased prior to the Third Amendment have reasonable expectations, and those who purchased after the Third Amendment cannot say they had any reasonable expectations even though the rights of the prior shareholders transferred to them?

 

I've brought this up multiple times and am always immediately dismissed.  Not a lawyer - but its one of the few things that keeps this from being a ridiculous sized position for me.

 

You shouldn't be dismissed.

 

I'm not a lawyer but I read Lamberth's ruling today very carefully and here is my take on what he said in his opinion: the contractual obligations, rights, and expectations of the securities do change as new laws, corporate actions, and regulations (such as HERA) are passed, BUT, when you buy a security you obtain all the rights from the previous owner. So the securities change over time, but they all change together and associated claims stand or fall together. To me, this allays your fear pretty clearly. Also, one of the plaintiffs' attorneys (can't remember I think Hamish Hume) asked, if contract rights or claims are lost when the security is sold to a new investor, then where do those rights go? Do they just vanish? I think in light of all this there should be little worry of securities being segregated into different classes based on when they were bought or sold. I don't think anyone in corporate America wants this precedent. But Lamberth's opinion is the most powerful statement so far.

 

My take on the Lamberth ruling is that it's pretty huge. Lamberth clearly demonstrates that he knows the "death spiral" story about the NWS told by the government is BS. Meanwhile he allows the surviving claim to be that of the "implied covenant of good faith and fair dealing" as pertains to the NWS. The implication seems to spell trouble for Treasury. Since Lamberth spelled out pretty clearly just how much more money Treasury has taken out than they put in (i.e. ~80 billion), then it seems reasonable that he could just order Treasury to pay the liquidation preference to junior preferreds, or alternatively, order the payment of 5 1/2 years of dividends on the junior preferreds.  Other thoughts on this last point?

 

Thank you.

[rros]

3/4 the way through the opinion.

 

I can't see how shareholders who bought their shares after the NWS don't have the contractual rights to any damages or relief granted by the court.

 

If I have bought someones shares after the NWS then the previous owner has surrendered their right to any claim and I own the contractual right to the claim. If I didn't buy the shares from someone and they gave me them free of charge, what have they given me? The contractual rights of the shares. If a company buys another company, they take on the contractual liabilities of the other company.

 

I've also looked in to bankruptcy claims courts proceedings and you can literally buy a claim from an claimant. You buy their rights. The question of timing doesn't matter.

 

I welcome any other opinion but I cant see any view to the contrary at the moment.

 

I'm not sure what we will be awarded, but I'm thinking only forgone dividends at the moment. And I only reach that conclusion as I have heard you cannot favour one shareholder alone in dividend payments. If you pay one, you pay all rate-ably. I can't see a liquidation preference payout, because ultimately these companies won't be liquidated.

 

Welcome any thoughts, ideally from the lawyers.

DRValue, this was Lamberth's reasoning if I am not mistaken. When he begins his discussion of plaintiff's implied covenant claims he agrees with plaintiff that rights travel with shares (inhere). He determines that these are "rights of the security itself, dividends and liquidation preference including any claim for breach of those rights" (He starts that sentence "In other words, " and paraphrases Activision Blizzard ruling). Then, he agrees with defendants on the timing issue based on his conclusion that corporate contracts are naturally flexible and the timing for expectations should be set at the time of the most recent change. Prior to the breach, the most recent change was the signing of HERA and the designation of FHFA as conservator (plus 2 inconsequential amendments that he never mentions). Buying shares after the breach and given rights travel with shares can only mean those claims were inherited by post-nws buyers. Someone correct me please if this isn't the right way of reading this ruling. Although never expressed, this simply comes out of his own logic. It will be really ironic if his assessment only applies to shares bought AFTER Hera when expectations were reset.

 

If so, Treasury may have a hot potato in their hands. Lamberth may have been smart in not fully deciding the matter. He only stated "these claims move forward". The next stage, thus, is a question mark. For Treasury, this is great. They may have the opportunity to disassemble the net worth sweep promptly and reset investor's expectations with little damage. Provided this interpretation is correct, Lamberth may be telling Treasury 'there is danger ahead'.

 

Again, I may have read this upside down (and quickly delete this post, if so). But I am feeling a kind of Lamberth redemption at the moment.

 

And coincidentally, his bombshell ruling was issued on 9/30/14. Almost 4 years to the date.

[Guest cherzeca]

3/4 the way through the opinion.

 

I can't see how shareholders who bought their shares after the NWS don't have the contractual rights to any damages or relief granted by the court.

 

If I have bought someones shares after the NWS then the previous owner has surrendered their right to any claim and I own the contractual right to the claim. If I didn't buy the shares from someone and they gave me them free of charge, what have they given me? The contractual rights of the shares. If a company buys another company, they take on the contractual liabilities of the other company.

 

I've also looked in to bankruptcy claims courts proceedings and you can literally buy a claim from an claimant. You buy their rights. The question of timing doesn't matter.

 

I welcome any other opinion but I cant see any view to the contrary at the moment.

 

I'm not sure what we will be awarded, but I'm thinking only forgone dividends at the moment. And I only reach that conclusion as I have heard you cannot favour one shareholder alone in dividend payments. If you pay one, you pay all rate-ably. I can't see a liquidation preference payout, because ultimately these companies won't be liquidated.

 

Welcome any thoughts, ideally from the lawyers.

DRValue, this was Lamberth's reasoning if I am not mistaken. When he begins his discussion of plaintiff's implied covenant claims he agrees with plaintiff that rights travel with shares (inhere). He determines that these are "rights of the security itself, dividends and liquidation preference including any claim for breach of those rights" (He starts that sentence "In other words, " and paraphrases Activision Blizzard ruling). Then, he agrees with defendants on the timing issue based on his conclusion that corporate contracts are naturally flexible and the timing for expectations should be set at the time of the most recent change. Prior to the breach, the most recent change was the signing of HERA and the designation of FHFA as conservator (plus 2 inconsequential amendments that he never mentions). Buying shares after the breach and given rights travel with shares can only mean those claims were inherited by post-nws buyers. Someone correct me please if this isn't the right way of reading this ruling. Although never expressed, this simply comes out of his own logic. It will be really ironic if his assessment only applies to shares bought AFTER Hera when expectations were reset.

 

If so, Treasury may have a hot potato in their hands. Lamberth may have been smart in not fully deciding the matter. He only stated "these claims move forward". The next stage, thus, is a question mark. For Treasury, this is great. They may have the opportunity to disassemble the net worth sweep promptly and reset investor's expectations with little damage. Provided this interpretation is correct, Lamberth may be telling Treasury 'there is danger ahead'.

 

Again, I may have read this upside down (and quickly delete this post, if so). But I am feeling a kind of Lamberth redemption at the moment.

 

And coincidentally, his bombshell ruling was issued on 9/30/14. Almost 4 years to the date.

 

it is hard to follow lambeth's reasoning...it seems that he is figuring out how he is going to decide in the process of the writing.  I think you have it right, @rros, but I wouldn't say the next step is uncertain.  the next steps will be P appeals of the claims that lamberth denied, and moving to trial with respect to the P claims that lamberth upheld...though Ds may appeals these.  if there is a trial, all of the fairholme discovery from court of federal claims will be able to be introduced to a jury to show that at the time of the NWS the GSEs were on the verge of historic profitability and that the D's death spiral fear was a ruse invented for litigation, all of which doesn't spell mother for the Ds.

[rros]

3/4 the way through the opinion.

 

I can't see how shareholders who bought their shares after the NWS don't have the contractual rights to any damages or relief granted by the court.

 

If I have bought someones shares after the NWS then the previous owner has surrendered their right to any claim and I own the contractual right to the claim. If I didn't buy the shares from someone and they gave me them free of charge, what have they given me? The contractual rights of the shares. If a company buys another company, they take on the contractual liabilities of the other company.

 

I've also looked in to bankruptcy claims courts proceedings and you can literally buy a claim from an claimant. You buy their rights. The question of timing doesn't matter.

 

I welcome any other opinion but I cant see any view to the contrary at the moment.

 

I'm not sure what we will be awarded, but I'm thinking only forgone dividends at the moment. And I only reach that conclusion as I have heard you cannot favour one shareholder alone in dividend payments. If you pay one, you pay all rate-ably. I can't see a liquidation preference payout, because ultimately these companies won't be liquidated.

 

Welcome any thoughts, ideally from the lawyers.

DRValue, this was Lamberth's reasoning if I am not mistaken. When he begins his discussion of plaintiff's implied covenant claims he agrees with plaintiff that rights travel with shares (inhere). He determines that these are "rights of the security itself, dividends and liquidation preference including any claim for breach of those rights" (He starts that sentence "In other words, " and paraphrases Activision Blizzard ruling). Then, he agrees with defendants on the timing issue based on his conclusion that corporate contracts are naturally flexible and the timing for expectations should be set at the time of the most recent change. Prior to the breach, the most recent change was the signing of HERA and the designation of FHFA as conservator (plus 2 inconsequential amendments that he never mentions). Buying shares after the breach and given rights travel with shares can only mean those claims were inherited by post-nws buyers. Someone correct me please if this isn't the right way of reading this ruling. Although never expressed, this simply comes out of his own logic. It will be really ironic if his assessment only applies to shares bought AFTER Hera when expectations were reset.

 

If so, Treasury may have a hot potato in their hands. Lamberth may have been smart in not fully deciding the matter. He only stated "these claims move forward". The next stage, thus, is a question mark. For Treasury, this is great. They may have the opportunity to disassemble the net worth sweep promptly and reset investor's expectations with little damage. Provided this interpretation is correct, Lamberth may be telling Treasury 'there is danger ahead'.

 

Again, I may have read this upside down (and quickly delete this post, if so). But I am feeling a kind of Lamberth redemption at the moment.

 

And coincidentally, his bombshell ruling was issued on 9/30/14. Almost 4 years to the date.

 

it is hard to follow lambeth's reasoning...it seems that he is figuring out how he is going to decide in the process of the writing.  I think you have it right, @rros, but I wouldn't say the next step is uncertain.  the next steps will be P appeals of the claims that lamberth denied, and moving to trial with respect to the P claims that lamberth upheld...though Ds may appeals these.  if there is a trial, all of the fairholme discovery from court of federal claims will be able to be introduced to a jury to show that at the time of the NWS the GSEs were on the verge of historic profitability and that the D's death spiral fear was a ruse invented for litigation, all of which doesn't spell mother for the Ds.

And what are your general feelings of this claim moving to trial? Is that when 12 unbiased jurors decide on the matter?

[rros]

What is the probability of winning Lamberth case on NWS invalidation? There is lot of optimism on message boards as I see it. Is this not a jury trial? When would it be?

 

Sweeney trial is also in December right? Again, lots of optimism there. What is the probability of winning there?

 

It appears stars are aligning. Are they? If so, I would like to buy on Monday some and recoup my losses.

There was a speck of buying when the ruling came out, later vanishing. Probably killed by the confusion Chris referred to. Based on this ruling and based on the 10% moment has passed I would be more of a buyer than a seller. Definitely holding all my shares.

[DRValue]

How can the issuance of 80% of common stock warrants not breach implied covenant of good faith?

 

The companies didn't issue shares for capital, which would be fair enough.

I've read the common shares would be used by the Treasury to get the money back if the preferred shares are unpaid. If they weren't going to get the money back on the preferred, the common would be worth 0.

 

As far as I can see the common warrants are a gift to a single shareholder.

 

[rros]

How can the issuance of 80% of common stock warrants not breach implied covenant of good faith?

 

The companies didn't issue shares for capital, which would be fair enough.

I've read the common shares would be used by the Treasury to get the money back if the preferred shares are unpaid. If they weren't going to get the money back on the preferred, the common would be worth 0.

 

As far as I can see the common warrants are a gift to a single shareholder.

There is nothing in the law or the agreements that says warrants were conceived as a back up. And as far as I can tell, no PR's by either Treasury or FHFA. There are, however, written statements by Lockhardt and even Paulson regarding the nature of the PSPAs in relation to HERA. That companies would remain shareholder-owned and blabla. If you do believe that any of the interested parties openly declared the warrants to be an insurance you may have something but I am thinking that was more hearsay.

 

The deal was done in accord and it was a straightforward, Buffett-like type of deal. Money in exchange for a huge bite. Nothing was gifted. Investor's expectations, in this case, are unrelated to giving away your grandma's jewels. Also, in the case of the Jrs. there is clarity as to which rights holders were expecting a positive outcome would one day materialize, namely rights that are inseparably (inhere) attached to those preferred shares: rights to dividends, rights to liquidation preference and any claim that may arise from breaching them and that would travel along, indefinitely.

 

Expectations regarding *these* specifics rights were demolished by the nws.

 

It is difficult to see which rights a common share has. Aside from owning a piece of the business as equity, there are none. That is why preferred shares aren't exactly like commons.

[muscleman]

Where is John Carney? He was so actively reporting the outcome of each and every court ruling and hammering investors all these years. And now he stops reporting?

[muscleman]

Could anyone give me some insights on how Lamberth suddenly had this change of heart? This lawsuit is the same old shit as in 2014. How could he suddenly see it differently than before?

[allnatural]

Muscleman just one thoery but how would you feel as a Judge if it turned out defendants you peviously ruled for actually lied to your face and the court about the rationale for the NWS. I could see why he flipped to our side when it comes to the facts now that he has the benefits of evidence (thanks to the Sweeney case which we received 2 years after his initial ruling).

 

Defendants tried to pull a fast one and they got caught red handed.

[DocSnowball]

I have to say kudos to Bruce Berkowitz for pursuing the cases to this extent. Not too many other value investors or activist investors have shown the stomach for this fight

[rros]

I have to say kudos to Bruce Berkowitz for pursuing the cases to this extent. Not too many other value investors or activist investors have shown the stomach for this fight

Lamberth's ruling could mean a lot to Bruce Berkowitz. The fact that Lamberth sided with plaintiff to explain how claims travel along with shares validates Berkowitz bet, having his stake been built after the net worth sweep. Not Perry's, who bought around the time we bought. And yes, Kudos to Berkowitz. But also all hedge funds who fought.

 

Maybe B.B. rebuilds his position tomorrow.

[Luke 532]

http://malonigse.blogspot.com/

My one true, additional offering, based on what some smart people have told me this past weekend, is that there are major investors who are ecstatic about this latest Lamberth action. (They trust juries more than judges.)

[investorG]

I have to say kudos to Bruce Berkowitz for pursuing the cases to this extent. Not too many other value investors or activist investors have shown the stomach for this fight

 

 

I agree.  Thanks, Bruce, from a lot of us.  In addition to a potential positive outcome, I hope it happens soon enough before his fund redemptions possibly become too much to handle.  This is another reason why Mnuchin has been so disappointing this year in his rhetoric (at a minimum); he's way smarter than us and clearly understands the sliminess of the NWS yet he's remained hidden in the corner this year rather than leading with a balanced tone.

[rros]

If a trial, will Mnuchin be called to testify? Geithner, Hank Paulson? How in the world could Mnuchin defend the sweep in light of his public statements?

 

There are judges (Lamberth) that have ruled the nws to be an outrageous government scheme, others who in dissenting argued against it and even judges who ruled against us have told the world that while their hands were tied, the nws was a complete trashing of shareholders rights. Even Lamberth in his first ruling in 2014 -against us- stated the nws was an eyebrow-raising move. If these same judges argued, opined or ruled about the deleterious effects of the sweep, what can the government expect from the regular citizen in a jury?

[Luke 532]

If a trial, will Mnuchin be called to testify? Geithner, Hank Paulson? How in the world could Mnuchin defend the sweep in light of his public statements?

 

There are judges (Lamberth) that have ruled the nws to be an outrageous government scheme, others who in dissenting argued against it and even judges who ruled against us have told the world that while their hands were tied, the nws was a complete trashing of shareholders rights. Even Lamberth in his first ruling in 2014 -against us- stated the nws was an eyebrow-raising move. If these same judges argued, opined or ruled about the deleterious effects of the sweep, what can the government expect from the regular citizen in a jury?

 

I highly doubt it would ever get to that point... they'd settle long before.

[rros]

If a trial, will Mnuchin be called to testify? Geithner, Hank Paulson? How in the world could Mnuchin defend the sweep in light of his public statements?

 

There are judges (Lamberth) that have ruled the nws to be an outrageous government scheme, others who in dissenting argued against it and even judges who ruled against us have told the world that while their hands were tied, the nws was a complete trashing of shareholders rights. Even Lamberth in his first ruling in 2014 -against us- stated the nws was an eyebrow-raising move. If these same judges argued, opined or ruled about the deleterious effects of the sweep, what can the government expect from the regular citizen in a jury?

 

I highly doubt it would ever get to that point... they'd settle long before.

How is a settlement going to work? Lamberth just ruled ALL preferred shares can claim the implied covenant breach regardless of date of purchase. This, from his conclusion that preferred stock rights are inseparable from the stock. The numbers are big. About 37 billion in Jrs. They now can't settle with a few. If they don't settle with John Doe who is buying some fnmas tomorrow, he too will have a claim against Treasury/FHFA. Buying shares today, means buying a claim. Settlement looks messy. Just as a trial. The potential for a nasty verdict cannot be underestimated.

[Luke 532]

How is a settlement going to work? Lamberth just ruled ALL preferred shares can claim the implied covenant breach regardless of date of purchase. This, from his conclusion that preferred stock rights are inseparable from the stock. The numbers are big. About 37 billion in Jrs. They now can't settle with a few. If they don't settle with John Doe who is buying some fnmas tomorrow, he too will have a claim against Treasury/FHFA. Buying shares today, means buying a claim. Settlement looks messy. Just as a trial. The potential for a nasty verdict cannot be underestimated.

 

Yes, settle all jr prefs.  The easiest way is to cancel all at par value.  If John Doe wants to litigate further for back dividends, then so be it.  But settling at par will satisfy the vast majority of pref holders, and certainly 2/3 of them (which I believe is the amount of votes needed).

[rros]

How is a settlement going to work? Lamberth just ruled ALL preferred shares can claim the implied covenant breach regardless of date of purchase. This, from his conclusion that preferred stock rights are inseparable from the stock. The numbers are big. About 37 billion in Jrs. They now can't settle with a few. If they don't settle with John Doe who is buying some fnmas tomorrow, he too will have a claim against Treasury/FHFA. Buying shares today, means buying a claim. Settlement looks messy. Just as a trial. The potential for a nasty verdict cannot be underestimated.

 

Yes, settle all jr prefs.  The easiest way is to cancel all at par value.  If John Doe wants to litigate further for back dividends, then so be it.  But settling at par will satisfy the vast majority of pref holders, and certainly 2/3 of them (which I believe is the amount of votes needed).

That would be a huge hole for Treasury. Unthinkable.

[undervalued]

How much money will Treasure need to settle all jr claims right now?

[Luke 532]

How is a settlement going to work? Lamberth just ruled ALL preferred shares can claim the implied covenant breach regardless of date of purchase. This, from his conclusion that preferred stock rights are inseparable from the stock. The numbers are big. About 37 billion in Jrs. They now can't settle with a few. If they don't settle with John Doe who is buying some fnmas tomorrow, he too will have a claim against Treasury/FHFA. Buying shares today, means buying a claim. Settlement looks messy. Just as a trial. The potential for a nasty verdict cannot be underestimated.

 

Yes, settle all jr prefs.  The easiest way is to cancel all at par value.  If John Doe wants to litigate further for back dividends, then so be it.  But settling at par will satisfy the vast majority of pref holders, and certainly 2/3 of them (which I believe is the amount of votes needed).

That would be a huge hole for Treasury. Unthinkable.

 

Not if it corresponds with an event maximizing the value of the warrants.  Treasury would profit handsomely and eliminate litigation risk.  And they could probably get a 2/3 vote for something as low as 75% or 80% of par. 

[Midas79]

How much money will Treasure need to settle all jr claims right now?

 

Depends on how they settle them. A conversion to common offer at a generous ratio can get it done with no cash cost at all, but it would also take an end to the NWS, a recap plan, resolution to the warrants, etc. for the juniors to accept. Cash is much cleaner and quicker (though much more expensive).

[investorG]

How much money will Treasure need to settle all jr claims right now?

 

Depends on how they settle them. A conversion to common offer at a generous ratio can get it done with no cash cost at all, but it would also take an end to the NWS, a recap plan, resolution to the warrants, etc. for the juniors to accept. Cash is much cleaner and quicker (though much more expensive).

 

 

since it's complicated, a settlement isn't likely over the near term.  the cases should continue and in the mean time the sweep should stop and be replaced by the backstop commitment fee.  that would provide time to get things done in 2019 in a thoughtful and non-rushed manner, while limiting any theoretical legal liability to the govt. 

 

[rros]

How much money will Treasure need to settle all jr claims right now?

 

Depends on how they settle them. A conversion to common offer at a generous ratio can get it done with no cash cost at all, but it would also take an end to the NWS, a recap plan, resolution to the warrants, etc. for the juniors to accept. Cash is much cleaner and quicker (though much more expensive).

 

 

since it's complicated, a settlement isn't likely over the near term.  the cases should continue and in the mean time the sweep should stop and be replaced by the backstop commitment fee.  that would provide time to get things done in 2019 in a thoughtful and non-rushed manner, while limiting any theoretical legal liability to the govt.

The sweep is actually a variable dividend. So what you are saying is that they should cancel the Sr. preferred shares. That is the only way to terminate the sweep. Isn't there a restriction in place from Corker's Jumpstart 2.0 till Jan 2019?

[investorG]

How much money will Treasure need to settle all jr claims right now?

 

Depends on how they settle them. A conversion to common offer at a generous ratio can get it done with no cash cost at all, but it would also take an end to the NWS, a recap plan, resolution to the warrants, etc. for the juniors to accept. Cash is much cleaner and quicker (though much more expensive).

 

 

since it's complicated, a settlement isn't likely over the near term.  the cases should continue and in the mean time the sweep should stop and be replaced by the backstop commitment fee.  that would provide time to get things done in 2019 in a thoughtful and non-rushed manner, while limiting any theoretical legal liability to the govt.

The sweep is actually a variable dividend. So what you are saying is that they should cancel the Sr. preferred shares. That is the only way to terminate the sweep. Isn't there a restriction in place from Corker's Jumpstart 2.0 till Jan 2019?

 

if we have learned anything, they can do what they want.  another amendment could tackle this issue however they see fit, ideally over the holidays (similar to last year).