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

[colinwalt]

Fairholme asks for a motion to stay the Government's motion to dismiss until after discovery is done.

 

While purportedly working furiously to complete discovery, the Government has now ab- ruptly brought forward a supplemental motion to dismiss challenging the standing of the Fair- holme Plaintiffs and “all other plaintiffs who did not own shares of Fannie Mae or Freddie Mac (the Enterprises) on August 17, 2012, the date of the alleged Fifth Amendment taking in this case.” It is mystifying why the Government has decided to raise this issue now. Indeed, the Gov- ernment does not dispute that at least one Plaintiff, Berkley Insurance Company, owned stock in Fannie and Freddie when the Net Worth Sweep was adopted and therefore has standing even un- der the Government’s view. Accordingly, even if the supplemental motion were granted (and, as noted below, it should not be), this Court’s subject matter jurisdiction would remain untouched and the case would proceed to a decision on the merits. Perhaps that is why the Government, alt- hough it has known the dates on which the Plaintiffs acquired their stock in Fannie and Freddie for over a year, has had no reason to file its supplemental motion until now. But there is still simply no reason for this motion to be adjudicated now, and there are ample reasons, including judicial economy, why the Court should defer briefing and decision on the motion until it adjudi- cates the Government’s principal motion to dismiss. The Court ought not permit the Government to distract the Court’s and the parties’ attention from discovery with its ill-timed and ill-con- ceived motion.

 

Very clever on behalf of the Fairholme lawyers -- keep the depositions going!

 

Another interesting tidbit from the motion:

 

Deferring consideration of the Government’s supplemental motion will also permit a more orderly presentation of the issues. After discovery closes, Plaintiffs intend to move for leave to amend their complaint and include facts gleaned from discovery. Presumably, the Gov- ernment could then file an amended principal motion to dismiss and raise any potential standing arguments, and the parties would be able to brief all issues raised in such a comprehensive mo- tion with the benefit of a complete record. Staying further action on the Government’s supple- mental motion, then, would ultimately help this Court adjudicate the motion with a fuller under- standing of the relevant facts.

 

Here's a summary of the "Palazzolo v. Rhode Island" case:

 

https://en.wikipedia.org/wiki/Palazzolo_v._Rhode_Island

 

"Reasoning:

 

The majority argued as follows: The argument that a claimant who acquires property after the enactment of a regulation waives the right to challenge such regulation as an unconstitutional regulatory taking fails because (1) such a principle would make the constitutionality of a regulation a matter of the passage of time, thereby creating a "[statute of limitations]" on a constitutional right; (2) such a principle also prejudices owners at the time of regulation, whose ability to transfer the land has become seriously impaired; and (3) such a principle would create different and unequal rights between different classes of owners (old owners and new owners)."

 

And more here:

 

http://caselaw.findlaw.com/us-supreme-court/533/606.html

[Luke 532]

Here's the counterpoint to the last video I posted:

 

 

Lew (at 2:30 in video): "...it's not the right time to be talking about ending the conservatorship or paying dividends."

 

Interesting that he voluntarily mentioned dividends.  Freudian slip?

[bmichaud]

Here's the counterpoint to the last video I posted:

 

 

Lew (at 2:30 in video): "...it's not the right time to be talking about ending the conservatorship or paying dividends."

 

Interesting that he voluntarily mentioned dividends.  Freudian slip?

 

Lew is a buffoon. He's the perfect guy to be up there "defending" this nonsense. Other than Biden I'm not sure who I would want up there more...

[Luke 532]

Supreme Court ruled 8-1 today against the government in a raisin taking case.  Yes, raisins.  Interesting read... http://www.usatoday.com/story/news/nation/2015/06/22/supreme-court-raisin-farmer/28475623/

 

Excerpts...

A majority of justices ruled that the Agriculture Department program, which seizes excess raisins from producers in order to prop up market prices during bumper crop years, amounted to an unconstitutional government "taking."

 

While the government can regulate production in order to keep goods off the market, the chief justice said it cannot seize that property without compensation.

 

Horne's lawyer, Stanford University law professor Michael McConnell, argued that the government must pay him for the raisins under the Fifth Amendment to the Constitution, which prohibits that "private property be taken for public use, without just compensation."

 

During oral argument, he had the court's conservative justices eating out of his hand, while U.S. deputy solicitor general Edwin Kneedler's argument was treated like sour grapes.

 

In the end, only Sotomayor refused to call the government's action a form of taking. She said that definition "only applies where all property rights have been destroyed by governmental action." Here, she said, the Hornes retained some property rights.

[doughishere]

Thoughts? I gatta look at the conclusions in the morning but...

 

http://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monty-accounting-of-fannie-freddie-conservatorship

 

 

 

[merkhet]

Eddie Lampert had a similar argument back in his 2009 letter to shareholders.

 

I'm not sure how this would hold up in court, because I can't remember if the board consented to the appointment of the conservator or not. It's bad for public opinion, though.

[merkhet]

Looks like Larry Kudkow just read that article. I'm curious to see if anything comes out of it.

[onyx1]

Looks like Larry Kudkow just read that article. I'm curious to see if anything comes out of it.

 

 

It will be a refreshing surprise to have a journalist trumpet this massive fraud.  Journalists are largely motivated by peer acceptance, and revealing a fraud that damages a culturally unpopular class (investors), and impairs the agenda of both political parties won't make any journalist the toast of the next cocktail party.  However, at some point, this story will become too big to ignore and an honest, prominent, journalist will appear. 

[orthopa]

Thoughts? I gatta look at the conclusions in the morning but...

 

http://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monty-accounting-of-fannie-freddie-conservatorship

 

Was just going to post the link but I'm a day late. I think we are finally seeing a bit of a shift in public opinion of the actions that took place, or maybe a better way to put it is more wide spread questioning. Those that will be most interested would be those with skin in the game of course. That may limit the uproar a little unless your really anti government or fraud. I cant image the "common citizen" caring too much about what took place as they are likely ignorant to what FnF does and if it helps them at all.

 

I dont know how much accounting will or is usually discussed in court but if questionable accounting has occurred I cant see how it wont help the cause against the gov.

[merkhet]

Millstein just weighed in on the article as well.

[merkhet]

Eddie Lampert had a similar argument back in his 2009 letter to shareholders.

 

I'm not sure how this would hold up in court, because I can't remember if the board consented to the appointment of the conservator or not. It's bad for public opinion, though.

 

I just went through the Washington Federal complaint again, and it looks like the boards consented to the conservatorship, but the claimants allege that the consent was coerced.

[onyx1]

Eddie Lampert had a similar argument back in his 2009 letter to shareholders.

 

I'm not sure how this would hold up in court, because I can't remember if the board consented to the appointment of the conservator or not. It's bad for public opinion, though.

 

I just went through the Washington Federal complaint again, and it looks like the boards consented to the conservatorship, but the claimants allege that the consent was coerced.

 

This paper does help reveal the breathtaking degree of government overreach and may assist in motivating the politicians into settlement discussions in the future.  I don't want my investment, however, to hinge on the whether the conservator was needed or not.  I believe the case against the 3rd amendment is stronger and easier to prove, and for that reason I mostly own the preferred.

[merkhet]

Larry Kudlow is asking follow up questions on the Housing Wire article... as a friend said to me via Twitter, let's see if this thing has legs.

[morningstar]

The report feels pretty thin. Some of the content there might be useful politically in pushing for a resolution, but I doubt a court is going to hear much of this - there's a reason most of the litigation surrounds the third amendment and not the initial conservatorship. It's just very hard to credibly argue that Fannie/Freddie did not desperately need help in 2008; this report chooses to ignore completely the financing needs of the GSEs, and yes if we assume that the market would have continued to roll over hundreds of billions per quarter of debt at each GSE through 4Q08 and 1Q09, they were probably fine. But I don't think that was a realistic assumption at the time and I doubt a court is going to second guess the decisions based on those assumptions without very very strong evidence they were not taken in good faith.

[constructive]

The report feels pretty thin. Some of the content there might be useful politically in pushing for a resolution, but I doubt a court is going to hear much of this - there's a reason most of the litigation surrounds the third amendment and not the initial conservatorship. It's just very hard to credibly argue that Fannie/Freddie did not desperately need help in 2008; this report chooses to ignore completely the financing needs of the GSEs, and yes if we assume that the market would have continued to roll over hundreds of billions per quarter of debt at each GSE through 4Q08 and 1Q09, they were probably fine. But I don't think that was a realistic assumption at the time and I doubt a court is going to second guess the decisions based on those assumptions without very very strong evidence they were not taken in good faith.

 

I agree. The authors are naively ignoring that Fannie and Freddie were dependent on rolling over short term low interest rate paper. If they had not received government financing, they would have not have been able to afford the market rate cost of capital and would have encountered liquidity crisis and bankruptcy very shortly.

[TwoCitiesCapital]

I certainly agree that the market conditions probably wouldn't have allowed for rolling the debt at low yields, but it certainly makes a case against the draws from the Treasury. If all they needed to survive was to be able to roll their financing, couldn't this have been done with an explicit, verbal, government guarantee without forcing a pre-emptive $180B in Treausry draws that were only necessary due to paper losses and the subsequent interest owed on those Treasury draws?

 

It seems like it would've been better for the Treasury to back stop them and only give them cash if they needed it. Not cash to cover accounting write downs that may or may not occur/be reversed...especially given the dubious nature of some of those write downs. They could have suspended MTM accounting, placed them into conservatorship to get the house in order, and only provided cash as cash was needed for actual losses and shortfalls. I don't have enough knowledge of the court system to know how they'd look at this, but I'm not crossing my fingers for the $180B to be wiped out. Just seems ridiculous that it was forced on them in the first place.

 

 

 

 

 

[merkhet]

Another motion to unseal things.

 

**SEALED** MOTION to Remove the “Protected Information” Designation from Certain Treasury and FHFA Documents , filed by All Plaintiffs. Response due by 7/13/2015. (Attachments: # 1 Appendix)(Cooper, Charles) (Entered: 06/24/2015)

[morningstar]

I certainly agree that the market conditions probably wouldn't have allowed for rolling the debt at low yields, but it certainly makes a case against the draws from the Treasury. If all they needed to survive was to be able to roll their financing, couldn't this have been done with an explicit, verbal, government guarantee without forcing a pre-emptive $180B in Treausry draws that were only necessary due to paper losses and the subsequent interest owed on those Treasury draws?

 

It seems like it would've been better for the Treasury to back stop them and only give them cash if they needed it. Not cash to cover accounting write downs that may or may not occur/be reversed...especially given the dubious nature of some of those write downs. They could have suspended MTM accounting, placed them into conservatorship to get the house in order, and only provided cash as cash was needed for actual losses and shortfalls. I don't have enough knowledge of the court system to know how they'd look at this, but I'm not crossing my fingers for the $180B to be wiped out. Just seems ridiculous that it was forced on them in the first place.

 

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs.

 

More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders.

[bmichaud]

I certainly agree that the market conditions probably wouldn't have allowed for rolling the debt at low yields, but it certainly makes a case against the draws from the Treasury. If all they needed to survive was to be able to roll their financing, couldn't this have been done with an explicit, verbal, government guarantee without forcing a pre-emptive $180B in Treausry draws that were only necessary due to paper losses and the subsequent interest owed on those Treasury draws?

 

It seems like it would've been better for the Treasury to back stop them and only give them cash if they needed it. Not cash to cover accounting write downs that may or may not occur/be reversed...especially given the dubious nature of some of those write downs. They could have suspended MTM accounting, placed them into conservatorship to get the house in order, and only provided cash as cash was needed for actual losses and shortfalls. I don't have enough knowledge of the court system to know how they'd look at this, but I'm not crossing my fingers for the $180B to be wiped out. Just seems ridiculous that it was forced on them in the first place.

 

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs.

 

More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders.

 

Sorry, I do not understand. How was the bailout structure NOT an explicit guarantee of F&F?

[morningstar]

I certainly agree that the market conditions probably wouldn't have allowed for rolling the debt at low yields, but it certainly makes a case against the draws from the Treasury. If all they needed to survive was to be able to roll their financing, couldn't this have been done with an explicit, verbal, government guarantee without forcing a pre-emptive $180B in Treausry draws that were only necessary due to paper losses and the subsequent interest owed on those Treasury draws?

 

It seems like it would've been better for the Treasury to back stop them and only give them cash if they needed it. Not cash to cover accounting write downs that may or may not occur/be reversed...especially given the dubious nature of some of those write downs. They could have suspended MTM accounting, placed them into conservatorship to get the house in order, and only provided cash as cash was needed for actual losses and shortfalls. I don't have enough knowledge of the court system to know how they'd look at this, but I'm not crossing my fingers for the $180B to be wiped out. Just seems ridiculous that it was forced on them in the first place.

 

They did need the cash, and used it - it's not like $180bn in cash was just sitting on the balance sheet as some sort of buffer to offset paper losses. Just look at the report - for 2009 and 2010 they calculate cash net income of $16bn for Fannie plus $89bn in Treasury draws. Cash on hand fell about $700m over the same period. That's despite the company also rapidly generating cash from the liquidation of its investment portfolio. Changing the accounting would certainly have boosted the apparent equity on the GSE balance sheet, but would not have changed the company's cash needs.

 

More to the point, a key aspect of the bailout structure was to avoid Treasury providing an explicit guarantee for the trillions in GSE debt and contingent liabilities, while still signalling to the market that the firms would not be allowed to fail. If Congress had been prepared to just guarantee the GSEs, I imagine they would just have been taken into receivership pretty immediately, wiping out the preferred and common shareholders.

 

Sorry, I do not understand. How was the bailout structure NOT an explicit guarantee of F&F?

 

Only in the most technical sense, in that if Fannie happens to default, you can't show up at the Treasury and demand repayment - there is no pledge of the credit of the United States covering those obligations. Obviously the intent is to fully support the firms, but if you read articles from the time period its pretty clear that there was a desire for them to remain separate from the actual US gov't balance sheet.

 

e.g. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXJSThdqLsXg

[Luke 532]

As far as I'm concerned, I like seeing more doubt surface on the actions of the government in 2008 as it likely makes winning/settling the 2012 actions much easier.  The latter is the only thing I care about as a holder of FNMAS.  Correct me if I'm wrong in that line of thinking.

[bmichaud]

I was under the impression the bailout was to signal to the international community that Treasury stood behind Fannie and Freddie debt 100% in order to avoid international financial contagion.

 

That's what's so great about this situation - the Government wants to milk the GSEs for cash because the Govt stands behind them explicitly - BUT BUT BUT we don't want to consolidate the debt because we don't stand behind them. But we want to collect the cash because we stand behind them. But we don't stand behind them...and so on and so forth.

[merkhet]

I referenced the 2009 Sears shareholder letter in one of my responses. Anyone read it?

 

http://www.searsholdings.com/invest/archives/feb09.htm

 

On September 7, 2008, in the largest nationalization in American history (executed expeditiously and without an obviously transparent process), the U.S. government announced that it was placing Fannie Mae and Freddie Mac into conservatorship. As part of the conservatorship, the government would provide capital support, if necessary, of up to $100 billion to each GSE through Preferred Stock Purchase Agreements. Although no cash changed hands, in consideration of this backstop, the U.S. government received 80% of the common stock plus $1 billion in preferred stock in each institution. This backstop has recently been increased to $200 billion as part of the Homeowner Affordability and Stability Plan. In the process, they suspended dividends on existing preferred stock of both Fannie Mae and Freddie Mac, eliminating approximately $36 billion in value, most of which was held by the major commercial banks in the United States.

 

Rather than help solve the housing and mortgage problem, the unintended consequences of this action were manifold. First, bank capital was depleted. Not only was $36 billion in GSE preferred wiped out, but the whole market for financial preferred securities went into a free fall, wiping out additional equity from financial institutions, including many large insurance companies. Second, despite the boards of directors of Fannie Mae and Freddie Mac consenting to conservatorship, neither company has ever given an explanation for its consent. For those who are sophisticated in finance, neither Fannie Mae nor Freddie Mac had a “funding” problem. Because each GSE’s balance sheet was comprised of highly liquid Mortgage Backed Securities (MBS) that pay off on a monthly basis, it should have been easy for either to pledge securities to raise money or to shrink their balance sheet and meet their financial obligations as they came due. The logical explanation for the boards of directors giving consent rests with the presumption that if they did not consent, there was some other threat that would have been even worse for those directors. As for the shareholders the directors represented, it is hard to imagine anything worse than having their investment effectively wiped out, and they had no vote on the matter.

 

Investors in regulated industries rely on the fact that regulators will not behave in an arbitrary fashion and, if they do, that there are due process remedies that their managements and boards can pursue. Investors in financial institutions who experienced what can happen when funding was compromised earlier in the year in the case of Bear Stearns, now experienced what can happen when a regulator unilaterally decides that the rules of the game are not sufficient or appropriate. Both Fannie Mae and Freddie Mac had capital in excess of the required levels under regulatory guidelines and accounting rules in effect, with Fannie Mae’s capital being significantly in excess of the required levels. However, if one were to use some other standard (and many were being suggested and recommended for quite a while), one could make the case that neither company had the capital desired by their critics, some of whom were not investors, while others had an academic or political interest in the housing and mortgage area that was adverse to the GSEs.

[doughishere]

"However, if one were to use some other standard (and many were being suggested and recommended for quite a while), one could make the case that neither company had the capital desired by their critics, some of whom were not investors, while others had an academic or political interest in the housing and mortgage area that was adverse to the GSEs."

[Luke 532]

I referenced the 2009 Sears shareholder letter in one of my responses. Anyone read it?

 

http://www.searsholdings.com/invest/archives/feb09.htm

 

Merkhet, I read that.  Thanks for sharing.  By the way, GSELinks.com will be posting the Lampert shareholder letter to their site tonight.