hardincap

thx. roughly: 40.2MM shares common of fnma/fmcc @ 11/30/2015 v 28.3MM @ 5/31/15 approx 136MM shares of fmcc/fnma pref @11/30/15 v approx 125MM @ 5/31/15 Went from 11.1% of portfolio to 15.1%.

I was comparing with his July 2015 report http://www.fairholmefundsinc.com/Reports/FAIRX2015SemiAnnual.pdf

Fairholme added to both commons and preferreds http://www.fairholmefundsinc.com/Reports/FAIRX2015Annual.pdf

Those SA articles are gold.. don't know why it hasn't been discussed more. My key part for me:

These two "outs" for the government seem to fail for the exact same reason? There is nothing in HERA that deals with the power to issue stock, so the only way the government could win on preemption is if Sleet interprets FHFA's powers to "manage and operate" the business and to "transfer or sell any asset" as subsuming the power to issue stock that conflicts with 151c. This is the same reasoning one would have to follow to conclude that 4617f bars the courts from examining NWS under corporate law. That reasoning, however, would have such egregious implications that it fails the basic gut check (or "red face test" as you call it). The other "out" is if Sleet goes Lamberth on us and rules that Steele's reading of 151c "reaches too far", without any real analysis. Can Sleet make this ruling without approving Steele's request for certification in delaware supreme court?

fwiw, according to a commenter its likely timhoward717 is affiliated with bill ackman. the commenter cites www.thetruthaboutvaleant.com and commingled twitter activity between the two handles (timhoward and valeant)

DoJ says on record that Parrott actually did not invoke the 5th

We should have a ruling on the delaware case before then, correct?

how do you reject this argument?

that makes sense. w/o that structure it would be a messy entanglement of separate arguments

would have liked to see it clearly stated here that NWS is not an exercise of power to transfer because the power to transfer does not permit issuance of stock that conflict with delaware corporate law, but I guess that would be redundant because he makes that point indirectly prior to this section. thanks for your thoughts

@cherzeca What are your general thoughts on the reply brief? Any surprises or interesting takeaways? I was underwhelmed with his rebuttal to the transfer argument (@p39). He doesnt seem to directly dispute the government's assertion that the nws constitutes a transfer of assets, and is therefore within its conservator power. He argues on the purpose of the transfer of assets--that it is inconsistent with its conservatorship duty to put fnma in sound and solvent condition--making it a "why" analysis, prohibited by the HERA anti-injunction provision. Shouldn't he have argued instead that this power does not extend into issuing issuing pref stock that is inconsistent with dcgl?

What are your guys' opinion of timhoward717's credibility? He's been teasing of having some major favorable news but hasn't come through with anything substantial. Wondering what his deal is.

That makes sense to me, but I am also operating under the assumption that government lawyers are not morons, and must have thought they had a decent shot at arguing that nws falls under the "transfer assets" power. The SA article examining the implications of the government's assertion of plenary power does make it seem like an egregious overreach, but it also didn't specifically address the "transfer of assets" clause that the government points to in its defense. (Maybe I'm being unreasonably nitpicky here, since its hard to imagine this part being the swing factor). Adding to my cautiousness is what you referred to as legal realism--"judges not having the balls to do what their brains tell them to do"--esp. considering what's at stake. re: steele's attitude, I was referring to the investors unite call. btw, i missed the question you asked on the call, but i'm guessing it was on this very issue we're discussing, the power vs duty claim?

Chris, thanks for clarifying your thoughts here, it is very much appreciated. This issue has stirred passions on both sides of the debate and alot of smart people seem to be letting their emotions compromise their analysis on the investment merits of these stocks. I thought it prudent to give the government's argument full benefit of the doubt, steele's dismissive attitude notwithstanding. Looking forward to his reply brief.

chris, maybe I'm being obtuse, but you seem to be overlooking the government’s argument that FHFA did actually have the power to issue the NWS pref stock, because HERA authorized them to “transfer or sell any asset” (pg 15 of motion to dismiss). I’m trying to understand why this argument will not fly with judge sleet. I have yet to read Florida lime but epstein seems to be saying conflict preemption would require more legal specificity in authorizing preferred stock with provisions inconsistent with 151c, and the "transfer or sell any asset" clause does not meet that bar

Can you explain this a bit further? The government is arguing that while there was no requirement, per se, to issue a 100-0 preferential stock (in relation to commons), there was indeed specific authority to, granted by HERA. Consummating this authorized action necessarily overrides 151c, therefore it is not possible to comply with both federal and state law in this instance.

In Lamberth's view, whether the transfer was arbitrary necessarily requires a why as opposed to what analysis, and hence is barred from judicial inquiry by HERA's anti-injunction provision. A what analysis involves an examination of the existence of conservator power, and is not barred by the anti-injunction provision. The government is arguing that the 100-0 usurpation fits "squarely" within the powers granted to FHFA as conservator under HERA's transfer clause, and this makes it a why not what analysis, barring it from judicial review. It also seems to me this could be construed as constituting a conflict with 151c, and hence preempts it? That is, HERA grants as conservator power an action that 151c prohibits, effectively overriding it.

Thanks for adding some color here. Whether 151c precludes 100-0 preferential relation between preferred and common is the $150bn question. It may be a good argument, but seems far from a "slam dunk", do you agree? In regards to "existence vs exercise" of power, the government argues that 3rd A was indeed an exercise of conservator power given HERA's authorization to "transfer or sell any asset of the [enterprises]" (pg 15). Why is this wrong? Further, does this not constitute a conflict with DCGL 151c, and hence preempt it?

What are your thoughts on the possibility that Steele is reading too much into 151©? He is arguing that taking 100% of net worth necessarily means there is no "rate", nor is there “preference to, or in relation to” other classes of stock, e.g common stock. Could this be taken as subjective (biased) interpretation rather than objective reasoning?

Pepto Bismol. Large quantities. Costco helps. At the end of the day, legal decisions are mostly rational but not entirely so. It was a low probability event, in my opinion, for Lamberth to rule as he did. It's similarly a low probability event that Sleet or Sweeney will rule similarly, but not a non-zero one. What would you identify as the major psychological biases at play in Lamberth giving the government so much discretion? Or do you think it was mostly incompetence? If it's the latter, we can take comfort knowing that its unlikely that all judges involved here are incompetent, but if its the former and all judges are under the influence of these subterranean factors that go against us, pass me the pepto bismol

A question for all but esp. for cherzeca and merk: if you believe lamberth overreached in his decision to dismiss the perry lawsuit, how do you get comfortable with the risk that sweeney, sleet, and others could do the same? The Delaware case seems solid, esp. coming from a former chief justice, but the perry case seemed just as solid. Yet we saw in Lamberth's ruling what Epstein warned us about, that federal judges tend to give "enormous discretion to the government no matter how outrageous its conduct". If Lamberth will essentially evade the question of whether the NWS constitutes a securities transaction, for e.g., saying that that argument "reaches too far", how do you get comfortable that Sleet wont do the same in regards to Steele's argument that preferreds must bear preferential relationship to the dividends payable on the commons?

fairholme reported 743k in total legal fees for the first half of the year - 1.5m annualized. Doesn't that seem a little low, considering hes got around two dozen lawyers working for his case? Very low. That might be just regulatory work for fund. He may be treating cooper/Kirk as an investment capitalized expense added to basis. I would expect CK to generate about $10MM annualized Also there are additional plaintiffs to share costs but fairholme likely dwarfs other plaintiffs. My experience with berkowitz (mbi v bac) is that he is patient, but once there is a win be blows it out like nobody's business to be fair, in '14 he recorded 3m in legal expenses and 2m in "misc" expenses

fairholme reported 743k in total legal fees for the first half of the year - 1.5m annualized. Doesn't that seem a little low, considering hes got around two dozen lawyers working for his case?

Berkowitz owns over 54m fnmas shares. Most he could have done is lighten up a little, but he's said earlier this year that he plans to invest for a very long time.